China Looks Set for Telecom Industry Restructuring

Rumors of a restructuring build as the massive mainland industry eagerly awaits the debut of a homegrown 3G mobile standard

On a quiet street off Renmin Road in the heart of Shanghai lies a China Mobile "Experience Center," where consumers can catch a glimpse of the future of telecom.

A pastel blue façade in a sea of aging, weather-beaten cement and brick structures, this center—and those like it in other major cities—is there to generate a buzz about China's homegrown third-generation (3G) mobile standard, TD-SCDMA. The center's sleek, state-of-the-art interior comprises several large areas showcasing TD-SCDMA handsets, and visitors are invited to pick up the phones and play, exploring the wonders of a new era in communications.

When CHINA ECONOMIC REVIEW dropped by, however, the center was empty save for a security guard and three of the staff. People passed by without casting a single glance at the storefront.

As 3G has yet to be launched in China, none of the phones or services could be purchased. The "Experience Center" was not so much a store as a museum of future possibilities.

"The technology is not perfect yet so there have been no big promotions," one of the staff explained, when asked why business was so light.

The waiting game

China has been waiting a long time for policymakers to agree that TD-SCDMA is ready for commercial launch and issue operating licenses for it and other 3G technologies. But in recent months the drumbeat has quickened with speculation that the telecom industry may be on the cusp of a comprehensive restructuring that will pave the way for 3G.

Handset makers, equipment vendors, wireless value-added service providers and China's own telecom network operators have been itching for a piece of the action.

"The restructuring will provide more opportunities for vendors like us," said David Tang vice president of Greater China sales for Nokia. He added that 3G could open doors to software and services as well as handsets and equipment.

The potential size of these opportunities is enormous. China is the world's largest mobile phone market with over 550 million users as of the end of January, according to the Ministry of Information Industry (MII). China Mobile's 380 million-strong user base is 140 million larger than that of the US as a whole.

Analysys International, a Beijing-based tech research firm, estimates China will have 30 million 3G users by 2011. Around 17 million of them will be using TD-SCDMA—small in terms of the country's mobile market as a whole but significant if the network is running in part on Chinese technology.

"I think the restructuring rumors are starting to rise to a fever pitch," said Mark Natkin, managing director of Beijing-based tech research house Marbridge Consulting. "I think there's a very real plan on the table and now it's a matter of ironing out some final details."

The rumored scenario is as follows: China Mobile will merge with small fixed-line firm China Tietong. Fixed-line giant China Telecom will acquire China Unicom's CDMA network, while the remainder of Unicom will merge with fixed-line carrier China Netcom and operate a GSM network. China Satcom will join a national aerospace consortium.

These mergers would occur at the parent company level, not between the companies' listed arms.

The three full-service telecom operators—each with a mobile and fixed-line business—would then be primed to receive licenses for one of three 3G standards. A CDMA2000 license would be given to China Telecom. A WCDMA license would go to the new Netcom/Unicom entity. China Mobile would run a network based on TD-SCDMA, the least mature of the technologies.

'Not shining'

The technology is being trialed in 10 cities including Beijing and Shanghai. Updates from the trials are a closely guarded secret, but one analyst described TD-SCDMA's performance as "not shining."

There are similar quality concerns regarding TD-SCDMA handsets. Dr Wang Jing, secretary-general of the TD-SCDMA Forum, a community for companies interested in the Chinese-developed standard, said that the handsets and chips have yet to reach China Mobile's features and functionality requirements.

There is also much to be desired in terms of stability and performance, he added.

According to state media reports, 11 companies have received licenses to make TD-SCDMA handsets. But the big boys are reluctant to commit themselves to mass producing better quality models while the licenses remain unissued. This may be starting to change—Tang confirmed that Nokia has begun developing TD-SCDMA handsets—but this still leaves Beijing under pressure.

The government pledged to have fully operational 3G networks ready for this summer's Olympic Games, and China Mobile is said to have built 3,000 TD-SCDMA base stations throughout Beijing in preparation for the event. There isn't much time left to put all the remaining pieces in place.

