China’s telecoms operators saw their collective net profits fall by almost €300 million in the first quarter of this year as changes to the government’s taxation policy took their toll.
Together the big three generated net profits of just over CNY32 billion (€4.62 billion) in Q1, CNY2.05 billion (€296 million based on current exchange rates) less than in the same period a year ago.
China Telecom was the last of the three state-owned operators to report Q1 financials on Wednesday. It posted a 9% decline in net profit to CNY5.05 billion (€725 million), in no small part due to the replacement of business tax with value-added tax.
China introduced a pilot VAT reform programme on 1 June. As a result, telcos are now subject to VAT of 11% on basic telecom services and 6% on value-added services, instead of the 3% business tax they previously paid.
China Telecom said the VAT reform impacted its top and bottom lines "to a certain extent", but insisted that "it will be beneficial for the sustainable development of the company in the long term." It also noted that its revenues were dented by stringent controls on marketing.
It was a similar story for its rivals.
China Mobile posted a 5.6% decline in net profit to CNY23.83 billion (€3.43 billion), although revenues grew, while China Unicom reported a 4% profit slide to CNY3.16 billion (€455 million) and a 2.8% decline in revenues to CNY74.3 billion.
Nonetheless, the Chinese firms are holding up relatively well on the global stage.
A week ago AT&T, the world’s biggest telco by revenues, reported a 12% decline in net income, in local currency terms to US$3.2 billion (€2.9 billion). Number two operator Verizon saw net income grow to $4.2 billion (€3.8 billion) though.
Meanwhile, Japan’s NTT, which slipped to third place in the most recent edition of Total Telecom’s Global 100 ranking, will share its figures for calendar Q1 next month.
China Mobile ranks fourth in the world in revenue terms and with a topline growth rate of 1.79% in calendar 2014 it looks set to retain that position in this year’s report. In Q1 2015 its revenues grew by 3.9% to CNY160.86 billion (€23 billion).
The telco attributed the increase to "the favourable effects of stimulated customer spending by relatively strong tariff promotion and sales initiatives towards the end of last year as well as the continuous rapid growth momentum of 4G terminal sales since the last quarter of 2014."
Indeed, China Mobi le had 143.08 million 4G customers at the end of March, having added just over 53 million since the start of the year, including 19.7 million net adds in March alone. China Telecom and China Unicom have yet to start splitting out 4G customers, having only been awarded their FDD LTE permits a couple of months ago.
But while players like China Mobile are leaving the rest of the world’s mobile operators in the dust when it comes to 4G subscriptions, the country’s device makers are facing increasing competition in their home market.
According to new figures from Strategy Analytics on Wednesday, Xiaomi retained its position as the leading smartphone maker in China based on unit shipments in the country in the first quarter of this year. The vendor first took the crown in Q4 2014, but it is already under threat from Apple, whose iPhone 6 and iPhone 6 Plus devices are proving very popular.
"Xiaomi’s rapid growth is now coming to an end, and it has delivered negative sequential growth in China for the past two quarters," said Strategy Analytics executive director Neil Mawston. "By contrast, Apple is growing swiftly in China at the moment."
In China, Xiaomi shipped 14 million smartphones in Q1, compared with Apple’s 13.5 million, according to Strategy Analytics. Third-placed Huawei, which lost the number two spot to Apple in Q4, shipped 11.2 million.
"If current trends continue, Apple could become China’s largest smartphone vendor in the second half of this year," Mawston said.
However, Canalys, which this week warned of a smartphone slowdown in China, claims that Apple leads Xiaomi in market share terms, although it has not shared any actual figures.
"Major local vendors face the strongest headwinds in their home market since the smartphone boom began in 2011," the analyst firm said. "Lenovo (including Motorola), Yulong and ZTE recorded their lowest shipment volume to the Chinese market for the last two years."
Apple posted fiscal Q2 numbers this week that clearly showed the growing influence China has on its business.
Greater China accounted for close to $17 billion of its $58.01 billion in revenues during the quarter, making it Apple’s largest region outside North America.
With China Mobile still growing 4G subscriptions at a phenomenal rate and China Unicom and China Telecom beginning their full 4G rollouts, China looks set to be a battleground for operators and vendors alike in the coming months.
