Chinese Wireless Carriers: 2014 In Review

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The Chinese wireless market was dominated by behemoth China Mobile (NYSE:CHL) in 2014, with the carrier leading the market in high speed (3G and 4G) subscriber additions as well as market share. The Chinese government had granted TD-LTE 4G licenses to the carriers in December 2013 and the year started with China Mobile launching its 4G network across the country. The other carriers, China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA), did not follow suit as they intended to build and expand their 4G networks using the FDD-LTE standard, licenses for which are still pending. This was because their existing wireless networks (WCDMA 3G) are more compatible with FDD-LTE, unlike China Mobile’s TD-SCDMA 3G network, which is compatible with the TD-LTE standard. This helped China Mobile grow its 4G subscriber base exponentially from just over 1.3 million users in February this year to over 71 million users at the end of November.

In this article, we outline the major developments in the Chinese wireless market in 2014 and how they impacted the country’s three major carriers.

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Chinese Wireless Market Share Details

China Mobile’s total wireless subscriber base at the end of November 2014 was almost 804 million, including over 313 million high speed users. The wireless major enjoys a dominant share of 62.5% in the country’s wireless market, reporting an improvement of 30 basis points since the start of the year. It is followed by China Unicom and China Telecom with 23.2% and 14.3%, respectively. The steady gain in high speed subscribers also helped China Mobile improve its 3G/4G mix by almost 14 percentage points over 2013 to about 39%. However, it still lags behind the smaller carriers China Unicom and China Telecom in this regard, which have 3G/4G mix of about 50% and 63%, respectively. ((Operation Data, China Mobile, Dec 2014)) [1] [2]

Chinese Wireless Data

Revision In Interconnection Fees

China’s Ministry of Industry and Information Technology (MIIT) revised the network interconnection fees for Chinese carriers towards the end of last year. Interconnection fees, or settlement charges, are what carriers on the calling side of a voice call pay those on the receiving side to cover the costs of interconnecting the two networks. The MIIT lowered these fees for calls from China Unicom or China Telecom to a China Mobile (NYSE:CHL) number (excluding those on its 3G TD-SCDMA network) from 0.06 yuan per minute to 0.04 yuan per minute. However, China Mobile still has to pay the earlier rate of 0.06 yuan per minute for all calls made from its network (except 3G) to a Unicom or Telecom number. Interconnection charges for all voice calls made to or from China Mobile’s  3G TD-SCDMA network remain the same. The revised charges came into force January 1, 2014. [3]

This revision was likely made by the government to avoid the prospect of China Mobile unfairly dominating the wireless market and to provide conditions for fair competition to the smaller carriers. This cross-subsidization exercise helped boost Unicom’s and Telecom’s finances at China Mobile’s expense, and provided them with some support as they incurred heavy expenses in building out their respective 4G networks.

Introduction Of VAT

As part of its tax and fiscal reforms for the country, the Chinese government decided to impose a value added tax (VAT) on telecom services this year, coming into effect across the country on June 1. The VAT rate applicable to basic telecom services and value-added services was fixed at 11% and 6%, respectively. While the earlier Business Tax (BT) was calculated based on net sales, the VAT is calculated on the difference between net sales and cost of goods sold. This change was expected to increase the carriers’ tax burden and hurt profits, as the VAT is significantly higher than the earlier applicable BT of 3%. [4]

The VAT is already impacting carriers’ profitability even as tax experts argue in its favor, citing the need to plug loopholes in the existing Chinese taxation system. However, the new system does allow companies certain cost deductions in the form of input VAT credits, which could offset some of the increase in taxes. It will be interesting to see how much impact this makes on the carriers’ bottom line in 2015. [5]

Joint Network Infrastructure Company

The three leading Chinese telecom service providers reached an agreement to establish the country’s first joint network infrastructure company in July this year. The joint venture (JV), called China Communications Facilities Services Corporation Limited, is going to be involved in building telecom towers, base stations and other transmission assets for the telecom industry. [6] [7] Reflecting on the positives of such a JV, the MIIT stated that such a move could help protect the environment and conserve resources, in addition to lowering network construction costs for the telecom industry. [8]

The JV is expected to help the carriers in avoiding overlapping investments and duplication of work related to building network infrastructure in the country, especially with respect to expansion of the 4G network in the near term. This is likely to help improve resource utilization and ease site selection bottlenecks, ultimately leading to a reduction in the carriers’ capital expenditures as well as operating expenses.

Joint Effort By Carriers In Mobile Gaming

In a bid to get a slice of the booming mobile gaming market in China, the country’s three major telecom operators teamed up to help developers get their mobile games released in the market. As part of the initiative, the companies planned to jointly help publish 100 mobile games in the first year, with a target of RMB 1 million ($160,000) in annual sales from each game title. [9] This joint effort by the carriers was seen as an attempt to cater to the changing customer needs and business dynamics of the telecom industry, as well as to plan effective ways to monetize new channels. This also represented the growing importance of Internet data for the carriers’ top lines over traditional revenue sources such as voice calling and text messages.

The Chinese mobile gaming market is expected to overtake the U.S. market in early 2015, with total spending expected to touch $3 billion by the end of this year, according to a report by Superdata Research. [10]

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Notes:
  1. Operating Data, China Unicom, Dec 2014 []
  2. Key Performance Indicators, China Telecom, Dec 2014 []
  3. China adjusts mobile interconnection charges, TelecomPaper, 24 December 2013 []
  4. China to Levy VAT on the Telecom Sector Starting June 1, China Briefing, May 28 2014 []
  5. China Tax Alert, KPMG, Dec 2013 []
  6. Press Release, China Mobile, July 11 2014 []
  7. Press Release, China Unicom, July 2014 []
  8. Press Release, MIIT, April 30 2014 []
  9. China’s three carriers team up to make a push into mobile gaming, The Next Web, May 5 2014 []
  10. REPORT: China $3B mobile game market is about to overtake the States, Superdata Research, May 5 2014  []