• Wed
  • Dec 24, 2014
  • Updated: 3:06am
Corporate China
PUBLISHED : Thursday, 12 June, 2014, 10:20am
UPDATED : Thursday, 12 June, 2014, 10:20am

China Mobile 4G drive: more profit erosion

China Mobile likely to spend heavily on promotions to meet its aggressive 4G targets for the rest of this year, leading to more profit declines in the next few quarters

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

Just days after Beijing reportedly issued an unusual order for China's three telcos to rein in their promotional spending, leading carrier China Mobile (0941.HK: NYSE: CHL) is detailing plans that look like it is preparing to do just the opposite. The company's top executives were being quite talkative at a major telecoms show happening this week in Shanghai, and their aggressive push into 4G services was clearly at the top of their list of talking points.

The new message sends a signal that China Mobile will aggressively promote 4G for the remainder of the year, meaning we're unlikely to see any cut in its promotional spending. To the contrary, the spending binge is likely to put further pressure on China Mobile's fading profits, which have declined in each of the last three quarters.

This looming promotional binge is probably what prompted Beijing to order the nation's three telcos to rope in such spending in the first place, which was disclosed in reports last week. That's because China Mobile's smaller rivals, China Telecom (0728.HK; NYSE: CHA) and China Unicom (0762.HK; NYSE: CHU), are also likely to sharply boost their 4G promotions later this year.

But regardless of what the regulator wants, China Mobile looks determined to forge ahead with an aggressive strategy to sell 100 million 4G mobile devices this year. I had to read that figure several times to make sure it was accurate, as it really looks quite large when one considers that it equals about one-eighth of China Mobile's current 785 million subscribers.

The number also looked quite ambitious when one considers that China Mobile only has about 6.5 million 4G subscribers right now, which translates to about a million new user sign-ups each month since it launched the service early this year. That number is quite small, and I personally don't know anyone yet who is using the service based on a homegrown technology called TD-LTE.

But then I re-read the reports, and realized the 100 million figure is just the number of 4G devices China Mobile aims to sell this year. In terms of new 4G subscribers, the company has set a more modest target of 50 million. That 2-to-1 ratio is consistent with China Mobile's current subscriber base of 6.5 million 4G customers using about 12 million devices. That means that China Mobile's 4G strategy will be focused on selling multiple devices to individual subscribers, which could be a tough since many people are already suffering from gadget overload.

So let's do a little math to figure out what exactly China Mobile needs to do to meet its 4G target. It would need to sign up 43.5 million new subscribers in the remaining seven months of the year, meaning it would need about 6.2 million per month. It would also need to sell about 12.6 million 4G devices each month over that time.

I've been covering the Chinese telecos for quite a while now, and those figures look far higher than anything I've seen in the past, even when market penetration was much lower. The mobile market now is much more saturated, meaning China Mobile will have to work extra hard to get so many new 4G subscribers.

Of course I should also point out that China Mobile will probably try to get a big portion of its new 4G subscribers by offering cheap upgrades for existing users of its older 2G and 3G services. Many of those are people like me, who still use 2G and might be tempted to upgrade to 4G if service plans and new phone costs are attractive. But no matter how you look at it, the second half of this year is likely to be an expensive one for China Mobile due to 4G promotions, and I would expect the company to post more quarterly profit declines for the rest of the year.

Bottom line: China Mobile is likely to spend heavily on promotions to meet its aggressive 4G targets for the rest of this year, leading to more profit declines in the next few quarters.

To read more commentaries from Doug Young, visit youngchinabiz.com

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