China's ZTE Corp, which launched its first basic mobile phone in Africa little more than 10 years ago, said it could be shipping 100 million smartphones a year by 2015, as it looks up-market to reverse a decline in its handset margins.

ZTE, which sold 15 million smartphones last year and could sell up to 50 million this year, also said it would launch its first two phone-cum-tablet 'phablets' this year, hoping to branch out from China's fiercely competitive mobile mass market.

ZTE, the world's No.4 handset producer and fifth-ranked telecoms gear maker, has fared better than crosstown rival Huawei Technologies in mobile sales, but lags its local peer in its mainstay telecom equipment business.

Both have diversified into consumer gadgets, selling dongles, smartphones and tablets to drive revenue growth as the telecom equipment sector stagnates, and both have met stubborn resistance in the United States where cyber-security issues have kept the telecom equipment market largely off-limits.

ZTE, valued at $9.3 billion, has expanded its footprint in emerging markets and Europe, though it said last month it was scaling back operations in Iran due to sanctions over Tehran's nuclear development programme.

A total of 472 million smartphones were sold around the world last year, according to research firm Gartner, and Credit Suisse has forecast sales will top 1 billion by 2014.

ZTE plans to focus on its Blade and Skate handphone models, upgrading them rather than unveiling new models, and expects to also double its tablet PC sales this year, executive director He Shiyou said on Monday.

"As handsets contribute more to overall revenue, it will affect our profit margins. In 2012, our aim is to increase handset margins," He told reporters on the sidelines of the company's annual analyst conference in Shenzhen, where the company is based.

The gross profit margin at ZTE's consumer gadgets division,  which comprises mainly handset sales, was 15.18 percent in 2011, down 3.81 percentage points from a year earlier.

"We spoke to components suppliers recently and it seems that handset makers such as ZTE won't be able to reduce their raw material costs," said Nomura Securities analyst Huang Leping.
"For ZTE to improve its profit margins, they will have to raise their average selling prices and to do so will largely depend on their sales in the North American and Japanese markets."     

Having cut its teeth making cheap-end smartphones for other operators to slap their brand names on, ZTE, founded in 1985 as Zhongxingxin Telecommunication Equipment Corp, is moving into the high-end market itself to take on Apple's iPhone  and Samsung Electronics' Galaxy.

"We want to come up with the next generation of a Galaxy Note-type product - a combo product of handsets and tablets," Lv Qianhao, head of handset strategy at ZTE, told reporters. But there are significant roadblocks, not least that it's a Chinese firm and the market it covets is brutal and expensive.

"The (higher) value part of the market is driven by brand and that's the part a company like ZTE needs to focus on," said Adam Leach, a London-based analyst at Ovum, noting that margins are much higher at the top-end of the market.

"People who buy Apple and Samsung have greater brand awareness so they might not take chances with a little-known brand, especially one from China," said Teck-Zhung Wong, a Beijing-based analyst for research firm IDC. "No one really knows ZTE outside China." - Reuters