Wireless in China Today

A UK Trade & Investment Mission to China and Korea

Wireless in China Today "From Little Red Book to Little Red Phone"

Stephen HopeOrange Labs


Contents

The Chinese Telecom Service Market

3G – What, How Much and When? The 2008 Olympics Technology Neutrality

Mobile TV WiMax

Impact Assessment Conclusion


中国电信China Telecom,

中国网通

Mobile 457m Subs

中国联通China Unicom,

Fixed 373m Subs

中国铁通、中国卫星等 Others,

中国移动China Mobile,

China: Telecom Service Market

China TieTong

- from 2004 formerly


中国移动ChinaMobile68 (63)%

中国联通ChinaUnicom32 (37)%

China: Mobile Market (As at Mar 2007 [source MII]. Figures in brackets 2004 figures at first mission)

109(83)m GSM Subs

38(25)m CDMA Subs

316(188)m GSM Subs

There are also ~91(50)m PHS Subscribers as Fixed Line Wireless extensions (China Telecom and China Netcom


A Changing but still Growing Market China Mobile had 45% of total telecom service revenue

($85Bn) in 2006. Q1 07 19.5% Revenue Growth for China Mobile vs 4.2 %

China Unicom

Growing mobile-fixed substitution impacting on China Telecom and China Netcom the Fixed Operators Revenue Growth 2.2% and 0.2% respectively

Currently 91(50 in 2004)m PHS Subscriber base operated as Fixed Line Wireless extensions by China Telecom and China Netcom predicted to shrinkshrink to 3m by 2011 as Mobile Operators have

aggressively implemented CPP (Calling Party Pays). Capital Investment reduced in preparation for Broadband and

new 3G licences The previous model of both Called and Calling Party Pays –

the norm in 2004 – was the key reason for the growth of the PHS market.


A Changing but still Growing Market

The number of CDMA subscribers remained static in 2006

China Unicom likely to spin off its CDMA assets and sell them to China Telecom in 2008

Net Subscriber additions still at 5 to 6 million per month - 80% China Mobile – 50% Rural

Increasing Rural Market Penetration through low cost Increasing Rural Market Penetration through low cost handsets is key for subscriber growth handsets is key for subscriber growth


3G – What, How Much and WhenThe Waiting Game

In 2004 3G Award of Licences was widely expected within the next year……. Speculation was that China Mobile would receive

W-CDMA, China Unicom CDMA-2000 and China

Telecom a TD-SCDMA Licence.

In 2007 3G Licences ... still awaited… A deliberate government strategy to encourage the

development of Chinese IPR? An expected Leadership reshuffle may further delay licence

awards until 2008

Large scale trials in all the 3 technologies.


The rise of TD-SCDMA (1)

Much of the IPR in TD-SCDMA is owned by Datang, in partnership with Siemens

In 2004 early trials TD-SCDMA significantly lagged other standards in commercialisation

Slow take up of 3G worldwide allowed external investment to be maintained to develop own standards and IPR rather than paying Qualcomm etc

In 2007 the picture has changed…..


The rise of TD-SCDMA (2)

"China already has 3G (TD-SCDMA) Networks deployed“

The trial networks have been extended TD-SCDMA Forum stated Feb 2007 that 20000 users with more

than 40 different terminals from 14 companies have participated in the 1st round of trials

2nd round will use significantly higher numbers

A key driver is the 2008 Olympics


The 2008 (Political?) Olympics (1)

January 2007 - MII announced TD-SCDMA had passed a series of tests and selected as a 3G technology

China Mobile have been asked by the Chinese Government to build and operate a TD-SCDMA network in 10 cities including the 6 Olympic Games Cities.

This fulfils the Chinese Government pledge for 3G coverage for the Olympics

During the time of the 2007 mission infrastructure contracts were awarded Datang 27% and ZTE 46%

($414M ) of contracts to date Other players are shown in the

table


The 2008 (Political?) Olympics (2)

Announcement in July 2007 by China Potevio (born out of China Putian, largest Chinese handset manufacturer and IT manufacturer) of successful handover between 3G TD-SCDMA and 2G GSM (both packet- and circuit- switched) will improve the potential business model for China Mobile

This TD-SCDMA deployment is without a licence.

