Key Trends in PHS

PHS subscribers in China totaled 44 million at the end of February 2004, up 3 million from January, according to the Ministry of Information Industry (MII). PHS uptake continues to be strong averaging 3 million additional subscribers per month in the first two months of 2004, up from an average of 2 million in 2003.

According to the MII, China had 38 million PHS subscribers at year-end 2003.

Strong uptake of PHS has been primarily driven by the promotional activities of the local operators, including handset subsidies and monthly flat fee packages.


Operator Activities

China Telecom Began Deployment of a New PHS Network in Shanghai

The urban area of Shanghai will launch PHS on May 17, according to press reports citing Shanghai Telecom.

Shanghai Telecom will spend RMB 600 million in capital expenditure on its initial PHS network. Shanghai Telecom will deploy about 10,000 cell stations in urban areas with a capacity of 2 million lines in 2004. Shanghai Telecom plans to add another 10,000 to 20,000 cell stations in 2005, but this plan could be altered depending on 3G licensing.

Shanghai Telecom is targeting to sign up 1 million subscribers by year-end 2004. Shanghai currently has approximately 200,000 PHS users in its suburban area.

The delay of the PHS network deployment in the urban area was largely due to its legacy CDMA 1900 network, which was adopted by Shanghai Telecom to offer WLL service.

Beijing Network Expansion is Much Smaller than Initial Build Out

According to press reports, there were 20,000 PHS cell stations in Beijing by February 2004 with 16,000 in the city area and 4,000 in the suburbs.

According to Beijing Communication (Beijing branch of China Netcom), only 2,500 to 3,000 new cell stations will be deployed in Beijing in 2004, as Netcom shifts its focus to network optimization.

Beijing Communication stopped most of its promotion programs at the end of 2003. The company is currently offering a RMB 70 monthly flat fee package with no handset subsidy.

Beijing Communication, Changsha Telecom Allow Interchangeable PHS Handsets, Numbers

In late February, both Beijing Communications and Changsha Telecom separated PHS handsets and numbers. Previously PHS telephone numbers had been hard-wired into the terminals. With the change, PHS subscribers can replace their handsets without changing numbers (or change numbers without buying a new handset.) The new service puts PHS on a more level playing field with GSM and CDMA whose subscribers have always been able to switch phones by swapping SIM or UIM cards.

The change is a boost for PHS handset vendors who hope to see growth in the replacement handset market as the more than 20 million PHS subscribers who have signed up for service in the last two years start to enter their first replacement cycle. UT Starcom, the leading PHS vendor in China, counted on handsets for 48% of its revenues in Q4 2003 and should benefit from the change.

For Beijing Communications and Changsha Telecom it may slow churn away to other operators. Previously, subscribers who needed to replace a handset had no reason to stick with PHS since replacing a handset required that a subscriber get a new number anyway. However, because there is no number portability between operators in China, allowing subscribers to keep the same number when replacing a handset gives them a new reason not to shift to GSM or CDMA.


Infrastructure investment

Newly Announced Contracts

Vendor	Operator	Contract Date	Contract Details
Lucent	China Netcom	March	USD 130 million contract for Shandong province
UTStarcom	China Netcom	Mar. 29	USD 86 million contract for Beijing and Heilongjiang province
UTStarcom	China Netcom	Apr. 5	USD 75 million contract for Hebei province

Lucent recently won a major contract in Shandong, where Lucent has long been a major vendor. Lucent's market share is expected to rebound in Q1 2004, due to the Shandong win. Both UTStarcom and ZTE lost some share in Q1 accordingly, but we expect their overall market share in 2004 to remain stable.


Handsets

Beijing PHS Handset ASPs are Declining but at a Reduced Rate

According to interviews with retailers, PHS handset Averages Sales Prices (ASPs) have continued to fall since PHS services were first launched in Beijing in May of 2003.



PHS/GSM Dual Mode Handset Launched, But Has Yet to Be Introduced in China
On March 1st 2004, UTStarcom launched a PHS/GSM dual mode handset in Vietnam.

Other domestic vendors, such as Jinpeng and Teltron, currently have similar trial products and other vendors, such as ZTE and Huawei, have announced plans to develop dual mode handsets.

The dual-mode handset could be a significant driver for the PHS market by attracting more existing GSM users.

However, the dual mode phone faces regulatory challenges. To sell the dual mode handset, a vendor would likely require a GSM handset license, but currently the MII has stopped issuing new licenses. In addition, mobile operators have been reluctant to test the dual-mode handset on their networks.