Growth At All Costs
Amid rising competition for cellular customers, China Mobile's 'quantity not quality' approach may prove its undoing
By CRYSTYL MO
Many urban middle-class Chinese already have cellphones. So China Mobile is wooing low-income users to grow its subscriber base.
Wang Xiaochu unveiled China Mobile's half-year results on Aug. 16, he presented figures most company chairmen would kill for: a 58% year-on-year increase in net profit, to $1.7 billion. Yet almost immediately, the head of China's largest mobile-phone operator saw his company's share price take an undignified nose dive. In four and a half days' trading following the announcement, China Mobile's stock fell 28% to finish at HK$25.05 on Aug. 22.
It was hardly what Wang could have wanted as a reward for delivering the company's biggest-ever interim profit. But it's not as if he didn't see it coming. Once one of the hottest growth stocks in Asia, China Mobile in the past year has received a hammering from investors, falling 69% from a March 2000 peak of HK$80.
Investors are questioning China Mobile's ability to sustain its growth and compete with its up-and-coming rival, China Unicom, without sacrificing profit margins. In a battle for market share in one of the world's biggest mobile-phone markets, China Mobile has been aggressively pursuing customers who spend relatively little on calls - or, as Duncan Clark of Beijing-based consultancy BDA (China) puts it, the company has been "giving away business-class tickets at economy-class prices."
It's a dilemma that centers on millions of wallet-sized plastic cards. In late 1999, China Mobile introduced prepaid cards as an alternative payment method to its regular monthly subscription service. New users get cellphone service by buying cards with a printed code that can be dialed to add value to the phone's SIM card; when the airtime runs out, they simply buy another card. Customers like prepaid cards because they don't have to fill in registration forms or worry about nasty surprises when the monthly phone bill arrives. China Mobile benefits, too. It can send out fewer bills and never gets stiffed on a past-due payment.
Prepaid cards encourage millions of less affluent people to use mobile phones. The drawback is that they generate far less revenue per person than traditional subscribers. Worryingly, almost all of China Mobile's new subscribers are opting for prepaid cards. Existing users with registered accounts are switching over as well. Of the company's 13.8 million new subscribers in the first six months of the year, around 95% were of the prepaid variety. The trend is showing up in quarterly earnings reports. The company's average revenue per user - a key indicator for analysts and investors - has fallen 28.5% since the start of the year.
China Mobile is chasing this new business partly because its other options are limited. Growth in cellphone usage among China's urban middle class is slowing. And China Unicom is gaining market share because it can charge 10%-20% lower airtime fees than China Mobile, thanks to a government policy aimed at fostering market competition. The result: China Mobile is locked into a struggle it can't win, for low-income users it may be better off without.
Not all analysts think prepaid cards are a margin-killer in the long run. Many feel the real trick is management - for example, paring back customer service when the returns don't justify the expense. An analyst for a European bank points to the success of prepaid cards in India and the Philippines. "Margins are wafer thin in India, but they've gotten savvy and they're making money. They don't spend that much money per subscriber. That's what China has to do."
Even if it follows this advice, China Mobile's glory days on the stock market are probably over. Soon, an emboldened Unicom won't be the only threat. Next year, the government is expected to issue new cellular licenses to strengthen the country's telecoms sector in anticipation of fierce competition after China enters the WTO. That may be just the wake-up call China Mobile needs to see that thoughtful management impresses shareholders more than market share alone.
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