China’s largest mobile phone operator, China Mobile Ltd. (CHL), saw its revenues rise 7.7% year-over-year, but it’s profit was able to manage just a bump of 1.1%. The company has more than 500 million subscribers, more than the combined population of the US, Britain, and Germany. The company’s market cap is slightly more than $202 billion, making it the most valuable mobile company in the world as well as the largest.

Competition is coming from two other big players in the Chinese mobile market, China Unicom (CHU) and China Telecom (CHA). Together the three claim 766 million customers. All three companies are gearing up for a battle over the rapidly growing 3G business, which so far has about 16 million subscribers.

Each company uses a different 3G standard and together spent $21 billion in 2009 rolling out their product. But subscriber growth was slowing in February, with China Mobile’s new subscriber rate falling 22% sequentially and China Unicom’s rate down more than 50%.

One analyst has noted that Chinese subscribers use only the low-end calling services and that there is little demand for premium data services or the services are simply too costly. China Mobile’s average revenue per user (ARPU) for the first quarter seems to bear that out. ARPU for the first quarter fell to $10.29, compared with $11.76 in the same period a year ago. Average ARPU in the US for data services in the fourth quarter of 2009 was $15 per month. For voice services alone, fourth quarter ARPU in the US was $35 per month. Data ARPU in the US is growing, and voice ARPU is falling.

Each carrier supports a different 3G technology and are relying on differentiation in smartphone offerings to separate them. China Mobile has a deal with Research in Motion (RIMM) to develop a version of the Blackberry for China Mobile’s TD-SCDMA network. China Unicom has a deal with Apple Inc. (AAPL) for an iPhone using the WCDMA standard. China Telecom has a deal for Blackberry smartphones set to launch next month and is expected to launch a version of Palm Inc.’s (PALM) Pre smartphone later this summer.

Spending gobs of money for technology that does not appeal to a company’s customer base is not usually a path to success. Clearly China Mobile’s lukewarm performance in the first quarter does not augur well for a boom in smartphone sales. What saves China Telecom and its competitors is the sheer size of the Chinese market. Market penetration for all three is barely 50% of the country’s total population. There’s a lot of growth potential with more than 750 million people still to be signed up for wireless services.

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