The mobile giants

Published: 2 November 2009

China and India are world's biggest wireless players

The global march of the mobile phone appears to be unstoppable. A report by the International Telecommunications Union (ITU), an agency of the United Nations, found that 4.1 billion people - well over half the world population of 6.7 billion - now pay to use one.

The ITU expects the number of mobiles to surpass the number of people on the planet within the next decade.

The remarkable expansion of cellular technology is changing society, particularly in developing countries where poor communications infrastructure has hampered economic growth. Mobiles started as playthings for the wealthy but soon became a catalyst for economic growth quite simply because they have provided telecommunication services to millions of people for the very first time.

Mobile phones create jobs, stimulate investment and generate tax revenues for governments. A recent article in The Economist quoted Jeffrey Sachs of Columbia University's Earth Institute as saying the mobile phone was "the single most transformative tool for development".

Nowhere is this more apparent than in China and India, the two powerhouse emerging market economies of the last decade, where more than a quarter of today's mobile subscribers live today. Consider the following:

• In India, in July 2009 alone, the number of mobile phone subscribers increased from 427.28 million to 441.66 million – a rise of 14.38 million
• In China, July saw the addition of 7.7 million new subscribers, taking the total to 680.5 million
• In 1999, India had about 1.6 million mobile subscribers and China 43.3 million. The global total was just 490 million

To put the latest figures in context, at the beginning of 2009 the United States had 271 million mobile subscribers compared to China's and India's aggregate of 1.12 billion.

While the exact numbers are a little fuzzy because some people own more than one handset or subscriber-identity (SIM) cards, the eye-popping numbers ram home the vast scale of the countries' domestic telecom industries, reflecting the huge strides they have made along the path to growth.

Tucker Grinnan, HSBC's senior telecom analyst in Asia, said: "There is broad agreement among policymakers and economists that higher wireless penetration rates help drive higher GDP growth. World Bank and Vodafone studies suggest every 10 percentage point increase in penetration leads to a 0.6 per cent increase in GDP."

Fishermen in the southwestern Indian state of Kerala, provide a fine example. An academic study has shown that before the advent of mobile phones they had little idea which of several available ports was the best place to sell their fish to wholesalers. As a result, if too many went to the same port, prices fluctuated widely and wastage was high.

With the introduction of mobile phones, fisherman could check where their catch would be in demand, the price swings disappeared and waste was eliminated. Kerala's fishing industry was transformed into an efficient market place where fishermen's profits rose an average of eight per cent and consumer prices dropped four per cent.

Growth potential remains enormous

But the mobile story still has a long way to run in both India and China, where the growth potential remains enormous. In India, the mobile penetration rate is still only 37.87 per cent; while in China it is 52.5 per cent. At the latest count (in 2008), the US had 846 mobile phones per 1,000 people, China had 414 and India 257 (Source: CIA World Factbook 2008). At the same time mobile technology has outstripped the growth of global fixed-line connections, which now total 1.3 billion, with market penetration stuck just below 20 per cent. Many people in the developing world are simply bypassing the older technology altogether.

Pre-paid services are vitally important because they have opened up mobile ownership to people in developing countries. Two other important factors driving the mobile boom are the falling price of handsets and increased competition - as more licences are issued to operators in many countries it drives down the cost of calls. In addition, new low-cost services such as farming and medical advice and weather forecasts are becoming increasingly popular in rural areas.

Growth in the highly competitive mobile industry is also being driven by rapid expansion into rural areas, the increasing use of data services and other new products that will be available once third generation (3G) technology - still in its infancy in both countries - becomes more established. 3G networks can handle faster data downloads, allowing users to access the internet, make video calls, play games, download music and watch TV programmes on their handsets.

However, the markets in India and China are very different, Mr Grinnan said: "The big difference is in market structure. The Indian government favours a more fragmented approach and issues lots of regional licences with small amounts of spectrum (the radio frequencies used to provide mobile phone services).

"The permitted level of foreign ownership is quite high at 74 per cent, making it a very attractive market for foreign strategic investors. The state-owned companies are relatively small players."

"China's government favours consolidation - there are three big, state-owned national players with lots of spectrum. This means there are limited opportunities for foreign investors who face an informal limit of a 10 per cent strategic stake."

But with competition so intense, what is the secret to success and which companies have had the most success in riding this cellular wave?

China Mobile - listed in Hong Kong and New York - is the world's largest telecom company and had 493 million subscribers at the end of July, more than the combined populations of the United States and Japan. But it is facing stiff competition, especially as the 3G market opens up, with China Telecom, also listed on share markets in both places, a leading contender. Likewise, Bharti Airtel, India's biggest wireless operator, which passed the 100 million subscriber mark in May, has competitors snapping at its heels and has formed a strategic alliance with Singapore Telecommunications Ltd.

The industry generates strong cash flows from subscribers but also requires huge amounts of capital expenditure for infrastructure such as base stations to expand networks. That's why it is important to create a balance between subscriber growth and amount of revenue received per customer.

"Scale is the key for telcos and the two strongest operators are Bharti Airtel and China Mobile. They have had the time to build an advantage through bigger networks and stronger balance sheets," Mr Grinnan said. "However, regulators in both India and China have sought to create a more level playing field and emerging wireless players like Reliance in India and China Telecom in China have significantly outperformed in the last six months."

"It is important to distinguish between the growth in the number of subscribers, which is being driven largely by higher rural penetration, and revenue growth, which is being undermined by falling ARPU, or average revenue per minute, which is falling as prices are cut to retain customers or stop them moving to rival operators. This is not being offset by higher MOU, or minutes of use, which is already at pretty high levels. The competition is intense but we think China Mobile and Bharti have the strength to prosper despite the crowded market."

But this is an industry that never stands still; technology is always on the move. While 3G will soon have a big impact on the market in both India and China, for some it is already in danger of being yesterday's technology.

Tomorrow is all about LTE, or Long Term Evolution, which is the last step towards the fourth generation, or 4G, of radio technology designed to increase the capacity and speed of mobile telephone networks.

"LTE is coming, but China and India are still several years away," Mr Grinnan said. "They are just rolling out 3G and don't have the kind of data-demand driven wireless network capacity constraints that will drive the use of LTE in the US and Japan in 2010. Note, however, that China is likely to jump on the LTE bandwagon relatively soon - even if it's on a trial basis - as Beijing wants to support the development of its domestic telecom equipment-making community."

• Bharti Airtel (Neutral) and China Mobile (Neutral) are HSBC's top regional telecom services stock picks in India and China, respectively (at October 2009). However, HSBC analysts are cautious on both telecom service markets, given the increase in competitive intensity and regulatory risk.