Telecom equipment maker stresses innovation, develops smartphones

ZTE Corp, China's biggest mobile phone maker and second-largest telecom equipment manufacturer, said the company will strive to improve its profits this year by effectively increasing the gross profit margin of its handset business.

Shi Lirong, chief executive officer of ZTE Corp, said in Hong Kong that ZTE hopes to restore its profits this year to their 2010 level, or even a little higher, though he didn't elaborate.

"We will endeavor to strike a balance between development for the future and present conditions," said Hou Weigui, chairman of ZTE.

The company's net profit fell 36.6 percent to 2.06 billion yuan ($327 million), according to the company's filing to the Hong Kong stock exchange. Shi pointed out that the lower handset gross profit margin was the biggest force dragging down profitability.

"The company's handset revenue grew very fast (in 2011), but its gross profit margin dropped," said Shi. The terminal business contributed 31.3 percent, or 26.93 billion yuan, to ZTE's total revenue, compared with 25.3 percent a year earlier.

However, the gross margin for ZTE's terminal business dropped to 15 percent in 2011, from 19 percent in the previous year. The handset business is part of the terminal business, along with tablet computers and other portable devices.

Shi said ZTE is still learning to compete in the smartphone market, but concrete measures have been taken to improve the handset gross profit margin.

"ZTE will enhance its technological innovation and we want to develop new smartphone models earlier than our rivals," said Shi. If ZTE keeps one step ahead of its competitors, the company is likely to earn more profits, he said

In addition, ZTE can use its economies of scale to cut manufacturing costs. Its two decades of close relationships with telecom carriers worldwide will also help it gain an upper hand in launching tailored mobile phones for operators, he added.

ZTE has promoted its mobile phone business since 2009. The company was the world's fourth-largest handset manufacturer by shipments in 2011. However, most of ZTE's mobile phones are aimed at low- to mid-end customers.

ZTE is gradually expanding its smartphone product line by adding more high-end models. Its competitor, Huawei Technologies Co Ltd, is also aiming to attract all sorts of customers.

Analysts said the two Chinese companies have demonstrated strong competitive instincts and gained momentum in seizing larger smartphone market shares since the fourth quarter.

Telecom equipment for carriers was still the biggest revenue source for ZTE, accounting for 53.9 percent of its total in 2011.

Its overseas revenue reached 46.76 billion yuan, or 54.2 percent of its total revenue, in 2011, up 24 percent. The growth rate was a little higher than that of the domestic market, which was 22.7 percent.

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