China's ZTE finds some positive in security concerns, wants to boost brand

ZTE is focusing on offering higher-end handsets and boosting the company's brand

Chinese handset maker ZTE put a positive spin on the recent U.S. scrutiny of its networking business, stating that the controversy at least gave the company some publicity and name-recognition.

"The publicity around it caused some to pay close attention to ZTE, and ask 'What kind of company is ZTE?'" said company executive vice president He Shiyou on Thursday. "Last year, when we were in Europe, many people were paying attention to the concerns."

ZTE is the world's fifth-largest smartphone maker, and the company has big ambitions to become a well-known handset vendor in the U.S. Last year, however, the company and its networking equipment business came under fire from a U.S. congressional committee for the company's alleged close ties to the Chinese government. Although ZTE has denied the claims and said its networking gear is safe to use, U.S lawmakers are worried that purchased ZTE gear could expose the nation to cyberespionage or hacking attacks from China.

The U.S. scrutiny of ZTE may have had more to do with politics than actual security, according to analysts. But the Chinese company is still in contact with U.S. authorities to try and resolve any misunderstandings, said He in an interview with journalists.

ZTE expects it could take some time for the U.S. market to recognize Chinese vendors, but customers shouldn't be discouraged from buying its smartphones.

"Our phones have no security problems. Firstly, most of our chips come from the U.S. chip vendors. Our operating system software also comes from the U.S.," he said, pointing to ZTE's Android and Windows Phone handsets. "If our phones have a security problem, that means the U.S. has a security problem."

ZTE has made a business of selling low-end handsets. But earlier this year the company unveiled two new premium smartphones a part of its new high-end "Grand" series. The Grand S and Grand Memo are slated to arrive in the U.S. later this year, He said, without giving a specific date.

ZTE's Grand series is part of the company's move away from selling budget phones, in favor of pricier handsets that can earn more revenues. The shift in business model is especially important in China, where low-end handset sales are surging, but competition is fierce with dozens of smaller vendors trying to tap the market.

"It's a very brutal competition," He said. "For ZTE, in the low-end market, the company faces huge pressure. Everyone can see it. So we are adjusting our products."

More than a third of the revenues for ZTE's handset business comes from China. The company must innovate in its products, sales channels, and even the way it brands itself, otherwise ZTE risks stagnating, He said.

To set itself apart from the competition, ZTE will launch a new phone running Mozilla's upcoming Firefox OS. Called the ZTE Open, the handset is slated to arrive in Spain, Venezuela and Colombia in mid-2013.

While the Firefox OS is still in its early stages, vendors are hoping a rival mobile operating system will emerge to challenge Android and Apple's iOS, He said. Open source HTML5 operating systems such as Firefox, or the Samsung-backed Tizen, could one day become a third alternative. But so far, Microsoft's Windows Phone OS has yet to succeed in the market, he added.

"Microsoft could succeed to become the third major operating system, but it won't be just them competing for it," He said. ZTE plans to continue releasing Windows Phone handsets. But in the end, consumers and the industry will decide which operating systems come out on top, he added.

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