China's Mobile Phone Competition Will Escalate as Business Grows

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By Mike Caggeso

China Mobile Ltd. (NYSE: CHL), the world’s largest cell phone provider, continues to pummel its competition.

Last week, the company posted a stronger-than-expected 25% increase in first-half profits, which rose from $3.87 billion to $4.85 billion.

And yesterday (Tuesday), China Mobile announced it added a record 5.6 million customers in July, up from the 5.33 million added in June. Its current number of subscribers 332.4 million people, about a quarter of China’s population.

Meanwhile, its nearest competitor, China Unicom, said it added only 1.46 million users in July, down from the 1.54 million added in June. DBS Vickers Securities Ltd. Analyst Steven Liu said he expects China Unicom to continue descending through 2007.

“China Unicom can’t compete with the dominant China Mobile. China Mobile has better services and a stronger brand name,” Liu told MarketWatch.

However, the Financial Times reported of a possible merger between China Unicom and China Telecom, the Beijing-based fixed-phone service. Such a merger would give China Unicom the leverage its needs to fight China Mobile’s market dominance and brand recognition, some experts say.  

Interestingly, the same story also hinted that China Mobile could possibly merge with China Netcom Group Corp. Ltd. (NYSE: CN), another fixed-phone service provider.

Davenport & Co. analysts maintained their “strong buy” rating on China Mobile shares, while boosting their earnings estimates this week. Davenport’s target price for the mobile-phone giant’s stock is $70. Its ADR closed yesterday at $56.70.

An Achilles Heel?

China’s cell phone use is rapidly growing because its population and economy are booming, cell phone towers are going up for the first time in parts of rural China, and China Mobile’s name recognition makes it easy for first-time users to sign up.

That raises an interesting issue that analysts must factor into their estimates: Of the 5.6 million users added in July, only 380,000 were contract customers. That can mean two things:

  • Depending on how much a customer prepays for a phone, it’s likely that a person can go through three to four phones a month. That would make the 5.6 million added users number a possibly inflated figure.
  • And such a large percentage of prepaid customers shows that first-time cell phone users in China aren’t necessarily brand-loyal, meaning they aren’t really committing to a single company. If 5.22 million of China Mobile’s new users are prepaid, non-contract users, every one is fair game for a rival company, once their minutes expire.

That’s a drastically different strategy than American cellular companies employ. U.S. firms look to lock in their customers by requiring user contracts that reward customers with exclusive deals. Verizon Wireless (NYSE: VZ), for example, knocks up to $100 off the cost of a new phone if the customer signs a two-year service contract. And AT&T Wireless (NYSE: T) has an arrangement with Apple Inc. (Nasdaq: AAPL) and its iPhone that requires all iPhone users to be registered for the AT&T wireless service.

 

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