From Forbes web site:
The world's biggest consumer market is not all mirage. Look at what's going on in cell phones.
China goes wireless
By Andrew Tanzer
CHINA IS LITTERED with foreign corporations frustrated by the mirage of those elusive 1.3 billion consumers. It's been pretty much the same tale since Lord Macartney's failed attempt to open China to Western trade in 1793. Sometimes the mass market never materializes, as for the automakers; other times it appears, for instance for beer brewers, but yields no profit; or else it purrs seductively, like the cigarette business, but remains closed to foreigners.
The cellular phone and equipment industry is different. The market for cell phones is exploding, and Western firms are participating fully. Almost overnight, China has become the second-largest market in the world after the U.S. for mobile phones and equipment. "There is an unquenchable thirst for wireless communications in China," marvels Jeffrey Belk, Qualcomm's vice president for marketing.
As recently as 1994 there were only 1.6 million cellular subscribers in China. Now demand races ahead at a rate of more than 1 million new subscribers a month. By the end of next year China should have in excess of 50 million cellular subscribers, according to Dataquest's Raymond Ho. (The U.S. currently has 75 million.)
The handset market is dominated by the "three horses," as the Chinese call Ericsson, Motorola and Nokia. Last year China became the largest market in the world for Ericsson; the country ranks number two after the U.S. for Motorola and Nokia.
It's not all gravy for the equipment suppliers. As a price of admission to the Chinese market they have had to agree to do most of their manufacturing locally in joint ventures with Chinese partners. Competition is keen. Still, this huge market appears to be fattening their bottom lines. China probably accounted for at least 10% of Ericsson's 1998 net income.
Calling for better karma
Share of Chinese with wireless phones, though growing rapidly, badly lags that in other parts of Asia and elsewhere.
Source: World Band; European Mobile Communications.
Why the wireless boom? A number of reasons. For one thing, the Chinese government has invested aggressively in the infrastructure. "Their basic philosophy is that telecommunications is central to economic modernization," explains Andrew Page, head of corporate planning for Nokia (China). Andersen Consulting's John Wang calculates that China's spending on telecom infrastructure has compounded at 62% annually over the past decade, to $19 billion last year.
This is not simply a case of skipping a wired network. It took China more than a century to reach 10 million wired phones in 1992. But in recent years the country has been adding a staggering 16 million to 20 million new fixed lines annually, the equivalent of building a Baby Bell every year. Yet at the end of 1998 still less than 7% of Chinese had phone numbers of their own, a fraction of the 50%-plus teledensity in Hong Kong, Singapore and other developed economies.
Even with the added wire, it can take months to be connected to state-owned China Telecom's wireline network. Businessmen, in particular, can't wait. "They think they will excel in their profession and get more things done [with a portable phone]," explains Roger Kung, a senior vice president of Motorola. Teenagers and women constitute the latest wave.
Handset prices have been halved in two years, to an average of $250 at retail. The connection fee for new subscribers has fallen by more than 50%, to $125 to $200, in two years. That's still plenty of yuan in a country where the average pay in the major cities is under $80 a week.
But talk time of a nickel a minute is one of the cheapest in the world. "There's unbridled demand at that price," notes Stephen Snyder, a Hong Kong-based partner at Andersen Consulting. "They have congestion on the network, because there's no pricing mechanism to limit demand." On average, Chinese subscribers spend 400 minutes a month on their cell phones, three times as much as Americans, according to Washington, D.C.'s Strategis Group.
Some of the credit, of course, must go to aggressive marketing by the handset vendors, some of the leading advertisers in China. Motorola, for instance, operates a fleet of 26 vans that hit the road 365 days a year, visiting 600 second-tier and smaller cities for some grass-roots marketing. Motorola advertisements hammer home the message that cell phones create business breakthroughs and consumer peace of mind. Status and fashion also figure in the appeal.
"Cellular phones have changed the way of life in China," says Kung Hing-Tong of Lucent Technologies (China). Travel in the country can be expensive and difficult, he notes.
Power on
Wireless phone use in the Middle Kingdom is expected to mushroom in the next few years.
Since 1996 the government has permitted the sale of handsets through independent distributors and retailers. Motorola phones are now available in 10,000 outlets; Nokia will open 500 franchised shops within 18 months. Foreign investors still are barred from operating cellular networks. But Beijing has injected some competition into the market by allowing a second state-owned operator, China Unicom, to compete with China Telecom.
Over the past several years competition has focused on the European-developed GSM technology (China is already the world's largest market for GSM equipment). But the Chinese government has awarded China Unicom a license to build a wireless network based on the U.S.-developed CDMA (code division multiple access) standard. CDMA proponents, such as Qualcomm's Belk, argue that the technology's more efficient use of spectrum makes it ideal for China's densely populated urban areas.
China Unicom recently announced an ambitious plan to construct a CDMA network with a capacity of 10 million subscribers by the end of next year, rising to 40 million by 2003. Unicom has selected Lucent, Motorola, Samsung and Nortel to build trial CDMA systems in four cities.
China's Ministry of Information Industry projects that by the year 2010 there will be 200 million cell phone subscribers in the country. Sound impressive? That would still represent a penetration rate of only 15%. Says Perry LaForge, executive director of Costa Mesa, Calif.-based CDMA Development Group: "China dwarfs everybody with their potential for growth." |
