China GSM Industry Supply Chain and Competition Analysis
According to a report from Norson, vendor revenue from the Chinese GSM equipment market between January 1st and March 31st 2006 reached US$570.8 million. This accounted for around 45% of operators' total US$1.27 billion GSM network investment; the remaining 55% was spent on construction. Of this investment, the US$1.14 billion spent by China Mobile accounts for 20% of the company's total GSM budget for 2006, and the US$133 million spent by China Unicom accounts for less than nine percent of that company's 2006 GSM budget.
The first quarter of the year traditionally has lower spending than the other three quarters in Chinese businesses, but this low spending by China Unicom - a drop of thirty percent since the equivalent quarter of 2005 - is a result of the company's organizational restructure which took place at the beginning of the year. Spending by both companies has also been postponed because of upcoming unified GSM equipment purchases, in which prices are negotiated with vendors by each operator's headquarters.
Chinese Operators' GSM Equipment CAPEX, 2005-2006 (Million USD)
Source: Norson,2006
Figures from Norson's database show some significant changes in the market shares of individual vendors during the first quarter of 2006. The most dramatic change is in Alcatel Shanghai Bell's market share, with the company increasing its share of the GSM equipment market from 13.2% in 2005 to 25.8% in the first quarter of 2006. However, this and other changes are a result of the relatively small sales volumes in Q1 and some large contracts signed in 2005 but calculated as part of the company's 2006 Q1 financial results. Norson therefore believes that the market will stabilize in the second quarter of the year, and that the positions of vendors will be similar to those in 2005.
China GSM Vendor Market Share, 2006 Q1
Source: Norson,2006
China's GSM Equipment Market in 2006
China Mobile finished its third round of unified purchase negotiations in May 2006, in which the company's headquarters negotiated prices with vendors, with individual provincial operators following these prices when signing contracts until the next round of negotiations in the first quarter of 2007. This is likely to lead to a significant amount of spending by provincial operators, who had been waiting for these prices to be defined before purchasing new equipment.
One of the conditions of China Mobile's unified purchase strategy is that, if domestic vendors control less than twenty percent of the market in a given province, international vendors must provide prices ten percent lower than those of domestic vendors to win a contract. This policy is aimed at supporting domestic vendors.
China Unicom has also started to follow a unified purchase model, with the company's first unified price structure dictated fifteen days after those of China Mobile. China Unicom's strategy aims to standardize the company's GSM equipment purchasing by allowing a maximum of three vendors in each province, with all of a province's wireless and switching equipment provided by a single vendor.
China Mobile and China Unicom also used their unified purchase strategies to negotiate lower GSM equipment prices, aimed at reducing their CAPEX and therefore achieving an increase in net profits. China Mobile negotiated a price of 35,000 RMB (4375 USD) per TRX from domestic vendors and 40,000 RMB per TRX from international vendors, while China Unicom pays a rate of 25,000 RMB to domestic vendors and 30,000 RMB to international vendors.
A common strategy among vendors in China has been to use GSM sales to improve relationships with operators as a step towards taking a bigger share of the future 3G equipment market. Ericsson, Nokia and Huawei have all been particularly active in negotiations with China Mobile - Ericsson has entered the market in Anhui province, Nokia has entered Hunan and Anhui and Huawei have entered Jiangsu and Guangdong provinces as a result of China Mobile's unified purchase mechanism. Similarly, Motorola is focusing on Sichuan, Nokia plans to continue its expansion into Guangdong and Shandong, and ZTE intends to move into a number of new provinces. The situation is similar in China Unicom's GSM network, with Nokia, Huawei and ZTE all keen to enter new areas by offering discounts and free services.
Prospects for China's GSM Equipment Market
China Mobile's policies during its unified equipment purchases have made it obvious that China Mobile is trying to support domestic Chinese vendors and reduce its reliance on international vendors. Norson predicts that this policy will continue and that Huawei will be the major beneficiary, at the expense of international vendors such as Ericsson, Siemens, Nortel and Motorola. Once China's 3G licenses are issued and China Mobile begins to upgrade its network to 3G the market shares of Huawei and Nokia are likely to increase substantially, with ASB and ZTE also benefiting.
China Unicom's unified purchase strategy is focused mainly on standardizing and reducing the price of GSM equipment throughout China. Judging from the current market situation, this is likely to result in an increase of market share for Nokia, Huawei and ZTE, although these companies are not likely to see a large increase in profits because of lower per-unit prices. Siemens and Motorola are likely to lose market share, while Lucent will continue to struggle.
Norson predicts that the implementation of the operators' unified purchase strategies will lead to a large amount of GSM expenditure throughout the second and third quarters of 2006, as the operators plan to accelerate network construction in the third and fourth quarters. Norson predicts that vendors will see a huge increase in GSM equipment sales in 2006 2Q over the previous quarter, with revenues reaching 10.62 billion USD - a growth rate of 86.1%. Ericsson and Nokia will continue to lead this market segment with market shares of 31.2% and 16.7% respectively.
Forecasted GSM Equipment Sales Revenues by Vendor, 2006 Q2 (Million USD)
Source: Norson,2006
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Posted to the site on 10th July 2006
