ZTE Shifts Focus to Handset Brand

By OWEN FLETCHER

ZTE Corp. is best known outside China as a maker of telecommunications hardware, but the company also has high ambitions for its mobile-phone business. Terminals, including handsets as well as plug-in data devices that let a computer access the Internet via a cellular network, posted by far the fastest revenue growth among the company's three business categories in the first half of this year.

But He Shiyou, head of the company's mobile-terminals business, says ZTE wants handsets to make up half of group revenue in five years, up from 30% in the first half. While ZTE does much of its business in developing countries, its handsets are also making inroads in developed markets: The company last month launched a mobile phone called the Salute with U.S. operator Verizon Wireless. ZTE also plans to launch a seven-inch tablet computer running Google Inc.'s Android operating system this year in Europe, Latin America and Asia-Pacific, Mr. He says. Still, ZTE faces challenges including building up its brand in competitive developed markets. Mr. He shared his goals for ZTE's handset business in a recent interview with Owen Fletcher in Beijing. Edited excerpts:

WSJ: What percentage of ZTE handsets are sold under your own brand?

Mr. He: In ZTE's mobile phones business, overseas business accounts for 70% of revenue, and China accounts for 30%. Inside China, all of the phones use ZTE's brand. Overseas, one-third use a joint brand between ZTE and a network operator, almost another one-third use ZTE's brand, and another one-third use the operator's brand.

Mr. He: Over 90% are designed and developed by ZTE itself. Of course in the manufacturing step, besides doing our own manufacturing, we also have some third-party partners who help us. To address the market better, in the U.S. and Europe, we have expanded our design teams so our products there will be more fit for Americans and Europeans.

WSJ: What is your market share target for the U.S.?

Mr. He: The U.S. is the world's highest-end market, and for ZTE that market certainly has some expected value. We hope that in about five years, the U.S. can become the top market for ZTE handset sales by units. We hope that in North America, Europe, China and other developed markets we can keep engaging more. I think ZTE mobile phones will be in a good position when, for instance, our level of sales from North America is about on par with North America's global economic status. Our competitors, like Samsung Electronics Co. and LG Electronics Inc., have done very well in the U.S. They are models for us to study but they also built up over a period of years. Actually, ZTE has just started to enter the U.S.

WSJ: Which country currently accounts for the highest proportion of ZTE handset sales?

Mr. He: In terms of individual countries, this year a few big countries are more suited to us. For instance, China which everybody says is growing very fast and Russia, Brazil, and of course India. Of course in a few major countries in Europe we've also made good progress.

WSJ: How much can the yuan appreciate before it starts to impact ZTE?

Mr. He: The renminbi's appreciation does in fact have an influence. Companies need to prepare. Including us, we need to prepare relevant policies to respond. For instance for our mobile phones, along with our world-wide growth, we will build a multi-factory model, opening branches in different regions to combine with local resources and develop the market. For the China market, the country's advantage in human capital will continue for quite a while. Since most of our spending is in renminbi, obviously our costs are also rising. Of course overall, these challenges do have some pressure on us, but I don't think it's just on us, I think other companies are also facing this pressure.

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