Telecoms

Generational change

Award of 4G licences a boon for Apple as well as China Mobile

iPhone5Sgold w

When Alexander Graham Bell spoke the first ever words on a telephone, they were “Mr Watson, come here, I want to see you”. That sort of dour and no-nonsense approach has passed down the generations. The heirs to Bell’s corporate legacy – i.e. those operating the world’s telecoms networks – aren’t usually an excitable bunch either.

But at China Mobile this week the excitement was palpably obvious to anyone who bothered to look at the company’s website.

After months of anticipation and delay, the licences for a revolutionary new mobile phone network are finally being released.

Or as the slogan on the China Mobile site celebrated with barely concealed glee (and no small measure of management relief): “4G is here!”

As we reported in issue 217, China Mobile has been counting on 4G to grow its revenue base by replacing its homegrown and technically inferior 3G technology TD-SCDMA.

China Mobile needs to lure subscribers to more profitable data services. In October, it reported an 8.7% drop in third quarter net income to Rmb28.4 billion ($4.67 billion) – well below analyst expectations of Rmb30.9 billion.

So it was good news last week when Chinese regulators finally awarded the first batch of 4G licences to China Mobile, China Telecom and China Unicom. This time round, all three operators were awarded the right to operate the homegrown 4G technology TD-LTE. But China Mobile is the best positioned to take advantage, having built and tested the network across the country. In contrast, its two rivals aren’t expected to launch 4G services until they are granted licences for the FDD-LTE standard (a more mature technology favoured in the US). That ought to happen next year, but the delay gives China Mobile a head start in grabbing new subscribers for 4G.

The award of the 4G licences is good news for iPhone maker Apple too. The Wall Street Journal reports that China Mobile will start taking pre-orders for Apple’s new iPhone 5 this week (the iPhone didn’t work on the TD-SCDMA 3G standard but is compatible with TD-LTE). Analysts say that iPhone sales through China Mobile – which has over 750 million subscribers – could bring as much as $10 billion in additional Chinese revenues for Apple.

Other US tech firms are in need of some holiday cheer from China too. Cisco, for instance, has reported that sales in China have dropped since June, when former NSA technician Edward Snowden revealed that US spies had monitored data traffic passing through the company’s routers in China. Cisco has denied the charge but sales in China plummeted 18% in the third quarter of this year.

IBM also claims that contracts have taken a hit amid spying accusations, while Microsoft also singled out China as the company’s weakest performing market during the September quarter.

Chipmaker Qualcomm has also revealed that it is being investigated by the NDRC, China’s top economic planning body, for alleged anti-trust violations.

“We hope and demand that relevant foreign companies respect China’s laws,” said Foreign Ministry spokesman Qin Gang, when asked about the accusations against Cisco.

“As the Chinese government we, of course, have an obligation, a responsibility, to protect the country’s security.”

WiC has written previously about the sense of schadenfreude in China following the Snowden revelations – which came in the wake of years of accusations on Capitol Hill that Chinese equipment makers Huawei and ZTE are linked to the military.

Washington is maintaining this line too – it emerged this month that the Americans have warned their South Korean allies against buying Huawei’s telecoms infrastructure for national security reasons – but Beijing is now using the same reasoning to urge Chinese companies to buy locally too.

Although it hasn’t prohibited state firms from purchasing Western-made technology, the government has sent a clear message to Chinese companies to ‘buy China’, that is, choosing China-made equipment first, says Century Weekly.

“I think in general China wants to favour local brands; they feel their technology is getting better. Snowden has just caused this to accelerate incrementally,” an industry insider told the newspaper.

So the timing of the award of the 4G licences and the ‘buy-local’ push looks like giving domestic network providers like ZTE and Huawei a major commercial boost, with PCWorld reporting that the three state-owned telecom carriers have already cancelled orders to buy from overseas, preferring domestic suppliers.

Elsewhere, there is pressure on foreign firm to reduce the profit margins they are earning in China. Take the Qualcomm anti-trust review, which some analysts think is a negotiating tactic. The American firm earns almost half of its sales in China, where its chipsets are widely used in telecoms products. The whisper is that the investigation is designed to encourage Qualcomm to accepting lower royalties for licencing its technology to Chinese customers, again at moment designed to coincide with the rollout of 4G.

Obviously, American tech firms don’t want to miss out on the 4G boom so they have been staging a PR fightback against their own government’s snooping techniques by forming a lobbying body called the Reform Government Surveillance group.

As the BBC points out: “The fact that eight technology giants which are normally bitter rivals have united to condemn the extent of government surveillance shows just how strongly they feel.”

The group will be hoping that the Chinese interpret the move in a similar way. According to a report published two weeks ago by the Information Technology and Innovation Group – a research body whose members include IBM and Intel – the backlash against NSA spying could cost US tech firms $35 billion in lost revenues to 2016 “because of doubts about the security of information on their systems”.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.