China's mobile maestro (pg. 2)

By Clay Chandler, Fortune senior writer

He Wanyong, Wuzhubi's 39-year-old chief, marvels at the speed with which mobile phones have transformed life in his isolated village. Now, when He wants to convene a meeting of Wuzhubi's 20-member council, he just rings them up or shoots them text messages. In the pre-wireless era, he recalls, he had to spend an entire morning walking house to house to let folks know. For He, who also serves as village grocer and pharmacist, the arrival of the China Mobile tower has made it easier to restock cigarettes and dispense medicine. "To do all the things I do now," he says, "I used to need three heads and six arms."

North of Wuzhubi, beyond the towering rock cliffs of Tiger Leaping Gorge, ethnic Tibetans, who live in rough-hewn homes and dress much as they have for centuries, have embraced the mobile phone as an invaluable tool. In the tiny hamlet of Dala, residents use mobile phones to track fluctuations in the price of wild pine-ear mushrooms. In the late 1980s they learned from Japanese visitors, much to their astonishment, that the mushrooms - known as songrong in China and matsutake in Japan - could fetch hundreds of dollars a kilogram in Tokyo. But before wireless coverage, locals were at the mercy of a handful of mushroom brokers who cheated them on price. With mobile phones, they can call around. "Mushroom prices can fluctuate a lot, even in a single day," says Nongbu Qilin, Dala's village chief. "You might get 200 yuan per kilogram in the morning but 500 yuan at night. You really need to know the right time to sell."

Dala lies near the center of a sparsely populated county that changed its name a decade ago to Shangri-la in a bid to draw tourists. The cobalt skies, rugged terrain, and proximity to Tibet evoke the hidden paradise described by James Hilton in his 1933 novel Lost Horizon. These days the horizon is dotted with transmission towers: Even in Shangri-la, there are few spots where the China Mobile signal can't find potential customers.

That has revolutionized one of the region's oldest trades, yak herding. In a makeshift hut on a ridge thousands of feet above Dala, 73-year-old Nongnu says he and his wife, Xizha, 71, use their mobile phone to ask family members below for supplies, let them know they've collected enough yak milk for churning, and alert them if a yak has wandered off. Until China Mobile's signal came to their mountaintop three years ago, Nongnu's grandchildren had to trek two hours up the mountain every couple of days to check on them. Now they come only every five days, although lately the interval is shrinking. It seems Nongnu and his wife spend so much time on the phone that they often run down their one battery after a few days, requiring someone to hike up for the battery, hike down to recharge, then hike back up again. (China Mobile says it's developing an affordable solar-powered battery recharger.)

Nongbu, the village chief, bought his first mobile phone when he was a salesman at a sawmill. It cost him 6,000 yuan, more than many families made in a year. But it was worth it, he says, assuring that he never missed sales and could keep his customers happy. Now that handsets are cheaper, he changes models every three or four months. He uses the phones to manage village affairs, keep tabs on the truck he rents out for cargo jobs, dispatch his duties as secretary general of a local transport cooperative, stay in touch with his mother - and, as he demonstrates during a visit, follow the NBA. "I really love LeBron James," he says. "He's better than Yao Ming." In a flash, he rings a friend in town to find out that the Cavs won a playoff game by one point.

Bringing mobile-phone service to Dala and Wuzhubi is part of an ambitious rural expansion drive launched by China Mobile in 2004, when Wang was named CEO. Last year rural subscribers accounted for more than half of China Mobile's 53 million new subscribers. Given that rural China has a mobile-phone penetration rate of only 17% - compared with more than 60% in major urban centers - Wang figures rural growth can continue at its current pace for years to come.

In its early stages, this rural buildout was dismissed by foreign analysts as an effort to win Brownie points with China's Communist leadership. Certainly the strategy was consistent with the goals espoused by President Hu Jintao, who has emphasized the need for policies to close the gap between rural and urban living standards.

But the decision to take wireless services to the rural masses also made good business sense. While China's urban markets had reached the saturation point, rural China was wide open. Signing new customers in the countryside is far less expensive than trying to lure them away from China Unicom in the cities - not least because regulators allow Unicom to offer its services for as much as 10% less than China Mobile's. There's less need to shell out for TV commercials or billboard space; in many villages, China Mobile can promote its brand for little more than the cost of the bucket of paint required to emblazon its logo on the side of a shed. Adding cell sites is cheaper too. A new transmission tower in rural areas costs less than $65,000, on average, a fraction of what it takes to build a tower in Beijing.

True, rural customers have far less to spend on mobile-phone services than their urban counterparts and aren't much interested in music downloads, the latest ringtones, or games. But it turns out they use their phones for voice and text messaging more frequently than anyone imagined. To attract more rural customers, China Mobile has gradually lowered rates, but only to the extent that reductions are offset by increased usage. Average revenue per user - the favorite benchmark of telecom analysts - has held steady at around $11 a month in the first half of this year, down less than two percentage points from 2004, when the rural expansion drive began.

