Chinese carriers gear up for 3G

Magazine
Sep 1, 2008
Chinese carriers gear up for 3G
The reorganization of China's telecoms industry into three full-service operators is likely to result in a revenue bonanza for telecoms equipment manufacturers all over the world, as Alan Wei explains.
China is the largest market in the world in terms of mobile phone subscribers, hitting 575 million subscribers in the first quarter of 2008. Indeed, the country's leading mobile operator, China Mobile, is the largest in the world both in terms of subscriber numbers and market value. No wonder that global telecoms equipment manufacturers, who made plenty of money from China's second-generation (2G) network roll-out, have been lobbying the Chinese government for more than eight years to upgrade to third-generation (3G) mobile systems.
Their pleas fell on deaf ears until earlier this year. On 24 May the Chinese government finally announced that the restructuring of China's telecoms industry had officially started, and that 3G licences would be issued when the process finished. There can be no doubt that the restructuring is a government-guided activity. Even though all these firms are listed on the US or Hong Kong stock markets, the government is their biggest shareholder.
Going for goldBefore the restructuring, China had two mobile carriers – China Mobile and China Unicom – and two fixed-line carriers – China Telecom and China Netcom. Following the restructuring, there will be three full-service carriers – China Mobile, China Telecom and China Unicom – providing fixed and mobile services. To bring this about, China Unicom is selling its CDMA network and business to China Telecom, and China Netcom is merging with China Unicom.
The aim of the process is to create a healthy competitive framework for China's telecoms market. China Mobile has dominated the country's mobile market for years and the only other mobile carrier, China Unicom, was too small to compete effectively. To put this in perspective, in 2007 China Mobile's net profit was double the profit of China Telecom, China Unicom and China Netcom combined. Meanwhile, the two fixed-line carriers have been struggling with declining subscriber numbers and revenues, and are desperate to enter the more profitable mobile business.
A good head for figuresIn theory the new framework will boost competition by balancing the assets of the carriers. In reality, China Mobile remains in such a strong position that the other two carriers probably won't threaten it for another three to five years. China Unicom and China Telecom will need to spend several years dealing with merger issues, such as the integration of human resources, networks and culture. In contrast, China Mobile is almost unchanged after the restructuring – China Tietong, a fixed-line carrier, will be merged into China Mobile, but it is very small.
The 3G battlefield
The most exciting aspect of the restructuring is that the three carriers are expected to embrace 3G quickly when they obtain the 3G licences simultaneously from the government for free, which is expected to occur at the end of 2008 or early 2009.
China Unicom and China Telecom realize that they cannot attack China Mobile's leading position in a 2G environment, and so they will rely on 3G to challenge the giant. China Unicom plans to upgrade its GSM network to W-CDMA (Wideband Code Division Multiple Access). The pros for China Unicom are that it has a huge GSM subscriber base – more than 125 million – and the upgrade path from GSM to W-CDMA is very clear and mature. The drawbacks are that the cost of upgrading to a nationwide W-CDMA network is high.
Meanwhile, China Telecom is expected to upgrade its CDMA 1X network to EV-DO (Evolution-Data Optimized). The upgrade will cost much less than the W-CDMA upgrade. The challenge will be how to attract enough subscribers, considering the limitations of the CDMA ecosystem, especially in terms of handsets. China Telecom is considered more savvy than China Unicom in terms of operation efficiency and service quality, but its experience in mobile operation is limited.
As for China Mobile, originally it hoped to obtain a W-CDMA licence because it has a huge GSM subscriber base and W-CDMA is a mature technology. But the government, which is also the largest shareholder, believes that China Mobile is the best candidate to undertake the task of implementing the less mature TD-SCDMA technology, because China Mobile is the most experienced mobile operator and is strong enough to tolerate risks. Initially China Mobile was reluctant to accept the arrangement, but the operator understands the determination of the government and has now built more than 15 000 base stations in a trial TD-SCDMA network. Even though the government hasn't publicly stated which licence will be issued to whom, it's almost certain that each carrier will be issued only one 3G licence, and so China Mobile will most likely be awarded a TD-SCDMA licence.
