Generation gap

China looks set to spend $249 billion on its new 5G network


Huawei plans 5G trial next year

Many people are familiar with the concept of peak oil. Far fewer have heard about peak data, or rather the Shannon-Hartley theorem, which posits the theoretical amount of error-free data that can be transmitted over a specified bandwidth.

It is important because emerging technologies such as autonomous driving, remote surgery, virtual reality and the internet-of-things all require vast amounts of data to be transmitted at very high speeds to work properly.

The falling cost of technology also means hundreds of millions more people will be able to own their own smartphones over the coming decade. According to Cisco, global mobile data traffic will grow eightfold between 2015 and 2020 to 30.6 exabytes per month.

But there is a hard limit on the bandwidth of lower radio frequencies, which are the best medium for transmitting data with low levels of interference and loss. Nearly all of the frequency has been used up. The mobile telecommunications sector, for example, has already eaten up the 400Mhz to 1Ghz range of the 300Mhz to 3Ghz spectrum that has been allocated by the World Radiocommunication Conference.

5G is supposed to change all this by moving the mobile telecommunications industry onto higher radio frequencies for the first time. But the transition is a huge technical challenge and far more problematic than the upgrades to 3G and 4G proved. The benefits could be enormous but so could the costs.

A study by China’s information ministry calculates that the country’s 5G rollout could cost $249 billion, compared to $117 billion for 4G. Others believe the figure is far harder to quantify and could be even higher.

As a result, analysts have been warning investors against getting too carried away with 5G-related hype. Wireless equipment manufacturer ZTE, for instance, has seen its share price rise about 35% since March. The more sceptical view is that the 5G transition could take a lot longer than many industry participants anticipate, particularly if the costs make it uneconomic for listed telecom firms to proceed at breakneck speed.

However, cost appears to be less of a concern to the Chinese government, which wants its companies to be leading global players in 5G R&D. Chinese entities like Huawei hold the lion’s share of the world’s 5G-related patents. The country’s state-directed economic model also means the government is ideally placed to coordinate its leading operators to absorb potentially massive costs that may act as a short-term drag, but will provide a long-term financial windfall. The information ministry reckons the 5G market could account for 3.2% of China’s entire GDP from 2025.

China also appears to have learned the lessons of trying to go it alone and develop its own technological standards as it did for 3G (known as TD-SCDMA). It ended up way behind its competitors and as recently as 2014, China ranked a lowly 86 out of 170 countries and territories on the ICT Development Index.

The Chinese were five years behind the South Koreans in allocating 3G licences in 2009 and three years behind with 4G in 2014.

Korea still aims to lead the world with 5G. Samsung, for example, hopes to have a 5G trial service in operation for the Winter Olympics in Pyeongchang in February 2018.

But this time round, China plans to be months rather than years behind its neighbour. Huawei has likewise planned for a 5G trial service for the 2018 World Cup in Moscow.

In 2013, the Chinese government started preparing the country for 5G by establishing an IMT-2020 taskforce that bridges the Ministry of Industry and Information Technology (MIIT), the National Development Reform Commission (NDRC) and the Ministry of Science and Technology.

China’s Communication Information News says “China can occupy a place in 5G R&D because it is occurring simultaneously across the world. We can be an industry leader rather than just a follower like before.”

The specialist website comments that 5G standards are still in their early stages of development and acknowledges China still has some way to go before it can truly become a world beater. In particular, its technology still lags along key parts of the industry supply chain, such as computer chips. It notes that Qualcomm has already developed a 5G modem chipset (Snapdragon X50) and has led developments in LDPC (low density parity check coding).

Earlier this month, the Chinese government began consultations on usage of higher frequency bandwidths (3.3Ghz – 3.6Ghz; 4.8 – 5Ghz; 24.75 – 27.5Ghz and 37 – 42.5Ghz). This aligns the country with the UN’s International Telecommunications Union Radiocommunication (ITU-R), which coordinates the world’s various 5G stakeholders.

This higher frequency spectrum, known as millimetre wave (mmW), has extremely wide bandwidths, which facilitate huge data transfers. But in other ways they are not as efficient as lower ultra high frequency (UHF) radio waves. There are proportionally more data errors at higher frequencies because the signal cannot be propagated as well. For instance, a building can block a signal at 2.5Ghz on the spectrum. Out at 30Ghz, raindrops are enough to impede one.

One solution is to create super dense cell networks, which shorten the cell radius and reduce interference. Historically, one base station served multiple mobile phone users. These days base stations are augmented by large numbers of small cells, which act as base stations in their own right. The key is to increase their density – a mobile telecoms network equivalent of Moore’s Law.

Another solution involves designing networks along similar lines to cloud computing (cloud-RAN) using multiple antennae called Remote Radio Heads. China Mobile tested cloud-RAN in Zhuhai last year and reported a 30% reduction in potential capex costs.

China Mobile recently said it expects the country’s 5G standards to be determined in 2019, facilitating commercial launch in 2020. China Unicom and China Telecom also hope to deploy around the same time.

Some analysts remain sceptical but believe the move along the radio spectrum will open up new possibilities such as initially deploying 5G hotspots at stadiums and festivals where data demands are concentrated and huge.

Aside from the unclear costs of implementing 5G, the picture in China is more complicated than other countries because the layout of the telecommunications sector is constantly shifting. As we reported in WiC366, the three carriers, led by China Unicom, are in the process of introducing mixed ownership, which may not only transform their shareholding structures, but also introduce new technology partners.

It is also not yet clear what role China Tower Corp will play in rolling out 5G. The three carriers hived off their telecom towers to the new entity in 2015 and it is currently preparing to go public in Hong Kong. Initially, analysts valued China Tower Corp around the Rmb400 billion to Rmb600 billion mark (the tower assets had been valued at Rmb231.4 billion in October 2015). More recent estimates peg the company with an Rmb340 billion valuation.

This will give it a very similar market capitalisation to New York-listed American Tower. However, the two are very different animals.

American Tower now derives a fair slug of its revenues from overseas. The mature US market also provides the company with a high degree of recurring income.

In China, the three operators have only just started sharing their towers with each other, which means China Tower has stronger growth prospects. Any increase in the sharing ratio benefits its bottom line. China Tower is also currently a monopoly operator with many more towers (1.5 million) than the rest of the world’s listed operators combined. It is entirely possible the Chinese government may decide to defray some of the country’s high 5G costs by telling the three telcos to share more than just their passive infrastructure. And it is also possible that China Tower Corp is in the process of transforming into another kind of company altogether.

It has previously announced plans to compete against State Grid Corp in building a national charging network for electric cars. Within the next decade, it may become far more than a conduit for transferring data.

Meanwhile the Financial Times cautioned this week that investing in Chinese telco stocks now looked riskier given the suspicion that they would foot much of the 5G bill. The newspaper cited one analyst’s view that China Unicom could see its market value reduced 21% because of the enormous capex required.

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