China and India remain Asia-Pacific's major telecommunications growth engines, with China leading in terms of telecom penetration and revenue, according to a report by Ernst & Young released yesterday.

But the Asian giants still have common nut to crack: realizing the full growth potential of rural consumers.

In 2006, China's telecom penetration was three times that of India, while China's telecom revenues reached $83 billion, four times that of India, according to the report titled "The Rise of the Asian Telecommunications Industry".

The report is based on in-depth interviews with senior executives from 57 companies around Asia.

By 2010, the Asian mobile industry will be home to more than half of global mobile subscribers, up from 1 billion subscribers in 2006. China, India, Thailand, Indonesia and Vietnam - countries where penetration is still low -present enormous growth potential.

India and China will be the top two markets worldwide in terms of annual mobile net additions in 2007, with between 64 million and 70 million new subscribers, followed by Russia, the US and Brazil.

"India has real expertise in telecom services, and China has inherent strengths in manufacturing and technology," the report said.

For both nations, the projected growth will continue despite increasing market challenges.

Price deflation is an ongoing threat, the report said.

"Although minutes of use are increasing, it cannot compensate for falling average revenue per minute as prices are falling in both emerging and mature markets."

Therefore, "low-end strategies are vital", but "the rural areas remain underpenetrated, especially in India, as the lower-value profile of rural customers has disincentivized the roll-out of rural infrastructure", the report said.

For China, rural growth can "offset the 3G competition, and China has narrowed the gap between urban and rural penetration", as many local telecom operators have been designing and manufacturing ultra low-cost handsets.

In 2008, rural penetration is projected to reach 25 percent, accounting for 42 percent of all subscribers, but "it will be a real challenge to move beyond one-quarter of the rural population", the report argued.

Private equity has an appetite for telecom infrastructure assets around Asia. Massive infrastructure needs in China and India "may provide a potential private equity role".

But "uncertain regulation" is believed to be one of the key external challenges for the Asian telecoms sector, which could hold back international players looking at the Asian markets for investment, mergers and acquisitions.

Training and retaining the right people remains a critical domestic issue.