What an astonishing picture it will be. Not only will the reorganization stimulate service provider competition, but all three 3G standards will go head to head in the world's largest telecoms market.
If W-CDMA rolls out successfully in China, it will enhance the technology's position globally. China Telecom's plans represent a last chance for the CDMA 2000 camp, and may well determine the technology's fate. Meanwhile, if TD-SCDMA prospers in China, it could seize the opportunity to expand into overseas markets.
Fixed-line fortunes
The restructuring will also bring about major changes to the fixed-line access market. Previously China Telecom and China Netcom competed in the fixed-line arena, but their competition was nominal. The two carriers divided the Chinese market into two by region to avoid repeated network construction. China Telecom dominated in the south and China Netcom ruled in the north. In 2007 the pair even signed an agreement that prevented them from entering each other's territories.
After the restructuring, three full-business carriers will compete in the same market. It seems likely that China Telecom will enter the north and China Unicom (China Netcom) will expand to the south. China Mobile's very small fixed-line business is likely to remain weak for some years. However, it's worth noting that the advent of high-speed mobile internet will position mobile technology as a viable alternative to fixed-line and broadband. This could encourage carriers to lower their tariffs on fixed-line and broadband services.
In a full-business framework, the networks will increasingly take on the task of carrying data from mobile communications as well as voice traffic, and this is prompting carriers to investigate fixed-mobile convergence. A unified network would be an ideal solution for China Telecom and China Unicom, because they have various network operations, inclu¬ding mobile, landline, WiFi, fixed broadband and Personal Handy Phone System, and they would like to integrate all these.
Unified networks should be a crucial part of the strategy for China Telecom and China Unicom. When the two smaller carriers look at their giant competitor China Mobile, they find that their only strength is in fixed line. China Telecom and China Unicom see that providing unified fixed and mobile services to their customers would be a good way to differentiate themselves from China Mobile.
However, it is unlikely that the two carriers will start to build unified networks soon because of the huge investment and the risks involved. As a first step they will offer customers unified service packages that combine mobile, fixed and broadband services. But everyone has BT's 21CN case study on their desk, and unified network construction is believed to be one of their mid-term objectives. The most likely scenario is that carriers will conduct trial network build-outs in specific places and then expand to the rest of the country if the output of the trial is positive.
The new market created by the restructuring and 3G licence issuing will provide a real boost to China's telecoms ecosystem from the carriers through to the equipment manufacturers and down to the end-user.
In fact, I'd go further and say that China's telecoms restructuring and 3G licence issuing will be good news for mobile phone users everywhere. Global telecom manufacturers will need to develop affordable 3G handsets to meet China's mass market needs. Meanwhile, as the total 3G market is enlarged after China joins, the rule of economies of scale will function. All these factors are expected to drive down 3G handset prices worldwide.
In terms of equipment manufacturers, local Chinese vendors Huawei and ZTE will probably be the big winners because they are leading providers of both the infrastructure equipment and the terminals. However, global manufacturers of W-CDMA and CDMA2000 equipment, such as Alcatel-Lucent, Ericsson, Nokia-Siemens and Nortel can expect to see their revenues in China flourish over the next few years. The emphasis on fixed-mobile convergence could provide considerable bounty for any vendor brave enough to seize the opportunity.
Wireless chipset manufacturers such as TI and Qualcomm will also benefit from the restructuring, and handset providers like Nokia and Samsung certainly won't miss the opportunity either. There is a question mark over the iPhone, depending on whether Apple can work out a better business model with China's service providers. So far they have refused the revenue sharing model.
From an investment perspective, the three Chinese carriers are eager to build on international partnerships to improve their operations and enhance their global impact. Many leading global telecoms companies have shown an interest in investing in the three. So far Vodafone holds a 3.3% share of China Mobile, and its long-term target is 15–20%. Telefonica owns 7.2% of China Netcom and hopes to increase its stake to 10%. Meanwhile, China's carriers are eyeing up opportunities to invest in overseas operators. I believe we will see more and more interaction between Chinese carriers and their global counterparts.
Sounds interesting? In my view, the fun is only just beginning.
About the author
Alan Wei is chief analyst at EastPoint Consulting in Beijing, China.