Chinese mobile sales to sputter
One year after China shone brightly as a beacon of growth amid global cutbacks, mobile equipment makers are bracing for leaner times as network operators in the world's biggest cellular market cut spending.
Although China adds more subscribers every month than any other market - 5.9 million in February - its two cellular carriers have trimmed spending plans by 17 per cent and 30 per cent, raising the spectre of the first contraction in mobile gear sales in several years.
A slowdown in China would come at a bad time for global equipment vendors such as US wireless giant Motorola and Sweden's Ericsson, which are struggling to return to profit amid declining sales worldwide.
After years of a steady build-up of mobile infrastructure in China, the pressure to keep extending networks in order to meet user demand has eased, said Jia-Bin Duh, president of networking giant Cisco Systems' China unit.
"With the higher percentage of coverage of mobile phone availability in China, the growth rate is definitely going to become more flat or slow down," Duh said.
Spending by operators on networks using the popular GSM (global system for mobile communications) standard reached an estimated US$7 billion last year, and with investment in third generation (3G) networks still years off, that is likely to mark a peak for some time.
"As people start to look ahead to see what the major drivers in investment will be in China, it's hard to see what's on the horizon until new mobile operators are licensed or until carriers upgrade to 3G," said Ted Dean, managing director of Beijing consultancy BDA China Ltd.
"And both of those are a couple of years away," Dean said.
Also fuelling growth last year was construction of a network using the CDMA (code division multiple access) standard by No 2 carrier China Unicom Group. But a slow take up of the new service may dampen expansion plans.
The top China executive at Ericsson told the Swedish daily Dagens Industry last month that he expects a slowdown in demand this year in China, its single biggest market.
Soon after, Ericsson's Finnish rival Nokia said a weak Chinese market was hurting its network sales, which it said would fall 25 per cent in the first quarter.
Behind the gloom were plans by China's cellular carriers to cut expenditure as equipment costs fell in the wake of slashed spending by carriers worldwide, analysts say.
Top mainland cellular carrier China Mobile Ltd said last month it had slashed its planned capital expenditure for 2002 to US$4.5 billion from an earlier plan of US$5.4 billion and for 2003 to US$4.1 billion from US$5.4 billion.
Smaller rival China Unicom Ltd, the Hong Kong-listed unit of No 2 carrier China Unicom Group, said last month it planned capital expenditure of 21.72 billion yuan (US$2.62 billion) in 2002, down 30 per cent from 2001.
"Our reaction to it is very simple. We have to be more innovative, increase our productivity and make an effort to control our costs. That we have to do," said T.K. Ng, general manager of the marketing department of Motorola's carrier solutions division in China.
Ng said he was still optimistic about China and cited the low percentage of Chinese using cellphones - about 14 per cent of the population compared to about 70 per cent in Europe.
Also stoking vendors' expectations were official plans by China to issue two cellular licences in a bid to break up the country's current duopoly, which would promise further waves of network investment, he said.
3G on the way?
The "big three" vendors were also greasing the rails for 3G networks with a campaign of seminars and conferences, said Peter Lovelock, director of Beijing telecoms consultancy MFC Insight.
"China is now about to hit a transition as it goes from stunning 2G (growth) into having to prime the market for the uptake in 2.5 and 3G," Lovelock said, referring to higher-speed services which will require hefty investment by operators.
But few analysts expect China's cellular firms to invest in earnest in 3G networks for at least another two years.
"That simply means you've got a potential slowdown on your hands while they cycle up into the next sphere of investment," Lovelock said.
With key decisions still up in the air - such as which standards will be used - and a slower-than-expected adoption in Europe, hopes are riding on China's expected 3G rollout.
"If 3G doesn't fill in the gap, then telecommunications spending could fall off the cliff after 2003," said Jerry Lu, a telecoms gear analyst at CLSA Securities in Hong Kong.
But Lovelock pointed out that even without market growth this year, foreign vendors will still strike huge deals this year as carriers race to accommodate an expected 55 million new users.
Analysts also agree that long-dominant foreign vendors face an increasingly competitive market in China, where an aggressive corps of local players are winning greater market share.
"For guys like Nokia, they should be okay, because they have handset sales, which are still strong. But equipment vendors are not going to have as nice a time as in the past few years," said Johnny Chan, technology analyst at JP Morgan in Hong Kong.