Mobile World: Chinese phone makers moving up the mobile food chain

This story ran in the print edition of The Seattle Times on Feb. 18, 2011. -Sharon Chan

BARCELONA, Spain -- Chinese phone makers want to do more than make low-end phones and iPhone knockoffs, and some companies showed they can do it at Mobile World Congress this week.

Huawei and ZTE both showed smartphones that, while not yet competitive with manufacturers such as HTC and Samsung, are a big jump upward in the mobile food chain. The rise of the Chinese phone makers puts them on a path behind Taiwanese counterparts.

The Ideos X3 smartphone and S7 Slim tablet Huawei introduced at Mobile World Congress were the strongest sign of the company's ambitions. In September, Huawei launched Ideos, what it called the world's "first affordable smartphone," which ran the Android 2.2 Froyo operating system and doubled as a wireless router for up to eight devices. European carriers and smaller U.S. carriers, such as Metro PCS and Cricket, sold the phone, priced at $150.

This week, Huawei introduced the next-generation Ideos phone, the X3, running Android 2.3 Gingerbread with a 3.2-inch touchscreen. The phone is competitive with devices that more upscale phone makers were making a year or two ago.

Will Stofega, analyst at Framingham, Mass.-based research firm IDC, said it's worth watching the Chinese phone makers, and noted that even Nokia Chief Executive Stephen Elop called out Shenzhen phone makers in a meeting with analysts.

"They created the bandit phone market," but they can do more, Elop said. The term "bandit phone" refers to knockoff phones, such as iPhone imitators.

Google's Android operating system has given an unexpected boost to Chinese phone manufacturers that aspired to build more sophisticated smartphones. The free operating system means the phone makers can build smartphones without having to pay for or fund development of their own operating system.

In fact, with Android leveling the playground, many higher-end phone makers are building their own software on top of Android to differentiate their phones. Examples include Motorola's MotoBlur and HTC's Sense.

Huawei says its goal is to bring smartphones to the mass market.

"The tipping point for smartphones we felt was $150," said Ross Gan, head of corporate communications at Huawei. "The smartphone used to be for business users. ... But at that price point, you get into mass adoption."

The Shenzhen, China-based company built its business making infrastructure equipment for wireless carriers. In 2009, the company tried, and failed, to acquire 3Com, based in Marlborough, Mass., over national security concerns. Hewlett-Packard eventually bought 3Com.

Just this week, another issue arose over the company's acquisitions. Huawei reportedly told the Chinese Commerce Ministry that a U.S. security review panel said Huawei must sell 3Leaf Systems, which it bought last May, or it would recommend that President Obama cancel the deal. Santa Clara, Calif.-based 3Leaf develops cloud computing technology.

Huawei started making devices in 2003, working with carriers as an original design manufacturer and building privately branded devices customized for the carriers.

The Ideos phones show the company wants to establish its own brand. The device business now makes up 14 percent of the company and includes feature phones, wireless USB modems for laptops and smartphones. Huawei says it has 50 percent of the USB dongle market.

"The whole industry sees that they're going to continue to grow and they're going to continue to move up market and work on more and more smartphones," said Mike McSherry, chief executive of Seattle-based Swype, which develops touchscreen keyboards. Huawei is a Swype partner. "We've seen tremendous growth of Huawei's device numbers through Q4 and Q1 with our work with them."

McSherry was in a meeting with a wireless-carrier executive who slid two phones at him, one that cost $400-plus and a Huawei phone that cost $150. McSherry said it was hard to tell them apart without turning them on.

The competition should benefit customers with lower prices for smartphones that can surf the Web and run apps.

The Chinese phone makers may be hoping to follow the path set by Taiwanese phone maker HTC, which has its North American headquarters in Bellevue. The company used to be a private label phone maker for the carriers, but began marketing and branding itself as "quietly brilliant" in 2009.

McSherry says if Huawei and ZTE want to follow HTC, they will need to spend a lot more money on marketing.

"You're going to see a lot of pricing pressure when they are going to produce more and more units," McSherry said, "but building a strong consumer brand is something that requires marketing dollars."

Material from The Associated Press was included in this report.

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