UTStarcom, a key supplier of xiaolingtong equipment on the mainland, hopes a central government plan to move 400 million people from rural areas to urban centres will continue to drive demand for the low-cost mobile phone services. UTStarcom chief executive Wu Ying said the migration plan to take place over the next 20 years would create demand among a population which did not have access to telecommunications services. 'Four hundred million is a huge number. Ninety per cent of these 400 million people today do not have any phone services, including fixed-line,' he said. 'Once they have a better choice in the next two to three years, it's going to be [xiaolingtong]. They cannot afford 3G services, not even 2G.' The first xiaolingtong system appeared in 1999, under a trial operation which began in Xian, Shaanxi province. Services have exploded since as fixed-line carriers China Telecom and China Netcom aggressively build networks to capture growth at the low end of the market from mobile carriers China Mobile and China Unicom. Subscribers for the limited, citywide services reached 25 million in August, compared with 12.5 million at the end of last year. UTStarcom supplies about 62 per cent of the nation's xiaolingtong network equipment and about 70 per cent of the handsets. Mr Wu said it cost fixed-line carriers just US$100 per subscriber to build a xiaolingtong network, about 50 per cent to 65 per cent less than wiring a fixed-line network. Carriers earn back their investment within two to three years. He said prices for deploying such a network were expected to drop 10 per cent next year. Mr Wu said: 'If you look at China Telecom or China Netcom, if they don't do [xiaolingtong] or broadband, what else can they do? About 40 to 60 per cent of their new users, depending on the provinces, [use xiaolingtong].' Users for the semi-mobile service spent about 60 yuan (HK$56.23) to 70 yuan per month, compared with 40 to 45 yuan monthly for fixed-line services, he said. Short-messaging services were also expected to boost average revenue per user. However, Mr Wu conceded the pace of growth would probably peak by 2006 as operators readied third-generation mobile phone networks. To counter the development, UTStarcom was developing equipment which would allow users to switch between 3G and xiaolingtong networks. 'Both China Telecom and China Netcom have clearly stated that they would not stop [xiaolingtong] after they get 3G licences,' Mr Wu said. WRHambrecht analyst Reginal King said UTStarcom would continue to enjoy robust growth for xiaolingtong equipment. 'With deployment [of 3G in China] commencing no earlier than the first half 2005, UTStarcom remains well-positioned to mitigate any decline in [xiaolingtong] growth with accelerating growth of its portfolio of 3G infrastructure equipment.'