China's Smartphone Diplomacy With an Angry Southeast Asia

TAIPEI (TheStreet) -- China faces obvious image problems in Southeast Asia, its strategic backyard and a coveted market. But China's low-priced smartphones have taken off the edge of popular outrage toward the nation, regarded as a bully.

Vietnamese protestors staged violent anti-China demonstrations last week over Beijing's installation of a giant oil rig in waters also claimed by Hanoi. China evacuated 3,000 people over the weekend after two were killed.

Separately, the Philippines is asking a United Nations tribunal to help it negate China's basis for asserting sovereignty over the 3.5 million square-kilometer ocean where Beijing put the oil rig. Like Vietnam, Manila calls much of that South China Sea its own.

And China and Myanmar were once authoritarian allies resistant to Western influence. But Myanmar has snubbed China in favor of investment from Japan and the West as it has opened its doors since 2012. China had extracted Myanmar's natural resources for too long, leaving a pile of resentment.

But the same skeptical Southeast Asian countries have emerged since around 2011 as enthusiastic buyers of Chinese-branded smartphones. Consumers across Indochina, into Indonesia and the Philippines, enjoy the Chinese functional phones at emerging-market prices, ideal for cash-constrained buyers.

Smartphone builders essentially borrow designs from advanced foreign chipmakers and handset firms with contract assembly in China. "Chinese brands have been able to take advantage of this supply chain to produce good quality products at considerably reduced cost," says Mark Naktin, managing director with Beijing-based market research firm Marbridge Consulting.

Handsets from China handily perform basic touch-screen functions with Google (GOOG) (GOOGL) Android, and, at less than $300, cost less than Apple (AAPL) iPhones or Samsung (SSNLF) Galaxy models.

Smartphone sales from all brands grew 61% in Southeast Asia in the first nine months of last year, to $10.8 billion on 41.5 million units, according to InsideRetail.Asia, an online publication for the retail industry.

Manila didn't object then when Chinese smartphone maker ZTE (ZTCOF) said in October that in three years it would dominate the Philippine smartphone market and may start to manufacture handsets there.

Chinese smartphone developer Huawei Technology, traded in China, already provides telecom terminal equipment to mobile carriers in Vietnam. Vietnamese government action against China "would be hard if your entire mobile network is run by Huawei," says Scott Harold, associate political scientist with the RAND Corporation think tank.

Indonesia, where anti-China riots killed local ethnic Chinese from 1996 to 1999, now makes up Huawei's biggest market, with more than $1 billion in annual sales revenue since 2011. The local Facebook (FB) page for Huawei has garnered 57,000 likes. Fellow Chinese developer Lenovo's fan page has about 5,000.

So is China dialing into smartphone diplomacy?

China has already tried to secure Southeast Asia's minerals and river water by investing in its infrastructure. It also sees the growing region as a frontier for Chinese companies cramped by competition at home.

But Chinese smartphone brands are not flying the red flag, just their own names. Flare-ups like last week's in Vietnam inevitably slow sales of merchandise associated with China. Southeast Asian governments will keep resisting Beijing's maritime expansion and, like Myanmar, diversify sources of investment to avoid depending on a foreign power that threatens local resources or sovereignty.

Hostile toward China for decades, Vietnamese consumers prefer to save for iPhones, says Carmen Le, general manager at Vero Public Relations in Ho Chi Minh City. Those who can't save go with Chinese brands. "People carry Apples," Le says. "No one is impressed with a phone from China."

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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