Dong Zhen, a doctor working at Tongji Hospital in Wuhan, Central China's Hubei Province, complains that his "Little Smart" mobile phone often fails to work when trying to make calls from his dormitory.

"Communication signals around my dorm are very weak. Sometimes I have to walk to the corridor outside to make or receive a phone call," he said.

Nevertheless, he is staying loyal to his Little Smart phone after he stopped using a global system for mobile communications (GSM) handset a year ago.

"Though it doesn't always work well, the Little Smart phone is cheap for wireless services compared to a GSM or code division multiple access (CDMA) phone," he said.

"If they can improve their coverage and offer more value-added telecom services, I may stick with it," he said of his phone made by ZTE, the country's second largest telecoms equipment maker.

Little Smart phones have become increasingly popular in China since being introduced to the market nearly three years ago by the country's two largest fixed-line operators China Telecom and China Netcom, in an effort to take a larger bite of the country's lucrative mobile phone market.

Government figures show that the two operators have signed up more than 64 million Little Smart phone subscribers so far. By the end of November, the Little Smart phone service was operating in 355 cities in the country's 31 provinces.

The Little Smart system, also called Xiaolingtong or PHS (personal handset system), is built onto the existing fixed-line network and lures users with low per minute rates, one-way charges and cheap monthly fees. It does not allow roaming between cities.

"Problems such as weak coverage and shortage of value-added services will be fixed step by step as we are currently optimizing our services," said Si Furong, managing director of China Telecom Corp Ltd, a listing arm of China Telecom.

According to Si, the company is working on several plans to bring more value added telecoms services based on Xiaolingtong to the market.

Analysts believe China Netcom and China Telecom are in the same boat as they have no mobile licenses and rely heavily on Xiaolingtong to compete with the country's duopoly of mobile carriers China Mobile and China Unicom.

New technology

To enhance Xiaolingtong services, an alliance the China Fixed Network and PHS Terminal Alliance was established last week in Beijing by China Telecom, China Netcom, Huawei Technologies, ZTE and UTStarcom to promote removable personal identity module (R-PIM) technology for Xiaolingtong services.

The R-PIM is similar to a GSM subscriber identity module (SIM), but is designed for Xiaolingtong services.

The new identity module contains user information and data features on a removable smart card about the size of a postage stamp.

Currently, smart cards coming with Xiaolingtong phones are not removable.

"We see great prospects for the R-PIM technology as it will better meet market demand," said Sun Kangmin, deputy general manager of China Telecom.

With the new R-PIM card technology, users will be able to upgrade to newer PHS handset models without the hassle of charging their phone number and losing private information stored on their existing handsets, such as phone directories or text messages.

It also eliminates the need for consumers to program phones with the same personal information multiple times.

"I believe the implementation of the new technology will be very effective in attracting more subscribers," Sun said.

According to Li Anmin, secretary-general of the alliance, the first major issue they face is working out standards for the R-PIM as well as a timetable for the commercialization of such phones. Li is also deputy director of China Telecom's Wireless Products.

"We are aiming to form an organic industry value chain to further promote the technology," he said.

"Through cooperation, participants of the Xiaolingtong industry value chain could effectively reduce production costs, increase handset procurement quantities and reduce handset prices," he said.

According to Li, the alliance is to finalize all technology standards in January next year.

Market promotion for the new phones will run from February 10 to May 1, with the official launch of the system likely to be scheduled for May 17, 2005.

"The separation between the Xiaolingtong phone and card will be a major boost to the development of Xiaolingtong," said Jasper Li, senior director in charge of UTStarcom China's strategic planning and also a commissioner of the National Telecom Economist Commission under the Ministry of Information Industry.

In October, UTStarcom introduced the first PAS handset with removable PIM UT228 to the Chinese market.

"We believe operators will benefit from the PIM card technology because it will make management of the PAS service more efficient and decrease operating costs associated with the technological personalization of PAS handsets," said Wu Ying, chief executive officer and chairman of UTStarcom China in a company statement.

3G related issues

"The standards for R-PIM wireless phones should also take 3G and the future development of fixed-line networks into consideration," said Yang Xiaochun, director of the Product Management Department of the Marketing Division of China Netcom.

According to a government blueprint, both China Telecom and China Netcom are likely to obtain 3G mobile phone licenses when the country kicks off its 3G strategies.

Analysts said starting next year, the growth of the Little Smart phone service is unlikely to maintain its current momentum as operators switch their focus to 3G related development starting next year.

But while the Chinese Government cautiously rolls out its 3G strategies, China Telecom and China Netcom will definitely continue to develop Xiaolingtong services to consolidate their businesses, said Dai Chunrong, an analyst with China Securities.

"Also, the development of Xiaolingtong services may continue to grow in the coming two years as the nation's 3G strategies are based on a step by step approach, mainly targeting high-end customers," she said.

According to Analysys International Corp, a global telecoms consultancy and research company, the Xiaolingtong service is likely to recruit 30 million new subscribers by the end of the year.

Infrastructure investment in the service is likely to surpass 6.4 billion yuan (US$771 million) in the coming three years.

"The development of Xiaolingtong will progress into maturity in 2005," said a report from Analysys.

The report also said that after 2007, the development of Xiaolingtong is likely to decline.

According to Yang, the Xiaolingtong network may become a supplement to China Netcom's 3G network in the future, targeting the low speed data business.

"As a result, the Little Smart service and 3G services will co-exist in the foreseeable future," Yang added.

China Securities' analyst Dai agrees.

It will be very much like the Japanese market where Little Smart phone services and 3G services will both have specific subscribers in the early stages of 3G, she said.

The Little Smart phones will continue to dominate the low-end market while 3G services will mainly target high-end subscribers.

Furthermore, Little Smart subscribers are likely to become China Netcom's first subscribers to use dual-mode PHS/3G phones, Yang said.

Tougher competition

With the quick expansion of Xiaolingtong services, how to maintain sustainable development of the service has become a major concern for operators. Analysts believe growth is reaching a bottleneck as the numbers of newly-recruited users declines while the ARPU (average revenue per user) is also dropping dramatically.

Furthermore, tougher competition is foreseeable given all the telecoms operators are trying to grab a larger market share.

Price wars are going on between all the country's major telecoms operators.

China's mobile phone duopoly, for example, has begun to offer free and discounted incoming airtime in some regions, as the pair defend their market share against low-end services.

Even before the latest promotions, competition was stiff among operators with free minutes and subsidized handsets being used to attract new customers and skirt State-set charges for incoming or outgoing airtime.

China Mobile is currently offering discounted incoming airtime in some markets, sources close to the company say.

Under the plan, callers can designate a group of friends or family members and receive their calls at discounted rates.

China Unicom has also entered the fray, rolling out a promotion in the inland city of Chengdu over the weekend that gives free incoming minutes to some users of the company's CDMA service.

"Enhancing value-added services for Xiaolingtong phones should be the top priority to generate new profits as Xiaolingtong is now gradually losing its advantage of providing cheap rates after being exposed to frequent price wars," Dai said.

Dai also believed that for Xiaolingtong equipment providers such as UTStarcom, ZTE Corporation and Lucent Technologies Qingdao, to enhance the design and function of Xiaolingtong phones as well as promote research and development is a must for them to continue their market success.

"They should also explore international markets," she added.

(China Daily December 22, 2004)