The Chinese smartphone that's ramping up in the US

ZTE ZMAX unboxing: First impressions
ZTE ZMAX unboxing: First impressions   

A relatively unknown Chinese smartphone maker is aiming to become the No. 3 smartphone maker in the U.S., and is targeting the relatively underserved no-contract user to get there.

While ZTE is currently No. 4 in the U.S—behind Apple, Samsung , and LG—the company's brand awareness has shot up dramatically in the past 12 months, and stands to gain even more thanks to a recent deal with New York City's Madison Square Garden.

"ZTE is 'the one to watch,'" Neil Mawston of Strategy Analytics said in an email. "ZTE is expanding rapidly in the prepaid market in the U.S., at Sprint and elsewhere, and it is (the) no. 4 smartphone player and the top Chinese brand in the North America region."

The company is targeting the prepaid and no-contract market, which currently makes up about 13 to 16 percent of the wireless phone numbers in the U.S.—and is growing, said Tuong Huy Nguyen, principal research analyst at Gartner. "I think we've seen some slight movement in favor of prepaid because (of) the economy and better, more affordable prepaid options."

Those plans can sometimes be as low as $10 a month without any commitment to continue, in contrast with a traditional two-year contract upward of $50 a month, plus taxes and early termination fees.

It's currently second place in the prepaid market (behind Samsung), a position it needs to hold if it aims to compete with better-known brands, some of whom it has already blown past in market share.

"Motorola and BlackBerry, even [though] these are waning brands, the average person knows about them," Wayne Lam, senior analyst at IHS, said.

What's changed

One year since CNBC last looked at ZTE, whose U.S. headquarters are in Texas, the company has stepped up its game with new devices and a high-profile partnership with the New York Knicks.

By the numbers, not much has changed from last year. ZTE is still fourth in the U.S. market overall, according to third-quarter figures from Strategy Analytics, and still has a three-year goal of surpassing LG to become the third player. But, importantly for future growth, CEO Lixin Cheng said brand awareness has increased from 1 percent to 16 percent.

"Our game plan is working," Cheng said at ZTE's press event in October at Madison Square Garden.

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"Brand recognition is a tough thing to get. They are doing the right thing to grow in this for ZTE," Lam said.

The Knicks deal is not ZTE's first pact with the NBA. Last year, when Jeremy Lin was still with the Houston Rockets, ZTE became the official sponsor of the team. The company has extended that partnership this basketball season and added the Knicks and the Golden State Warriors to its sponsorships.

Madison Square Garden President and CEO Tad Smith told CNBC that the partnership fits because ZTE has "a great team and a set of values that resonate with us [such as] affordability to the consumer."

Prepaid advantage

ZTE's devices retail in the $100-$300 range and are primarily sold through prepaid vendors, both of which are favored by the budget-conscious.

Since carriers play such an important role in the U.S. market, their store offerings also determine which brands most consumers are familiar with. In the U.S., ZTE has edged out Huawei and other lower-cost smartphone makers with its ability to strike deals with several major carriers, including an exclusive launch of the 5.7-inch ZMAX with T-Mobile in September in New York City.

"ZTE's ZMAX combines the latest technology with distinctive design to give our customers an incredibly affordable large screen smartphone," Jason Young, senior vice president of marketing at T-Mobile, said in a release.

The ZMAX retails for $252 with no contract requirement and has received five star reviews on T-Mobile's website for great battery life.

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Also helping ZTE's ambitions is the fact that more companies are offering no-contract plans.

Significantly, last year, T-Mobile broke away from traditional two-year contracts early last year by offering month-to-month talk, text and data plans. Sprint offers a similar options, as does AT&T's subsidiary Cricket Wireless. (Cricket Wireless sells six ZTE devices online, but none from competitors such as Alcatel OneTouch and Huawei.)

"For us, ZTE is a brand that can bring great value at great prices that we can turn around and offer to customers," said Andrew Smoak, head of product development at Cricket.

Tough road ahead

BlackBerry's 2015 money making plan
BlackBerry's 2015 money making plan   

ZTE's longer-term challenge will be growing its share in the mainstream contract market.

Indeed, prepaid remains second-tier to the contract territory of Apple, Samsung and LG. Samsung already leads the prepaid market and has also recently embraced a strategy of diversification that increases direct competition with ZTE.

"I think ZTE has done a pretty good job at coming in and offering these more affordable devices [with] smaller operators—MetroPCS, Cricket," Nguyen said. But "they still have quite a ways go. It's quite difficult to move up market."

Also, ZTE's overall fourth place share still leaves the company with a very thin slice of the U.S. market, Lam noted, with barely 3 million units sold in the last quarter. Even third-place LG shipped a record 16.8 million phones in the third quarter.

Globally, ZTE's third-quarter results also showed operations at a loss, although the company expects full-year profit for 2014 to increase by as much as 106 percent.

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"There's tons of competition out there," Lam said, citing Lenovo's acquisition of Motorola as another imminent challenge. "This market is highly fluid."