China Telecommunications Report Q1 2008

Growth across China's mobile market continues to forge ahead; both China Mobile and China Unicom have been expanding their networks into rural areas, with around 50% of the market leader's subscriber base deriving from low income households. This has had a negative impact on average revenue per user (ARPU), which operators are looking to offset by expanding their value-added service (VAS) portfolios.

China Unicom has announced that it is forecasting VAS to account for 30% of its total service revenues in the next two years, from an existing 25%. Furthermore, its CDMA unit has continued to report smaller net additional increases compared with its GSM equivalent, thanks to pricier handsets, which are not mass produced, unlike GSM handsets. In order to encourage subscriber take-up of its CDMA services, the operator has announced significant discounts of as much as 50%, as long as customers subscribe for a year.

At the end of October 2007, there were 514mn mobile subscribers, representing 82.2mn net additions over the year. The bulk of the new subscribers derived from China Mobile, which had a 79% share of the market, with China Unicom retaining the remainder. By the end of 2007, BMI forecasts a total subscriber base of 525mn, representing a penetration rate of 40%. Demand for mobile services is such that it has fuelled the handset market. Once again, foreign brands dominated China's mobile handset market in Q307. Nokia reported a 35.1% share of the sector, with Motorola and Samsung with shares of 13.6% and 11.6%, respectively. Nokia continued to gain market share lead against its competitors compared with H107; its share rising by 4.1 percentage points (pp). This came mostly at the expense of Motorola, which saw its share fall from 20% in June 2007, with Samsung gaining 2.6pp to close in on the US vendor.

Nokia's success has largely been built on its brand name, while the operator has produced entrant-level handsets, ideal for rural-based subscribers.

Demand for mobile phones has had a negative impact on fixed-line growth, however, with mobile operators competing aggressively on price; this has taken subscribers away from China Telecom and China Netcom. Indeed, October became the fixed-line sector's worst-performing month in 2007. China Telecom reported 880,000 disconnections during the year, while China Netcom reported a loss of 370,400 subscribers over the same period. For this reason, fixed-line operators are for the moment focussed on driving their broadband networks and this should partially contribute to the deployment of fixed-line, ahead of losing out to subscriber preferring broadband alternatives. We have downgraded our fixed-line forecasts, but expect that penetration rates will for the most part remain flat at 28%.