Telecommunications

China Unicom's Smart Call on Cheap Phones


Despite recent video out of China of egg-wielding customers angry about shortages of Apple’s (AAPL) iPhone 4S, that’s not where the mobile-phone action is on the mainland. China Unicom Hong Kong (CHU), the nation’s No. 2 carrier and an iPhone distributor, really saw its business take off last year when it began pushing smartphones that cost 80 percent less than Apple’s coveted device.

After previously courting high-end customers, China Unicom in May started selling handsets from local manufacturers Huawei Technologies and ZTE that cost less than 1,000 yuan ($158), about half a month’s salary for an urban Chinese worker. The 16-gigabyte iPhone 4S costs 4,988 yuan or up to 5,880 yuan (without a contract). The low-end strategy helped make Unicom the best-performing stock on Hong Kong’s benchmark Hang Seng Index last year, with a 47 percent increase, and has put China on course to top the U.S. in smartphone users this year. “People aspire to own an iPhone, but they can’t afford it,” says Teck Zhung Wong, a Beijing-based analyst at IDC China. “If a vendor offers a phone that can do most of the things a high-end device can do, there’s no reason people won’t bite.”

China introduced 3G wireless networks in 2009, six years after the U.S. Adoption of the high-speed service, however, was hampered by high handset prices in a nation where monthly incomes are still low. China Unicom initially was expected to miss its 2011 goal of adding 25 million 3G subscribers. Then the 1,000-yuan smartphones jump-started demand. By November the carrier was adding more than 3 million new 3G subscribers monthly. For the year, China Unicom added 26 million 3G mobile users.

That’s just the beginning. The number of subscribers to 3G mobile networks in China will almost double, to 229 million, this year, according to the median estimate of 11 analysts surveyed by Bloomberg News. That compares with an analyst forecast of 200 million in the U.S. “People are underestimating the growth,” says Jim Tang, at Shenyin & Wanguo Securities in Shanghai. “The number is going to be huge.”

More of the new subscribers will go to China Unicom and third-place China Telecom at the expense of China Mobile, the No. 1 carrier, according to a Bloomberg News survey of analysts. One reason: China Mobile uses a homegrown 3G network standard that is not supported by as many international handset makers. China Mobile’s market share will drop to 38 percent from 44 percent in 2010, according to the survey. Rainie Lei, a China Mobile spokeswoman, declined to comment on its 3G strategy.

China Unicom’s 3G customers use about twice as much data as China Mobile’s, says Paul Wuh, an analyst at Samsung Securities in Hong Kong. “Unicom’s subscribers are going there with the specific purpose of buying smartphones and using data,” he says. That’s been good news for suppliers of low-cost handsets. Between the first and third quarters of 2011, ZTE’s sales in China almost quintupled and Huawei’s almost tripled, according to researcher Gartner (IT). Huawei sold 4.47 million handsets there through the first nine months, and ZTE sold 3.03 million. During the same period, Apple sold 5.6 million iPhones in China as its market share dropped to 10.4 percent in the third quarter from 13.3 percent the quarter before, according to Gartner.

“Low-end smartphones are selling like hotcakes,” says Samsung Securities’ Wuh, “and there is nothing in the market trends that suggests this is not going to continue.”

The bottom line: Smartphone use is expected to almost double in China in 2012. Strong sales of sets costing 80 percent less than the iPhone are a reason.

Lococo is a reporter for Bloomberg News in Beijing.

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Companies Mentioned

  • AAPL
    (Apple Inc)
    • $102.47 USD
    • 2.71
    • 2.64%
  • CHU
    (China Unicom Hong Kong Ltd)
    • $14.72 USD
    • -0.02
    • -0.14%
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