Talking Point, Telecoms

Generational change

China Mobile will invest Rmb1 trillion on 4G. The fight’s on to win contracts

Generational change

Speed is of the essence: huge investments in 4G networks could be made in China next year

Much media attention has been lavished on a fifth generation in recent weeks – in this case the fifth cohort of Party supremos to rule China since revolution in 1949. But executives at China Mobile have been much more focused on a fourth generation decision. Not of leaders, but the phone technology 4G. Last month, Minister of Industry and Information Technology (MIIT) Miao Yu announced that fourth-generation mobile licences are likely to be granted within a year. China Mobile in particular will be holding its breath. That’s because it has been lobbying the government to grant it a licence after spending years and investing billions of dollars in its 4G mobile technology standard, TD-LTE.

What is China Mobile’s role in a 4G world?

Let’s backtrack a little. In 2009 China Mobile was given the unenviable task of developing the homegrown 3G technology TD-SCDMA, while its two rivals China Unicom and China Telecom were given the globally accepted technologies known as WCDMA and CDMA 2000, respectively. Three years on, and China Mobile is still struggling to make a success of TD-SCMDA. It had signed up a total of 75.6 million 3G users as of the end of September, or roughly 11% of its 700 million subscriber base.

By contrast, about 28% of China Unicom’s smaller subscriber base are 3G users. China Mobile has long grumbled about being forced to develop the problem-plagued domestic technology on its own. In fact, analysts say it has made minimal efforts to promote its 3G network, preferring to leapfrog it and develop TD-LTE as the next-generation 4G standard.

4G networks will allow users to do more things with their mobile phones, streaming data more reliably and at higher speeds. But unlike TD-SCDMA, which is only used in China, TD-LTE is one of two key types of 4G technologies being adopted by global carriers (the other is FDD-LTE, which is favoured in the US). Japanese telecoms group SoftBank uses TD-LTE, for instance.

Technology-wise, TD-LTE has little to do with its predecessor TD-SCDMA. That means that TD-LTE can be rolled into the global LTE standard, and that other LTE handsets should work on Chinese TD-LTE networks. Industry experts say that roaming will be easier, for example.

Since 2010, China Mobile has been conducting large-scale trials on TD-LTE technology. The company expects to deploy 20,000 TD-LTE base stations this year and 200,000 next year in more than 100 major cities across the country. To demonstrate that the technology is stable and ready for launch, China Mobile will also roll out its 4G network in tech-savvy Hong Kong next month.

It has also been lobbying regulators to force at least one of the two other Chinese telco operators to use TD-LTE. With two mobile carriers, the thinking goes, economies of scale will develop more quickly, rendering it more attractive for telcos outside China to adopt the standard too, says CBN.

Economies of scale are also important in attracting the handset makers. The spectrum that governments will allocate to 4G services isn’t going to be consistent in every country. Studies have suggested that there could be as many as 38 different frequency bands in usage, forcing handset manufacturers to create different versions of their LTE devices. Of course, they will be keener to produce phones for networks with larger user bases.

What about China Unicom and China Telecom?

They hadn’t paid as much attention to 4G until recently because both believed that MIIT wouldn’t issue new licences until 2014 at the earliest.

But in light of the new timeline both mobile carriers are stepping up efforts to test their own 4G networks. China Telecom has begun building a trial network based on FDD-LTE instead of TD-LTE in the city of Guangzhou. China Unicom says its 4G trials began in February this year and its trial networks also seem based on the same FDD-LTE standard as China Telecom, according to media reports.

Analysts say this sudden rush to accelerate FDD-LTE trials appears to be a signal to the regulator that neither company wants to build TD-LTE networks when the licences are awarded, presumably because they want to avoid a marketplace likely to be shaped by their larger rival.

Sina Tech reported that senior executives from both telco operators reiterated this message on the sidelines of the 18th Party Congress in Beijing in early November. Chang Xiaobing, Unicom’s chief executive, even warned it would be a “bad decision” if the government granted a TD-LTE licence to his company.

So will TD-LTE succeed?

