The ‘People’s Phone’ on Hold

EM-Electronic Markets, Vol. 12, No. 1, 2002, St. Gallen

The growth of China’s mobile-phone industry in recent years has been nothing less than phenomenal. Beginning with a mere 1.6 million mobile-phone subscribers in 1995, China now boasts 160 million subscribers (compared with 190 million fixed-line subscribers) and has become the world’s single largest mobile-phone market. In 2001, the combined mobile phone–related revenue from China Mobile and China Unicom — the country’s two dominant providers — reached $20 billion, accounting for nearly 46 percent of overall telecommunications revenue in China.

Nir Kshetri and Maggie Kei Cheung explore this boom in "What Factors Are Driving China’s Mobile Diffusion?" which appeared in a recent issue of EM-Electronic Markets, an 11-year-old quarterly journal focusing on e-commerce and business media. Kshetri (a doctoral candidate at the University of Rhode Island) and Cheung (a Texas-based business manager) emphasize that China’s market-friendly policy reforms certainly play an important contributing role. However, they also identify more specific reasons behind the exponential mobile-phone growth. These include rapid development of domestic mobile-phone technology, innovative business models by local service providers, a huge inflow of foreign direct investment in this sector, and relatively cheap connection and subscription rates. (The authors understate the Chinese mobile-phone sector’s reliance on imported technologies.)

Kshetri and Cheung maintain that the product’s domestic diffusion is due in part to the Chinese government’s marketing of the mobile phone as the "people’s phone." But just who has China’s mobile-phone market served so far? Mobile-phone ownership remains mainly a middle-class privilege in China. Although the Chinese government defines both fixed lines and mobile phones as basic telephone services, a mobile phone is typically a second or third phone in superconnected upper- and middle-class families.

More important, mobile phones do not solve the problem of poor fixed-line access in rural areas because China’s mobile phones are disproportionately concentrated in well-wired urban centers. As Kshetri and Cheung note, 78 percent of China’s mobile-phone users in 1999 were in three cities — Beijing, Shanghai, and Guangzhou. Meanwhile, some 17 percent of Chinese villages were still without even a fixed-line connection through 2001. And although mobile-phone prices in China are cheap by international standards, a typical rural resident would still have to spend a full year’s income to buy and connect a mobile phone, plus an additional 30 percent of this income to sustain 25 minutes of monthly usage.

In reality, China’s mobile-phone phenomenon is as much a statement about the developmental priorities of the Chinese state and the rise of China’s urban middle classes as it is a case study of successful technological diffusion. Although mobile phones continue to attract new customers, it is far from clear that the "people’s phone" will reach a majority of Chinese soon, particularly when competition for current high-end users has become a popular business strategy. China Unicom, for example, explicitly markets its new $2.9 billion Code Division Multiple Access network — which provides better sound quality — to high-end consumers, and analysts have predicted that purchases of upgraded handsets by China’s existing mobile-phone users will soon overshadow sales to first-time buyers.

Ultimately, China’s mobile-phone miracle is inseparable from the country’s broader patterns of social and economic development. Kshetri and Cheung praise China’s transformation "from a rural based economy to one of the leading mobile markets," but their analysis largely ignores the human development trade-offs inherent in such a transition. For example, investments in telecommunications and state promotion of the mobile phone have gone hand in hand with the highest urban-rural income gap in the world as well as a below-average record in education expenditures as a percentage of gross domestic product among developing countries. Anyone seeking to replicate the Chinese telecommunications experience would do well to keep such trade-offs in mind.