Aggressive pricing to drive China smartphone sales

The three Chinese mobile operators, China Mobile, China Telecom and China Unicom, have been planning to launch their own smartphone offerings since 3G licenses were awarded in 2009. Pricing, subsidies and local language applications will be key to success in the Chinese market. Intense competition between the three operators will promote strong growth of the smartphone market. However, Western vendors will need to take care to meet China’s strict censorship restrictions to maximize the potential that this market has to offer.

 

We expect the Chinese smartphone market to see strong growth over the next five years, as a result of two main factors. First, data services will drive smartphone growth. The three leading mobile operators are promoting data services, hoping to create new revenue streams as they continue their investment in 3G and (in some cases) LTE network rollout.

 

Second, the three operators are focusing on smartphones as a key strategy. Smartphones and associated services are of primary strategic importance to these operators following their focus on 3G network rollout in 2009. 3G subscriptions grew impressively during the fourth quarter of 2009 and the early months of 2010; China Mobile recorded new subscriptions of 2.2 million, while China Unicom had more than 3 million new additions. All operators regard the smartphone as a key strategy to promote 3G and target high-end users.

 

The three operators all regard subsidies as an important tool, and competition will intensify as more smartphone models are brought to market. However, subsidies could become a double-edged sword for operators. In the short term they have the potential to increase subscriber numbers, but if a price war starts among the three operators, profits will become an issue and high subsidies may emerge as a burden. We predict that the three operators will continue their subsidies on smartphone handsets and possibly reduce (or stop) their subsidy strategies on other, lower-end mobile handsets. They view the smartphone as one of their key competitive differentiators in the mobile market.