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Swimming against the current: Two Chinese vendors ready to take the plunge in U.S.

IF NOKIA CORP. HAS TO REFRESH its efforts in the United States to solidify carrier relationships, as it said last week, two Chinese handset vendors entering the market may similarly have to gird for the long haul-though ambition is a good place to start.
The industry will know more about these vendors’ prospects at the upcoming CTIA Wireless 2007 show, when they make planned announcements on carrier partners and handset launches and describe their strategy in some detail.
But the news that TCL Communications, a subsidiary of Chinese electronics manufacturer TCL Corp., and ZTE USA, a new subsidiary of the Chinese network equipment and handset company ZTE Corp., will enter the U.S. market reflects a driving ambition and raises perennial issues for new market entrants. With a wave of consolidation anticipated in the maturing, global handset industry, launching handsets in the U.S. could be viewed as a bold, even contrarian move.

TCL to use Alcatel brand
TCL has already announced
that it will bring its products to North American GSM carriers under the brand Alcatel Mobile Phones, which are already sold in Europe and Asia, as well as Central and South America. Though the vendor’s specific plans haven’t been announced, the company’s distributors-Cellatel and Quality One Wireless-have said they will handle distribution to tier-one and tier-two carriers, respectively. Whether that includes a tier-one carrier in the U.S. is not yet clear, but could be crucial to success, according to analysts.
Alcatel Mobile Phones takes its name from the well-known French infrastructure company, which formed a joint venture for handsets with TCL in 2004. A year later, Alcatel sold its 45-percent stake in the JV to TCL, which acquired the rights to use the Alcatel name for 10 years. The infrastructure company, of course, subsequently acquired the U.S.-based Lucent to become Alcatel-Lucent.

ZTE targets EV-DO, WiMAX
ZTE USA plans to announce its own launch of handsets with U.S. CDMA network operators at CTIA and has said that its U.S. plans include a focus on CDMA2000 1x EV-DO, WiMAX and home-gateway equipment. ZTE’s global handset business may be fueling its U.S. ambitions. It recently landed a contract with Vodafone Group plc, one of the world’s largest carrier, for low-cost phones.
Neither ZTE nor TCL was able to provide a spokesperson last week by press time to clarify their announcements.

Three’s a crowd?
Huawei, another well-known Chinese vendor of handsets and infrastructure, is planning to introduce new products at CTIA as well, but it was unclear at press time whether that included a handset launch here.
“Huawei is prepared to serve the North American market and is working toward potential opportunities,” spokesperson Sing Wang wrote in an e-mail in response to questions.
As M:Metrics’ analyst John Jackson recently remarked in discussing the prospects for new market entrants in the context of consolidation, “the barriers to entry are low, the barriers to scaling up and breaking even are high.” Thus brand, scale and carrier deals are critical pieces of the U.S. puzzle for ZTE, TCL’s Alcatel Mobile Phones and Huawei, should the latter also take the plunge.

New frontier
Conditions in the Chinese handset market, however, differ greatly from market conditions here, according to one analyst.
“The Chinese handset market is one of the most vibrant in terms of the number of handset vendors and consumers,” said Roger Entner, analyst at Ovum.
“That market has successfully de-coupled the choice of handset and the choice of wireless provider. This is diametrically opposed to the situation here in the U.S. That means that these two vendors’ biggest challenge is landing a carrier contract.”
The size of the carrier is critical to success in scaling up volumes, Entner said. A tier-two carrier gets a vendor’s foot in the door, but does not offer the potential for significant volumes in comparison to the tier-one carriers. Eighty percent of handset sales volumes is driven by relationships with tier-one carriers. Even among tier-one carriers, size varies by degrees of magnitude. T-Mobile USA Inc., the smallest tier-one, has about 25 million subscribers, in contrast to Cingular Wireless and Verizon Wireless, which each have more than twice that number.
“Watch for the carrier deal,” Entner said.
New vendors entering the U.S. market also face a high level of innovation in handset offerings here, according to the analyst.
“In a stagnant market, Chinese vendors can win on cost, but innovation drives the market here,” Entner said. “When Motorola (Inc.) spends $4 billion a year on research-and-development, you’ve got an immense challenge.”

Bravado
Given the daunting conditions for success in the U.S., what would motivate Chinese vendors to enter the market?
“Bragging rights,” Entner said.
Both ZTE and TCL have good businesses in China, the analyst said. Successfully selling their handsets in America would bring prestige at home.
As for American perceptions of brand and quality in Chinese handsets, Entner said “there’s no perception of Chinese value here. Neither name stands for anything in the U.S. They’re starting from scratch. Perhaps TCL is wise to use Alcatel’s name in Europe, but ‘Alcatel’ means nothing in the U.S.”
According to Chris Ambrosio, analyst at Strategy Analytics, scaling up fast and obtaining brand luster-probably the motivation behind TCL’s use of Alcatel’s name-is critical. But major Chinese handset vendors such as ZTE and TCL don’t appear oriented toward major, brand-oriented acquisitions in the U.S.
“Their pockets are deep and they can compete on their own,” Ambrosio said.

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