The Cheap Phones Quietly Winning the U.S.
In most AT&T, Sprint, or T-Mobile stores, it takes a while to find the ZTE phones, buried in the back, past the latest from Apple and Samsung. But they’re there. In AT&T stores it’s the ZTE Maven, which has a screen, speakers, and a processor with capabilities somewhere between the iPhone 5 and 6. As Tony Greco, ZTE’s head of U.S. retail marketing, puts it, “These were state-of-the-art features two years ago.” The Maven’s draw, really, is price. Without any subsidies from a wireless carrier, the phone costs just $60. And it’s not even one of the company’s cheaper models.
ZTE is quietly becoming a force in the U.S. by selling good enough phones at low prices—smaller prepaid smartphones for $30, basic phones with QWERTY keyboards for about the same, and so on. The Chinese company’s products are among the cheap phones of choice at three of the big four U.S. carriers. (Verizon doesn’t carry them.) ZTE claimed about 8 percent of America’s smartphone market in the second quarter of this year, says researcher IDC, up from 4.2 percent in the first quarter of 2014. That ranks the company fourth among smartphone makers overall, behind Apple, Samsung, and LG. “We came from nowhere, and now we are a solid force,” says Lixin Cheng, head of ZTE’s U.S. operations.
In the U.S., the company was best known for years for making network routers and switches for mobile operators. Its phone sales are all the more surprising because it’s been frozen out of the more lucrative telecom networking market since 2012. That year, the House Intelligence Committee issued a report warning that China’s intelligence services could potentially use ZTE’s equipment, and those of rival Huawei Technologies, for spying. Huawei then dismissed the allegations as “little more than an exercise in China bashing.”
“We were unfairly lumped in with those complaints,” says Cheng. But in any case, officials “made it clear that phones weren’t a concern.” So while Huawei essentially moved out of the U.S., shifting the North American focus of its networking equipment business to Canada, ZTE began concentrating on smartphones. Cheng, an Ericsson veteran who joined the company in 2010, figured that American consumers wouldn’t know or care about the congressional heat.
After starting modestly with small carriers such as MetroPCS, ZTE landed some of its prepaid phones in bigger carriers’ stores and expanded from there. Besides phone stores, its products are on sale at Wal-Mart, Target, and Best Buy. While the brand is hardly famous, it’s doing much better in the U.S. than Chinese powerhouses such as Lenovo, which has seen its share of the market drop from 5.3 percent to 3.1 percent since the first quarter of 2014. Chinese leader Xiaomi, which is focused on emerging markets such as India and Brazil, has avoided the U.S. so far.
To boost its U.S. street cred, over the past two years ZTE has teamed with the NBA’s Houston Rockets to make phones with their logo and app, and is also working with the New York Knicks and Golden State Warriors. To win over critics in Washington, the company has upped its lobbying expenditures from $170,000 in 2011 to $950,000 last year, according to Senate records. “ZTE is a little shrewder in how to work in the American market” than other Chinese phone makers, says James Lewis, a senior fellow at the Center for Strategic & International Studies, a Washington think tank.
ZTE’s next challenge in the U.S. will be translating higher sales into higher revenue. While its U.S. market share has nearly doubled since early 2014, quarterly revenue is up 4 percent, from $354 million to $369 million, according to IDC. That means ZTE has gained share only by making its phones cheaper. And it doesn’t have the home market to fall back on: The company is No. 8 in China with just 3 percent of the market, down from 10 percent in 2012, according to researcher Canalys. The nation’s stock meltdown has carved 36 percent from ZTE’s Hong Kong-listed share price since its June peak, leaving its market value at $10.3 billion.
In July, ZTE rolled out the Axon Pro, a higher-end phone that sells for $450 on its website, Amazon.com, and EBay. It’s unclear whether customers will respond to, or even notice, the sleeker model, but Peter Ruffo, senior director for government relations at ZTE’s U.S. arm, says the campaign to change the company’s image will pay off eventually. “ZTE is taking the long view,” he says. “We are very patient.”
The bottom line: ZTE is now the No. 4 smartphone brand in the U.S., but its increased share hasn’t yielded much revenue growth.
(Updated seventh paragraph to clarify IDC's revenue figures as quarterly estimates.)