Can ZTE Mobile achieve a comeback by betting on 5G as it resigns from senior executives, suffers losses and lays off employees?

In early April, ZTE announced that Zeng Xuezhong, executive vice president of ZTE, resigned from the company's executive vice president position for personal reasons and will no longer hold any position in ZTE in the future. It is reported that Zeng Xuezhong has served as executive vice president since January 2014, in charge of the terminal business unit and responsible for global operations. His official explanation for his resignation was personal reasons, but it was actually related to the poor performance of the smartphone business he was in charge of.

In late March, shortly before Zeng Xuezhong left, ZTE released its 2016 annual report, achieving operating revenue of 101.23 billion yuan, a year-on-year increase of 1.0%. However, what is more striking is that ZTE suffered a net loss of 2.36 billion yuan in 2016, a decrease of 173.49% compared with the net profit of 3.207 billion yuan in 2015. This is also the second loss for ZTE in its 20 years of listing.

On the surface, the direct cause of ZTE's huge losses is that ZTE recently reached a settlement with the US Department of Commerce, admitting to violating relevant US sanctions against Iran and agreeing to pay a fine of US$890 million. But in fact, ZTE's bigger problem is weak revenue growth, declining mobile phone business, and too low operating profit margin, especially the disappointing performance of the mobile phone business that was once highly expected.

Poor performance, mobile phone business becomes the hardest hit area for layoffs

At the beginning of this year, there were reports that ZTE would lay off 3,000 employees. At that time, ZTE had 60,000 employees worldwide, and this time it would lay off about 5%. Among them, the global mobile phone business department will lay off 600 people, accounting for 10% of the total number of employees in the mobile phone department. The layoff rate of the mobile phone department is significantly higher than that of other departments, and the domestic mobile phone department has become the hardest hit area. The media quoted a ZTE executive as saying, "The layoff rate of the Chinese mobile phone business department will exceed 20%, and it will be completed within the first quarter of this year.

The mobile phone business, which was once regarded as an important growth point, has become the hardest hit area in this round of layoffs. This shows that ZTE's mobile phone business is facing challenges in its internal strategic position again due to its poor performance.

After several years of ups and downs, ZTE's mobile phone business finally achieved a significant growth in 2015, reaching 32.47 billion yuan. The latest financial report shows that ZTE's consumer business achieved operating income of 33.45 billion yuan in 2016. Although it increased by 3% year-on-year, if the exchange rate and inflation factors are taken into account, ZTE's mobile phone business did not achieve substantial growth last year. In this layoff storm, the proportion of mobile phone departments is significantly higher than that of other departments, which seems to confirm the rumors of poor business.

The latest statistics from TrendForce, a global market research organization, show that ZTE's mobile phone business does not seem to be that bad. In 2016, global smartphone shipments reached 1.36 billion units, an annual growth of 4.7%. ZTE once again squeezed into the top ten with 3.5%, or about 47.6 million units, ranking 10th. This ranking is basically stagnant compared to 2015, which seems not bad. However, data from another authoritative organization IDC shows that ZTE's global smartphone shipments last year fell by 36.5% compared to 2015. If the data results are accurate, then ZTE's global smartphone shipments in 2016 were only more than 35 million units. Both sales data are far from the 70 million sales target set by ZTE.

If compared with its competitors, ZTE's gap is even more obvious. In 2016, the sluggish performance of Apple and Samsung provided domestic mobile phone manufacturers with an excellent market opportunity. Old rival Huawei and upstart BBK's VO brothers took advantage of the situation and decisively attacked the mid-to-high-end market, becoming the biggest winners in the market in 2016. The gap between ZTE and Huawei is getting bigger and bigger. ZTE's global market share has increased from less than 5 percentage points in 2015 to 6.1 percentage points; the ratio of ZTE's market share to Huawei has dropped to nearly 1:3, while ZTE's market share once led its competitors a few years ago.

Compared with its disappointing international business, ZTE's mobile phone performance in the domestic market is even worse. ZTE's mobile phone sales in 2015 were 56 million units, but China, as its base camp, only contributed 15 million units. ZTE's mobile phone market share and brand popularity in China have fallen out of the top ten, and its performance is very bleak. This may be the main reason why ZTE's mobile phone, especially the domestic mobile phone department, has become the hardest hit area for layoffs.

Technology alone will not work without products and brands.

When we evaluate domestic smartphone manufacturers, we usually think that they lack core technology. However, in terms of technology investment, ZTE is one of the few domestic companies that attaches great importance to R&D. Whether it is the total amount of R&D funds invested or the proportion, ZTE ranks among the top domestic manufacturers. In the first half of 2016 alone, ZTE invested 7.059 billion in R&D, and the proportion of R&D investment approached the historical high level of 15% of revenue for the first time.

Adhering to the strategy of technology orientation and independent research and development, coupled with long-term guaranteed huge capital investment, ZTE has a strong advantage in technology. This can be easily seen from its long-term dominance in the domestic patent application and authorization rankings, as well as its ability to not lose out in international patent wars. In fact, ZTE is also among the world's top in terms of R&D innovation and patents, ranking among the top three in PCT international patent applications for six consecutive years, and the number of ZTE terminal patent applications is about 20,000.

However, ZTE's technological advantages do not seem to have achieved the expected bonus points on ZTE mobile phones. What are the characteristics of ZTE mobile phones? In addition to being an old brand, it is difficult for ordinary consumers to think of other characteristics of ZTE mobile phones. We can find the cost-effectiveness of Xiaomi, the technical flow of Huawei, and the appearance of VO brothers on ZTE mobile phones. In today's stock replacement market, ZTE mobile phones with no characteristics are difficult to attract users, so it is not surprising that they perform poorly in the market.

