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3G falls victim to time warp in China

Posted: 27 Dec 2004 ?? ?Print Version ?Bookmark and Share

Keywords:china? telecommunications? third-generation cellular license? 3g cellular license? lehman brothers asia?

Anyone who has watched the Chinese telecommunications market for some time knows it's wiser to bet on the ponies than on the issuance of third-generation (3G) cellular licenses. This is the fourth year that people have been staring into tea leaves to divine the course of Chinese officials. On the sidelines of conferences, analysts, equipment executives and reporters pepper officials with questions, hoping for even the tiniest hint.

"It really depends on whom you ask, what time of the day it is and what the wind direction is," said Allan Hellawell, head of Asian telecommunications equity research at Lehman Brothers Asia. "And you'll get a pretty wide range of responses that you could drive a few Mack trucks through."

The past month, however, has seen a major rise in 3G-related activity in China, ranging from the completion of a major round of 3G network trials to handset launches by a major domestic producer, Huawei Technologies, and the release of chipsets for China's fledgling domestic standard, including one from Analog Devices Inc. (ADI). This, plus a few signals from the government, has just about every China watcher hoping that 2005 will finally-finally-be the year the country breathes life into its 3G market.

By issuing licenses, an event expected late in the second half of next year, government officials will be loosening the reins on what will eventually be the largest 3G market in the world. The move will affect business interests ranging from semiconductor makers and cellphone designers to equipment companies and system integrators. Everyone will battle for a place at the trough.

China is expected to issue four 3G licenses, doubling the number of Chinese mobile operators by including fixed-line giants China Telecom and China Netcom. That will spark a spending spree of tens of billions over the next several years as the fixed-line operators roll out new networks and the mobile incumbents-China Mobile and China Unicom-transition their second-generation and 2.5G systems to 3G.

However, as with many things in China, nothing connected to the 3G rollout will be straightforward, not even the timing of the licenses. Chen Jinqiao, director of China's Institute of Telecom Policy, warns, "Many people have said that China will issue 3G licenses in the middle of next year, but an important hint is that China has not made any final decisions on the release of these licenses, despite the expectations of others."

The Chinese government has been cautious about the introduction of 3G services for several reasons. Some arguments in favor of delay relate to how hot the economy is running in China, prompting the government to reduce capital spending on infrastructure projects. "The questions are, do we really need two or more new networks, when are you going to get your money back and is it best to perhaps take it a little bit more slowly there?" said Hellawell.

Robert Mao, CEO for Greater China at Nortel Networks, is more blunt. "China wants the latest technology, but it is not a rich country, so they will never be the guinea pig," Mao said. "They will wait for others to test it out."

During the past few years, the Chinese have spent a lot of time and taken many trips to Europe, Japan and South Korea, among other places, to observe the main 3G technologies-wideband CDMA and cdma2000 1X-and their readiness for commercial launch.

At home, two rounds of trials have tested the mobile networks and handsets. After the recent completion of the second round of trials, observers say it's pretty clear that Chinese officials are favorably impressed with the fully loaded network speeds of both W-CDMA and cdma2000 1X. However, they believe China's domestic standard-TD-SCDMA-could probably benefit from several more months of development by Datang Telecom Technology & Industry Group, the company that has devised the standard in China.

"If Datang could actually make TD-SCDMA work by the end of the first quarter, then my own guess is [licenses] would come in the third or fourth quarter of next year," said William Lo, vice president and executive director of mobile operator China Unicom.

One of the key hurdles for TD-SCDMA has been handsets and the chips that go in them. But that is slowly changing. A handful of companies have begun to supply the market with silicon, ranging from U.S. analog specialist Analog Devices to small Chinese firms.

ADI's chipset reportedly went into the handset prototype that Datang used in the recent 3G trials. Texas Instruments Inc. (TI) and Commit, TI's chip design joint venture with Nokia and a group of Chinese companies, demonstrated a 3G TD-SCDMA prototype handset developed by one of its customers at the 3G World Congress in Hong Kong last month. TI says the complete chipset solution will be ready for mass production in 2005, with handset makers including LG, Bird and DBTel already at work on developing TD-SCDMA terminals.

Yet some still believe there isn't enough involvement in developing the food chain for TD-SCDMA to make it a success. "In order to create real commercial products, more vendors have to jump into this race," said George Huang, VP of wireless networks for Nortel Networks China. "In the trials that we just completed with MII [the Ministry of Information Industry], we really only had five vendors participateDatang, ZTE, Putian, Huawei and Nortel. On handsets and chipsets, we had lots of domestic vendors. But I cannot emphasize enough that we need more vendors and big guys to join the supply chain to make sure it is successful."

To sweeten the pot, the government is putting in place a set of tax incentives and subsidies for companies willing to develop products and for operators who will use the TD-SCDMA standard, said Chen of the Institute of Telecom Policy. "We must admit that the TD-SCDMA systems lag behind, so we need to speed up the adoption," he said.

Even though TD-SCDMA is considered the dark-horse candidate, Chen's policy group is estimating that 20 percent of China's 3G subscribers will use it within five years of launch. That would mean about 25 percent of the market by revenue, he said.

That estimate likely assumes a smooth rollout, which is far from certain. At the moment, it looks as though China Telecom and China Netcom will be assigned TD-SCDMA licenses but also will be allowed the option for W-CDMA. Assuming interoperability is achieved, that may enable the fixed-line providers to use W-CDMA at the core of the network and TD-SCDMA as an overlay in small pockets that may be heavily subsidized by government incentives.

Yet even if the technology does fall into place soon, another key challenge is whether officials believe there is enough market demand in China for 3G services, whatever the standard used. Although 3G has proven popular in Japan and Korea, that doesn't necessarily translate into success in China, said Howard Xia, senior director and chief representative of Vodafone China. "Culturally, Japan and Korea are very similar to China, but in terms of GDP [per capita] they are not," he said. "So Chinese officials still have some questions in their mind as to whether there is real demand for 3G."

The government is also keen to manage competition. Currently, the Chinese telecommunications market is one of the most competitive, not only with call rates, but also in terms of vendor infrastructure equipment and handset pricing. Among those issues, operator competition has taken center stage, with price wars erupting despite prohibitions against them.

So the government is concerned that by introducing two more competitors into the process, the entire situation will worsen. "Don't forget that with all these operators, the majority owner is the government," said Xia. "So if the environment gets worse, the government gets hurt the most."

Participants in the Chinese telecom market say there is no rush for 3G in China because the two main mobile operators are profiting from 2.5G services at the moment. And with China's domestic standard heading back to the lab, it seems that for a while longer, 3G may remain on hold.

- Mike Clendenin

EE Times

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