How ZTE is winning the US market

No-contract strategy attracts customers

China's ZTE Corp is getting the jump on its rivals in the no-contract mobile phone market by transforming itself into a smartphone maker that big US carriers can no longer take for granted.

ZTE's 85.7 percent surge in first-quarter sales compelled research firm Strategy Analytics to name it the fastest-growing US smartphone vendor of the past year. ITG Market Research ranked the Shenzhen-based maker of telecommunications gear the third-largest US smartphone maker, with 17 percent of the nation's prepaid handset market, trailing only South Korea's Samsung Electronics Co and California's Apple Inc.

"Our strategy's working," Lixin Cheng, CEO of ZTE USA, told online technology news outlet Engadget in a recent interview.

Notably, ZTE - the subject of a US Congressional investigation last year over concerns that its work with telecommunication companies constituted a threat to national security - is beating big-name rivals such as Sony, HTC and LG without any major smartphone releases in the United States.

But while its success in the pre-paid market has boosted its US brand awareness, ZTE still aims to market its more lucrative high-end phones to Americans, no small challenge in the fiercely competitive US marketplace.

Asked when ZTE would bring flagship phones like its Grand S or Grand Memo to the US, Cheng told Engadget, "We are working on that, and I think that very soon we will announce some good news." The Grand S has a 5-inch (12.7 cm) screen and 6.9mm thin body shell. The Grand Memo is a 5.7-inch smartphone/tablet hybrid.

Almost all of ZTE's 18 US-released phones have gone to the pre-paid, or pay-as-you-talk market - in which users can top up their balance at any time using a credit card, paying through an ATM, or buying a refill card, among other methods.

Prepaid phones - which may have a time limit such as 90 days from the last credit addition - are an alternative to mobile phone contracts, which involve a billing arrangement that can last anywhere from 30 days to 24 months.

Working with carriers such as AT&T Inc, Boost Worldwide Inc's Boost Mobile, MetroPCS, and Cricket Communications Inc, and by making phones available without a contract or activation fees, ZTE is luring customers away from its rivals - both in the US and on its home turf. In China, ZTE has "taken full advantage of the nation's obsession with the smartphone, especially for those not wanting to spend potentially thousands of dollars for an Apple or Samsung flagship phone, and contract", DigitalTrends reported.

A recent study by PriceWaterhouseCoopers LLP found that no-contract plans generated 29.2 percent of total mobile service revenue in 2012, up 7 percent from the prior year. ZTE cited other studies showing that one in four new phone users are expected to choose a no-contract plan this year, increasing to one in three people by 2014.

ZTE's growth in the pre-paid market has surprised the industry. In February, a Nielsen study showed that just 15 percent of US smartphone buyers prefer a no-contract plan. By contrast, prepaid services are the choice of 51 percent of smartphone owners in China.

Chen noted in the interview that ZTE's research into customer preferences helped it overcome initial US resistance to prepaid plans. "We did some studies looking at what consumers care about. So we have a list of things that itemizes what kind of features they really like," he told Engadget.

"It's not what is talked about in the media, but actually what the consumer uses from day to day. That's why we've spent a lot of time and resources to improve those features and then bring that really true, unique user experience to consumers."