PHS Market in China Update - by BDA China Ltd.


- Key Trends in PHS
- Operator Activities



Key Trends in PHS

PHS Subscriber

Source: Ministry of Information Industry (MII)

PHS users increased by 2.11 million in September and by 2.14 million in October, reaching 63.4 million at the end of October. PHS additions for September and October were approximately 19% higher than July and August.

PHS additions accounted for 57% of total new fixed-line subscribers nationally in October, compared with 52% in September. We believe local promotions for the October National Day Holiday boosted PHS growth in September and October. Monthly PHS additions will likely stabilize at approximately 2 million in the final two months of 2004.


China Telecom vs. China Netcom

Source: MII, company information

Market share of the two fixed-line carriers remains stable, with China Netcom holding 34.5% and China Telecom holding 65.5%. China Netcomfs PHS subscriber growth remains strong, with its share slightly up from 34.4% in June.

After China Netcom said the ROI period for its PHS business may now be as long as 7 years, China Telecom recently announced that it will not be able to recover its initial investment in PHS until 2006, despite doubling its PHS subscriber base this year. Based on the operatorfs forecast, the average ROI period for PHS would be around 5 to 6 years as most of China Telecomfs PHS networks were constructed in 2001 or earlier. The ROI period is longer than previous estimates of just 3 years.

China Telecom also expects PHS subscriber growth in 2005 to slow by as much as 40% compared to this year, due to intense mobile price competition and reduced spending on network expansion and upgrades by China Telecom.


3G Spectrum

TD-SCDMA may be moved from the originally planned 2GHz frequency to 800 MHz, according to press reports quoting an official from the National Development and Reform Commission (NDRC), which is reportedly submitting a proposal to the State Council to make the change. This would bode well for PHS since the planned change could resolve the spectrum conflict between PHS and TD-SCDMA, the Chinese 3G standard. PHS operates in the 1900-1920 MHz, one of the main bands of spectrum allocated for TD-SCDMA.

Officials from the Radio Administration Bureau under the MII have subsequently denied this news, but since the change could be beneficial to TD-SCDMA which has received strong government backing, the Chinese government is likely to consider the proposal carefully.


Operator Activities

SMS Interconnection Between PHS and Mobile Users Moves Forward

News reports from provincial branches of mobile and fixed line operators show that SMS interconnection is moving forward. After commercial trials of SMS interconnection between PHS and mobile users conducted in October in Jiangsu and Shanghai, Guangzhou, Jilin and Hebei are also now carrying out trials. Chongqing has also completed technical preparations for SMS interconnection, and Beijing is reported to be preparing new equipment to support interconnection, which is expected to be offered on a commercial basis in early 2005.


Operators Are Establishing Standards for PIM Enabled Handsets

Operators are establishing their own standards for PIM enabled handsets, after UTStarcom introduced the first PHS Handset with an embedded Personal Identity Module (PIM) card at the recent PT/Expo Comm China 2004 in Beijing. PIM cards will help drive the replacement market because PHS users will be able to swap handsets without having to visit their carrier's retail outlets to migrate their subscriber information.

According to press reports, China Netcom is establishing its own standards, which is expected to be finished as soon as year end. Meanwhile, the Chengdu and Guangzhou branches of China Telecom are reportedly conducting internal trials of PIM enabled handsets.

After UTStarcom showed the first PIM enabled handset in October, other handset vendors including ZTE and Lucent also announced plans to produce similar handsets.