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The Honolulu Advertiser
Posted on: Sunday, August 26, 2001

Frugality caps China's wireless profits

Associated Press

SHANGHAI, China — At first glance, Chen Xiaomei seems like the sort of customer wireless companies would dream about: The 23-year-old department store clerk is so fond of cell phones she just bought a new one — her second in two years.

More cell phone users are popping up all over China, including this man in Tiananmen Square. But most Chinese users want only basic services, making it harder for companies to make money.

Associated Press

But in making her purchase at a Shanghai shopping mall, Chen didn't even glance at the more expensive handsets offering Internet access and e-mail. "I don't want all that," she said. "I just want to talk to my friends."

She walked out with a simple model costing $100.

"Low-end subscribers" in industry parlance, Chen and others like her are helping keep the shine off a wireless market that already rivals that of the United States in size and could easily dwarf it soon.

They want basic, no-frills voice service. Companies are having a hard time persuading them to upgrade to phones that can read e-mail, store numbers, download movies — fattening profit margins.

"In China, the low-end subscriber is somebody who only has a couple of extra dollars a month. That doesn't leave a big margin," said Ted Dean, an analyst at Beijing-based BDA China Ltd.

China's Ministry of Information and Industry announced the number of mobile phone owners jumped by half in roughly 12 months to 120.6 million in July. That would make it the world's largest market, surpassing the United States' 120.1 million.

Some suspect the ministry's counting method overstates the number of users. But no one doubts the market potential of 1.26 billion people.

About one in 10 Chinese has a cell phone, compared with four in 10 Americans. Analysts predict that by 2005, China could add another 250 million users.

Wringing profits from that growth is getting harder. China Mobile, the larger of China's two wireless phone service providers, last week reported first-half earnings of $1.67 billion. Analysts had expected earnings of $1.8 billion, and noted a 21 percent drop in the amount of money China Mobile earned per user each month, to $19. By comparison, earnings per user in the American market average $50.

To spur growth, companies have been lowering costs to consumers. Until last year, buyers had to pay a $60 registration fee and monthly service charges of at least $6 — and then were charged for every call made and received on top of that. That's a lot in a country where the average city dweller makes $750 a year.

In October, prepaid calling cards and over-the-counter phone numbers costing $12.50 appeared. The cheaper rates helped attract 3.8 million new subscribers per month this year — more than twice the U.S. growth rate.

One of the new subscribers was Chen, the department store clerk. She paid $120 for a handset, a phone number and about a month's worth of calls.

It represented about one month's salary for her. "I wanted to replace my old mobile phone with a cheaper one," she said.

To keep up with growth, China Mobile spent $3.7 billion on new infrastructure in the first six months of this year alone. That kind of investment has been a boon for foreign equipment-makers. It contributed a big chunk of Motorola's $4 billion in sales last year in China, said company spokesman Michael Ning.

Other foreigners haven't been so lucky, however, and China is intent on building a homegrown telecommunications industry.

Companies that have had success, like handset makers Nokia of Finland and LM Ericsson of Sweden, are losing market share to government-owned and -financed domestic competitors. Meanwhile, foreign service providers have lobbied for years for market entry — and are still barred.

"Global telecoms are tiring of this endless waiting game," said Martin Kralik, senior analyst at Strategic Intelligence, a Singapore-based market research company. "They are frustrated because they've invested so much but haven't penetrated in a meaningful way."

Pacific Century Cyberworks, Hong Kong's largest cell phone service provider, is among the companies with good reason to be frustrated: It has yet to make a dime in China. Still, it isn't giving up.

"Foreigners have to be patient. That's all we can do now in mainland China," Jimmy Wei, a company spokesman, said.