17 November 2019
Sales of cost-effective smartphones from Xiaomi and other homegrown brands are now a major source of income for Chinese telcos. Photo: Xiaomi
Sales of cost-effective smartphones from Xiaomi and other homegrown brands are now a major source of income for Chinese telcos. Photo: Xiaomi

Phoning home: Cheaper local brands save day for Chinese telcos

With just hours to go until the Wednesday debut of the Mi3, the launch of the next generation smartphone from mainland tech upstart Xiaomi is getting more attention in the country than the approaching release of the iPhone 6.

China’s social networking platforms like Weibo are filled with leaked photos and rumors about the tech specs of the Mi3, which is reportedly better than the iPhone 5S in terms of display and camera resolution. Many are saying they will definitely buy one if the price — around 2,000 yuan (US$322) — remains unchanged. 

That’s in sharp contrast to two years ago when everybody, including the country’s telcos, scrambled to plug into the latest smartphone release from Apple Inc. Now homegrown phone brands are riding a rapid rise in popularity and although the carriers failed to see the wave coming, they’re surfing it to the shores of profitability.

Telecom companies previously bought into the idea that they needed the prized — but expensive — iPhone to expand their subscriber base. They teamed up with Apple to sell the device in the hope that they could lure more network users, paying the price of the iPhone in advance and recovering the costs in fixed monthly fees on one- or two-year contracts. Without the subsidized phones, they feared, sales of high-end devices like the iPhone would stall, cutting into subscriber growth and revenue.

But the staggering subsidies have eroded carrier profitability.

Bloomberg data show that last year the big three splurged a total of 56.9 billion yuan on various phone purchase subsidies, with China Telecom’s expenses 5.3 billion yuan higher than its net earnings. Beijing News also reveals that China Mobile has footed the hefty 500 million yuan advertising bill for its alliance with Apple since the start of year, in return for a flash of its logo at the end of the iPhone 5S TV commercial.

But while the carriers were sinking big money in the Apple alliance, cheaper smartphones from indigenous brands like Xiaomi, Lenovo, Coolpad and Huawei — usually sold through telcos’ outlets with little or no subsidy — started appealing to more customers.

Data from consultancy firm Sino Market Research show that 9 million iPhones were sold on the mainland in the first quarter compared with Xiaomi’s 10.4 million. Xiaomi’s market share has also risen to 11 percent from 8 percent a year ago; Lenovo and Coolpad each now command 10 percent. 

The telcos failed to see that newer generations of smartphones from top-shelf brands no longer lure customers because the products have been homogenized and lack breakthrough technologies. By the time they saw the problem, their earnings prospects were already weighed down by the large outlays for iPhone subsidies.

With domestic phones catching up in China, the carriers are more than happy to ride the trend and trim their expenses. Units priced at 2,000 yuan or less now contribute the bulk of phone sales at telco outlets.

The rise of domestic phones also times well with an order from the industry watchdog for carriers to cut marketing and sales promotion expenses, in particular smartphone subsidies, by 20 percent a year. The order is expected to save the industry 40 billion yuan over the next three years. The savings for China Mobile alone are tipped to be 24 billion yuan.

Carriers had also been jittery in the past few months over the sectorwide rollout of a value-added tax and concerns about heavy investment outlays for 4G infrastructure. But the situation has definitely improved with cheaper phones becoming the drivers of subscriber growth.

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EJ Insight writer