At this point, we’re all familiar with the words "made in China," but a recent survey found that only 6% of Americans
can name a Chinese brand. It’s one of the great disparities of globalism. For all of the overseas goods that end up in US markets, very few Chinese companies have made it big on this side of the Pacific. Language and culture barriers play a role, no doubt. So, too, does a lingering perception of poor quality. One could also point to the long shadows cast by Congress and the WTO; compete too openly against American businesses, and you’re liable to find yourself the victim of national security
, or the target of trade complaints.
China’s smartphone industry may change all that. It’s one of the country’s most dynamic sectors, ranging from hot startups like Coolpad and Xiaomi, to multinationals like Huawei
(SHE:002502) and ZTE
(SHE:000063). There’s an air of confidence ab
out these firms, and also determination. They want to perform on a global stage
that few Chinese companies have reached, and most of them have announced plans to expand into the US over the next year. Gone are the days of low-priced knockoffs. Huawei’s Ascend P6 and Lenovo’s
(HKG:0992) K900 are making a credible stab at the high end of the sector, although not widely available in the United States. Xiaomi is targeting the budget market, but with an eye to design and quality control that hasn’t always marked Chinese goods.
What’s changed? For one thing, overseas manufacturers have cut their teeth producing high-end devices for Apple
(NASDAQ:AAPL) and Samsung
(OTCMKTS:SSNLF). Today, Foxconn is more than just an assembly line; it’s the focal point for a sprawling Asian supply chain. When Xiaomi was getting started a few years ago, it didn’t have to reinvent the wheel. A good design and a partnership with Foxconn were all that was needed.
(Also see: Apple Whips iPhone Users With Their Own Third-Party Cables.
The suppliers have improved as well. Many Chinese smartphones now run on processors
(TPE:2454), whose chips don’t offer the same performance as offerings from Nvidia
(NASDAQ:NVDA) and Qualcomm
(NASDAQ:QCOM), but come close, and at a lower price. Like Xiaomi, Mediatek is trying to carve out a middle ground between quality and price – territory left vacant by Western firms as they chase the high end. With the smartphone industry commoditizing, and performance improvements becoming less important to many people, this is a compromise that could prove popular.
Something that hasn’t changed is the willingness of Chinese firms to sell for little or no profit. There are a number of reasons for Lenovo’s success in PCs, but a big one is low margins – less than half of those at competitor Hewlett-Packard
(NYSE:HPQ). Mediatek may be Taiwanese, but it follows a similar approach; in 2012, the chipmaker settled for operating margins less than one-third of Qualcomm’s. Xiaomi has already said that it plans to sell hardware at cost, and make profits on the software side. American companies find themselves in a tough position. Shareholders have become accustomed to a certain amount of profitability, and it’s no easy task convincing them that less is more.
As they try to break into the US, the great barrier to entry for China’s smartphone makers – aside from a momentary lack of LTE models – is carrier subsidies. AT&T
(NYSE:T) and Verizon
(NYSE:VZ) have built businesses around subsidized handsets and expensive data plans, driving consumers towards high-end devices like the iPhone. This basically eliminates any cost-savings of going with a cheaper device like Coolpad’s Quattro 4G.
(NYSE:TMUS) made headlines earlier this year when it moved away from subsidies and cut the price of its data plans. It subsequently acquired MetroPCS, another contract-free carrier. The unsubsidized model is both an opportunity and a hope for Coolpad, Huawei, and the rest. An opportunity because they finally have a venue to put their case before the American consumer; and a hope because, if T-Mobile’s experiment pays off, the larger carriers may decide to copy it
. Here, too, commoditization of smartphones is playing a role. As hardware upgrades become more incremental, there’s less reason to buy a new phone every two years – and less incentive to pay for an inflated data plan.
Of course, these ambitions could all pan out. National security remains the elephant in the room, and no one can predict what effects NSA-gate will have on trade in the digital economy. China is another question mark. Rising wages have dented its competitiveness, and a groaning financial industry could spell trouble. When all is said and done, the US might remain the land of made-overseas-but-branded-locally. Either way, China’s smartphone makers are angling for their day in the sun; and with them pushing hard over the coming year, we’ll soon known whether or not they get it.
Tim Cook Will Not Be the Victim of an iCahn
Apple's Pattern of Rip-Offs Forces Customers to Buy New or Pay Up
Social Media: Why It's the Next Bubble to Burst
No positions in stocks mentioned.