Chinese handset maker ZTE is now the fourth-largest smartphone vendor in the U.S., behind Apple (NASDAQ:AAPL), Samsung (NASDAQOTH:SSNLF), and LG. ZTE's share of the U.S. smartphone market rose to about 8% in the second quarter, up from just over 4% in the second quarter of last year, according to research firm IDC (via Bloomberg).
ZTE's rising popularity could eventually make it a threat to other handset vendors.
Going after the low end
ZTE's phones are available through most carriers, but are particularly dominant among among prepaid providers. Boost Mobile and Cricket Wireless feature ZTE smartphones prominently on their respective home pages. Like Samsung and LG, ZTE's smartphones are powered by Google's Android operating system. But unlike LG and Samsung -- whose expensive flagships retail for upward of $800 -- almost all of ZTE's phones are inexpensive. The ZTE Overture 2, for example, costs just $50, and the ZTE Sonata 2 is $30.
Unsurprisingly, these phones are far removed from high-end flagships like the Galaxy Note 5 or iPhone 6s, but they do offer a variety of features that were once class-leading. The $50 Overture 2 supports 4G LTE, offers a 5-megapixel camera, and comes equipped with a quad-core processor and a gigabyte of RAM. In other words, it's about on par with Samsung's Galaxy SIII, the Korean tech giant's former flagship that retailed for around $650 in 2012.
ZTE's growth is likely a byproduct of maturing smartphone technology. Until recently, it was virtually impossible to find a decent smartphone that retailed for under $100. In 2011, the best phone Boost Mobile offered was the Galaxy Prevail. It didn't support LTE, was equipped with a sluggish processor, and was crippled by a small, low-resolution display. Its camera was only 2 megapixels -- on par with camera phones from 2005. Still, it retailed for $180.
ZTE faces competition at the low end: Alcatel, HTC, Motorola, Samsung, and LG (among others) also offer cheap Android smartphones. Nevertheless, ZTE appears to be doing well.
Growing price competition could hurt top Android vendors
For a discriminating consumer, a $50 ZTE phone certainly won't replace an expensive Samsung Galaxy, but growing competition at the low end could put pressure on Samsung's North American mobile business, perhaps swaying an increasing number of Android buyers over time. Both Samsung's and ZTE's phones exist within Google's Android ecosystem, offering access to the same apps and services.
In China, Samsung has already felt the effects of growing price competition. Over the last year, its profits have tumbled as its share of the Chinese smartphone market has dwindled. In the first quarter of 2014, about one in every five smartphones sold in China was made by Samsung. That fell to just one in 10 in the first quarter of this year. Other Chinese vendors, including Xiaomi and Huawei, have seen their market shares rise as consumers flock to their low-cost handsets.
ZTE has shown interest in going upmarket. Last month, it launched the ZTE Axon Pro, its first true North American flagship. Its specs are on par with Samsung's competing Galaxy S6, but it retails for about 30% less ($650 vs. $450).
Apple, with its proprietary mobile operating system, should remain somewhat insulated. Consumers who want a phone powered by iOS have no choice but to go with Apple. Ever-cheaper Android phones could eventually cause some loyal iPhone buyers to question their purchase, but with its use of the Android operating system, ZTE poses a much bigger threat to Samsung than Apple.
ZTE lacks the name recognition, marketing budget, and profitability of Samsung and Apple, but in terms of U.S. market share growth, over the last year it's been more successful than either. As the capabilities of its cheap smartphones increase, it could emerge as a threatening rival.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns and recommends Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.