Chinese wireless giant China Mobile (CHL) is reportedly planning to spend more on 3G terminal subsidies in 2010. The company has tripled the amount of subsidies from the current year level and is expected to spend up to RMB30 billion (US$4.4 billion) next year. This move will enable the company to better compete with its Chinese peers in the domestic 3G space.

China Mobile remains the leading player in the Chinese wireless market with 70% market share and more than 500 million subscribers. However, the company’s share of the new subscribers has dropped recently due to stiff competition from China Unicom (CHU) and the relatively new wireless player China Telecom (CHA) as they both operate internationally acclaimed 3G standard based networks.

Leveraging its home-grown TD-SCDMA 3G standard, China Mobile launched its 3G network in early 2009, already covering 38 Chinese cities. The company currently has more than 1.3 million 3G customers and plans to exit 2009 with 3 million subscribers.

To achieve this goal, China Mobile is aggressively investing on 3G TD-SCDMA network expansion as it plans to spend RMB 58.8 billion (US$8.6 billion) in 2009. The company’s current cash resources are adequate to support this aggressive capital spending.

China Mobile is increasingly focused on differentiating its 3G services from competition by offering a large assortment of premium 3G handset models and better value-added services. The company recently launched a line of smartphones (called “Ophones”) based on the TD-SCDMA technology which leverages Google Inc’s (GOOG) open-source Android mobile operating system. A significant portion of the terminal subsidies is expected to be allocated to 3G TD-SCDMA handsets.

Ophones represent China Mobile’s response to the emerging threat from Apple Inc’s (AAPL) iPhones. The company’s biggest rival China Unicom has sealed a three-year agreement with Apple to market iPhone (3G and 3GS) in China through subsidized price plans. The popular handset was introduced by the carrier on Oct. 1, 2009 with an official nationwide roll-out scheduled on Oct. 30, 2009.

China Mobile expects the relatively low priced Ophones to drive demand for its relatively less-mature TD-SCDMA based 3G services in China and boost subscriber growth.

While China Mobile’s efforts to boost its 3G business is encouraging, we believe that the company will face significant challenges ahead regarding adaptability and performance of its proprietary 3G technology given the faster network speeds offered by competition. Moreover, higher terminal subsidies may tighten margins moving forward. 
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