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China Makes Handset Makers Happy Again

The world's fastest-growing market reported numbers that showed it worked through a summer slump.

Motorola (MOT) and Nokia's (NOK) - Get Nokia Corporation Sponsored American Depositary Shares Report knight is back on its steed.

The Chinese mobile market broke wireless hearts in July when its new subscriber numbers dropped after several quarters of strong growth. The fastest-growing major market in the world, China has more wireless users than the U.S. and is expected to buy 15% of all handsets sold this year.

Was it a signal that the slowdown in Western Europe was spreading into a worldwide funk that would further depress the numbers of mobile-phone makers? Friday, China instilled the market with hope as August figures for wireless subscribers showed a strapping rebound.

Motorola turned heads on the Street in the second quarter by grabbing a few points' improvement, good for 17% of worldwide handset market share, admittedly by selling "end of life" phones into the nascent Chinese market. With 1.2 billion people and a spotty communications infrastructure, China has long been a wireless dream. Motorola has been applauded enthusiastically for grabbing the No. 1 spot in that market from last year's leader, Nokia, just as wireless is beginning to bloom.

U.S. Bancorp Piper Jaffray's Sam May estimates that Motorola will have 28% market share in China by the end of its fiscal 2001, selling some 21 million handsets, while Nokia will notch a 21% share, or 15.8 million phones, before its year-end.

China Mobile

added the most subscribers in August by May's estimation, or approximately 2.45 million, while

China Mobile HK


China Unicom

added 1.75 million and 1.2 million, respectively. For a little perspective,

AT&T Wireless

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added 668,000 subscribers in the entire second quarter.

The August numbers peg China's mobile-subscriber totals at 126 million, or about 10% of the country's population. Compare that percentage with Europe's approximately 70% penetration and the U.S.' 43% level and you can see that China has the potential to save handset manufacturers' top lines in a rough year.

In Latin America, about 20% of the population wields a cell phone. Nokia has been hamstrung by the drop-off in sales to Western Europe, a region that was the first to embrace mobile phones and seemingly the first to become tapped out until a data-friendly general packet radio service (GPRS) phone comes along (or so the industry hopes).

"Conservative people among us say terminal penetration in the U.S. will be around 65% -- I personally think it will be 75% to 80% -- but somewhere between 65% and 75%, and it stops," explains Yankee Group analyst Roger Entner. "I would say in Europe everybody but the subteen population and the retirement group now has a wireless phone."

Handset makers love China, a country that still can turn up 4.9 million new users in April, 4.8 million in May and a whopping 6.73 million in June, according to Raymond James. July numbers, which fell to 3.87 million subscribers, injected butterflies into all the stomachs of Motorola fans newly minted after its second-quarter showing in the Chinese market. In August, the new subscribers leapt back up to 5.4 million, re-establishing confidence in the wireless Asian engine.

Gartner analyst Bryan Prohm explains that the past two quarters have seen a push for prepaid packages in China, a crucial addition of pay-in-advance plans in a nation without the U.S.' or Europe's credit infrastructure. This has enabled an influx of orders from prospective customers that didn't have a credit card to secure a pay-as-you-go plan. Prohm estimates that more than 50% of the new Chinese customers are on prepaid plans, illustrating the boom caused by the service.

"Given the type of handset Motorola has been successful in selling in the second quarter, it could see the same sort of success in the third quarter," says Prohm, as the ranks of prepaid subs who need cheapie phones swell.

U.S. numbers were surprisingly healthy in the second quarter, and previews from



and AT&T Wireless indicate that the third quarter will be solid from a domestic standpoint. Western Europe is expected to continue its slump, but that weakness has been factored in until GPRS' arrival. Latin America is having troubles, given the economic uncertainty in Argentina and Brazil. But with China on board, the third quarter is shaping up better than dire expectations.