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China Mobile is to introduce its first device based on its OPhone smartphone concept this month. The device, made by Lenovo, uses an operating system developed by China Mobile based on Google's Android platform. It is expected that other handset vendors, such as Dell, LG and Dopod, will release OPhone designs soon.

Meanwhile, China Unicom will most likely release Apple’s iPhone this September. This means that the smartphone battle between Google and Apple is expanding into the Chinese market. With all three operators focused on 3G market competition, smartphones will be a critical way for them to target high-end customers.

The key to success
It is too early to tell which will win between the OPhone and iPhone in the Chinese market. The key factors will be the mobile operators’ handset subsidies and tariff plans. With two operators (China Mobile and China Telecom) already committed to using the Android platform, iPhone’s success in China will face big challenges.

The OPhone from Lenovo (the O1) is quite similar in form factor to the iPhone. To help localize the device for Chinese customers, the OPhone is embedded with China Mobile services such as Fetion (instant messaging via mobile and PC), mobile news and mobile mailbox, together with GPS and CMMB (the Chinese mobile TV standard).

Handset subsidies will be a key tool to attract potential users, with heavy subsidies expected for both the OPhone and iPhone. Rumors suggest that the first released OPhone and iPhone devices will be around Rmb3,000 ($439) after a subsidy of around 50%. Although details of tariffs have not yet been released, we expect tariff competition between China Mobile and China Unicom to intensify when they launch OPhone and iPhone services.

High-end customers a priority
3G and value-added services have become critical areas of competition for the three operators in 2009, together with expanding 3G coverage through heavy investment in network rollout. With each of the three operators using a different 3G standard, customers are confused as to how to choose a 3G handset and services package, and are also waiting for coverage expansion to bring further improvements in network quality. Therefore, the growth in 3G customers has so far been slower than the Chinese mobile operators had anticipated.

All three operators are targeting high-end customers to improve their ARPUs. It is therefore likely that China Telecom will also introduce a smartphone soon. In a recent interview with Ovum, China Telecom said it would take a similar strategy to China Mobile, using an Android-based platform to attract more handset manufacturers. The battle between Apple and Google in China will therefore involve all three mobile operators.

China Mobile is in talks with around 40 mobile handset manufacturers, to set up partnerships to introduce OPhone handsets. China Telecom is also in talks with many handset vendors. According to the local press, more vendors are keen to introduce smartphones via China Mobile and China Telecom, which will intensify competition in the smartphone market. This increased competition will also bring the price of smartphone handsets and services down further and will increase smartphone usage in the Chinese market. However, the nationwide deployment and quality of the operators’ 3G networks will remain a key inhibitor to growth in the short term.

Charice Wang is an analyst for Ovum's telecom regulation team