China has been considered a mountain of opportunity for mobile phone infrastructure vendors, but signs today indicate a bleaker outlook as Chinese officials seem to have soured on cdmaOne technology and have banned certain foreign joint ventures in telecommunications projects.
Vendors say China presents a large opportunity for Code Division Multiple Access, or cdmaOne, technology, as the huge pent-up demand for mobile phone service has taxed the world’s largest Global System for Mobile communications network run by China Telecom, which this summer surpassed 13 million subscribers. CdmaOne technology, its proponents say, would solve the congestion problems of GSM networks. But the Chinese government doesn’t seem to see it that way.
Those pushing for the technology say the main reason why cdmaOne technology has not been commercialized in China lies with the People’s Liberation Army, which owns 50 percent of China Telecom Great Wall, a mobile phone operator that is operating experimental cdmaOne networks. Since summer, the Chinese government has been trying to push the PLA out of commercial affairs, including telecom, in an effort to eliminate corruption the government says is associated with the army. This effort has been at a standstill, as the PLA is refusing to leave the profitable telecom business, say sources.
China Unicom, China Telecom’s GSM competitor, also had planned to deploy cdmaOne technology, but those efforts stopped when it officially became part of the Ministry of Information Industries in March, said one source.
The PLA seems to be only one piece of China’s increasingly confusing and jagged telecommunications policy. U.S. officials claim China, in a roundabout way, has mandated GSM technology, saying it wants a nationally compatible system and would rather wait for third-generation technology. Sources indicate the government is leaning toward the belief that dual-band GSM networks can solve today’s capacity problems.
“The U.S. is encouraging China to permit multiple standards and let network operators use the standards they want to use,” said one U.S. official. “Basically what it has done is mandate GSM. There are customers for CDMA systems and others, but [new operators] can’t get the operating licenses from the government to put those systems in operation … The Chinese themselves have said they prefer to wait for the next generation of cellular technology before they start using systems other than GSM.”
This is good news for Sweden-based L.M. Ericsson and Nokia Oy of Finland, which have been lobbying the Chinese government to wait for their 3G wideband CDMA standard rather than commercially deploy cdmaOne technology. Both vendors hold the bulk of GSM infrastructure contracts in China, and China is Ericsson’s largest customer. Analyst firm Warburg Dillon Read estimates Ericsson will generate about $1 billion to $2 billion in revenue from China this year and will capture more than 45 percent of the $3.8 billion in announced orders in China during the first nine months of the year. Nokia, it believes, captured about 17 percent of the country’s mobile infrastructure orders during the first nine months of the year.
“We believe that Motorola and Lucent are most negatively impacted [by cdmaOne technology delays], in that they were expected to win a significant portion of the anticipated cdmaOne orders, which we believe could have exceeded $2 billion,” said Dillon Read in a recent report. “Nortel and Samsung were also expected to win a portion of the cdmaOne business, although a smaller market share than Motorola and Lucent.”
Sources say many complex factors ranging from vendor stances on technology to what some sources characterize as cronyism in the Chinese government also play a role in whether cdmaOne technology could become commercialized. Part of today’s denial of cdmaOne technology lies with China’s desire to allow domestic vendors to grab a piece of its own lucrative telecommunications market today and in the future for 3G technology, say U.S. officials.
“China’s desire is to manufacture equipment domestically as opposed to importing,” said a U.S. government source. “There are GSM manufacturers up and running in China, with no CDMA manufacturers there.”
“The strong message being conveyed by the ministry and by government in general is that this market has attributed to $11 billion worth of sales of mobile communications equipment into China in 1998,” said one vendor. “This is a huge market dominated by overseas’ suppliers. There is a growing capability among domestic suppliers to respond to the needs of the Chinese operators.”
The Chinese are actively involved in setting standards for 3G technology and have been awarded the chairmanship of the standards body within the International Telecommunication Union. They will work on harmonizing as many of the 15 various 3G proposals submitted around the world into a family of standards. The CDMA Development Group said China has a strong interest in converging W-CDMA proposals with the cdma2000 proposal, based on cdmaOne technology. This could give cdmaOne technology a footing in China.
Many cdmaOne vendors and the CDG deny that China’s government has soured on cdmaOne technology. But all, including the U.S. government, will not let China prevent commercialization of cdmaOne technology without a fight.
“Definitely, the technology is not the issue,” said Perry LaForge, executive director of the CDG, which has been in discussions at the highest levels in the Chinese government. “It’s the army.” But he conceded that 3G “provides an interesting piece of the equation … There is a certain overhang created by 3G,” he said.
“The fight in China is actually a 2G debate,” said Jeffrey Belk, vice president of marketing with Qualcomm Inc.
CdmaOne vendors, in talks with Chinese officials, insist dual-band GSM networks will not cure the congestion problems experienced by current systems in China, and 3G technology is not expected to become commercialized for several years.
“We believe that the dual-band solution is not the cure all that one might believe … and there is a need for (cdmaOne) when looking at the structure of population density and urban areas within China,” said one vendor.
CdmaOne technology also was a topic of discussion in meetings between U.S. Undersecretary of Commerce David Aaron and the Chinese government in September. After the meeting, the United States threatened vindicative measures if China failed to end a series of barriers to trade and investment in telecom and other industries. China needs U.S. endorsement into the World Trade Organization. Telecom is one outstanding area of concern for the U.S. government, said a U.S. official.
Further clouding China’s mobile phone market is the Chinese government’s decision to stop the financing model, Chinese-Chinese-foreign, used by the Great Wall network and China Unicom. CCF funding has been used as a way for operators to get around the Chinese government’s ban of direct foreign investment in telecommunications.
Financial firm Credit Suisse First Boston believes this likely will delay plans for some network deployments, and Dillon Read said the ruling creates uncertainty for China Unicom, which is seeking to operate a nationwide GSM system. However, vendors indicate China Unicom will receive funding from the Chinese government to make up for the lost financing.
Dillon Read expects capital spending on mobile systems to remain strong in 1998, but delays in network deployment at Unicom and Great Wall will impact growth of the Chinese wireless equipment market in 1999.
“We believe that Chinese mobile infrastructure spending should show about 20 percent to 25 percent growth in 1999 over 1998 levels,” said the firm. “However, for infrastructure spending to continue to grow in 2000, China Unicom and/or Great Wall will have to contribute significantly. Otherwise, we believe the growth in Chinese mobile infrastructure spending will likely decline in 2000.
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The U.S. government is reviewing foreign equity participation in China’s telecom market as a prelude to negotiations over the country’s membership in the WTO. The Chinese government may develop alternative models allowing minority equity participation by foreign investors.
