Telecom subscribers are growing at a breakneck pace. In 2006, China added 68 mn mobile subscribers to reach 461 mn, by far the world's leading subscriber market. While since August 2006 India has consistently surpassed China in terms of new monthly mobile subscribers (excluding the recent subscriber clean up), China continues to add 5 mn mobile subscribers a month. In May 2007 total subscriptions surpassed 480 mn. China Mobile has been adding over 4 mn subscribers a month in 2007, growing its share of the market beyond 68%.

In the area of Internet and broadband users, China has experienced impressive numbers. By the end of year 2006 China's Internet and broadband users had risen to 128 mn and 52 mn, respectively. China trails only behind the US in Internet subscriptions, and is currently poised to surpass it in broadband users. In fixed lines, total subscriptions are flat or even down in some provinces, as fixed-mobile substitution takes hold. BDA forecasts declines in the national tally of fixed line users within the next year or two.

Revenue Picture
Revenues from telecommunications services continue to grow, although at a slightly slower pace than subscriptions. The main reason for this is erosion in ARPU as value-added services, while growing, have failed to compensate for the erosion in average revenue per minute of voice due to competition or IP substitution.

Overall the heydays of 15-20% annual carrier revenue growth are over, as telecom services growth rates have converged with China's GDP growth rate.

Even if services growth has slowed,
10%-11% growth remains impressive, and is likely to be sustained given continued growth in mobile subscriptions and broadband access against a backdrop of relatively low penetration rates, especially in populous but less developed in-land provinces. In 2006, over 50% of China Mobile's new subscribers were in less developed or rural areas.

Comparing with the red hot mobile market, broadband service in China is just on the beginning stage. With three years strong growth in ADSL access and a smattering of LAN and FTTH, total users have reached 55 mn with a compound annual growth rate of 20%. The key driver for the broadband market growth is simply price. As prices have fallen from $500 or more for installation, to no installation charge, and flat-rate pricing for $15 or so for ADSL, subscriber numbers have been growing steadily at one to two million per month. Fixed line carriers now even bundle value-added services with broadband subscriptions. Sustained declines in the price of desktops and laptops have also contributed to the growth. As higher-performance PCs have become more accessible, the demand for streaming media and online games has increased dramatically.

Capital Expenditure
Trailing subscribers and revenue growth, capital expenditures in China's telecom sector barely increased in 2006. Total capex of RMB 219 bn was only slightly ahead of the 2005 capex of RMB 203 bn. The delay in the introduction of 3G, as China continued to attempt to support its own TD-SCDMA standard as a rival to W-CDMA and CDMA 2000-1x EV-DO, and the uncertainties over a pending restructuring of China's four carriers contributed to the sluggish capex growth.

Overall though, compared to international peers and especially to Indian operators, China's capital expenditure to revenue ratio remained high at 33.8%.

Capital expenditures on fixed-line access networks, with the exception of broadband services, will continue to go down in the near future. However investments in the core network, especially on next generation technology like IMS and components support convergence service, will increase steadily due to the current requirement of 3G service and the all-IP interactive multimedia applications in the future.

Capital expenditures of the mobile carriers is set to increase healthily in 2007 and 2008 as carriers either upgrade 2G capacity, or performance (EDGE) as well as eventually inking contracts for 3G, whatever the flavor of technology chosen.

Considering the strong user growth in GSM service for both carriers, the capex on GSM, which includes upgrades to GPRS, EDGE, new IN components for value-added services, and the replacement of legacy BSS, will increase steadily during the next two to four years. Investment on GSM will still occupy most of the total capex in the near future, but the growth rate will flatten and eventually decline as 3G capex ramps up.

On transmission equipment, carriers will invest more on transmission network, optical fiber and core routers, driven by the demand from 3G network and broadband service.

In the broadband sector, which is the key hope for fixed-line carriers, China Telecom and China Netcom, generated large amounts of capex in 2006.

Telecom Equipment Vendors
In the fixed-line market, Huawei and ZTE, along with vendors like Fiberhome, Datang, and UT Starcom, occupied 75% of the Chinese market. With low prices, competent service, and an aggressive marketing strategy, domestic vendors have dominated the market in recent years.

In the wireless sector, although Huawei and ZTE accounted for only 8% of the market. Huawei's intensified focus on the domestic market will allow it to join ZTE in gaining a significant slice of a market hitherto dominated by vendors such as Ericsson, Alcatel-Lucent, and Nokia-Siemens.

Chinese telcos are likely to purchase increasingly from domestic vendors, due to low prices and the support or even subsidies of the Chinese government. Policy from the government and the changing attitude of carriers is only part of the story. Three key factors have contributed to the success of Huawei and ZTE in China.

The first, and most important factor is low prices. Price for the same products from domestic vendors is 30%-50% lower than those of foreign peers.

The second factor is heavy R&D expenditures on established technologies and areas with strong demand in near term have allowed Huawei and ZTE to compete effectively with foreign vendors.

A third factor is excellent after-sales service and highly customized design for clients. Both Huawei and ZTE have large teams for technical support and their local offices cover most areas in the country. The quick response of support engineers makes Huawei and ZTE the first choice of carriers in some equipment segments in China. And the two have also done well in the international market thanks to their agressive pricing strategy.

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