Chinese restructuring announced at last, but tricky 3G choices remain

By Tony Brown

China’s government has finally announced details of its restructuring of the local telecoms market, bringing to an end years of speculation, rumors and theorizing about its content.

Ironically, the announcement was somewhat of an anticlimax, because the details of the exercise matched those that had been steadily leaked by the government since the beginning of the year.

Nonetheless, the restructuring remains one of the biggest stories of the year, because it is unlikely that any other government would so brazenly move its major telecoms players around like pawns on a chess board.

Under the broad terms of the plan, mobile market giant China Mobile will acquire small fixed-line player China Tietong (formerly known as China Railcom), and leading fixed-line player China Telecom will buy the CDMA-network operations of second-ranked mobile operator China Unicom. China Unicom will maintain its GSM operations but merge with second-ranked fixed-line operator China Netcom.

On announcing the restructuring, the Ministry of Industry and Information (MII), the Ministry of Finance and the powerful National Development and Reform Commission (NDRC) said it was designed to address the unbalanced competition in the telecoms market, in which China Mobile and China Telecom dominate their respective sectors against much weaker rivals.

The three bodies also said they hoped the restructuring process would create three strong, integrated operators that would all be allocated 3G licenses.

But the sting in the tail came via a comment in the bodies’ joint statement: that they wanted the restructuring process to “focus on self-developed technologies and their application, so as to improve the nation’s innovation capabilities.”

Peeling back the bureaucrat-speak, this means that the three groups want homegrown 3G technology TD-SCDMA to be as widely adopted as possible, and this is the most crucial part of the entire restructuring imbroglio.

China Mobile would still be the most powerful operator by far in the market after the restructuring exercise, and might be even more powerful, in light of its acquisition of China Tietong’s fixed-line assets.

By contrast, the prospects for China Telecom as a CDMA operator remain sketchy: The firm has little experience in the wireless space and cannot be expected to develop overnight into a fearsome competitor to market giant China Mobile.

The China Netcom/China Unicom merger is similarly fraught with potential difficulties, given the complexity of integrating two huge companies with thousands of employees and billions of dollars of assets.

The creation of a three-player market will not on its own be enough to bring parity to the telecoms market and slow down China Mobile’s domination, especially since the government’s proposed “asymmetric” regulatory policies look far less interventionist than those implemented in other markets, South Korea in particular.

The real threat to China Mobile comes from not knowing how far the government will go in using the company to push TD-SCDMA into the market.

Most analysts agree that China Netcom/China Unicom will be granted the much-prized WCDMA license, while China Telecom will receive a 1xEV-DO license for its CDMA network. And as the strongest player in the market, China Mobile will receive a TD-SCDMA license, analysts say.

Some analysts suggest that because of TD-SCDMA’s less-than-stellar performance in trials, the government will accede to China Mobile’s wishes and grant it a WCDMA license alongside its TD-SCDMA one.

China Mobile would then be able to roll out a nationwide WCDMA network followed by a much smaller TD-SCDMA network, based mainly around the largest cities. This would create huge capex savings by removing the need for two nationwide networks.

Sounds like an ideal solution, right? Not so fast.

The mainland government is certainly not naive enough to have deployed vast financial and political resources to develop TD-SCDMA, only to allow China Mobile to shuffle the technology toward the back door by granting it a WCDMA license.

TD-SCDMA is not necessarily the government’s last chance to push a homegrown mobile standard: Domestically developed LTE TDD-based technologies are a possibility, but not for a while.

China is about five years behind the rest of the region in deploying 3G services. It is clear that any move toward LTE is still a long way off and that the government would be reluctant to allow foreign technologies, such as WCDMA/HSDPA and EV-DO, to have the market completely to themselves, even in the medium term.

The government clearly sees the restructuring as a watershed in the telecoms market and might well choose this moment to make a powerful stand on TD-SCDMA by forcing China Mobile to go it alone with the technology, at least for an initial period, to give TD-SCDMA the best chance of mass adoption.

What’s important to remember is that although China is far behind in TD-SCDMA development, senior members of the government – well above the level of those calling the shots at the MII or NDRC – are pushing hard for locally developed technologies to be advanced at the expense of foreign rivals’.

The MII and NDRC would be loath to open themselves to embarrassment in front of their political bosses by allowing TD-SCDMA to be sidelined by China Mobile. They see it as a political obligation to give the technology the best possible chance of success.

That does not, of course, mean the government is willing to risk destroying China Mobile’s intrinsic value by subjecting the firm to onerous obligations with respect to TD-SCDMA.

But it does mean the government will expect the operator to do its part to make TD-SCDMA a success, given that it has enjoyed such a favorable regulatory ride in the past decade, which is what helped turn it into such a giant in the first place.