China told the nation’s three state-owned wireless carriers to cut marketing expenses because they overspent on subsidies and advertising for devices such as Apple Inc. (AAPL:US)’s iPhone, people familiar with the matter said.
The State-owned Assets Supervision and Administration Commission told the carriers to cut promotional spending by a combined 40 billion yuan ($6.4 billion) in three years, said the people, who asked not to be identified because the order hasn’t been made public.
A reduction of subsidies would make high-end devices like the iPhone or Samsung Electronics Co. (005930)’s Galaxy S5 more expensive in the world’s largest smartphone market as the carriers expand fourth-generation services. That may benefit domestic phone makers including Xiaomi Corp., Lenovo Group Ltd. (992) and Coolpad Group Ltd., which offer less costly models.
“If carriers do as asked, this is likely to benefit lower cost phones, including both local and foreign vendors that also have low-cost models, except for Apple,” Sandy Shen, an analyst with Gartner Inc., said in an e-mail today. “Of course due to the cost competitiveness of local vendors, they are likely to benefit more than foreign brands.”
The three state-owned carriers are China Mobile Communications Corp., China United Network Communications Ltd. (600050) and China Telecommunications Corp. Each has a Hong Kong-listed unit.
As much as 60 percent of phones sold in China are subsidized and any reduction could weigh on the high end of the market, a segment that accounts for about 20 percent of sales, analysts led by Steven Milunovich at UBS AG said in a note to clients. Apple had about 33 percent of China’s premium sales in 2013, according to UBS.
China Mobile began selling the iPhone in January after six years of negotiations. Discounts for the Apple device are one reason why subsidies on all phones will rise 29 percent to 34 billion yuan this year, Chief Financial Officer Xue Taohai said in March. The company hasn’t received formal notification of the SASAC policy, said Rainie Lei, a Hong Kong-based spokeswoman for the listed unit, China Mobile Ltd. (941)
“The company is always working to increase revenue and control costs, including marketing costs,” Lei said in an e-mail yesterday.
The move comes after SASAC lowered the profit-growth target for companies under its regulation to 5 percent in 2014 from 10 percent in 2013, the people said.
The Hong Kong unit of China Mobile, the world’s biggest wireless carrier by users, is projected to report an 18 percent drop in net income in 2014, according to the average of 23 analyst estimates compiled by Bloomberg. That would be the largest since 1999.
The carrier has said it faces challenges this year including costs to roll out fourth-generation network services, and a decline in revenue from voice and text services as users switch to free instant messaging applications such as Tencent Holdings Ltd. (700)’s WeChat.
Jacky Yung, a spokesman for Hong Kong-listed China Telecom Corp. (728) declined to comment on whether SASAC ordered cuts in marketing expenses.
“The company has been incurring appropriate selling expenses according to the market development need,” Yung said in an e-mail. China Telecom “has been implementing stringent control on the selling expenses to ensure operating profitability.”
A China Unicom (Hong Kong) Ltd. spokeswoman didn’t respond to an e-mailed request for comment.
“It is a trend that carriers would gradually reduce subsidy spending, given the financial stress, even without a push from the SASAC,” Ashley Sheng, a Shanghai-based analyst at SWS Research Co. said in an e-mail today “We believe the whole sector is likely to be hurt negatively, but of course high-end phones are most likely to be impacted.”
China Telecom fell 1.3 percent to close at HK$3.91 in Hong Kong trading. China Mobile dropped 0.5 percent to HK$75.80, while China Unicom lost 0.3 percent at HK$12.26.
Pressure on Apple from reduced subsidies adds to the challenges that U.S. technology companies are facing as China takes steps to limit dependence on overseas technology.
The government is reviewing whether domestic banks’ reliance on high-end servers from International Business Machines Corp. (IBM:US) compromises the nation’s financial security, people familiar with the matter said in May. IBM said at the time it wasn’t aware of any official policy recommending against the use of its servers by banks.
No review of IBM server security by China has ever been publicly confirmed, Edward Barbini, a spokesman for Armonk, New York-based IBM said in an e-mail today.
Tiffany Yang, a Beijing-based Apple spokeswoman, declined to comment on whether the company had any information about the order for carriers to cut expenses on devices including iPhone.
“The telecom operators are deploying the strategy of using low-end smartphones as they launch 4G service,” Ricky Lai, a Hong Kong-based analyst at Guotai Junan Securities, said by phone today. “Coolpad, Xiaomi, Lenovo and most of the Chinese smartphone makers are all releasing 1,000 yuan 4G smartphones.”
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