Growth At All Costs
Amid rising competition for cellular customers, China
Mobile's 'quantity not quality' approach may prove its
undoing By CRYSTYL MO
ALSO LG
Goes For 3G: Next-generation services
could trip LG Telecom
Dermot Tatlow. 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.
Commentary
2003-12-06
Coming soon to the commentary column--behind the scenes stories of the how the articles are really put together--the difficulty in getting anyone to accept an interview in China, the political sensitivities, the great stuff that got cut because of space, and much more about the joys and frustrations of writing in China
