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Doug Young
Doug Young

Corporate China | 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

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China Mobile is likely to spend heavily on promotions to meet its aggressive 4G targets for the rest of this year.
Doug Young
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.
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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.

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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.

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