Can ZTE catch up to its wireless ambitions?

Phil GoldsteinI spent last week traveling through China on a media tour sponsored by ZTE. Just like China itself, I think ZTE is a rising power that wants to take a more prominent role on the world stage. The company has daring goals: to be a top three handset maker in the next four years, and to be one of the top three mobile infrastructure vendors. To reach these milestones, it will have to prove to operators in Western Europe and North America that its devices and solutions are not only more cost-effective than those of its rivals, but more attuned to carrier needs.

When I was traveling to the Shanghai airport aboard a bullet train going 267 miles per hour, and gazing at the sprawl outside, I got a sense of the potential of both China and ZTE. With a wireless penetration rate in China hovering around just 60 percent, it's clear there's plenty of room for both wireless carriers and vendors like ZTE to grow.

In handsets, ZTE faces a difficult task. The company can count on 3G growth in the domestic market to propel sales (China Mobile, China Unicom and China Telecom just started building their 3G networks last year), but it faces a tough road in cracking more developed markets. To assume a top three position (from its current position of around No. 7), it will have to supplant not only Sony Ericsson and Research In Motion (NASDAQ:RIMM), but also either Nokia (NYSE:NOK), Samsung or LG. Liu Len, ZTE's global director of handset marketing, told me that the company's strength lies not only in its ability to customize its products to suit carriers' needs, but also in its ability to transfer knowledge from its infrastructure business into handset design.

I'm not sure how much those strengths will count in more established markets though, especially in the cut-throat smartphone market. It took years for Taiwanese firm HTC to establish its brand and develop a reputation for delivering compelling, cutting-edge products, as well as establish its ties with carriers--and it's still a relatively small player in terms of market share. As smartphones grow in importance, ZTE will have to differentiate itself from its rivals on multiple fronts, including industrial design and in software. It will also have to establish closer relationships with U.S. carriers, something which has so far proved elusive.

On the infrastructure side of the house, where ZTE still does the majority of its business, the company has a more compelling case to make. Xu Ming, ZTE's vice president of wireless products, made a solid point when he said that Ericsson (NASDAQ:ERIC) has been successful not because it provides the cheapest solution, but because of its technical expertise. ZTE believes, he said, that its continual investment into research and development, coupled with its lower prices, will allow it to slide ahead of rivals Alcatel-Lucent (NASDAQ:ALU) and Nokia Siemens Networks, both of which are suffering. Indeed, such a move has precedent: Huawei has been battling NSN for the world's No. 2 slot.

In fact, though ZTE executives would never admit this, I think the company hopes to emulate Huawei, ZTE's larger cross-town rival in Shenzhen. ZTE officials went out of their way to point out the differences between the two firms, especially that ZTE is a publicly traded (and thus more transparent) company. Yet for ZTE to succeed in the long-term, it will have to do what Huawei has done: parlay its success in emerging markets into more developed ones; convince operators that its solutions are just as good, if not better than those of the Western vendors; and, above all, demonstrate that it has the right mix of price and technical skill.

ZTE has a wide product range and strong foundation of R&D. Further, it has been encroaching on Western markets, recently winning a WiMAX deal with Clearwire Spain and a software-defined radio deal with Portugal's Sonaecom that includes an upgrade to LTE. Now it needs to score a contract with a Western Tier 1 operator. Once it does that, perhaps more operators, including U.S. carriers like Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T), will consider ZTE for future phases of their LTE deployments.

ZTE does not lack ambition, strategy or vision. What it lacks right now is the confidence of the major Western operators. --Phil