3G Choice Could Roil Europe's Mobile Players

China has yet to award 3G mobile licenses. Who will benefit when it does is an open question, says Bengt Nordström of inCode

It's not really a question of "will they or won't they?" but more a matter of "when?". The long-running saga of China's decision regarding licensing and adoption of third-generation mobile services has filled many a column inch. What is certain is that there will be 3G in China, sometime. It's also certain that the decisions eventually made by the Chinese authorities will shape the power base of the mobile industry for years to come.

At stake is nothing less than the future of the wireless infrastructure business. Leading European players, such as Ericsson (ERICY) and Nokia (NOK) can't afford to miss the opportunity to supply 3G equipment to China. But the profit margins aren't likely to be great -- suggesting that winning deals in China could be more about maintaining market share and prestige than fattening the bottom line.

Smaller suppliers, meanwhile, see China's big buildout as perhaps their last best chance to grab a piece of the pie. Vendors such as Alcatel (ALA) and merger partner Lucent (LU), Nortel (NT), and Siemens/NEC (SI) (NIPNY), are relying on Chinese contracts to create sustainable positions in the worldwide 3G market. Then, of course, there are the rising Chinese stars, Huawei and ZTE, who are justified in expecting a cut of the deal from their own government.


Mere anticipation of these huge stakes is already feeding consolidation in telecom infrastructure. Witness the Alcatel/Lucent merger, which is driven largely by the quest for global scale, and Siemens' decision to offload its loss-making handset division to focus on equipment.

True, there were -- and still are -- healthy profits to be made from second-generation services and infrastructure (e.g GSM and the original CDMA from Qualcomm (QCOM). But the massive upfront investment required to get 3G off the ground has resulted in altogether less healthy balance sheets and forced companies to make dramatic moves to position themselves for the future.

Further complicating the picture is that the Chinese have chosen to develop their own 3G technology, known as TD-SCDMA. Apparently, they are not content to adopt the other two prevailing standards: W-CDMA, the putative successor to GSM; and Qualcomm's 3G variant, CDMA2000. This will give China its own intellectual property -- as opposed to it depending on, and paying for, someone else's. With a domestic market the size of China, the country can achieve economies of scale without looking beyond its own borders.


The big stumbling block, of course, is that the Chinese government still hasn't awarded 3G spectrum licenses. This could be because TD-SCDMA is still immature and China wants its homegrown technology to develop fully as a realistic alternative to W-CDMA and CDMA2000. Or perhaps government leaders are waiting to see whether third-generation mobile actually delivers on its over-hyped promise.

After all, 3G doesn't deliver much today that 2G -- especially enhanced versions such as GPRS and EDGE -- cannot. If most customer needs can be satisfied with 2G, why rush to lay out all that money on building new networks simply because the rest of the world thinks it's the right thing to do?

Whatever the reasons for the delay, by the time China's licensing takes place, W-CDMA will have cemented its place as the leading global 3G standard, available via the widest range of infrastructure and handset players. However, it's still likely that China will allot at least one license to the EVDO type of CDMA2000, since there are already two operational CDMA networks there, plus a number of influential vendors that are lobbying for such a license. For CDMA2000 backers, a license in the world's biggest cellular market is a must-have.


There's also no doubt that TD-SCDMA will be deployed in China, but we already know that it is a difficult technology to commercialize. This raises the question of whether it will permit viable services. But having said that -- and here it's back to politics again -- failure for the Chinese communications flagship is not an option. TD-SCDMA will generate its own domestic industry, regardless of whether it's the most appropriate technology for 3G.

The industry is already preparing itself for this eventuality: To carve out position in TD-SCDMA, we've already seen Ericsson hook up with ZTE, Siemens with Huawei, Nokia with China Putian, and Alcatel/Lucent with Datang. These couplings will be ready to exploit whatever opportunities TD-SCDMA produces.


The non-Chinese companies have entered these marriages not so much with an eye on the bottom line, but as an insurance policy. The pressure on pricing for 3G infrastructure and handsets is far greater than it was -- and is -- for 2G. When China makes its move, this pressure will increase. Vendors may find themselves in a Catch-22. To retain credibility and market share, it's essential that they be involved in the rollout of Chinese 3G, yet profit margins will not so much be squeezed, as suffocated. Some vendors could even find that they cannot afford to compete.

The future of the mobile industry is now being driven by the mass market. China is a huge economic force -- its very size, like India's, gives it tremendous market muscle. And while demographics may not allow 3G mobile penetration across the whole of Chinese or Indian society, it's only a matter of time until the economies of scale in these massive emerging markets give 3G the success that it has not achieved elsewhere.

Will that come at the expense of today's industry leaders? Whatever decisions are taken in China, and whenever they are made, they will dictate who will survive the 3G battle -- and who won't.