Why ZTE and Alcatel are smartphone makers to watch out for

They both focus on selling affordable smartphones. They concentrate on prepaid customers. They're both growing at an impressive clip. And as Chinese companies operating in the US, they've both flown under the radar.
Now ZTE and Alcatel OneTouch both want to make a lot more noise in the states, and they made some bold claims at this year's Consumer Electronics Show. They're preparing to spend more on marketing. They're sponsoring events and arenas. They're increasing the quality of their products and expanding into related fields such as wearable technology. They're also investing in the Silicon Valley area in hopes of drumming up developer support.
Their lofty goals underscore the constantly shifting ground in the US smartphone market. With Samsung stumbling last year, and established brands such as HTC and Motorola scaling back their product lineups, ZTE and Alcatel OneTouch see an opportunity to establish a more visible beachhead in the US. For customers, that will mean more choice when it comes to affordable smartphones.
With a stronger brand comes increased consumer appeal and, ultimately, higher sales of pricier smartphones. It's a strategy that companies such as HTC, LG and Samsung followed to household recognition: Slowly build credibility by catering to the carriers' requests, expand distribution, gradually introduce the brand and roll out the marketing. The higher profile -- and more profitable -- products should theoretically follow.
Still, given the lack of awareness and the competitive nature of the business, there are significant challenges.
"Most US consumers don't know the Alcatel or ZTE brands, so in addition to product marketing, they'll need to bring compelling brand advertising to create awareness," said Charles Golvin, an analyst at Abelian Research.
Despite similar goals, ZTE and Alcatel are in different situations. ZTE has been in the smartphone business longer and is further along in building its name thanks to its sponsorship of a few NBA teams, which includes having its name featured on Madison Square Garden.
Alcatel, owned by Chinese television giant TCL, is further behind the curve, having just gotten into the smartphone business in 2013. But the company is promising big things, and on Tuesday parent TCL acquired the rights to the Palm name in the hopes of tapping into the nostalgia factor and raising its profile.
In the third quarter, TCL ranked as the sixth-largest manufacturer of cell phones, with 3.5 percent of the global market, according to Gartner. ZTE was the No. 9 player, with 3 percent of the market.

Experienced upstart

Over the last several years, ZTE has been steadily building a presence in the US through the prepaid market for budget phones. As part of its 30th anniversary this year, it unveiled an updated version of its logo -- the letters Z T E in a lighter shade of blue and with more-rounded corners -- that the company believes is more approachable for consumers.

From left to right: Madison Square Garden CEO Tad Smith, ZTE USA CEO Lixin Cheng and former Knicks stars Earl Monroe and John Starks at an event in October. Roger Cheng/CNET

ZTE on Monday unveiled the Grand X Max+, a 6-inch jumbo smartphone for Cricket Wireless, the prepaid arm of AT&T. It also showed off a new smart projector called the S Pro 2, an exclusive to AT&T.
"The good thing about ZTE is that it has already secured distribution and significant sales in the US for its relatively inexpensive smartphones," said Avi Greengart, who covers consumer electronics for Current Analysis.
The company is putting more resources behind its marketing efforts. ZTE told The Wall Street Journal that it plans to spend 1 billion yuan ($161 million) on marketing in key regions around the world.
Some of that money will flow to the states. In the United States, ZTE plans to triple its marketing budget, ZTE USA chief executive Lixin Cheng (no relation to the author) said in an interview on Saturday at the Consumer Electronics Show. He didn't provide specific figures, but he noted that the increased resources come on top of a budget that was already tripled in 2014.
Some of those funds have gone into big-name sponsorships, most notably of the Golden State Warriors, whose ranking atop the NBA's Western Conference standings gives ZTE an extra boost in profile. But Cheng said there wouldn't be splashy TV campaigns.
Instead, ZTE will pick its spots with grassroots efforts and community events. Cheng also hinted at a program that would enlist its base of 20 US million customers to help spread the company word, vaguely suggesting those who helped would benefit through some form of reward.
ZTE on Monday pulled the curtains back on its Innovation Venture Fund, a program to find development talent in the Bay Area and to foster apps that make their way on to ZTE devices first. Cheng said the fund has been operating unofficially for the past six months.
"It's providing a launching pad for startups looking to reach a bigger market and broader distribution," he said on why developers would want to work with ZTE.
Cheng acknowledged he lacked the deep pockets of larger competitors such as Apple, Samsung or LG. Instead of a marketing blitz, he will also focus on helping educate the sales teams at distributors and carrier stores. "TV ads drive people in the store," he said. "But the final decision is made over the counter. It's that final three feet."

