Enemies at the gates: Apple’s biggest threats are Samsung and ZTE

It was pretty clear that Samsung would eventually overtake Apple (s aapl) in terms of smartphone sales. And this past quarter, thanks in part to the introduction of the Samsung Galaxy S II and the later than usual upgrade to Apple’s iPhone, that happened. But Apple also slipped in the overall phone sales category, dropping one spot behind a rival that could be more of a long-term threat: China’s ZTE.


Samsung had a very strong quarter, according to numbers it revealed on Friday to investors. Its shipments (which it doesn’t provide specific numbers for) jumped more than 40 percent during the third quarter. Strategy Analytics estimates that amounts to total sales of nearly 28 million devices, while Apple moved 17 million during the same period.

During the quarter, however, it’s worth noting that Samsung had a brand-new product come to market, while Apple was still selling a device that was more than a year old. Rumors were also circulating widely about what the next iPhone would bring, and the promise of a new device could have kept potential iPhone consumers on the fence, as Apple itself suggested during its last quarterly earnings conference call.

ZTE and China

The less-publicized but possibly greater challenge comes from ZTE. The China-based mobile device maker passed Apple in the global handset shipment rankings in Q3 to become No. 4 overall. China’s top three device makers actually grew by 56 percent year over year combined, representing the market leaders in terms of shipment growth.

For Apple, China represents an increasingly important part of its worldwide sales breakdown. China delivers the second-most revenue for Apple after the U.S., and Tim Cook said during the company’s last conference call that it is Apple’s “fastest-growing region by far.” Threats in that market could well become the competition for Apple’s primary source of consumer dollars in the next decade or so.

ZTE is also launching a smartphone invasion in the U.S., along with Huawei, another major Chinese handset maker. ZTE and Huawei appear poised to flood the U.S. market with low-cost Android devices. These cheap, mass-market devices could do an end around on both Apple and Samsung as they battle for the upper tiers of the market.

Apple’s strategy

In many ways, this is a fight for which Apple has already deployed the weapons. During its last device refresh, it kept the 3GS, and it plans to sell it alongside a cheaper iPhone 4 and the high-end iPhone 4S. The addition of the free (on-contract) phone at the bottom end is already a huge step toward preventing further erosion of market share to low-cost devices, but its effects won’t be felt until the next quarter.

From another perspective of what Apple is already doing, the company is aggressively pursuing Samsung’s phones and tablets with ongoing patent litigation around the world. The stated goal of such litigation, according to both comments from Jobs’ recent biography and Apple’s lawyers in one instance, is not licensing but to stop the sale of Samsung devices. So far, the effects of those suits have mostly been felt with Samsung’s tablet division, but the outcome of future hearings could have a significant effect on Samsung’s ability to continue to offer its devices in some markets.

Apple has also shown that it doesn’t need to be a market share leader to be the most successful and profitable device maker around. As long as it can keep growing its customer base with subsequent devices, its revenue should continue to outpace the market, thanks to aggressive margins and a tightly knitted software and hardware ecosystem that sells apps and media as well as devices. I also think we will see the company push even more value-add innovations such as iCloud to make its products stand out from the crowd. If other new product initiatives succeed, like the rumored Apple television, the halo effect will also keep new users rolling in.