China approaches 1 billion mobile connections as 3G services gain traction - Chinese 3G connections surpass 200 million in Q4 2011; China Mobile lagging rivals in 3G migration

China is on track to surpass 1 billion mobile connections before the end of the current quarter, fuelled by growth in 3G which will soon account for a quarter of the country’s connections.

According to the latest GSMA Intelligence data, China ended 2011 on 973.7 million connections, up about 16 percent year-on-year. The number of 3G connections surpassed 200 million in Q4 2011 and accounted for 22 percent of the total at year-end. Market penetration is estimated at 72 percent, up almost 10 percent from a year ago.

The three Chinese operators began rolling out the new networks in 2009 following the large scale-restructuring of the telecoms sector that year by the government. Each is using a different flavour of 3G: TD-SCDMA at China Mobile; WCDMA at Unicom; and CDMA EV-DO Rev. A at China Telecom (both China Telecom's CDMA2000 1X and CDMA EV-DO Rev. A networks are classed as 3G).

After a slow start, China's Ministry of Industry and Information Technology (MIIT) recently declared that the new networks had moved to a “large-scale development stage” during 2011. It notes that the three operators jointly invested CNY94.1 billion (US$14.9 billion) in related equipment in the nine months to November 2011. The Ministry later noted that there were 814,000 3G base stations deployed in the country by year-end, comprising 220,000 TD-SCDMA (China Mobile), 270,000 WCDMA (Unicom) and 324,500 EV-DO (China Telecom).

3G is now accounting for almost 80 percent of new connections in the country, according to GSMA Intelligence data. 3G net additions in Q4 2011 were estimated at 26.8 million out of a total 34.2 million.

China Mobile remains the country’s clear market leader, with an estimated 648.7 million connections in Q4 2011, giving it a 67 percent market share. However, 3G connections account for just 8 percent of China Mobile’s total base giving the market leader a much lower share in the fast-growing 3G sector. Nevertheless, 3G accounted for over half of China Mobile’s net additions in the quarter.

3G (WCDMA) accounted for 20 percent of the total at second-placed Unicom, while third-placed China Telecom had 26 percent of its base migrated to the higher-speed EV-DO Rev. A. The fact that these two operators have been able to migrate more subscribers to their respective 3G networks is partly due to them being able to tap into a broader range of 3G smartphones compared to what is currently available for China Mobile’s homegrown TD-SCDMA network.

Unicom has been the exclusive provider of the iPhone since 2009, while China Telecom is thought to be close to launching a CDMA version of the iconic Apple device. But despite reportedly being in discussions with Apple for several years, China Mobile has yet to launch the device officially - though it is thought to have millions of “unofficial” GSM-enabled iPhones running on its 2G network.

The market leader has its own Android-based proprietary smartphone platform called OPhone, while Unicom has a similar platform known as the Wophone. Both tie-in with their respective 3G brands and application stores.

But 2011 also saw Unicom diversify into regular Android-based smartphones in a bid to offer low-cost smartphones at (or below) the key CNY1,000 price point. Unicom said this month it hopes to ship 90 million CNY1,000 smartphones this year and a further 60 million in the CNY1,000 to CNY2,000 range. One hugely successful low-cost model for Unicom to date has been ZTE’s Blade V880, which has sold more than 3 million units since launching last summer.

Meanwhile, China Telecom says it aims to sell 45 million smartphones this year that will be compatible with its EV-DO network, which would account for over half of its forecast 80 million total terminal sales.

Calum Dewar, Analyst, GSMA Intelligence:

As China nears the 1 billion connections milestone, a market penetration level of 72 percent suggests that there is still plenty of room for growth. However, with the vast majority of the untapped market lying in poorer rural areas, the three operators are rapidly increasing their focus on pushing 3G to existing mobile users. China Unicom continued to increase its 3G market share throughout 2011 by offering considerable subsidies on its WCDMA handsets, and last week launched a three-year contract plan offering a free iPhone 4S for as little as CNY286 per month. However, the inherent risk in this strategy is borne out by the operator’s most recent results, which put 3G handset subsidies at CNY4.156 billion (US$658 million) for the nine months to September 2011 – up CNY2.890 billion (US$458 million) from the same period a year ago. Unicom will hope that expanding the lower-cost end of its smartphone portfolio can alleviate these pressures, but it will be running into stiff competition in this area. Of the 45 million smartphones China Telecom aims to sell this year, the majority will be in the CNY700-2,000 price range, and the operator also offers bundled deals via its fixed-line and broadband businesses. Aside from low-cost smartphones, 3G services are also a key battleground – China Mobile’s own app store ‘Mobile Market’ is believed to have more than 150 million registered users, while Unicom offers 3G-specific music and real-time live TV services. These kind of services will be crucial in generating user ‘stickiness’ ahead of the introduction of LTE networks in the country.

China mobile connections, Q4 2011
Source: GSMA Intelligence, company data