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China telecom firms take long road to profit with 4G rollout

A woman speaks on her smartphone as she walks on a busy street in downtown Shanghai in this March 13, 2013 file photo. REUTERS/Carlos Barria
A woman speaks on her smartphone as she walks on a busy street in downtown Shanghai in this March 13, 2013 file photo. REUTERS/Carlos Barria

By Paul Carsten

BEIJING (Reuters) - Faster isn't necessarily better for China's telecom carriers as they prepare to roll out high-speed 4G mobile phone networks at the expense of their profitability for years to come.

China Mobile Ltd, which has the most subscribers in the world, is investing billions of dollars to upgrade its infrastructure so clients can enjoy speedier Internet and data access once the government awards 4G telecom licenses before the end of the year.

Its rivals China Unicom Hong Kong Ltd and China Telecom Corp Ltd are being forced to follow suit, especially as China Mobile is in talks with Apple Inc to carry its latest smartphones, which require 4G to function at their best.

While the pressure is strong to keep up with international standards, China's mobile carriers will, like their peers in other emerging markets, struggle to recoup their investments.

"In a best case scenario, it would be no less than four to five years to turn profitable," said Juan Jose Rio of Delta Partners, a global telecoms, media and technology advisory and investment firm based in Dubai.

Chinese mobile subscribers are notoriously frugal, which means any 4G package must be attractive enough to lure users away from the slower data plans they currently use, a factor likely to eat into profit margins.

The upgraded networks also enable subscribers to better utilize technology that makes classic revenue-generators like SMSes and calls obsolete, further eroding revenues.

"Chinese carriers may price contracts at a level that's profitable straight away but it probably won't go down very well with Chinese consumers because of the higher price point for plan," said Teck-Zhung Wong, a Singapore-based analyst at information technology consultancy IDC.

TOUGH DECISIONS

The network upgrades in the world's biggest mobile phone market are a boon for equipment vendors like Shenzhen-based Huawei Technologies Co Ltd and ZTE Corp, which already each won over 25 percent of China Mobile's $3.2 billion 4G tender.

Huawei expects revenues of $2 billion from 4G investments in 2013, and a 10 percent year-on-year increase in its 4G revenue over the next two years. ZTE also sees growing income as carriers continue to invest in 4G at least until 2015.

"A nationwide 4G network is a huge undertaking - the cost of building system equipment alone is conservatively estimated at more than 100 billion yuan ($16.4 billion)," said Gu Xiang, ZTE's deputy general manager for wireless products.

Faster mobile Internet allows subscribers to use apps like the hugely popular WeChat from Tencent Holdings Ltd for messaging as well as voice and video calls. China Mobile has blamed such apps for diminishing revenues, leading to a lower-than-expected third-quarter net profit.

While all three networks must make substantial investments, the road to 4G is likely to be easiest, and cheapest, for China Unicom which only needs a simple update to its current 3G network to achieve the globally popular FDD-LTE standard.

China Telecom is the worst off.

The smallest of China's carriers has the most 3G subscribers, and its third quarter net profits are up 20 percent on the same period last year in what is its third straight quarter of double-digit growth.

It neither has the cash of China Mobile, nor the easily upgradable network of China Unicom, and now faces the choice of sticking with 3G and hoping it will keep its subscribers, or shelling out for the more expensive jump to 4G.

"There is always an inherent conflict between spending more or optimizing the assets you have already used on the ground," said Delta Partner's Rio.

"They could still utilize their network for five years without having to introduce any new technology, however this new technology is available and there is pressure from the market and consumers for them to invest in this technology."

($1 = 6.0840 Chinese yuan)

(Additional reporting by Yimou Lee in Hong Kong and Beijing Newsroom; Editing by Miral Fahmy)

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