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April 2004

China has the potential to become a 3G development powerhouse.  But will it happen?  And if so, when?

The biggest hit among China-made movies in 2003 was one called Cell Phone, about a love triangle involving a successful middle-aged TV talk show host, his wife and his lover.  Cell Phone did very well at the box office  —  and it sparked heated discussions nationwide about miscommunications and mistrust generated by mobile communications.

China has another love triangle, also about mobile communications.  This one involves China’s government, its domestic telecom industry, and the international telecom community.  In this case, however, the sex appeal is in third-generation mobile technologies  —  3G.

Glorious Potential

China has been having a steamy affair with mobile communications for some time now.  The government made telecommunications a key driver of economic development almost from the time that Deng Xiaoping, China’s then paramount leader, declared in 1978 that “To get rich is glorious!”

Modern telecom networks now blanket China, and mobile communications are commonplace.  There are now over 380 million mobile phone subscribers in China, more than the total number of fixed line subscribers.  Text messaging is wildly popular, growing from 90 billion messages sent in 2002 to 220 billion sent in 2003, according to Norson Telecom Consulting in Beijing.  Internet usage is also up strongly, from 58 million subscribers in 2002 to 80 million in 2003.  In addition, Chinese manufacturers and engineers now produce high quality mobile devices and equipment for a global market.

With such a huge market and high level of mobile interest and capability, China would appear to be in a perfect position to become a leader in 3G development.  Nevertheless, while 3G services are being rolled out this year in Europe and the United States and upgraded in Japan, China has yet to issue any 3G licenses.

What’s going on in China?

The conventional wisdom of industry observers is that the Chinese Ministry of Information Industry has delayed 3G technology trials and the issuance of 3G licenses in order to give China’s domestic industry  —  and its home-grown 3G technology, TD-SCDMA (Time Division Synchronous Code Division Multiple Access)  —  a chance to catch up with potential competition from foreign manufacturers and technologies.  Technology field trials have now started for the leading foreign technologies, W-CDMA and CDMA2000, with trials of TD-SCDMA to follow.  TD-SCDMA is unproven as yet, but its supporters claim that it is cheaper to deploy and has higher data transfer rates.  The trials are expected to be completed by September 2004, and statements by the MII suggest that licenses will be issued in early 2005.

In the meantime, industry speculation has centered on which operators will receive licenses, which technologies will be authorized, which operators may be required to use the TD-SCDMA, how much spectrum will be allocated, and what conditions will apply.  Observers expect that four operators will be licensed:  the two major mobile operators, China Mobile and China Unicom, and the two major fixed line operators, China Telecom and China Netcom.  It is anticipated that China Mobile, which operates extensive GSM networks, will be permitted to use the W-CDMA standard for 3G, and that China Unicom, which has a large CDMA network, will be able to use the CDMA2000 standard for 3G.  China Telecom and China Netcom, which would be building all-new mobile networks, are expected to receive licenses primarily for TD-SCDMA.  But nothing is clear yet, says Duncan Clark, managing director of BDA China Ltd., a consulting firm in Beijing.  “Those who talk don’t know, and those who know don’t talk,” he says.

Key to the Realm, and a Bonus Too

The viability of TD-SCDMA is the wild card in this deck, and it is the key to China’s potential as a 3G player.  If it is successful, China’s 3G operators and domestic manufacturers will be able to avoid substantial royalty payments to foreign technology licensors such as Qualcomm, and it will be full speed ahead for their 3G efforts.  The stakes are high indeed.  The developers of TD-SCDMA  —  Datang Group and Siemens AG  —  have invested heavily in the technology, as has a consortium of companies that includes Texas Instruments, Huawei Technologies, ZTE Corp. and Legend Group.

While the industrial policy that has driven TD-SCDMA is focused on developing the best technology for 3G (and, yes, a technology that protects and promotes Chinese interests), its success could someday mean substantial export value for China in the form of technology licensing and product manufacturing.  According to Peter Lovelock, director of MFC Insight, a telecom research consultancy in Beijing, the commercial viability of TD-SCDMA was a secondary concern of China’s industrial policy makers.  “But if it turns out that TD-SCDMA is also a commercial success for China, it will be a remarkable bonus,” he says.

Lovers’ Quarrels

Backers of other 3G technologies are understandably concerned that Chinese authorities will favor TD-SCDMA at the expense of their own technologies or will impose unreasonable requirements.  Concerns mounted when the government mandated in December 2003 that Wi-Fi products produced for the China market must comply with a new Chinese encryption standard by June 2004 and that vendors must partner with one or more of 24 designated Chinese manufacturers to incorporate the standard.  Apprehension rose in March 2004 when China’s State Development and Reform Commission announced that it expected to commit “considerable” funds to the development and commercialization of TD-SCDMA this year.

As a result of intense lobbying in Washington, these two issues  —  over imposition of China’s Wi-Fi encryption and TD-SCDMA standards  —  were addressed at the annual meeting of the U.S.-China Joint Commission on Commerce and Trade on April 21 in Shanghai.  (The joint commission was established by the two governments in 1983 to resolve trade concerns and promote bilateral commercial opportunities.)  The outcome of this year’s meeting on these two issues was that China agreed (1) to “suspend indefinitely” its Wi-Fi encryption requirement and (2) to “support technology neutrality” with respect to 3G.  As to 3G, China stated that it will permit telecom service providers in China to make their own choices as to which standard to adopt and that Chinese regulators will not be involved in negotiating royalty payment term with the relevant intellectual property rights holders.

These promises are no assurance that TD-SCDMA will not somehow receive favored treatment in China.  However, Clark believes that favoritism issues will be resolved by accommodation on the part of both the government and foreign interests.  “China wants the best technology, and foreign vendors want a piece of China’s big market,” he says.  As for the concern that government favoritism might diminish foreign participation in 3G in China, Lovelock adds, “Are you kidding?  The world’s biggest and most valuable market?  No, no diminishing.”

Unrequited Love?

But the larger question might be whether 3G has a future in China or anywhere.  “Where is the market?  Where is the revenue?” asks Kaili Kan, a professor at Beijing University of Posts and Telecommunications and formerly in charge of strategic research for China’s telecommunications sector.  Kan notes that we are in an age of rapidly evolving technologies and applications, and he points to the fate of ISDN (Integrated Services Digital Network), which 20 years ago was as hot as 3G is now but soon became obsolete and was superseded by DSL, cable and WLAN.  “I believe China should just sit on the sidelines and watch how 3G develops in Europe, Japan and other parts of the world.  This way, China could avoid costly mistakes and wait for the real future of broadband wireless to appear, which I seriously doubt will be among W-CDMA, CDMA2000 and TD-SCDMA.”

In China’s 3G love triangle, the government, the domestic telecom industry and the international telecom community are currently hotly engaged and nervously awaiting the next event to impact their relationships.  The outcome of the drama may become apparent later this year after results of the technology trials emerge.

On the other hand, if Kan is right, perhaps the matter will be resolved by abstinence.

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