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June 26, 2004

Rosalie Nelson, Research Director, Asia-Pacific

You have to hand it to the Chinese Government - they have managed to keep an entire industry permanently holding its breath in anticipation of 3G without expiring. Mobile vendors are falling over themselves to stake a claim in the world's biggest mobile market with 380 million subscribers and growing. Yet expected timescales for 3G licensing keep slipping ...2004 ... 2005 ... now apparently shelved' indefinitely, according to Ovum's discussions with policy makers.

Not that there isn't confusion about this. Different Chinese policy groups convey different messages, as they seek to influence what is ultimately a Government decision. For the record, China's regulatory body, the MII, said on 26th April that China was not in a hurry to issue 3G licences. Timing will be determined by the maturity of the technology and the market for 3G. Chinese operators will determine which 3G standards they implement by themselves. Originally four licenses were planned - now it may be three.

Yet should we be surprised at the Chinese Government's wariness to commit to 3G? The current pragmatism indicates recognition that China will benefit from delay - even taking into account the political, economic and industry drivers.

The Chinese Government wants to create a high-tech powerhouse - naturally. Yet the sheer scale of China's potential means it has already received billions in foreign investment. Witness recent announcements: Alcatel committing $145 million; Siemens investing a billion euros; Lucent spending $30 million; Nortel committing $200 million. Local partnerships means Chinese vendors are already benefiting - indeed local players like Huawei are now international vendors, and powerful competitors in their own right. It doesn't require a Government-mandated licensing agenda to further stimulate this.

A popular media view is that China's Government is delaying 3G to allow its homegrown 3G standard, TD-SCMDA to mature. It's true any delay will benefit this new technology, which is only now moving out of laboratory testing, with a prototype handset due later this year. Yet it is simplistic to say TD-SCDMA alone will drive 3G timescales. The Government is not going to impose a mass market rollout of a new network technology on China's operators; instead TD-SCDMA is currently being positioned as a complementary technology, possibly providing wireless-broadband type services, or coverage in areas otherwise hard to reach.

A more compelling argument for 3G in China is competition, with China's fixed players, China Telecom and China Netcom, both lobbying for a 3G license. Both operators currently only have a limited mobility service called 'Xiaolingtong' or 'Little Smart' which, while popular with over 40 million subscribers, has significant constraints in meeting the high-end mobility requirements of the enterprise market. China's fixed operators are also experiencing the impact of fixed to mobile voice substitution - more voice traffic is now carried over the mobile network than fixed.

However, while competitive needs are recognised, policy makers express concerns about over-capitalisation at a time market dynamics mean slowing topline revenue growth. China's strong mobile growth is now being driven by low-end subscribers, which has lead to price wars and declining ARPU. Capex remains high - China Mobile has a high capex to operating revenue ratio of 32%. The concern is whether a sustainable business case for new network rollout can be created when 3G demand is unproven.

Another driver for 3G capacity requirements are not currently seen as an issue in China. Neitherwill wireless data build the business case: China is still a market dominated by voice, which comprised 92% of China Mobile's revenues in 2003. This is in spite of the explosive growth in SMS to 124 billion messages in 2003.

Figure 1: China Mobile's subscribers, mobile data users and ARPU in 2003

Source: China Mobile's annual report.

Ovum believes a sustainable business case for 3G in China must be built on low cost, robust networks which can quickly provide scale and coverage, and also the provision of a range of low cost voice-centric handsets. That requires technological maturity and economies of scale, particularly for W-CDMA - it's not there yet, whatever the industry might say. On this basis, it makes sense for the Chinese Government to hedge its bets - the industry will have to hold its breath a bit longer.