China's Huawei Gives it Up for Vodafone

What's in a brand? For the mainland manufacturer, the advantages of producing handsets for a cellular giant are more important than fame

London cellular giant Vodafone (VOD) has unveiled its latest phones, and they're made in China. On one level, that's not a huge surprise. After all, Chinese factories now manufacture tens of millions of cell phones.

What's noteworthy is that the Vodafone 701 models that will be available in European markets in early October are not low-end commodity phones but whiz-bang, feature-laden 3G handsets, the sort of more sophisticated gadgetry that Chinese manufacturers haven't produced in the past.

Vodafone's Chinese partner is telecom equipment maker Huawei Technologies. The two companies announced plans to team up early this year, with Huawei producing the handsets on an outsourcing basis for Vodafone—that is, without the Huawei name. This is no ordinary launch for Vodafone, but actually the company's first own-branded 3G consumer handsets. The phone features an MP3 player and 1.3-megapixel camera, and can handle video telephony.

Few European consumers are likely to notice or care that their high-end handset was made by a Chinese outfit. In the recent product launch press materials, Vodafone's global director of terminals, Jens Schulte-Bockum, stressed that this is the company's first self-branded 3G handset and bypassed Huawei's key role. "We're proud that this phone carries only the Vodafone name," Schulte-Bockum said in a canned statement distributed to the media.


  Even so, this is a hugely important step for Huawei. It's proof that the company is making progress in its drive to diversify away from its traditional business of routers and other types of infrastructure. Ping Guo, senior vice-president of Huawei Technologies, said in a statement when the two companies first announced their partnership that the deal would help propel the Shenzhen company into the top ranks of handset makers globally.

"This agreement will enable Huawei to become one of the world's leading players in handset development and production," he said. "We already have a strong presence in the global market, and this agreement offers us a great opportunity to expand into new regions alongside the world's leading mobile community."

The Vodafone handsets also show that Huawei is willing to be flexible as it expands globally, since the Chinese company is willing to give up all branding rights. Huawei's crosstown rival, ZTE, is making similar moves. It announced on Sept. 14 in Beijing that it had reached an agreement with BT Group (BT) to provide the British operator with 3G handsets.


  Other companies from China such as PC maker Lenovo and white goods producer Haier are focusing on building up their own brand names globally. They haven't had an easy time of it.

Also struggling is Taiwan's BenQ (BNQCY). For years, it was successful as an outsourcing manufacturer for companies such as Motorola (MOT).

But in an attempt to build up its own-brand business, BenQ last year took over the money-losing handset operations of German conglomerate Siemens (SI). BenQ hasn't been able to turn the cellular business around and on Sept. 29 announced that its German subsidiary was declaring bankruptcy.

But Huawei executives are betting that their willingness to let Vodafone have the branding rights will help the Chinese company avoid a similar fate. With this strategy, Huawei is taking a page from the playbook of successful Taiwanese contract manufacturers such as High Tech Computer (HTC) that are willing to stay in the background.


  HTC is the world's biggest producer of Windows-enabled smart phones, but most of the handsets it sells in the U.S. and Europe only carry the brand of its customers, operators such as Verizon (VZ) and Sprint Nextel (S).

Just as important for Huawei is the symbolism of the Vodafone deal. Huawei may be China's top information technology company, but it also was the defendant in a high-profile lawsuit brought by Cisco (CSCO) in 2002, with the U.S. company alleging that Huawei improperly lifted Cisco intellectual property. The companies eventually settled before the case came to trial, and ever since then, Huawei executives have emphasized the company's commitment to patents, copyrights, and intellectual property rights protection.

The Vodafone alliance, according to Guo, is a vote of confidence in Huawei as a company that doesn't cut corners. "We consider the partnership with Vodafone as a sign of the trust they have in the quality of our research and production," said Guo in his press statement.


  Huawei isn't the only Chinese company that has been successfully diversifying into cellular handsets. Lenovo, the leading personal computer brand in China and the world's No. 3 PC player thanks to its acquisition last year of the IBM PC division, has also been making a push into mobile phones.

Unlike Huawei, Lenovo is focusing on building up its own brand. It's hard to pass through the streets or subways of Beijing without coming across slick-looking Lenovo ads hawking the company's products.

Only a few years ago, Lenovo was an also-ran in the Chinese cell phone market, but in the past two years the company has focused on building up the business and is now the leading Chinese brand, ahead of traditional leaders TCL and Bird. (Foreign brands such as Nokia (NOK), Motorola, and Samsung (SSNGY) are the only ones now ahead of Lenovo.)

With Lenovo's rapid progress in the cell phone business and Huawei's moves into 3G, some people see the beginnings of a trend, with Chinese companies becoming more influential outside of China. Ya-Qin Zhang, corporate vice-president at Microsoft (MSFT), is president of the company's China R&D group. He's impressed with the way Lenovo has been able to come out of nowhere in mobile phones to become the leading Chinese brand in just two years.

Zhang credits Lenovo's experience making PC hardware and software, which he believes helped the company roll out hardware and software for cell phones. Zhang sees more Chinese companies making their presence felt on the global stage. "A lot of companies are getting to be world-class," he says.

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