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SK Telecom's China Challenge

By Bruce Einhorn and Moon Ihlwan Like so many telecom operators, South Korea's leading cellular outfit wants to crack the world's largest market -- China. For Cho Jung Nam, vice-chairman of SK Telecom, the way to start is by working closely with the No. 2 Chinese cellular operator, China Unicom. The Beijing-based Unicom runs a cellular network using CDMA, the technological standard created by San Diego-based Qualcomm.

Unicom has had its problems getting Chinese to switch to CDMA from the rival GSM network. That's where Cho and his team come in. Few countries have embraced CDMA more enthusiastically than South Korea, and SK Telecom is looking to use its CDMA experience to win a place in the Chinese market.

"NETWORK HELPER." The Korean company has signed a memorandum of understanding to set up a joint venture with China Unicom, and SK Telecom hopes to be a key adviser to the Chinese operator. "We are going to be a network helper to China Unicom," says Cho, who was in Hong Kong in early December for the annual International Telecommunications Union's Asian conference. SK Telecom, he adds, also wants to supply wireless Internet services through its joint venture, which Cho says the two sides will soon sign a final agreement to establish.

The Korean company also is pushing its handsets in China. SK Teletech, a subsidiary of SK Telecom, will provide Unicom with 1 million CDMA phones. SK Teletech will do the design and Chinese telecom-equipment manufacturer ZTE, based in Shenzhen, will handle the assembly.

The company certainly needs to be looking abroad, given the limited growth prospects at home. South Korea's mobile-phone market is crowded, with little room for expansion. As of October, 2002, 68% of South Koreans were cellular users, up from 62% at the start of the year. "The Korean market is reaching saturation in voice," says Cho. That's why, he adds, the emphasis at SK Telecom is on developing data services and expanding overseas.

CHANGING TASTES. It doesn't help that SK Telecom has been struggling with regulators. Last month, all three of South Korea's mobile operators were punished for violating a ban on subsidizing phones as marketing gambits. The government fined SK Telecom and banned it -- as well as its rivals -- from taking new subscribers for a month.

Still, SK Telecom's net profit this year is expected to rise 58%, to around $1.5 billion, after a sales increase of 41%, to $7.3 billion. And there might still be room to expand in the voice market. Nevertheless, SK Telecom must rely on new services for future growth. So far, the bulk of the company's data traffic has been for ring tones and other services related to making cell phones fancier.

Subscribers are beginning to become more sophisticated. For instance, SK Telecom this year began monitoring highway traffic so drivers can find the least congested routes. It is also pushing services that allow users to send photographs over the wireless network.

FAR HORIZONS. "SK Telecom is going to be the frontrunner to expedite the newly developed business models," vows president Pyo Moon Soo. "We can create brand-new, never-been-available services for customers."

Meanwhile, the goal is to expand into other international markets. SK Telecom is deploying a network in Vietnam, which should begin operation in the spring of 2003. It has also licensed its mobile Internet platform to an Israeli operator, and Cho says efforts are underway to do the same in Europe.

The biggest opportunity is in China, where SK Telecom is likely to find it tough to make much of a dent. Yes, it's a leader in CDMA, but the vast majority of China's 190 million-plus mobile-phone users are subscribers to China Mobile's GSM network. China Unicom is playing catch up. Moreover, as China prepares to switch to 3G, there's a new wild card: the locally developed standard called TD-SCDMA, which Beijing-based telecom-equipment maker Datang is producing with the help of German giant Siemens.

STANDARD STRATEGY. Many industry executives are dismissive of China's dreams of establishing its own global standard through TD-SCDMA, but Cho doesn't share that skepticism. "Once the Communist Party decides anything, then it's a rule," he says. "Once China has made a decision, then we should keep step with China's policy."

Cho figures that one way to address the challenge of TD-SCMDA is to change the subject by focusing on what comes next. So, while China has not yet moved to 3G, Cho wants to start working with the Chinese on next-generation, or 4G, technology. "Our desire is that the next-generation network will come before the battle among [the competing 3G standards]," he says. And SK Telecom wants to be in on that development. "We would like to cooperate with organizations in China to develop 4G," he says. Present or future, Korea's biggest cellular operator wants to figure out a way to make itself a key player in China. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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