Wang, a fan of Insead management professors W. Chan Kim and Renée Mauborgne, talks about China's hinterland as a classic "blue-ocean market," where the company can cast its net widely without worrying about getting tangled up with the nets of rivals. To be sure, the fish are tiny: In many of China's rural communities, per capita income is less than $50 a month. But China Mobile's low cost structure assures comfortable margins serving such small fry. In that sense the company's strategy reflects the wisdom of another popular management guru, C.K. Prahalad, who promises that big corporations capable of serving the world's aspiring poor will discover a "fortune at the bottom of the pyramid."

Wang chuckles as he recalls the frosty reception he received from analysts three years ago when he unveiled his rural strategy. "Analysts and investors, managers of large institutional funds, all thought China Mobile's years of high growth were over," he says. "They thought we were a good company, but they considered us a big, slow elephant. I went around asking why, and always the answer was this: 'You can still add to your subscriber base, but from now on all your customers will be low-end users. You'll run up big capital expenditures to reach them and high operational costs to serve them, but they won't bring you much profit.' But I had worked in this industry many years. I knew the numbers. I knew what kind of returns we could see on those investments. I told skeptics, 'You are absolutely wrong.'"

Great Northern Telegraph, a Danish firm, opened China's first telephone office in Shanghai in 1882. One hundred years later, Wang says, the country had no more than 2.3 million fixed-line phones. But in his early years as a bureaucrat there was no need to think about consumers, and the only marketing skill required was an ability to persuade people to be a little more patient. Wang didn't get a phone for his family until 1987, after he'd toiled in the ministry for more than a decade.

Wang's own marketing skills have improved considerably since then. He is arguably the most polished CEO at any of China's state-owned giants. He speaks English fluently, is well versed in the latest management literature, works at building relationships with global telecom leaders, and has gone to great lengths to meet foreign analysts and investors.

Still, Beijing keeps even its most talented executives on a short leash - something made clear in 2004, when the State Assets Supervision and Administration Commission (SASAC), which holds ultimate control over China's two fixed-line and two mobile carriers, rotated the CEOs of three of the four companies into one another's jobs. Wang, then president of China Unicom, was ordered to clear out his desk and report for duty at China Mobile. Wang says he took his 2004 transfer in stride, although he admits it caught him by surprise. "I don't talk about my old job," he says.

At the end of his workday, Wang says, he enjoys using his own mobile phone to surf the Internet. "The search engine is very useful for me," he says. "On my way home from work, I'll sit in the back of the car and put my name into Baidu or Google to look for the daily news reports about myself." And why not? For now at least, the news about Wang and China Mobile is pretty good.

But the pressure on Wang can only increase. Beijing has decreed that China will deploy its own 3G standard, known as TD-SCDMA, to compete with CDMA2000, the dominant U.S. protocol, and W-CDMA, favored in Europe and Japan. They have also vowed to have 3G networks up and running in at least ten cities by next summer, when tens of thousands of athletes, journalists, dignitaries, and tourists descend on China for the Olympics. China Mobile's parent has been tasked with developing the standard, and China Mobile has been ordered to roll out the service in eight cities. Whether the new standard is ready for prime time remains one of China's most guarded state secrets. Wang won't comment, but earlier this year a top official declared TD-SCDMA "commercially mature."

Analysts remain skeptical, as regulators have been promising a 3G rollout for years. But they are paying close attention because many believe the rollout, when it comes, will occasion an industry revamp. Officials have repeatedly said China's telecom sector is out of balance. In the wireless segment, China Mobile dominates. And the fixed-line carriers, while big, are far less profitable than the mobile carriers. Among the possible scenarios: The state will break up China Unicom and parcel out its mobile networks to the fixed-line operators, creating two much stronger competitors to slug it out with China Mobile.

Some analysts are betting 3G will be put on hold until after the Olympics, reasoning that Beijing is too proud to roll out TD-SCDMA before it's perfect. Plans for China Mobile to list shares on Shanghai's stock exchange - a development expected as early as August - may add to regulators' aversion to risk. But Goldman Sachs analyst Helen Zhu predicts 3G will be up and running and the industry shaken up well before the Olympics, arguing that it won't be possible to work the bugs out of TD-SCDMA without loading "substantial numbers of subscribers on the network" and rolling out on a commercial basis.

Regardless of timing, restructuring is sure to make life tougher for Wang, which explains why he's moving so aggressively to stake his claim in rural China. "The longer regulators wait to restructure," says BDA International research director Zhang Dongming, "the more subscribers China Mobile can load onto its network. This is an old-fashioned land grab: China Mobile is trying to lock up the countryside while it can." Mobilizing rural masses is a time-honored strategy in China; after all, it worked for Chairman Mao. For China's newly connected farmers, the results of this campaign may prove no less revolutionary.

REPORTER ASSOCIATES Dan Chinoy, Joan L. Levinstein and Zhang Dan contributed to this article. Top of page

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