By Bruce Einhorn China has more cellular users than any other nation on earth. More than 300 million Chinese -- more than the total number of men, women, and children living in the U.S. -- have mobile phones, and that population continues to grow by millions a month. Yet China remains a laggard when it comes to the cutting edge of telecom technology: third-generation (3G) cellular services.
While neighbors like Japan, South Korea, and Hong Kong boast operators that have 3G networks up and running, Chinese phone users are still waiting for 3G. Worse, government in Beijing hasn't even gotten around to issuing 3G licenses yet.
LATE START. The delay isn't due to lack of interest. The Chinese are keen to be players in 3G. Because the government wants to use its market clout to influence the development of 3G worldwide, it has helped foster a homegrown 3G standard -- TD-SCDMA -- that can compete against the two commonly accepted worldwide standards -- UMTS, which is dominant in most of Western Europe and parts of Asia -- and CDMA2000.
San Diego-based Qualcomm (QCOM) backs CDMA2000, which has won acceptance in the U.S. and South Korea. Beijing's thinking has been that if China has a locally produced alternative, it could reduce the amount of royalties it would have to pay to foreigners while helping Chinese tech companies become more powerful globally.
It's reasonable to think that success in 3G could lead to Chinese-originated standards in other technologies. But the problem is China got off to a late start on its 3G standard. And while it has received assistance from the outside -- most notably from German giant Siemens (SI), which has been working for years with Chinese partners to help develop TD-SCDMA -- no network anywhere uses it yet. The reason is simple: TD-SCDMA isn't yet ready for prime time.
UNSTABLE NETWORK. Many people in the telecom industry have long assumed that China's regulators will choose to have all three standards, but until the local favorite can be seen as more or less equal to the other two, that's not possible. So Beijing has stalled. The conventional wisdom was that the government would make a decision by the end of 2004, but as the year winds down, it's clear that nothing is going to happen.
How much longer can the stalling go on? That was the question on the minds of many people attending a major 3G trade show in Hong Kong last week. Giving more urgency to the speculation were press reports that the Information Industry Ministry, China's telecom regulator, had conducted trials on TD-SCDMA that produced less-than-ideal results. The Ministry has said the TD-SCDMA trials showed that the network was unstable and unreliable and that not enough TD-SCDMA-compatible handsets were available.
"Tech-wise, certainly they are lagging," says George Huang, Nortel Networks' (NT) vice-president for greater China. Indeed, Nortel has been one of the most active foreign companies in working with Chinese partners to spur the development of TD-SCDMA. "Expectations are quite high, and that makes people say that it's not going well." While Huang says he's hopeful, he concedes that more work must be done before TD-SCDMA is commercially viable.
OLYMPIC PRESSURE. Some people are getting impatient. "TD-SCDMA has certainly fallen short of expectations," says Jing Wang, Qualcomm's chairman for greater China. "It's becoming very dangerous for them to continue to delay and wait for TD-SCDMA to work at a commercial level." He argues that it makes little sense for China to sacrifice its 3G future for TD-SCDMA. With the Olympics to be held in Beijing in 2008 and the regime determined for them to be a showcase of China's economic and technology might, the government will want to have 3G networks up and running, Wang says. "They don't want to be embarrassed."
He points out that given the amount of time it will take for mobile operators to get their networks operational, the Chinese government's stalling game will have to end soon. And Wang says continued delay will hurt Chinese companies like Huawei Technologies and ZTE, which want to manufacture and sell 3G handsets worldwide. Without a strong home market, they'll be at a big disadvantage compared to rivals like Samsung Electronics, LG Electronics, Sony Ericsson, Nokia (NOK), and Motorola (MOT). "2005 is the year they will have to issue the 3G licenses," he says.
Some people say there's no reason to worry. Siemens, which this year formed a joint venture with Huawei to focus on TD-SCDMA, is pushing ahead, says Lothar Pauly, president and CEO of Siemens Communications. The German company didn't take part in the recent trials that were disappointing, according to Pauly. "We're going to conduct our trials starting in December, and we're pretty confident that our equipment will work sufficiently," he says. "We'll have equipment commercially available in the middle of 2005."
NO CRITICAL MASS. More foreign companies are showing interest, despite the shortcomings so far. For instance, Analog Devices (ADI), based in Norwood, Mass., announced at the Hong Kong show that it was launching a new chipset for TD-SCDMA handsets. In a press release, Christian Kermarrec, a vice-president at Analog, said, "We expect TD-SCDMA handset design activity to increase rapidly over the coming months."
These announcements are positive for the Chinese standard. The big problem, though, is that few other countries have shown much interest in TD-SCDMA. And until they do, there's less incentive for a critical mass of companies to invest the time and money required to make phones capable of working on the standard.
As a result, the handsets now available are pretty clunky, says Amer G. El-Nahi, Asia Pacific executive director of marketing and strategy for mobility solutions at Lucent Technologies (LU). "Right now, TD-SCDMA handsets are about as big as a refrigerator," he says, only half-joking. "There is a lot of work to be done." And not much time is left. Einhorn is BusinessWeek's Asia Economics correspondent, based in Hong Kong
Follow China Journal only on BusinessWeek Online