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Seeking Telco Biz? Try China Mobile

Still wondering why high-tech and electronics equipment makers, component suppliers, and contract manufacturers are so gung ho about China?

Try this: Over a five-year period, {complink 1082|China Mobile Ltd.}, the world's biggest telecommunication service provider in terms of subscribers, will put almost US$100 billion into capital expenditure. This year alone, the company expects to increase its capex to $20 billion, or 132.4 billion yuan, up from 124.3 billion yuan in 2010.

While China Mobile's capex budget compares well with spending at Western rivals — including {complink 5926|Verizon Communications Inc.}, which in 2010 had $16.5 billion in capex, down slightly from $16.9 billion in the previous year — the Chinese company is expected to continue increasing spending on equipment to maintain its breakneck growth rate. The company had 584 million customers in 2010 and improved its 3G coverage to 656 cities, helping to raise mobile Internet access sales 49 percent.

Analysts generally were surprised (and unhappy) with the company's decision to increase capex in 2011, arguing that the numbers were well above what they expected, according to reports. Some researchers were actually expecting the company to drop capex as much as 35 percent below the 2010 level.

Let's leave the bickering over the capital expenditure numbers to the analysts. Instead, I'll focus here on why the company believes it needs to devote this level of spending to its plant and what it means for telecommunications equipment vendors and component suppliers.

First, China Mobile is close to peaking in terms of customer subscription and facing stiff competition from local rivals, which are eager to hack off chunks of its sales. The company, like rivals in the West, needs to migrate up the food chain to higher value-added services and accelerate the rollout of data-intensive applications, as chairman Wang Jianzhou, acknowledged in a presentation on the 2010 performance.

China Mobile identified three challenges it is currently facing. They include:

  • Higher risk of intensifying competition as mobile penetration increases
  • Greater cross-sector competition as more emerging technology companies enter the mobile market
  • Unprecedented challenge to carrier networks due to explosive growth of mobile Internet

I believe China Mobile has made a strong case for increasing spending on capital equipment. In addition to the challenges identified by chairman Wang, China Mobile pointed to opportunities such as “rising demand for communication and information services being stimulated through government policies and enormous potential in the fast-growing Internet of Things.” China Mobile's subscription growth has been astounding, until now. In 2010, the company added about 62 million new subscribers, increasing its total to 584 million.

While this is a mouth-watering number US and European telecom companies would be giddy to report, it represented only a 12 percent increase over the 522.3 million subscribers from 2010. By comparison, in 2009 subscriber growth rose 14.2 percent. The lower growth rate posted for 2010 is a sure sign the company needs to seek revenue growth elsewhere — hence the increased focus on value-added data services.

This is where equipment vendors, chipmakers, and other electronic component vendors come in. China Mobile is seeking to add equipment to support convergence and the rollout of 4G services nationwide. Other areas of higher value China Mobile is pursuing include mobile payment/mobile wallet, mobile reading (e-books, tablet computers, etc.), mobile video, music download, mobile gaming, and mobile TV. It has already launched all of these services, but it must now expand sales outreach and ensure its network is able to support increased customer usage. Equipment manufacturers that can offer the best in innovative technology and service can count on winning a chunk of the capex China Mobile is planning for the next three years.

Don't limit your focus to the Chinese telecommunications market, though. China and many Chinese companies are raising their capital expenditure in a hot race to catch up with leading economies and accelerate the development of the country. Opportunities are opening up in other areas, including general manufacturing, medical, industrial, and power sectors. All of these areas have increased levels of electronics. Dig in.

3 comments on “Seeking Telco Biz? Try China Mobile

  1. mfbertozzi
    March 18, 2011

    Very good report Bolaji about what is going on from Chinese regions. Major difference between western and far eastern mobile operators is exactly on investments' speed focused on broadband infrastructure.  To be very direct and clear: currently “westerns” are talking, “easterns” are doing or at least sometimes this is the feeling.

     

  2. maou_villaflores
    March 31, 2011

    Going east is the trend for mobile/telco biz. Aside from the factor that China has the number mobile users, Chinese love gadgets and phones and symbolizes their social status. But the main issue here in the competition of the local cellphone companies versus MNC telco company. MNC telco company has a good quality but pricey unlike the local brand.

  3. hwong
    August 19, 2011

    @rich

    Actually Verizon Wireless is leading its way in cloud computing. They have invested 1.4 billion in the company Terremark to provide infrastructure as a service in their portfolio. Because they already have the customer base and the connections in place, it makes alot of sense for them to tap into the cloud market by offering data centers to host applications, databases and storage.

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