What’s preventing Chinese phone manufacturers from breaking into Western markets?

February 2, 2014
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If you want cutting edge technology at a fraction of the usual price then you can find it in the Chinese market. We saw a range of impressive smartphones, phablets, and tablets from Chinese manufacturers like Lenovo, Huawei, ZTE, and Alcatel at CES this year. Apart from fast processors, big HD screens, and buckets of battery life, do you know what all these flagships had in common? No definite release details for the U.S. and most of Europe.

What’s the problem here? Is the carrier oligopoly shutting them out? Are patent disputes a problem? Is it just down to a lack of effort and marketing muscle?

Not for you

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Casting an eye back to CES 2013 reveals a similar pattern; a wave of impressive Chinese smartphones that caused a few raised eyebrows in the tech press, but never landed in the West, or touched down late and in a very limited fashion.

TCL-Alcatel was the perfect example this year unveiling the One Touch Idol X+ with a 2GHz MediaTek octa-core processor, 2GB of RAM, a 5-inch 1080p display, 16GB or 32GB of storage, a 13.1MP main camera, a 2MP front camera, and a 2,500 mAh rated battery. That’s impressive on paper by any standards and do you know what the R.R.P. on that phone is? $250.

I’ll just let that sink in for a minute. Two hundred and fifty dollars.

You may immediately think that build quality will be poor. Actually the design is pretty good; it’s only 7.9mm thick, exactly the same as the Galaxy S4. Check out our hands-on look to see for yourself.

There was no news about a U.S. release for this phone; instead we heard that Alcatel’s last flagship, the Idol X would be landing on Bell and Virgin Mobile in Canada. Americans can buy it direct from Alcatel’s website. The first European market to get the new follow-up, the Idol X+, is going to be Russia.

Those pesky carriers

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In the U.S. and much of Europe it’s the norm to pay nothing, or a seriously reduced upfront fee, and be locked into a two-year contract to get a brand new smartphone. You’ll typically end up paying more over the length of the contract than you would for a SIM-free handset, but your service is mixed in and it means you can get expensive phones without having to save up. This system gives carriers a lot of power.

If OEMs want U.S. carriers to stock their wares there’s often an expectation that they’ll give them some sort of exclusive deal, or that they’ll create a special version. Many manufacturers start out building carrier relationships by allowing the carrier to put their branding on the device, HTC did this with T-Mobile. Verizon built a strong Droid brand with Motorola and HTC. Samsung’s original Galaxy S was branded ten different ways in the U.S. to satisfy all the carriers and there were some subtle and some fairly major differences between the variations.

When consumers want your device, as with the iPhone, and you’ve built some bridges with carriers, like Samsung and HTC did, then you can expect them to be less demanding. They’ll throw some marketing weight behind your flagship and give it shelf space, although they’re always going to want a decent markup.

Are people asking U.S carriers where they can get the Lenovo Vibe Z, Alcatel One Touch Idol X+, or the Huawei Ascend Mate 2? Obviously not. You need to offer carriers something to sweeten the deal and work on marketing to build brand awareness. If a company like Sony is finding it hard to break onto the radar of U.S. carriers then you can imagine how tough it might be for lesser known Chinese OEMs. You may even wonder if it’s worth their time and effort.

Where’s the market?

Lenovo Vibe Z first look hands on

There’s a reason that analysts keep going on about emerging markets. The smartphone market in the West is saturated. Take a look at this recent IDC report and you’ll see that Huawei came third and Lenovo came fifth in overall worldwide smartphone market share for 2013. TCL-Alcatel and ZTE will undoubtedly have made the top ten. Then there’s Xiaomi and Oppo.

All these manufacturers are doing pretty well out of the Asia Pacific market and many of them have made inroads in Latin America and Eastern Europe. There have also been some moves into India and Africa. That’s where the customers are right now. So, why do they want to break into Western markets?

Low prices and direct sales are commonplace in other markets and there is a big difference between market share and profit. Taking the two most extreme examples in Q3 of 2013 the average selling price for a TCL-Alcatel handset was $45, the ASP for the iPhone was $581 (the lowest it’s ever been, having since climbed back up to $637).

The potential for profit is an obvious driving force, but even if Chinese manufacturers can build bridges with carriers, there are other obstacles to overcome.

Deck stacked against them

Huawei Ascend Mate 2 Phablet Hands on AA -2

We don’t think the patent war is a major barrier here. All the big smartphone manufacturers are suing each other; most of the big Chinese players are engaged in lawsuits amongst themselves. Huawei just settled with the Apple and Microsoft backed Rockstar consortium. This might factor into the cost of doing business in the U.S. and Europe, but it’s not going to block entry.

What have been far more damaging are the repeated spying allegations leveled at Huawei, ZTE, and Lenovo. It all seems pretty hypocritical in light of the torrent of revelations about how the American and British governments have been spying on everyone, but mud-slinging has an impact. Huawei has given up on the telecommunications equipment market in the U.S. and it was actually banned in Australia, the fact that’s separate from its smartphone business won’t register with a lot of people.

All the Chinese manufacturers accused have been quick to deny the allegations, just as Apple and Google were quick to deny any involvement with PRISM. You still have to figure that the idea of Chinese government involvement with these companies is off-putting for many. It’s another hurdle to jump if they want to attract customers and it’s another disincentive for carriers to strike deals with them.

Google opens the door

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There’s been plenty of talk about Google’s influence on driving down smartphone prices with the Nexus range and through Motorola with phones like the Moto G. Google has definitely shown that direct sales to consumers are another way to go, if the price is right. If people are prepared to buy direct from them, then Chinese manufacturers can gain a foothold that way.

Then there’s the news that Google will sell Motorola to Lenovo. This is going to be a really interesting test case. The first question is whether it will be allowed to pass. Lenovo was blocked from buying BlackBerry by the Canadian government, reportedly over national security concerns. Early indications are that the deal will go ahead, but not without some concessions.

Will Lenovo inherit Motorola’s existing carrier relations? Can it buy its way into the U.S. market with this move and start selling its own hardware with the Motorola logo? Lenovo could be the first Chinese manufacturer to make a serious breakthrough in the U.S. smartphone market.

The truth is that regardless of the branding on your smartphone, most, if not all, of it was probably manufactured in China. As Chinese manufacturers get better at producing premium hardware, cutting the middleman out of the equation could be inevitable, and it will mean cheaper smartphones all around. Some people may balk at that prospect, but voting with your hard-earned cash is what will count and who doesn’t love a bargain?

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