ZTE Sees Potential For Growth With Vodafone

SHANGHAI (Dow Jones)--Chinese telecommunications equipment maker ZTE Corp. (000063.SZ) hopes its deal to produce ultra-low-cost mobile phone handsets for Vodafone Group PLC (VOD) will eventually lead to supplying the U.K.-based mobile operator with higher-technology products in the future, said He Shiyou, president of ZTE's handset division.

"You have to look at our cooperation with Vodafone from a long term perspective," He said in an interview with Dow Jones Newswires. "We hope the relationship won't be limited to just one or two products, but that it will include second-generation and third generation phones and ultimately even network equipment."

In February ZTE signed an agreement to produce ultra-low-cost handsets for Vodafone to sell under its own brand, focusing on emerging markets.

In May, Vodafone unveiled two second-generation phones, Vodafone 125 and Vodafone 225, the first handsets to be produced under the partnership.

He said ZTE and Vodafone originally expected to produce "a few million" handsets under the agreement.

"But demand is likely to exceed that by several times, it's been that well received by the market," he said.

ZTE's deal with Vodafone sees the Chinese firm push further into emerging markets where it's been rapidly expanding its presence, most recently including contracts to sell network equipment to Ethiopia, Pakistan and Mexico.

According to He, about 50% of ZTE's revenue came from overseas operations last year, up from 34% in 2005.

"And in 2007 overseas revenue could exceed that generated from China," he said. "Our main trend is toward globalization, and China is only one part of that."

Western markets also figure largely in ZTE's plans to become a bona fide multinational.

In February, ZTE said it would jointly manufacture third-generation mobile phones with Telefonica Espana, a unit of Telfonica SA (TEF), for sale in Spain under Telefonica's Movistar brand.

However, He said making inroads into developed markets is more difficult than in developing countries which have a greater need for foreign technology.

"For consumers and governments in developed countries, there is a process of accepting Chinese firms," He said. "Those markets need to better understand we are there to serve consumers and we don't present at threat."

ZTE is also set to be a major beneficiary of China's push to develop its own home grown mobile standard.

Last week the company said it signed contracts to provide CNY2.37 billion worth of services to China Mobile Ltd. (0941.HK) for the development of the Time Division Synchronous Code Division Multiple Access standard.

China Mobile Communications is now spearheading tests of a locally pioneered TD-SCDMA technology in eight major Chinese cities.

He clarified last week's statement, saying the contract includes both services and the supply of network equipment, but couldn't provide further details.

In April ZTE President Yin Yimin said his company would get half of the deal to supply equipment for Mobile Communications Corp.'s 3G mobile core network.