Until recently, operators in China have been able to focus on the affluent subscribers living in urban regions, with sufficient demand for telecoms services and customers aplenty. But now the balance is shifting; the bulk of new customers must now be found in rural areas. So far China Mobile has been the only operator to seriously target the countryside.
In the eyes of China's telcos, urban regions such as Beijing, Guangdong and Shanghai will always hold the most appeal. They are home to millions of people and crucially include the mid- to high-income individuals and early adopters.
Yet this also means that the cities are fiercely competitive, especially in the wake of the industry restructure in 2008. China Telecom and China Unicom are focusing on winning customers in both the fixed and mobile markets through service bundling strategies (a segment where China Mobile is weak).
On the other hand, China Mobile is continuing to act like a mobile-only player, despite possessing fixed operations through China Tietong, and is pushing services to promote fixed-to-mobile substitution.
The imminent flood of 3G handsets and services will further amplify the competition for China's mid- to high-value mobile customers.
Taking a "tunnel vision" view and focusing on the urban regions makes business sense in initial network deployment stages.
However, such an approach will not provide the long-term growth that the Chinese operators desire. Urban regions are already mature - China's mobile penetration rate was around 49% in April 2009 and 43% of the population lived in the urban regions at the end of 2008. In stark contrast, China's rural market is a treasure chest of new customers.
All operators must focus more attention and resources on the rural market if they are to achieve their ambitious growth targets. However, targeting rural markets is no easy task and extending mobile coverage to rural regions is only one part of the equation. Customization is just as important as it facilitates demand from rural mobile customers. Such customization needs to be applied not only to mobile services but also to sales, marketing and support functions, as shown by the efforts of China Mobile.
For the market leader, with 74% of all mobile customers, rural towns and villages have become a valuable source of connections. In 2006, 2007 and 2008, around half of China Mobile's net additions were from rural customers (around 105 million over the three years). We expect that in 2009 rural net additions will continue to make up around half of its new mobile customers.
By exploiting its scale, experience and ability to customize, China Mobile has engineered itself a secure leadership position in the countryside. Shortfalls from its rivals have also contributed to securing its dominance.
China Telecom's experience in extending fixed networks to rural regions has been unrewarding, and it believes it is not cost-effective compared to mobile.
China Unicom simply does not have the scale, branding and experience to put up a strong fight against China Mobile in remote areas of China. With China Telecom and China Unicom focusing on urban regions, it seems China Mobile will further extend its lead in rural China.
Raymond Yu, analyst at Ovum