China Unicom, the country's second largest mobile phone carrier, will gradually abandon its handset subsidies policy to cut its operation cost and enhance development of its CDMA (code division multiple access) technology.

Analysts believe the move is tightly connected to the firm's target for realizing profitability in its CDMA operations by the end of this year.

They believe handset subsidies are one of the major reasons driving up China Unicom's operating costs.

"We are adjusting our marketing policies on CDMA phone development," said Tan Xinghui, general manager of China Unicom's Marketing and Sales Department. Previously, about 70 per cent of CDMA phone subscribers could expect to enjoy handset subsidies, which included a series of preferential services. China Unicom started the handset subsidies in the second half of 2002.

The policy contributed a lot to the spread of CDMA phones over the past few years. However, it also caused expensive operating costs.

In fact, many of China Unicom's subsidiaries still count a lot on handset subsidies to attract customers and keep their loyalty.

"It is impossible to continue the policy due to high costs for such a long time period," Tan explained.

As a result, the company plans to gradually cut its handset subsidies to overcome losses it is incurring.

Tan's remarks were in line with Chang Xiaobing, board chairman of China Unicom at the company's annual meeting earlier this year. Chang said then that the company must focus on the control of handset subsidies and improve CDMA performance this year.

China Unicom used to claim it would realize a profit on its CDMA operations by last year.

A source close to China Unicom said that to cut operational costs, China Unicom would build up a new subsidiary focusing on the purchasing and sales of CDMA phones.

It said the new company is to be directly involved in the marketing and sales of CDMA phones to help narrow the costs caused by the handset subsidies over the past few years.

Meanwhile, Tan said China Unicom is launching low-end handsets to lure more low-end CDMA phone subscribers.

According to Tan, the company has ordered 3.5 million low-end CDMA handsets recently from five handset manufacturers, including ZTE, Hisense and UTStarcom.

The prices for the phones range from 500 yuan (US$60.2) to 700 yuan (US$84.3).

"It will help China Unicom lure more CDMA phone subscribers," said China Securities analyst Dai Chunrong.

"The low prices will help China Unicom to improve its customer base by attracting more low-end subscribers, especially those in rural areas," she added.

In fact, with a capacity of more than 70 million CDMA phone users, China Unicom will have to greatly widen its subscriber base since there are only about 30 million users at this stage.

"With the launch of low-end handsets, China Unicom's CDMA network will become more competitive as it used to target only high-end customers," Dai said.

The company should turn to value-added telecom services to improve its ARPU (average revenue per user) to help make CDMA profitable, she said.

(China Daily July 5, 2005)