Worrisome wireless
Major telecom firms may have overestimated Chinese sales
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
September 9, 2001
BEIJING -- Thomas Boam has a word for foreigners who invest too much hope and optimism in China's burgeoning marketplace. He calls it Chinaphoria.
"A lot of companies come here with this euphoric sense that they're doing business in the biggest country in the world," says Boam, a commercial attache at the U.S. Embassy in Beijing.
"But they have to understand that while China has great potential, its gross domestic product is still only about the size of Italy's. It's about half the size of Japan's. And it's less than California's."
Boam's words have taken on special meaning these days, as the shares of China's much-admired telecom giants China Mobile and China Unicom plummet in the stock markets of Hong Kong and Wall Street.
A month after China unseated the United States as the world's top market for mobile phones, there are growing doubts that the two top phone providers can sustain their expansion, creating fears not only for the Chinese economy but for the Chinaphoric wireless providers from the United States and Europe.
Late last week, the Lehman Bros. investment house warned that weakness in China "could clearly have negative impacts" for such already-troubled firms as Motorola, Ericsson and Nokia.
The weakness in China comes just after what should have been a bit of good news.
In July, China unseated the United States as the world's top market for mobile phones, with 120.6 million subscribers compared with 120.1 million in the United States.
During the first half of the year, China was adding more than 5 million new subscribers a month, about three times the rate in the United States.
China's Ministry of Information Industry said that if current trends continue, China would have 200 million phone users by the end of 2002, and 300 million by 2005.
And even those sky-high figures would represent only a 20 percent market penetration, leaving plenty of room for expansion.
The growth in the Chinese market was especially bright compared with the dismal state of the wireless industry in the rest of the world.
Global mobile-phone sales are falling this year for the first time in more than two decades.
Some analysts project that the market will have slipped 9 percent by year's end. The slowdown has pushed such giants as Ericsson and Motorola deep into the red, prompting them to slash tens of thousands of jobs.
As the foreign companies axed workers in their home countries, however, they hired more in China, banking on its continuing growth.
China's low-cost labor force made it easy to expand.
"You can get excellent engineers here for $8,000 to $10,000 a year instead of $80,000 to $100,000 in the States," says James McGregor, managing director of Global Internet Ventures in Beijing.
Germany's Siemens this summer spent $60 million to boost capacity at its Shanghai handset factory, so it could pump out 14 million handsets by 2003.
Motorola invested more than $1 billion in its seven-factory complex in the industrial center of Tianjin, with plans to sell 17 million mobile units by year-end.
Cisco Systems, partnering with Motorola in Invisix, a wireless-video joint venture partly based in Beijing, was planning on growth of 50 to 60 percent in China in the coming year, even though it remains to be seen how many Chinese are eager to get streaming video over their cell phones.
"Beijing is going to be the center for Invisix throughout the whole Asia-Pacific region," says Li Bing, who heads Invisix operations in China. "The United States is not as strong a market as China will be."
It is beginning to appear that the foreign firms misjudged the market.
Beneath all those rising subscriber numbers are darker figures of narrowing profit margins, a thinning customer base and growing competition from low-tier homegrown competition.
Markets saturated
It appears that China's impressive growth over the past few years came largely through mobile phone sales concentrated in such urban centers as Beijing, Shanghai and Guangzhou, where business executives and other professionals vie for the latest high-tech gadgetry.
By late spring, the urban markets were so saturated that cell-phone companies began to turn their attention to the cities' dusty tenements and the impoverished countryside, where 80 percent of Chinese live.
The demand for cell phones is high in the countryside, where as few as six out of 100 people own any kind of phone.
Cell phones are more popular than traditional phones because they cost less and are not encumbered with the bureaucratic red tape and long waiting lists involved in having a phone line connected to the home.
But not everybody can afford the service.
Roughly 120 million Chinese make less than $70 per year, slightly under the cost of the cheapest cell phone.
The nation's average income is less than a 20th of that in Europe. The low-wage workers who can afford a phone typically spend less time on calls and less money on frills than more affluent city folk.
The push into the hinterlands meant that even though companies were expanding, their profit margins were dropping like a stone.
China Mobile, for instance, more than doubled subscriber numbers in the past year. By December, analysts say, the firm could unseat England's Vodafone as the world's largest wireless service.
Lower profits
But the more China Mobile expands, the thinner its profit margin becomes.
Average revenue per subscriber dipped to $19 by June, down 34 percent from last year, when revenue averaged more than $29 a subscriber.
In comparison, monthly revenue per subscriber averages $38 in Europe and $50 in the United States.
Jiang Xiaojuan, who heads the Institute of Finance and Trade Economics at the Chinese Academy of Social Science, says foreigners shouldn't be surprised by the low profit margins.
"The profit rate in China has always been lower for Japanese and U.S. companies than their average overseas rates," he says.
In addition, as unemployment soared in China, cell phone companies found it increasingly hard to find subscribers.
In July, China added 3.8 million cell phone subscribers, which would be an enviable record anywhere else in the world. But that figure is down from 6 million in June, and slower than the 5.2 million monthly average in the first six months.
The push into the low-cost marketplace has led to a price war among the big suppliers, which already are reeling from a worldwide slowdown for their products.
Before the slowdown, many of the foreigners were still concentrating on high-end products for the marketplace.
Siemens, for instance, recently entered a deal with China's Legend computer firm to work on wireless Internet applications. Motorola was concentrating on products like Accompli, another wireless Internet application, and Viva, a project to make personalized cell phones and accessories for fashion-happy Beijing youths.
Price battle
Now, however, most companies are in a race to see who can offer the lowest price.
Motorola took an early lead, introducing stripped-down models of its cell phones for as low as $75. "Nokia was the market leader in low-end products. Now we are No. 1," boasts Cho Mijin, director of operations of Motorola University in Beijing.
But demand for the phones was so high that many of the 35,000 retailers selling the phones ran through their supplies in a matter of days. Motorola is still scrambling to keep up.
More recently, Motorola has been pumping hundreds of millions of dollars developing a stripped-down mobile phone chip at a wafer-making plant in Tianjin.
The low-cost chip has less than 150 components and costs much less to produce than a normal chip with 200 to 300 parts.
Motorola hopes to roll out the chip by the end of the year and is already talking to several Chinese manufacturers, including South Tech in Guangdong and Eastern Communications in Shanghai, about the possibility of making lower-priced handsets using the chips.
"Traditionally, Motorola has been a high-end company, driven by engineers," Cho says. "Engineers don't want to make low-end products. But we've been losing market share because we don't do low-end."
Dean Calbreath's e-mail address is dean.calbreath@uniontrib.com. His phone number is (619) 293-1891.
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