Home team advantage?

Domestic handset and equipment makers hope to benefit from 3G

Home team advantage?

Phones with bells and whistles

According to an old Chinese proverb, the first generation makes the wealth, and the third generation destroys it. China will be hoping this rule of thumb doesn’t apply to third generation mobile telephony, or 3G as it is better known.

After years developing its own homegrown 3G network – via a proprietary technology called TD-SCDMA – the Chinese government finally issued a TD-SCMDA license to China Mobile in early January, The timing couldn’t have been better. In light of the economic slowdown, the 3G network will offer a welcome boost: it will require over Rmb200 billion ($29 billion) in investment. Mainland telecom equipment makers such as ZTE and Huawei are expected to get the big orders.

For handset makers, the 3G market has created a new playing field. After years of lagging behind foreign handset manufacturers in the 2G market (i.e. GSM and CDMA), domestic handset makers like Hisense and Zhongxing have been honing their TD-technology and have already released a slew of TD-cellphones. So far, LG and Samsung are the only two foreign manufacturers producing TD-handsets. Nokia has announced that it will start producing TD-compatible phones but no prototypes have been unveiled yet.

However, it remains unclear whether TD will rival foreign 3G technologies (W-CDMA, which was developed in Japan and Europe, and which has been deployed in 55 countries and American-developed CDMA2000 which is in 58). Indeed, rather alarmingly, China Mobile has been testing TD in the last year and reports the technology is still not ready. Wang Jianzhou, the firm’s CEO, said in an interview with Beijing News that trial users have complained of technology glitches, and dropped calls. Worse yet, the telecom operator is having a hard time integrating its core GSM network with TD-SCDMA.

But getting the fledging technology to work is now China Mobile’s problem. Being the dominant player in the country’s telecom industry, China Mobile will be the only operator given the TD-license. With a subscriber base of 415 million and a market share of over 70%, China Mobile has the most muscle of any carrier in China – hence the decision to foist it with an undertaking of this scale. Meanwhile, the smaller operators China Unicom and China Telecom will be given licenses for W-CDMA and CDMA2000 respectively.

Some industry observers wonder if the move to TD-SCDMA will damage China Mobile’s existing market share. An internet poll at suggested 38% of 246,000 respondents would subscribe to China Mobile’s TD-SCDMDA service, whereas 38% said they would opt for China Telecom’s CMDA2000 and 24% for China Unicom’s W-CDMA.

So it sounds like there is still some convincing to do. The telecom operator predicts that 100 million subscribers will make the switch in the next three years. Nonetheless, with 614 million mobile accounts in the country, 3G promises enormous opportunities for everyone in the industry. As a vote of confidence, Telstra, Australia’s largest telecommunication company, recently announced the acquisition of two Chinese cellphone content and online music businesses, banking on the millions of subscribers who will be clamouring for 3G data services.

Many are hopeful that the 3G endeavour will be another example of China’s growing techno-clout. China thinks its own standard could be a winner and there is perhaps some mercantilist logic in its approach. As the world’s biggest domestic market, why pay royalties overseas when you can build your own, and perhaps even eventually sell that overseas too?

But then, a bit like the proverbial third generation family member, it could just prove wasteful. Juniper Research, a specialist telecoms consultancy, forecasts TD will get just a 15% market share of the Chinese market versus 65% for W-CDMA, and 20% for CDMA2000.

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