Maybe Beijing Should Have Stayed Out of This One

State-owned China Unicom's CDMA network is a dud so far

During its 15-year effort to join the World Trade Organization, China was determined to show Washington that the U.S. stood to gain by helping Beijing enter the global trading club. One of the carrots dangled by Premier Zhu Rongji was the prospect of a Chinese mobile-telecom network based on the CDMA technology pioneered by California's Qualcomm Inc. (QCOM ) For years, Qualcomm and its political patrons had been lobbying Beijing to give it a foothold in the huge market, which was dominated by Europe's GSM technology. Politics prevailed: Late last year, just weeks after China joined the WTO with U.S. backing, state-owned cell-phone operator China Unicom Ltd. (CHU ) began rolling out a multibillion-dollar CDMA network, even though it already operated a profitable GSM system.

The question now is whether China Unicom can turn what many suspect was a government-influenced decision into bottom-line results. Its CDMA network is off to a decidedly slow start. After a $2.5 billion investment in new infrastructure, Unicom has managed to attract just 700,000 subscribers--a meager number in a nation of 160 million-plus cell-phone users. Critics say Unicom hasn't got a prayer of making its yearend target of 7 million. The CDMA rollout has been disastrous, says Duncan Clarke, managing director of BDA China, a Beijing telecom-consulting company. "It's approaching Edsel proportions."

Unicom insists that its embrace of CDMA is not the result of official pressure but a hardheaded business strategy. China's No. 2 cellular provider (last year's profits: $540 million on sales of $2.47 billion) says CDMA infrastructure is cheaper than GSM. Moreover, points out Unicom Executive Vice-President Li Zhengmao, CDMA technology is ideally suited for the coming switch to third-generation (3G) services, which will allow ultrafast transmission of data, voice, and video.

Naturally, Unicom's CDMA adventure is a big deal for Qualcomm. The outfit has licensed several mainland companies to make CDMA phones--and hopes that exports of those handsets will help bring down prices worldwide. Success in China also could give Qualcomm a competitive edge elsewhere as the battle for 3G supremacy heats up. Says company Chairman Irwin M. Jacobs: "China will be a swing vote as to which way the world goes."

China Unicom concedes that it has had trouble. For starters, CDMA handsets cost an average of $350, up to $100 more than GSM phones. Critics also say Unicom's CDMA service is not appreciably better than GSM. And until recently, Unicom's CDMA phones didn't work with the stored-value cards that most Chinese use. Peter C. Friedland, an analyst for WR Hambrecht & Co. in San Francisco, says Unicom has also done a lousy job of selling CDMA. "They're marketing this as a high-end product" to rich people in big cities, he says. But wireless penetration is already relatively high there--20% to 30%--which means the affluent already have phones. Says Friedland: "It would be better to target lower-income subscribers."

Execs from China Unicom and Qualcomm say the Chinese operator will soon fix its CDMA problems. Unicom recently bought half a million phones from local makers and is selling them for 80% of the previous price. Jacobs also says that Unicom is "moving fairly quickly" to upgrade its network to allow subscribers to use such cutting-edge services as global positioning. Finally, China recently became the first country to introduce removable user-ID cards for CDMA phones, making it possible for Unicom to sell stored-value cards.

That's not enough to convince such skeptics as BDA's Clark, who still believes Unicom was pressured to launch a service for which there is little demand. The company "didn't have control of its destiny," he says. Unicom's Li claims the critics are wrong. "We're confident about CDMA," he adds. Ultimately, the future of CDMA in China lies with Beijing, which may have too much at stake to let it fail.

By Bruce Einhorn in Hong Kong, with Arlene Weintraub in Los Angeles

— With assistance by Arlene Weintraub

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