China Mobile Ltd (中國移動) is to cut US$2 billion from its device subsidies this year, potentially raising prices for Apple Inc and Samsung Electronics Co smartphones sold by the world’s largest carrier.
The 38 percent reduction might accelerate market-share gains for local producers, including Xiaomi Corp (小米) and Lenovo Group Ltd (聯想), both of which outsell Apple in China with feature-packed phones at cheaper prices.
Xiaomi became the largest smartphone vendor in the country in the second quarter, overtaking Samsung, according to researcher Canalys. The carrier’s shares rose to the highest in 19 months.
“With fewer subsidies, consumers may opt for cheaper devices made by local producers in favor of those sold by Apple and Samsung,” Bloomberg Intelligence analysts John Butler and Matthew Kanterman said in a report on Thursday.
China Mobile is changing an industry practice that spurred sales growth for high-end devices including the iPhone and Galaxy S5 after the costs eroded the carrier’s profitability. On Thursday, China Mobile reported its fourth straight drop in quarterly net income.
China Mobile is to spend 21 billion yuan (US$3.4 billion) to offset the costs of phones for customers this year, compared with the 34 billion yuan the carrier had planned to spend, chief financial officer Xue Taohai (薛濤海) said at a press conference in Hong Kong on Thursday. The company already spent 15.3 billion yuan in the first half.
The reduction was announced after Chinese government regulators were said to tell wireless carriers to lower their marketing expenses.
The state-owned Assets Supervision and Administration Commission told China’s three carriers to cut costs because they overspent on subsidies and advertising for devices such as the iPhone, people familiar with the matter said last month.
Lowering subsidies should be positive for profit, Xue told the conference.
“Our concern is how will consumers react to this drastic change in marketing style,” Hong Kong-based Macquarie Research analyst Danny Chu wrote in a report after the announcement. “If China Mobile decides to lower handset subsidy in the near term, we may see higher churn rate.”
Even as it cuts spending, Apple “must” still make the carrier one of the first to offer the next iPhone when it is released, China Mobile chairman Xi Guohua (奚國華) said.
“It’s a must for us to be in the first batch,” Xi said in Hong Kong. “China Mobile has a huge user base. Apple also greatly values China Mobile’s market in China.”
The carrier in December last year agreed to offer the iPhone after six years of negotiations with Apple. Sales of the device started in January at China Mobile shops, and Apple said iPhone sales rose 48 percent in the country in the quarter ended June 28.
China Mobile posted profit that beat analysts’ estimates as the expansion of its fourth-generation network and sales of the iPhone helped it add more subscribers than competitors.
Net income was 32.5 billion yuan in the second quarter, according to figures derived from six-month results reported on Thursday. That represents a 7.8 percent decrease from the year before.
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