Fresh challenger

Then there's TCL's Alcatel OneTouch smartphone brand. It started selling smartphones in the US only in 2013, previously focusing on cheap, basic cell phones.
It wants to make up ground fast. The US division will boost its marketing investment by six times over that of a year ago, according to Nicolas Zibell, president of Americas and Pacific regions for Alcatel. This includes broader TV and online campaigns. "We're taking brand investment seriously," he said in an interview Sunday. "Building a brand is expensive."

Alcatel OneTouch's Pop 10 tablet debuted at CES. Sarah Tew / CNET

Alcatel, even more so than ZTE, was largely invisible over the last few years. Zibell said the company is in a better position to go public because of its breadth of products. On Tuesday, Alcatel showed off the Pixi 3 line of smartphones and the Pop 10 tablet to mixed reviews. In addition, it jumped into the wearables fray with the Watch, a smartwatch running on proprietary Alcatel software that is able to work with iPhones or Android devices.
Like ZTE, Alcatel also said it would begin investing in Bay Area talent through its Innovation Accelerator program. It originally began in Europe early last year and resulted in apps debuting on Alcatel's smartphones first. Later this month, the company plans to open an online store channel on Amazon to go directly after consumers, similar to a tactic used by ZTE and Huawei.
Zibell also made some bold claims. The company is planning to launch its next flagship device, the successor to the Idol 2, at Mobile World Congress in late February. Alcatel intends to sell the smartphone in the US, likely through an exclusive partnership with a carrier, he said. While he considers it a "hero" phone that is Alcatel's aspirational product, it's not going after the ultra-high end, where the iPhone 6 and Samsung's Galaxy S5 sit.
Another wrinkle: Parent TCL on Tuesday announced it was buying the rights to the Palm smartphone name and intends to "re-create the brand" by tapping fans of the old devices. While the Palm name could help raise the overall company's profile, it is supposed to sit alongside the Alcatel line, so it's unclear what the ultimate benefit will be.

'Brutal' competition

While ZTE and Alcatel made a lot of bullish proclamations at CES, they aren't the only ones looking to gobble up some of the lost market share of the bigger players. Fellow Chinese vendors Huawei and Lenovo have a larger presence, and Lenovo has the added benefit of its Motorola unit, whose smartphones have turned heads for their combination of robust features and low prices.
"It's a harsh, brutal market, and you better have great products or you're going to be in trouble," said Rick Osterloh, head of Motorola, in an interview on Tuesday.

In addition to phones, ZTE also has a smart projector called the S Pro 2. Josh Miller/CNET

Analysts question the potential effectiveness of some of ZTE's and Alcatel's planned marketing efforts. "Grassroots and spot marketing approaches are challenging, especially since they get overshadowed by the main events (such as the Golden State Warriors themselves)," said Ramon Llamas, an analyst at IDC. "They move the needle marginally."
The category of affordable smartphones -- with an off-contract price ranging between $100 and $200 -- is expected to explode further, with wireless carriers increasingly eliminating subsidies and revealing just how much a smartphone really costs. In comparison, the base model of Apple's iPhone 6 costs $650 without a contract.
That's what has ZTE feeling good. "We're the first to talk about 'affordable premium,'" Cheng said.
Alcatel, meanwhile, believes it brings more to the table than just affordability. "They compete on price, but we focus on design," Zibell said.
The claws are already out; let the fighting begin.