Chinese manufacturer ZTE has been hit by a seven-year ban on any purchases from the US, as a result of ZTE supplying telecoms equipment to Iran and North Korea. This includes hardware such as chipsets and memory modules but more importantly also prevents it from licensing Google’s Android mobile operating system. This leaves ZTE without any viable operating system to use on its smartphones. ZTE is also one of the largest suppliers of mobile broadband dongles which will also face significant problems following this purchase-denial order.
Smartphones are not ZTE’s main business, but they still constitute a significant part of its business. This order shuts that down in the short term, requiring a major restructure if it is to continue. While it might be possible for ZTE to source replacements for the hardware to which it no longer has access, there is no viable alternative to Google’s services outside of China.
ZTE has a long pedigree in handsets but it has not grown as quickly as compatriots Oppo or Xiaomi in recent years. It still sold 45 million smartphones in 2017, but that was actually a decline of over 20% from 2016. ZTE’s smartphone business was focused on the US and China primarily but had also made inroads into other developed markets. ZTE could continue to operate Android in China as it (together with all other Chinese brands) does not use any Google services for its domestic devices, only the Android Open Source base.
Without ZTE’s presence in North America, a door is now opened to other low-cost brands to move in, potentially heralding a wave of aggressive moves into the US market from other low-cost vendors. Previous attempts to push into the US market from the likes of LeEco have failed abysmally and at high cost, but Xiaomi and Oppo are likely sizing up the opportunity to replace ZTE in stores across the US. US operators remain wary of working with Chinese brands, however, as Huawei’s abortive partnership with AT&T from earlier this year shows.
ZTE is also one of the leaders in 5G development, so this order could potentially slow down the spread of 5G handsets to lower price points. ZTE said at MWC this year that is was aiming to launch a 5G handset in 2018, but Ovum believes it would be a demonstration device at best, similar to its “world’s first gigabit smartphone” a couple of years ago. Nonetheless, ZTE would likely have been one of the first 5G smartphone providers – something that is now at risk.
ZTE’s international handset business simply cannot continue in its current form; it has no alternative to Android that it can turn to, and it does not have the influence to bring its own non-Google version of Android to market. ZTE could potentially work with Jolla and its Sailfish OS, and many Android apps are compatible with Sailfish. For both options though, ZTE would struggle to convince consumers to buy smartphones without access to Google Play and will always have a partial app offering in comparison to Google Play enabled handsets. ZTE could completely reboot its smartphone business, but it will require huge levels of investment – both in development and marketing – to do so.
It will likely continue with its domestic smartphone business as is and will probably double down on its marketing domestically to try to gain share to replace some of its lost international sales. ZTE has de-emphasized China in favor of North America in recent years, so it has a lot of ground to make up before it has a significant market share in China again.
ZTE’s likely demise in the international handset market will create a gap, but one that will be rapidly filled by a large number of brands. Competition in the handset market is intense, so operators and retailers will likely have a large number of suitors looking to capitalize on ZTE’s difficulties.
The most intriguing possibility though is that this creates an opportunity for Oppo and Xiaomi to push into North America. Xiaomi has made no secret of its ambitions in North America, and both Xiaomi and Oppo have ample resources to launch major marketing campaigns in the US and Canada. Oppo technically already has toehold in the US market through its subsidiary OnePlus, which should give it credibility and a brand to build around in the US if it wants.
However, the hostility of the US government towards China currently means that the greatest opportunity is there for non-Chinese brands that can much more easily work with US operators and gain access to US stores. LG already has a large presence in the US and will likely try to expand this. LG will struggle to replace ZTE’s presence in the value segment, so smaller brands like US based Blu could potentially make large inroads.
This dramatic ban on ZTE should also increase interest in alternatives to Google’s Android ecosystem, particularly among other Chinese vendors, given the US government’s aggressive stance towards China. While Ovum does not believe that non-Google Android will be viable outside of China, manufacturers will be keen to have their options open just in case.
Mobile Handset Forecast: Sales, Installed Base, ASP, and Revenue, 2017–22, CES004-000005 (January 2018)
Mobile Handset Sales Forecast Update, January 2018, CES004-000010 (February 2018)
Daniel Gleeson, Senior Analyst, Consumer Technology