China's 3G wall comes down

China'S 3G Wall Comes Down

Huawei and ZTE are the only clear-cut winners to emerge so far.

Who are the winners and losers from the award of 3G licences in China last month? As widely expected, China Mobile was granted a TD-SCDMA licence, China Unicom a WCDMA concession, and a CDMA2000 EV-DO licence was awarded to China Telecom. But as far as the operators are concerned it is much too early to say, with any degree of certainty, which has the best 3G deal-a successful outcome, in other words, for the licensing process.

The Chinese authorities want to have a much more competitive mobile sector than they have had with the second generation, which is dominated by China Mobile. By appearing to level the 3G playing field, and increasing the number of mobile operators from two to three, there looks every chance that the Chinese authorities will achieve their goal.

But if each of the operators’ 3G prospects are up for debate, as we shall discuss later, the outlook for the supplier community-particularly Huawei and ZTE-is unequivocally positive. According to the Ministry of Industry and Information Technology (MIIT), China’s regulator, the 3G licence winners will spend a total of RMB280bn ($41bn) on 3G infrastructure over the next three years. Some estimates put capex levels on China’s 3G networks as high as RMB165bn ($24bn) for this year alone. China Unicom has announced it expects to spend at least RMB60bn ($8.8bn) on WCDMA capex during 2009.

As China’s two largest telecom equipment manufacturers, Huawei and ZTE can expect to be the principal beneficiaries of network investment surges by the 3G licence winners. ZTE, in particular, looks well placed set to reap the benefits of China Mobile investment in TD-SCDMA, China’s homegrown 3G standard, having worked closely with the country’s largest mobile operator in TD-SCDMA trials in the lead up to the Beijing Olympic Games where the technology was showcased. And with over 100 HSDPA/WCDMA and 65 EV-DO contracts around the world, Huawei is now an established and formidable competitor for mobile network contracts on the international stage, not just in its domestic market. The same is true of ZTE.

Lin Sun, a telecom analyst based in China, estimates that Chinese companies as a whole could secure as much as 80 per cent of China Mobile’s TD-SCDMA infrastructure orders over the next three years; 50-60 per cent of China Unicom’s WCDMA capex; and at least 50 per cent of the EV-DO investment made by China Telecom. And even in the handset market, where western suppliers have dominated in 2G, Sun says that Chinese companies are now “on a par” with international competitors when it come to 3G, except for certain high-end models. “For the handset market, which is estimated at about $22bn in the next 3-5 years in China, Chinese companies should take a 50-60 percent share if not more,” he says.

That’s not to say there won’t be some sizeable 3G opportunities in China for western suppliers. “Overall, I think Ericsson may do better in WCDMA, followed by Nokia,” says Sun. “Motorola, however, is crippled by problems at home and that will seriously affect its ability to compete in China.”

But what of the 3G licence holders? Is there really not much to pick and choose between them? China Unicom certainly appears to have the best 3G deal in that it will deploy the technology with the greatest economies of scale (WCDMA). Then again, it doesn’t have the strong wind of government support behind it as China Mobile does by virtue of securing the TD-SCDMA concession. As China’s homegrown 3G standard, the government is desperately keen for TD-SCDMA to be a triumph.

“MIIT recently reiterated it has implemented more than 20 measures to ensure the Chinese standard will succeed, including enlisting TD-SCDMA equipment purchases under ‘government procurement’, which can cut prices down and may even allow China Mobile to offer lower rates than rivals’ offerings,” says Sun. “The government may also set up a special fund designated for the TD-SCDMA supply chain, such as chipsets, handsets and applications.”

Having said that, TD-SCDMA has still got much to prove performance-wise and has little in the way of support from established handset suppliers. This will be a handicap for China Mobile, at least in the short term.

As for China Telecom, it has by far the smallest 2G mobile subscriber base of the 3G winners (after acquiring China Unicom’s struggling CDMA operation last year), which gives it less scope for 3G growth through ‘upgrades’. And the CDMA2000 evolution path no longer enjoys the same level of operator support as it once did: Verizon Wireless, KDDI and Telstra are some of the big name operators to announce recently they will go to LTE rather than upgrade their existing EV-DO networks.

“Ultimately, China Telecom will have to spend more on building its network than China Mobile or China Unicom,” says Paul Lambert, editor of Informa Telecoms & Media’s mobile operator intelligence centre. Even so, it would be premature to write off China Telecom as a 3G ‘loser’-EV-DO is still streets ahead of TD-SCDMA in terms of network performance and sheer range of handset choice. And if China Telecom’s much smaller installed 2G subscriber makes it difficult to roll out a mass market 3G service, China Telecom could still specialise in serving higher-margin business customers.

Each of China’s 3G licence holders, for now at least, has a fighting chance of success.