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In 2003, when Nokia launched a new handset model with a black-and-white screen, it seemed to be a misstep. At that time color screens prevailed in China's overcrowded mobile phone market. But the cheap Nokia 1100, dubbed by its design team as "Penny", has become one of the largest cash cows for the company.

 

Last year alone, more than 8 million Nokia 1100s were sold in China, mainly in the fourth- and fifth-tier cities and rural regions, which Nokia calls the "emerging market". In a sharp contrast, total sales of the largest home-grown maker, Lenovo, stood at 7.7 million units for its 2006 fiscal year.

 

The runaway success of Nokia 1100 underlines how China's rural market, once ignored by many, is starting to emerge as a key battleground.

 

With high cellphone penetration in big cities, both telephone operators and manufacturers are looking at the rural market for new growth.

 

"The Chinese market is a combination of a mature market and an emerging market. And both are promising," said Collin Giles, president of Nokia (China) Investment Co Ltd.

 

China's sparsely populated rural areas have been much less connected by telephones. Mobile phone penetration there is around 15 percent while that in cities is about 60 percent, according to Merrill Lynch.

 

By May, China had 490 million mobile subscribers, show statistics by the Ministry of Information Industry (MII).

 

"Rural areas are under-penetrated; they account for 57 percent of the population but comprise a minority of mobile subscribers," said Ernst & Young in June.

 

But with farmers' increasing purchasing power, operators and regulators' increased rural push are turning it into a big market.

 

In the first three months, the less developed western China recorded a net increase of mobile phone subscribers of 4.65 million, up 33 percent from a year ago. In the affluent eastern part, the growth was only 9 percent.

 

Ernst & Young forecast rural penetration would hit 25 percent by 2008, compared with 42 percent for the total market, while Merrill Lynch forecast it to climb to 55 percent by 2015, with 93 percent in cities.

 

The rural market is so alluring that even Sony Ericsson and Samgsung, which have been focusing on premium models, are also showing increasing interest in offering lower-end phone models.

 

Sony Ericsson recently set up a research and development team in Beijing to focus on developing entry-level handset models. Samgsung executives said the firm would seek to expand its portfolio.

However, "it will be a real challenge to move beyond one quarter of the rural population", said Ernst & Young.

 

Giles said one of the biggest challenges to go rural is affordability. Nokia 1100 was launched with a price tag of around 900 yuan. In 2005 the price dropped to about 600 yuan and now sells for less than 400 yuan. The latest, Nokia 1200, expected to be available in the fourth quarter of this year, will be sold at 350 yuan.

 

But price is not the only thing that counts. A recent survey of 77,000 potential consumers by Nokia found that reliability, durability, ease of use, relevant features and affordability, all affect first-buyers' choices.

 

Chinese farmers' craze for Nokia 1100 largely stems from its dust-proof feature and in-built flashlight. "Low income does not mean they demand fewer features," said Giles.

 

Ernst & Young pointed out that "battery life, dust-proof casings and FM radio functionality can act as differentiators in emerging handset markets".

 

But cost control is the major catalyst for popularization of mobile phones in rural regions and it's not all about handset retail prices, said Giles, adding that handset expense accounts for only 14 percent of the total so-called ownership cost.

 

Nokia is now in talks with Chinese cellular operators to introduce call-time tracking to mobile phones to be used in rural regions. According to Nokia's survey, mobile phones are often shared among families or entire villages. The tracking system enables users to set a time or cost limit, automatically ending the call when the limit is reached.

 

But cracking the rural market remains a tough job for manufacturers as profit margins are much lower than those in premium models sold in big cities. Domestic brands have been dominating the rural market by offering cheaper models, with armies of sales assistants hawking the brands.

 

But "now they are losing appeal as foreign makers like Nokia and Motorola are expanding their presence in the rural market with even cheaper models", said David Li, CEO of New York-listed Qiao Xing Mobile Communication Co Ltd, which controls domestic handset maker CECT Telecom Co.

 

(China Daily July 3, 2007)