Nonetheless, the TD-SCDMA Forum's Wang believes—"for sure"—that some kind of network based on the technology will be in place come August 8.

"We all believe there is no substantial technical difficulty that threatens the deployment of this network," he said.

Soft entry

Most analysts expect a soft launch of the technology in Beijing as a face-saving measure for the games.

"Whether or not TD-SCDMA is ready for a commercial launch depends upon the scale of the launch," said Wang Jinjin, a telecom analyst with investment bank UBS in Hong Kong. "Realistically, the technology is still one to two years behind its peers, WCDMA and CDMA2000."

CHINA ECONOMIC REVIEW sampled some TD-SCDMA phones and services at the China Mobile "Experience Center" in Shanghai with mixed results.

The handset models were nothing to write home about in terms of design. A mobile television service offered a wide variety of live television shows, though the reception was choppy at times. It was possible to make a video phone call to one of the center's employees on the other side of the building—and the quality was surprisingly good.

However, as there is no TD-SCDMA network available in Shanghai—all services had to be run through an internet connection, which meant that the phones used were mounted to computers.

In this sense, the "Experience Center" highlights the real problem with a commercial launch of TD-SCDMA: While the technology may work well in a controlled environment, nothing can prepare it for the real deal—millions of users with different phone models and software all attempting to access the network.

As WCDMA and CDMA2000 have had several years of market exposure in countries such as the US, Korea and Japan, many of the inevitable unforeseen glitches that occur in a real world commercial launch have been worked out.

The opaque process by which China Mobile has apparently been pushed into accepting TD-SCDMA is also cause for concern. Gu Wenjie, head of research at the US Information Technology Office (USITO) in Beijing, argues that it raises questions about China's attitude toward fair trade and corporate transparency.

Gu also believes the delay in issuing 3G licenses in order to give TD-SCDMA time to mature means that foreign technologies are being treated unfairly.

"China has agreed on numerous occasions to observe the principle of technology neutrality," he said. "But in 3G we find that there's still room for improvement. We keep encouraging the Chinese government to be more technology-neutral and to introduce the best technologies to benefit subscribers instead of protecting some local Chinese interest groups."

Export value

Whatever measures China may employ to ensure companies accept the technology within its borders, they won't be replicated overseas. The immaturity of TD-SCDMA—and its secretive development process—is hardly likely to encourage other countries to import the technology.

"To me, it's a very localized standard; I don't see the world embracing TD-SCDMA," said Simon Leung, president of Motorola Asia Pacific. "We chose to participate in (TD-SCDMA) but we didn't see the need to invest a lot in it. We partnered with several different people in China so we could supply the equipment for the devices if we want to."

But Leung isn't ready to write off the standard. Rather, he sees TD-SCDMA as "more of an interim technology" that could ultimately become one of the building blocks for a fourth generation mobile technology (4G) standard.

China Mobile recently announced that it would participate in 4G trials being carried out by Vodafone and Verizon Wireless. The trials will focus on LTE (Long Term Evolution) in both the FDD and TDD band. Given that TD-SCDMA already uses TDD, the theory is that the Chinese standard might harmonize with LTE in this band.

"TD-SCDMA is a technical achievement that shouldn't be dismissed out of hand," said David Wolf, president of media, tech and telecom consultancy Wolf Group Asia. "But from a commercial standpoint, all it represents is that when 4G comes, China has a place at the table that it never would have had without TD-SCDMA. It makes China a player in 4G, but it won't make it a player in 3G."

News of the 4G trials, together with statements from the National Development and Reform Commission that it has allocated an unspecified amount of funding for 4G development, has even led to speculation that China could skip 3G entirely. Marbridge's Natkin says this fits in with talk among mobile operators and telecom officials in Beijing that China is too far behind the pack on 3G but has a shot at being competitive in 4G.

However, Wang of UBS is quick to dismisses such rumors as premature. She observes that 4G is still years away from a commercial launch.

"Some investors have asked me if China could skip 3G and move into 4G directly—I believe the chances are low," Wang said. "[But I also believe] that 3G will only be a transitional technology and on a relatively small scale in China."

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