Alexander Graham Bell’s vision of a world connected by telephone wires “laid underground” and “suspended overhead”, which sounded fanciful back in 1876, is now reality throughout the developed world. But now the telegraph pole has given way to the phone mast, developing nations are ‘leapfrogging’ old-style communication networks in favour of wireless technology. Nowhere is the impact of this transition being felt more than in China, the world’s largest mobile-phone market.
As of December 2006, 461 million of the country’s inhabitants were mobile-phone subscribers – more than double the figure for 2002. Falling prices have been one driver behind the surge in usage. The relative ease of erecting infrastructure such as antennae has enabled mobile-phone companies to benefit from lower costs compared to their fixed-line counterparts, who with 369 million subscribers have been left spluttering in the dust of the wireless sector.
China’s mobile market has a long way to go
And yet, despite the stellar growth rates, China’s mobile market has a long way to go. Penetration rates at 35% are very low by international standards, according to a recent note from Pali International. This “represents a penetration level that typically leads to a higher level of growth in the future”, says the broker, citing the example of Latin America, where mobile telephony is now the predominant mode of communication. Penetration rates in Chile, for example, have gone from 39% of the population in early 2003 to 66% today.
Most subscriber growth in China has so far come from urban areas such as Shenzhen, Beijing and Shanghai, but the cities are reaching saturation point. On the other hand, just one in ten of China’s 700 million or so rural dwellers currently own mobile phones. Although average incomes are about a third of those in the cities, falling prices for handsets and calls should make phones more accessible, while firms are keeping costs down by running tighter operations in rural areas, says BusinessWeek, dispensing with stores and relying on village chiefs to “persuade neighbours to buy handsets and prepaid cards”.
How wireless penetration benefits the Chinese economy
The ongoing expansion of mobile usage is great news for the Chinese economy. Increasing wireless penetration by just 10% could lead to an increase of 0.5% in GDP growth a year, or around US$12bn, estimates McKinsey & Co. The move into the countryside is particularly important for developing these relatively impoverished areas. With mobile phones, “you’re providing people with the tools – rather than aid – to earn a living”, Leonard Waverman, a professor at the London Business School, tells the Associated Press. Residents of one village told BusinessWeek of their plans to become a centre for ecotourism. “With our mobile phones, potential tourists can contact us and learn more about our village. We can increase our incomes in many ways.”
Best-placed to benefit from all this is China Mobile, which has by far the lion’s share of the domestic market. While the group is taking steps to expand overseas into regions such as Pakistan, “China is likely to remain its growth engine for some time”, says Zhang Dongming of telecoms consultancy BDA in the FT Deutschland. “It has a dominant position and the market is still relatively young. I don’t worry about its growth potential here.” (We look at China Mobile in more detail below.)
The best buy in China’s mobile sector
With 301 million subscribers in China (a market share of 65%) and a market cap of $187bn, China Mobile (CHL: US) is the world’s largest mobile-phone operator in terms of both value and size. The group’s dominance has enabled it to sign deals with Western multinationals, including Vodafone, Google and News Corp. And it’s still growing fast, adding 52.2 million customers in 2006, up 26% on 2005.
That’s a trend that’s set to continue, says Walter Piecyk of Pali International, who put a price target of US$66 on the stock last week. Piecyk expects subscription growth of 17% this year (that’s another 64 million users) and 14% in 2008, which will “drive the stock over the next 12-24 months”. Merrill Lynch also rates the stock, which trades on a p/e of 22, a buy. The only potential fly in the ointment is that China Mobile is likely to be chosen by the government to roll out a home¬grown 3G standard not used in other countries, which “could be a costly distraction”, says BusinessWeek.
Even so, China Mobile remains preferable to main rival China Unicom (762: HK). Shares in Unicom, which has around 33% market share, also trade on a p/e of 22, but BusinessWeek says the group is “a distant No. 2”, partly due to problems “maintaining a network that uses two mobile standards”. Its revenue per user is also well below its larger rival, at $6.80 APU, against $11.19 for China Mobile.