The Chinese mobile communications market shows little sign of waning. For 2005, China Mobile, the world’s largest cellphone operator in terms of network capacity and customers, reported a 28.3 per cent increase in profit to 53.5 bn yuan (US$6.7 bn) on revenue of 243 bn yuan (US$30.4 bn).
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In the year, China Mobile added 42 million new customers to 246.6 million or about two-thirds of total market. Although growth slowed by some 15 per cent from a year ago, monthly growth still reached 3.5 million new users, a number envied by most other operators.
Perhaps more significant, revenue from SMS, ringtones and WAP downloads rose sharply to about 44 per cent of total revenue, which is a more effective driver for growth than voice services. In the meantime, ARPU fell slightly, but the change is negligible and is well offset by China Mobile’s ability to bring in new customers.
China Mobile should be the largest beneficiary of 3G given its user base and network coverage, but it also could suffer the most if the government policy on 3G remains ambivalent, especially on which standards to use and the timing of the licence awards.
However, China Mobile is trying to stay its course and focus on current growth. Wang Jianzhou, CM chairman, recently predicted that voice and most data services available today will continue to be the “primary source” for revenue, and will likely “coexist” with 3G in the “foreseeable future”.
To prove it, the company said its capex for 2006 (83.3 bn yuan or US$10.4 bn) does not include 3G. However, the company does not say whether it will beef up spending when a 3G licence is granted. I suspect at least 5 billion yuan ($625 million) will be allotted to 3G this year and the figure could double easily in 2007. In the meantime, budget for existing projects will be pruned or eliminated.
To a great extent, the future of China Mobile is closely tied to 3G and it has many reasons to be concerned. For example, the government may promote homegrown TD-SCDMA by mandating its deployment through the 3G licensing process. In fact, a government official recently suggested using the “strongest” operator – China Mobile -- as a carrier for TD- SCDMA traffic. This is at odds with China Mobile’s strategy of GSM-GPRS-WCDMA migration.
China Mobile cannot reject government decisions, but Wang voiced his protest by saying any decision on 3G should ensure “healthy” development of the market. Because policy- making process in China is not transparent, it not only makes the future more confusing than it should be and creates a volatile situation. Anything, including government statements, could change overnight. Unfortunately, companies like China Mobile can do very little to reduce uncertainty but wait.
China Unicom, by comparison, is facing a much more precarious situation. For 2005, its profit grew only 9.7 per cent to 4.9 bn yuan (US$616.2 m), revenue 87.1 bn yuan (US$10.9 bn), less than 10 per cent and 35 per cent, respectively, compared with China Mobile. Unicom was having difficulty making money and its customers grew much slower than China Mobile, at about 1.3 million a month.
Interestingly, CDMA, which is often hailed as a superior technology to GSM for data service, did not live up to expectation as its non-voice service grew much slower than China Mobile and accounted for only 15 per cent of total revenue. In fact, CDMA registered the slowest user growth since launch, adding fewer than 5 million in the entire year (total 32.7 million). CDMA continued to lose money after fours years in operations, but the situation is expected to turn around after cancellation of handset subsidies and free bonus minutes in 2005.
Although China Unicom will face similar challenges to China Mobile in 3G, its outlook is more vulnerable. For one thing, running two competing networks (GSM and CDMA) not only confuse potential customers but they actually create infighting that undercuts Unicom’s performance and its ability to compete with others. There was speculation last year that Unicom might spin off GSM operations and use EV-DO (evolution-data optimized) as its 3G platform, but does not appear likely -- at least for now. GSM accounts for 74 per cent of Unicom’s total user base and the company says it has no plan to give it away. In fact, Unicom will spend nearly 10 bn yuan (US$1.2 billion) this year to expand and upgrade GSM networks. The change in strategy for GSM and CDMA is a clear sign of reckoning that technology alone does not drive growth- -an about face from the old policy.
It is not very clear what the government will do about Unicom. On one hand, Unicom is a valuable asset for the industry, but its growth potential in 3G is questionable given complexity in running dual networks and its ability to compete with old rivals and new. Apparently, Unicom has recognized the dilemma. Chang Xiaobing, Unicom chairman, recently told investors the company is looking for a domestic or outside partner to “cooperate” in CDMA operations. It is not clear if he meant to “outsource” CDMA and grow GSM to WCDMA, or a precursor to eventually jettison CDMA.
So far, no foreign or Chinese companies have responded to Chang’s call. Last year, NTT DoCoMo expressed interest in becoming a strategic investor at Unicom, but the talks failed to bear any fruit. Some analysts say Unicom should take a closer look at South Korea for its expertise in CDMA service and stronger interest in China, the caveat is success in one country may not be easily transferable to another country.
Regardless, steady growth is expected this year for both China Mobile and China Unicom, bolstered in part by the country’s insatiable appetite for cellphones (still a low 30 percent in density). However, growth rate will slow as the base becomes large, and that will affect revenue and profit in one way or another. 3G can give a strong boost to growth, but it also will hurt incumbent players like China Mobile and Unicom when fixed-line operators enter the foray.
Lin Sun is a telecom consultant specializing in China. Contact him at lsun@chinanex.com.
This article originally appeared on www.telecommagazine.com, Telecommunications Magazine Online®, and was reprinted with permission of the publisher.