“Every six months the Chinese telecommunications market grows at a rate that equals Spain’s population.” That’s an eye-catching statistic from Telefonica’s chairman Cesar Alierta. He’s got an equally headline-grabbing forecast too: Alierta predicts one billion Chinese will own mobile phones by next year, up from 800 million today.
So perhaps it shouldn’t come as a surprise that the Spanish telco giant wants to widen its strategic partnership with China Unicom, one of China’s three telecom operators. Both companies have announced that they will invest a further $500 million each into their cross shareholdings, although China Unicom will also increase its ownership stake in the Spanish company from 0.9% to 1.37%, says the Wall Street Journal, and get a board seat.
What’s in it for China Unicom? The Latin American market, where Telefonica has 180 million subscribers (and which it hopes to grow to 270 million by the end of 2014, says Bloomberg). Last year Telefonica also signed a deal to buy Portugal Telecom’s stake in Vivo, Brazil’s largest mobile phone company.
It’s an attractive region for the Chinese. Telecoms equipment makers like ZTE and Huawei have already made inroads in Latin America, selling networking equipment and handsets. But many people, both within China and without, will have been less likely to have heard of the success of Cellon, one of the largest original design manufacturers (ODMs) in Latin America.
That means that Cellon designs and manufactures handsets based on the requirements of mobile phone carriers like Telefonica.
Founded in 1999, Cellon (formerly CECW) used to be one of China’s largest handset research and development houses. It didn’t actually make phones, but developed ready-to-build designs, mostly for Chinese handset makers.
But business wasn’t good and in 2007 the company declared bankruptcy, closing all of its offices bar one in Shenzhen. A year later, senior manager Dai Xiaoquan took over the company and rebranded it as Cellon.
Dai also changed strategic tack, thinking that the biggest opportunity lay in ODM rather than pureplay R&D. The timing was also fortuitous: during the financial crisis major mobile carriers in Latin America were looking to prune back costs. Cellon seemed like a good fit to help them. Focusing on the mass end of the Latin America market also meant the Chinese company could compete with less advanced technologies.
So since 2008, Cellon has been making relatively inexpensive mobile phones for Latin American mobile operators. Though the designs have largely been low-tech, their low prices and function-oriented features have proved popular among consumers in the region, Dai told Entrepreneur magazine.
Also according to Dai, the company recorded $200 million in revenue last year, with Latin America as the biggest export market. Together with ZTE and Huawei, Cellon today commands 20% of the handset business on the continent.
What’s next? Cellon now wants to shift strategy again, as it sees shrinking margins ahead. Its customers have already started to look for rival suppliers and bargain down to lower prices.
“After the company gets to a certain scale, you need to move beyond businesses that have low barriers of entry,” Dai says.
To that end, Cellon is now making more handsets that play videos and MP3 songs, take photos and offer third-generation (3G) technology. The company is also experimenting with tablet devices.
Dai also knows that he must expand beyond Latin America to keep Cellon growing. Eventually, he wants Cellon to start developing its own phone brands, much like HTC. In fact, Dai says that the Taiwanese firm, which was a contract manufacturer before it began developing its own brands, is his role model.
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