Axon 7 is ZTE's most important product in 2016 and is highly anticipated by ZTE. In order to create a high-quality product, it even spent a huge amount of money to cooperate with the BMW Group on design. Many concepts such as naked-eye 3D, fast charging, sound effects, business, grabbing red envelopes, and WeChat dual opening are wrapped together, but none of them is ZTE's first or first-mover, and it has not formed its own unique characteristics. Due to its lack of outstanding features and inadequate marketing, the market performance of Axon 7 is even worse than that of the sentimental Hammer M1L. Its JD rating is only 4,000+, while the Hammer M1L is as high as 19,000+. It is difficult to see that this is a normal performance between two companies that are not at the same level in size.

As a member of the China Cool Alliance in the early years, ZTE has not been able to get rid of its support for operator channels. Its performance in the international market, like in the domestic market, mainly comes from operator procurement rather than the consumer market, which also explains why ZTE's foreign performance is better than the domestic market. Of course, ZTE's mobile phones have also changed and improved in 2016. Through spokespersons, sports marketing, consumer plans and other means, it has achieved a certain degree of improvement in brand image and popularity. But overall, ZTE mobile phones still have too little work to do in the consumer market. Whether online or offline, ZTE has not built an effective sales channel and corresponding brand image.

ZTE and Huawei are often compared together. In recent years, ZTE's mobile phone business has been left behind by Huawei for many reasons, including products, positioning, marketing, etc. But I personally think the most important fundamental factor is that Huawei has achieved the transformation of a consumer brand, while ZTE has just taken the first step.

The current situation of ZTE mobile phones tells us that it is true that technology is the core driving force of smartphones, but having technology alone without products and brands will not work and will still fail to gain recognition from consumers.

ZTE will not abandon its mobile phone business like Ericsson did

In recent years, the mobile phone market has already become a red ocean, with fierce competition, increasing concentration, and increasing business operating costs. Under pressure, many traditional big brands have chosen to withdraw from the smartphone market and seek transformation. Ericsson is an early exit manufacturer, and has turned to focus on the telecommunications network equipment industry. Although it has been challenged by Huawei in recent years, its overall performance has been outstanding, proving that its transformation strategy is correct. Nokia and BlackBerry have also announced that they will abandon their mobile phone businesses for transformation. The former completed its transformation to a communications equipment provider two years ago, and the latter's transformation to a software and service company has basically been achieved.

ZTE's mobile phone business, which has performed poorly in the market, is in great demand after layoffs in 2017. Will ZTE follow the footsteps of Ericsson and Nokia and withdraw from the mobile phone market to focus on the communication equipment business?

It should be said that giving up the transformation of the mobile phone business is a good strategy, which is conducive to exerting ZTE's core competitiveness driven by technology. However, for now, there is no sign that ZTE will withdraw from the mobile phone market in the short term. There are two main reasons:

First, the mobile phone business still accounts for a large proportion of total revenue, and ZTE needs it to narrow the gap with its competitors. In 2015, ZTE's revenue exceeded 100 billion yuan for the first time, but its revenue gap with competitors such as Huawei, Ericsson, and Nokia is large. Exiting the mobile phone market will lose tens of billions of revenue, which will widen the gap in scale, which is not good for both face and substance. The mobile phone business itself may not bring pure profits for the time being, but it can share operating and R&D costs.

Secondly, ZTE's mobile phone business has not reached the point of exhaustion like other manufacturers such as BlackBerry and HTC. ZTE believes that it still has a chance. Currently, it still maintains a sales volume of tens of millions per year, and ZTE's mobile phones have not fallen below the scale cost. Huawei's outstanding performance has not only made ZTE see the huge potential of the consumer market, but also seen its own possible path to success.

Therefore, ZTE will not withdraw from the mobile phone market in 2017. Instead, it is likely to adjust its strategy after layoffs and continue to increase its investment in the mobile phone business.

Betting on 5G may not be an opportunity for ZTE in 2017

Before Zeng Xuezhong resigned, ZTE also participated in MWC2017 in a high-profile manner and displayed a smartphone that supports gigabit networks. It is said that this gigabit phone is also one of the only two Snapdragon 835 phones displayed at MWC. On the eve of the 5G storm, ZTE claimed that its gigabit phone has become a milestone from 4G to 5G.

This shows that ZTE is betting its hopes for its mobile phone business in 2017 and the future on 5G. However, the transition from 4G to 5G will take some time, and there are variables in network construction and tariff issues. In addition, the existing 4G experience can basically meet the existing needs of users, and the impact of 5G technology advantages on the development of the mobile phone market may not be as great as the previous communication technology iterations.

At present, it is undeniable that ZTE has the advantages of technology and 5G, but as mentioned above, every step from technology to product and then to market is a difficult challenge. If ZTE cannot quickly make up for the shortcomings of products and brands and give full play to its technological advantages, the prospects of ZTE mobile phones will still be difficult to be optimistic. Surrounded by strong competitors, ZTE mobile phones may have little chance of counterattack. Therefore, some institutions predict that ZTE's global smartphone market share will fall by 3% in 2017.

For a state-owned enterprise like ZTE, the execution of strategy is certainly important, but the decision-making on the strategy itself may be the most difficult.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.