Regardless of how many telcos are given TD-LTE licences, China Mobile is focusing its resources on preventing TD-LTE from meeting the same fate as TD-SCDMA.

The “lethal” problem with TD-SCDMA, according to China Mobile’s chief executive Xi Guohua is the lack of devices that work on its 3G network.

For instance, Apple’s iPhone, which has already launched on the 3G networks of the other two carriers in China, hasn’t made its way to China Mobile yet. Learning from that lesson, China Mobile met with handset suppliers in September to discuss trials of the new 4G system. The China Daily reported the carrier is also trying to lure handset makers into committing to the standard by offering to buy 200,000 4G handsets and data cards in the fourth quarter.

Meanwhile the manufacturers will be hard-pressed to ignore the potential for China’s smartphone market. China Mobile has more than twice as many subscribers as the total population of the United States. Although 3G take-up has been disappointing, can companies like Samsung and Apple afford to miss out on a larger portion of Chinese users opting for 4G in future?

China Mobile has a lot riding on the transition to 4G too. Net profit grew 1.5% to Rmb62.2 billion ($9.7 billion) in the first six months of this year on revenues of Rmb266.5 billion. But revenue per user slipped from Rmb71 to Rmb67 in the same period, which the company blamed on more new subscribers using lower-value second-generation services. To boost revenue per user, China Mobile needs to grab a higher-end user base. According to HSBC’s latest report on Asia telecoms, roughly 20% of China Mobile’s customers delivers 80% of its revenue and profits. So deploying its TD-LTE network sooner rather than later should help it to capture more of this higher margin market.

“China Mobile’s hope lies in TD-LTE. The dawn is drawing near, and we have almost passed the dark night,” its boss Xi told the China Daily.

Who else is winning 4G contracts?

China Mobile is quoted in the Economic Information Daily as saying that it will allocate Rmb180 billion to 4G deployment in the coming 12 months. The newspaper reckons that further investment in handsets and infrastructure may push its total commitment above Rmb1 trillion.

International firms are also keen to cash in on the telecoms bonanza. In mid-November the chief executive of Nokia Siemens Networks (NSN) Rajeev Suri went to China to meet with government officials at MIIT to lobby for a bigger share of contracts when the TD-LTE licences are issued. Prior to Suri’s trip, Ericsson’s chief executive Hans Vestberg also arrived on a five-day visit. Again, he made the rounds at the appropriate government ministries, as well as the offices of the three mobile carriers, angling for a slice of China’s 4G pie, says ENN Weekly.

But Beijing has long favoured domestic players…

In recent years the Chinese government has pushed for equipment to be purchased from domestic manufacturers. Tenders for new telecom-infrastructure equipment have often been awarded to domestic firms like Huawei and ZTE, with analysts estimating that the two held a combined 50-60% share of China Mobile’s trial TD-LTE contracts for this year alone. On the other hand, Ericsson, NSN and Alcatel-Lucent were given no more than 15% of that business each.

It’s likely that the trend will continue. “When China Mobile launched the Phase 2 scale-trial in 10 cities recently, 70% of the order went to Huawei, ZTE and Datang [another state-owned equipment maker]. Ericsson grabbed 10% and Alcatel-Lucent also took 13%,” says one industry observer.

That should come as little surprise. The Chinese feel that Huawei and ZTE are being discriminated against in international markets, especially in the United States, where both face accusations of posing a security risk. American companies have been warned against buying their products, especially their networking equipment. Although it’s unclear whether Beijing’s following a deliberate policy of retaliation, unquestionably the central government can influence the purchasing decisions of state-backed telcos, says the Economic Observer.

Over at Cupertino in California, Apple will be paying close attention too (not least because its Chinese smartphone market share fell in the third quarter to 7% from 12.3% in the second quarter, according to Gartner). Its iPhone 5 is LTE compatible but not currently for the format that China Mobile wants to introduce. That may change in the future as LTE usage matures, and China Mobile launches a nationwide network of its own. If Apple wants its share price to hit $1,000, China Mobile’s 700 million subscribers can hardly be ignored…

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