Oct 16th 2008 | SHENZHEN
From The Economist print edition

An emerging Chinese telecoms giant is growing steadily—and stealthily

IN THE last quarter of 2007 there were three new entrants in the top ten list of mobile-phone makers. Most people know two of them—Apple, maker of the iPhone, and Research in Motion (RIM), maker of the BlackBerry—but not the third: ZTE of China. Its worldwide market share went from 0.4% at the start of 2007 to 1.2% in the second quarter of 2008, according to Gartner, a consultancy. Last month it sold its 100 millionth phone. Its goal is to become the third-biggest handset-maker, behind Nokia and Samsung (it now lies in seventh place). Yet ZTE is easy to overlook, because of its distinctive business model.

Founded in 1985, ZTE chiefly makes networking gear, rather than phones. With prices for comparable products 25-90% less than those of its Western competitors, ZTE has customers in over 60 countries. As Alcatel-Lucent, Nortel and other established telecoms-equipment makers have suffered, ZTE has thrived. Its revenues and profits increased by more than 50% in 2007. This year growth is also likely to be strong, for two reasons.

Export sales, which account for around two-thirds of revenues, continue to grow as poor countries expand the range and capacity of their mobile-phone networks. On October 13th, for example, ZTE announced a $400m contract to provide equipment for a new network in India. At the same time ZTE (along with its domestic rival, Huawei), will benefit from one of the largest telecoms projects in history: the construction of China’s much-delayed “third generation” (3G) mobile networks.

Behind ZTE’s emergence are the usual factors that have come to be associated with China’s economic rise, with a few twists. ZTE has benefited from the thousands of inexpensive and well-trained engineers coming out of China’s universities, many of whom are deployed at short notice to work on large projects in some of the world’s most difficult places. More fuzzy, but still important, has been ZTE’s ability to use help from the Chinese government to arrange cheap financing for its global customers, which often lack capital.

Beyond these broader factors, ZTE has done a good job of understanding how to pursue a low-cost strategy—and there is far more to it than merely producing cheap products. “ZTE is a strong technology company, but of a particular sort,” says James Liang, an analyst with Citigroup. ZTE focuses on making equipment that is cheap, reliable and unobtrusive.

In developed markets, makers of elaborate handsets such as Nokia, RIM and Apple have strong brands and fiercely loyal customers. This is a mixed blessing for network operators: offering a snazzy new handset can help them attract customers, but many users are more loyal to their handset-maker than to their operator. ZTE, by contrast, keeps itself in the background. It supplies handsets on a “white label” basis to operators, which then sell them under their own brands. The name ZTE is nowhere to be seen. In keeping with its roots as a network-equipment supplier, it sees operators, not consumers, as its customers.

ZTE moved into the handset market in 2002, and handsets accounted for 22% of its revenue last year; it expects this figure to reach 50% by 2012. ZTE does make some advanced handsets, but its strength is in combining low cost with a willingness to customise handsets for the operators. For Australia’s Telstra, for example, it produced a “country phone”, with a pull-out antenna, which suits people outside cities who need highly sensitive receivers. Although ZTE supplies phones to big names such as Vodafone and Telefónica, most of its customers are in the developing world, where overall handset sales are growing by 16% a year. ZTE’s steady but stealthy rise reflects how much of the growth in telecoms is at the bottom of the economic pyramid.