ZTE Plans Upmarket Expansion

China's ZTE Corp. has grown fast over the past decade. Last year, the firm also made waves in North America selling 14 models of handsets there, and became the world's No. 4 phone supplier by units.

Now the company, based in Shenzhen, is looking to move upmarket and expand sales overseas. In particular, ZTE's management has sights on North America, where the firm aims to broaden its device offerings with smartphones and tablet computers and to land higher-profile network-gear deals.

But the firm's ambitious plans raise new challenges. "We think our [revenue] growth last year was 16%-17%," said ZTE Chief Financial Officer Wei Zaisheng. "In the industry, our growth was relatively high…But there were a few situations last year."

The company has run into difficulties with governments in the U.S. and Europe over concerns about ties to the Chinese government and, in India over official security inspections for network equipment from China.

Mr. Wei spoke to Owen Fletcher about the challenges of managing a growing global telecom business. The following interview has been edited.
WSJ: ZTE's preliminary results said operating revenue last year rose 17%. What drove the revenue growth?

Mr. Wei: Maintaining growth in the Chinese market actually meant our market share expanded. Overseas, the Indian government's security-inspections incident halted our market in India in the first half, but it was restored in the second half. This had some impact on our overseas results. There was also the European Union's antidumping investigation [on certain wireless modems from China] and the U.S. government's interference in cooperation with operators. Without these situations, our growth may have been faster.

WSJ: Have you directly communicated with the U.S. government on its political concerns about ZTE?
Mr. Wei: As a company we can't directly communicate with a government. Our goal is to sell equipment, we don't have any other thoughts. We hope the U.S. government can be accepting of us. We believe our technology and our service abilities will win the recognition of the major U.S. operators. At least for Sprint last year, we should have had the qualifications to become their key partner. The government should promote a fair, equitable, normal and free commercial environment, and it shouldn't interfere in this.

WSJ: What measures are you taking in the U.S. to address the political issues and expand your business?
Mr. Wei: Right now mainly we hope to provide equipment for local operators, and for instance terminals for the big operators. We are waiting for more opportunities.

WSJ: ZTE is known as a low-cost producer. How will a rising yuan-dollar exchange rate affect you?
Mr. Wei: First, I don't accept the view that our prices are lower than our competitors'. Telecom-equipment prices should be at the same level for everyone. It's more your products and service that determine your competitive status. Price is not a competitive factor we are relying on in the global market. The yuan's appreciation will cause your prices to rise. But more important is your status in the market.

WSJ: What types of overseas investments are you considering to help reduce foreign-exchange risk?
Mr. Wei: As one measure in certain key countries we will build local factories. We hope to use the factories to extend the local market. In Brazil, Ethiopia and Venezuela we have mobile-phone factories.

WSJ: Will you build handset factories in Europe?
Mr. Wei: The timing isn't confirmed yet. We certainly must build them.

WSJ: Does ZTE hope to sell more own-brand phones?
Mr. Wei: We have a relatively open policy. We can use other brands or go dual-branded between ZTE and an operator. Overseas we hope to build ZTE's brand.

WSJ: Which markets will you focus on first for ZTE-brand phones?
Mr. Wei: High-end markets, like Europe and the U.S. In the U.S. we already have cooperation with the four big carriers on independently ZTE-branded terminals, mobile phones. We will increase the force of our investment on "smart" terminals [like smartphones]. Another thing is advancing from the middle and low end to the middle and high end.

WSJ: Will you use Android on all smartphones and tablets?
Mr. Wei: Android will have the leading role.

WSJ: Will you develop your own operating system?
Mr. Wei: We have no need to do that. Android has already become a very mainstream platform. It is competing with Apple.

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