Chinese Telcos Look to Boost Margins With Cheaper Smartphones

by Trefis Team
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China Unicom
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The Chinese telecom industry appears to be trending toward selling cheaper smartphones and actively promoting sales, as opposed to higher-priced phones from Apple (NASDAQ:AAPL), Samsung and Nokia (NYSE:NOK). According to DigiTimes, China Unicom (NYSE:CHU), China Telecom (NYSE:CHA) and China Mobile (NYSE:CHL) have started actively promoting smartphones at up to CNY 1,000 ($158). [1] China Unicom in particular unveiled cheaper Android-based smartphones on Monday. We believe this is a good move by China Unicom, as selling cheaper smartphones helps the company reduce its subsidies, which in turn helps boost the company’s operating margins.

See our complete analysis of China Unicom here

Smartphones help push up ARPU levels..

China Unicom and its competitors emphasize selling smartphones as they help to increase the average revenue per user (ARPU) metric due to the higher price points of data plans. Smartphone users are generally heavy data users, as internet access and social networking usage have picked up on smartphones. Further, improvements in phone camera resolutions have resulted in a large number of images and mobile videos being recorded and transferred over wireless networks, which has become a rapidly growing source of increased data usage.

..but subsidies hurt operating margins

Although expensive phones such as the iPhone provide substantial boosts to ARPU levels for these companies, the higher subsidies associated with these phones make them unattractive from a margins standpoint. For instance China Unicom’s EBITDA margins for its mobile division have declined sharply in recent years, from 42% in 2008 to about 24% expected by the end of 2011. By selling mid-level smartphones, these companies will be able to reduce their subsidy costs while keeping data usage, and consequently ARPU levels, intact.

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Notes:
  1. China market: China Unicom to launch mid-level smartphones for sale at below CNY1,500, DigiTimes, December 27th, 2011 []
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