China's smartphone makers should improve brand, innovation

Chinese handset makers are competing well against more established foreign rivals even as they transition from feature phones to meeting smartphone demand from consumers, but they will need to improve on brand standing, ability to innovate and channel distribution to break into high-end smartphone market.

According to Gartner's research director Sandy Shen, Nokia and Samsung remained the top two smartphone vendors in terms of shipment in the third quarter of 2011, while Huawei came in third ahead of Apple at fourth and local rival ZTE at fifth.

With the rankings in mind, she said the two Chinese brands are "doing a reasonably good job" when competing against their foreign rivals in the smartphone market. Other companies, which had built their businesses on feature phones, are also transitioning to the smartphone market and this likely explains their low market shares, she noted, adding that this does not mean they are not doing well.

"After all, smartphones only account for about 20 percent of total mobile shipments and they still have to serve the feature phone market, where the demand is still quite large," Shen explained.

The future for Chinese phonemakers is looking rosy, too, as the Gartner analyst noted that China has yet to surpass the United State's smartphone market although that will happen over the next few quarters. An earlier report showed that while China's smartphone shipments had surpassed the U.S. for the first time, boosted mainly from the influx of low-cost Android devices and aggressive operator subsidies, the American market remains the biggest in terms of revenue.

The good showing of China's handset makers should come as no surprise either, said Sun Kai, telecom analyst at GfK Group.

"The prosperity of the Chinese smartphone market attracts hundreds of foreign and local handset vendors. Although foreign brands occupy the majority of the market share, local brands are aggressively penetrating the market," he stated. The GfK analyst said local brands are cornering the low-end and operator-subsidized smartphone market. Some local companies such as Huawei and ZTE, which have grown into global giants in the telecom equipment and mobile devices businesses, have also leveraged on their familiarity with mobile operators to gain an advantage in the market, he added.

"The year of 2011 witnessed the soaring of low-price smartphones driven by operators. And local brands are absolute winners of this market boom," Sun said.

Learn from the best
That said, Chinese mobile makers can learn from their rivals, which have several competitive advantages over them outside the low-cost smartphone arena, he noted.

Firstly, vendors such as Nokia are market pioneers and, as early movers, these brands have gained more knowledge about these devices. Chinese brands will need to play catch up though, and find their own way in product development, promotion and distribution, he said.

Sun added that these foreign manufacturers also have "strength in innovation", which further consolidates their dominant position. Innovation in smartphone apps and services, in particular, has stimulated new consumer demands and businesses. "Foreign brands lead that innovation wave while local brands are confronted with technological barriers once they enter the market," he noted.

These established vendors would also have benefited from a mature distributional channel in the open market, as they have invested in these channels since the feature phone era, the analyst stated.

To better compete, local Chinese companies need to emulate their competitors' strengths to break into the high-end smartphone market, Sun surmised. "Chinese brands should improve their brand image, strengthen ability to innovate and optimize distributional channels," he said.

Elaborating, he said a better brand image helps to attract high-end customers, differentiate Chinese vendors from their competitors, and increase customer loyalty. They will also need to change their sales tactics and wean themselves off their dependence on operators.

"Being highly concentrated on the bundle channel implies that most local products are sold with operator subsidies. To boost their domestic market share, strong distributional channels in the open market is essential," Sun suggested, adding that having a strong presence in both open and bundle channels is fundamental to achieve market dominance.

Beyond branding and channel distribution, Shen added that localization is another important factor for differentiation. Chinese smartphone vendors need to look for features that are favored by local users to attract their attention, she said.