Pantech's North American Offensive
Michael Cost plots his next move from a workspace that spans 85,000 square feet but houses a mere 75 employees. If Cost has his way, the Cypress (Calif.) buildings won't be empty for long.
Cost, chief operating officer of mobile phone maker Pantech Wireless, is waging an increasingly aggressive campaign to transform South Korea's Pantech from a virtually unknown brand in the U.S. into a household name in a matter of years. And he'll try to ensure the office and warehouse space is teeming in no time.
Pantech is already moving up the market share rankings on its home turf, and in emerging markets like Russia and Mexico. The world's No. 7 cell phone maker quietly opened a North American offensive more than two years ago, hiring staffers in the U.S. and Canada, leasing offices, and opening negotiations with carriers. The efforts are bearing fruit.
Judging by Pantech's efforts so far, market leaders Nokia (NOK) and Motorola (MOT) ought to take note. In recent months, providers Cingular, Alltel (AT), and smaller outfits Helio and Disney Mobile (DIS) have begun carrying Pantech-branded phones. The same goes for Canada's second-largest wireless carrier, Telus. In early October, Sprint Nextel (S) started selling Pantech's wireless data card for laptops, a sign Pantech's attack may not be limited to phones.
More Pantech-branded handsets are on the way. Cingular Wireless, the biggest U.S. wireless service provider, plans to announce a whole range of Pantech phones in the first half of 2007, says Glen Lurie, president of national distribution for Cingular, owned by AT&T (T) and BellSouth (BLS). Disney Mobile, a tiny wireless carrier catering to kids, will introduce another Pantech handset in November. In the coming weeks, Pantech will also release a QWERTY-keypad game phone and a special phone for seniors, with larger fonts and a simpler look and feel.
Cost wants to see Pantech follow in the footsteps of Samsung or LG, South Korean handset makers that have taken the U.S. by storm in recent years—only Cost wants to see it happen faster. "I'd love to see us get a double-digit percentage of Cingular's handset sales in the next 12 to 18 months," says Cost, who was a handset purchaser for Cingular before joining Pantech six months ago. That's pretty audacious for a brand that, according to researchers, had zero U.S. market share in 2005. Cingular doesn't say how many phones it purchases, but it had 57.3 million customers at midyear, and users are upgrading handsets with increasing regularity. "Our brand will become a household name," Cost says.
That may be more than assertion. Pantech got its start in the 1990s as a pager maker and has long been known as a contract manufacturer for bigger, more recognized brands like Finland's Nokia. Pantech has been building up its own brand since 2004, and according to Cost generates a "large percentage" of contract manufacturing sales in North America. The company had global revenue of $282 million in the second quarter (it doesn't break out sales by region), and North American unit sales should grow 15% to 20% this year, in part thanks to sales of branded phones, Cost says. August was the best month ever for Pantech in North America, he says.
Part of Pantech's appeal to U.S. carriers is a willingness to feature the service provider's name prominently on phones. That's something established makers have traditionally resisted. More important, the first Pantech handsets have met with strong end-user demand. Cingular's first Pantech phone, the C300—the smallest camera flip phone in North America—"has exceeded our expectations" since it was introduced in June, says Lurie. "Their design is unique, the quality of their devices is top notch. We put Pantech through our very stringent certification process, and they did very well. [Pantech is] definitely on the upswing as far as becoming a larger player."
Much of the Pantech allure stems from unique design. Alltel sells Pantech's PN-218 phone, a compact device that shuffles ringtones. Internally, executives call it the "Hummer phone," says Wade McGill, senior vice-president of product management at Alltel. That's a testament to Pantech's look, often rugged and industrial. Think Hummer, versus, say, a Toyota Corolla.
Cingular, Alltel, and Helio, among others, already see Pantech phones as a hit with trendsetting teens and young adults. "Motorola has done a good job with thin phones," says McGill. "But we are constantly looking for a new variation on thin. At one point, the youth market will want something different because their parents are carrying the thin folder [phones, like the Razr]." Pantech is betting that once they see kids playing with the gadgets, parents will want its phones, too.
Having standout phones will become all the more crucial if and when Apple (AAPL) introduces its first mobile phone next year (see BusinessWeek.com, 10/19/06, "Another Music Phone? Yawn…"). "[The North American handset market] is a very conventional and a very boring market," says Yves Behar, the award-winning designer who had a solo exhibit in the San Francisco Museum of Modern Art and whose firm, fuseproject, was retained by Pantech a year ago. "If Apple comes in as a disruptive company that does what consumers want, it's going to be a market that's going to get re-energized," he says.
Pantech is doing its part to come up with out-of-the-ordinary designs. It has retained seven world-renowned design firms, including fuseproject and Lunar Design of the U.S. and Germany's Design 3, to develop prototypes of mobiles that hardly look like phones at all. When set on a desk, Lunar Design's Pivot concept phone folds out into an alarm clock or a photo- or video-viewing screen (see BusinessWeek.com, 8/21/06, "A Quantum Leap for Cell Phones"). Pantech's Wide Cube concept looks a bit like a Star Trek ship. "It's all about how design can make a difference," says Jeff Salazar, design director at Lunar. "[Pivot, for example], is not just a flip phone, it can do other orientations."
Behar, who previously designed for brands like Nike (NKE) and Birkenstock, has developed some 30 phone prototypes that could show up in Pantech's products as early as 2007. In July, Behar, chair of industrial design at the prestigious California College of the Arts (CCA), also hosted a four-day workshop that drew 20 Korean design students selected by Pantech to San Francisco to join 15 CCA students for a four-day phone design workshop. The results included a phone that looked like two pieces of clear glass sliding against each other and painted with an intricate design. Another student developed a phone with a nose—a built-in sensor that can sniff food being eaten to determine caloric intake. The device also acts as a pedometer that calculates calories burnt during exercise.
Pantech is also putting its money where its design is. The company devotes 57% of its workforce, or some 2,000 staffers, to research and development. Pantech, whose name in Korean means "all technology," sank more than $300 million into R&D last year. "At the end of the day, it's the magic of the product that makes you successful," says Behar. "Pantech can certainly put a dent with a magical product in the market."
It will also take money—lots of it—to muscle the competition. In handsets, competition is fierce. "They are trying to break out," says Neil Strother, an analyst with NPD Group. "Lots of luck. It's a crowded field." Several companies, including NEC and BenQ, have failed to gain traction in the U.S., he says.
To succeed where others have failed, Pantech will need patience and a willingness to sacrifice margins. That won't be easy for a company that reported a second-quarter loss due to a double-digit drop in exports elsewhere in the world, and it may not be in a position to sustain losses in North America for very long. In late October, the company is expected to announce a restructuring.
Cost says Pantech's rapid North American sales growth will help bring the company back to profitability. "North America is definitely one of our strategic marketplaces on a global basis," Cost says. "We believe that our pricing is extremely competitive and will allow us to operate profitably."