Any future 3G Licence award is seen as being a separate activity from the "Trial"

It is anticipated that China Mobile will receive a licence for TD-SCDMA

…….but NO timescales for award of 3G licences


Technology Neutrality & Licensing

EU Commissioner Viviane Redding reported assurances that China would be 3G technology neutral.

MII announced W-CDMA and CDMA treated equally and will be used in China

More than one 3G license would be issued

Operators allowed to choose which standards they wish to use

Government would still determine the number of licences issued.

Terms of WTO membership appear to have had some impact

…….but NO timescales for award of 3G licences


Market Demand for 3G Services?

In 2004 it was predicted that Mobile Demand would plateau at 500m out of 1.3Bn population due low income levels in rural areas.

Current Mobile Market as of June 2007 is 451 million GSM subscribers and 38 million CDMA

CDMA subscribers still showing a slight but not dramatic increase in numbers

GSM subscribers still increasing at 5m per month although the relative rate of increase has slowed !

Mobile Operators particularly, China Mobile, have aggressively addressed Rural Areas through the introduction of low cost handsets and cheaper tariffs to maintain the growth.



Also in 2004 Voice the Key Revenue Driver SMS the main Data Revenue Driver

In 2007 mobile ARPU levels at around 8.5 – 9 Euro have not increased over the past two years, Voice and SMS still being a key driver but the Chinese Telecom market as a whole saw a 34% increase in non-voice service income in 2006

As with Europe, the mobile industry needs to further increase data usage in a static ARPU market for long-term growth, although subscriber numbers are still increasing

The Olympics and 3G offers a significant opportunity for encouraging usage of data services across the full subscriber base

China Mobile have announced some 34 new Olympic Services and working with many partners.



China Centre for Information Industry Development published optimistic survey results in December 2006

77% of China Mobile's customers were keen to buy 3G Handsets when they become available citing Mobile TV, Video Calls and Mobile Internet as attractive services.

BUT

76% of those surveyed buy handsets worth less than 2500 Yuan ($320) with 25% going for handsets less than 1000 Yuan ($128)

Less than 24% would buy a handset over 2500 Yuan


Market Demand for 3G Services? THEREFORE

The cost of the handset from both an operator and end user perspective will have a significant impact on the economics of supplying a successful 3G service without some form of handset subsidy business model

The introduction of the Calling Party Pays model with cheaper tariffs and low cost handset is succeeding in gaining a greater subscriber base from the rural market but these may not be able to afford the 3G handset without such a subsidy

HOWEVER

MII has recently issued 3G Video Telephony interoperability standards for TD-SCDMA and W-CDMA handsets and is expected to extend these to the PSTN and ISDN. This should significantly drive revenues, particularly for those living in the cities and wishing to communicate with their families in rural areas

This standardisation activity is an example that Europe could follow !


Mobile TV

Regulatory Structure MII – Ministry of Information and Industry SARFT – State Administration of Radio Film and

Television


Mobile TV

Like their European counterparts the Chinese Telecoms Operators view services through convergence of telecoms and broadcast as an important market and aim to introduce TV over 3G. Other standards being reviewed

TV to the Mobile competes within a regulatory structure that protects the dominance of cable and investment in digital TV SARFT controls IPTV and content in mass media MII controls Telecoms MII and SARFT at times appear to act in competition

Telecoms Operators must partner with a licensed media companies

The Chinese Government trying to gain cooperation to ensure Olympics opportunities are realised


WiMAX – A Market in China, A Market for China? (1)

WiMAX products figure strongly in the portfolio of the major Chinese Infrastructure manufacturer such as Huawei and ZTE, like their other international counterparts, for international export

Market forecasts from the MII suggest the Chinese Broadband Wireless Access market will comprise some 14 million users with a manufacturing market value of 25 Billion RMB

The operators are mostly expected to be Local and National Government, Medical and Emergency Services - rather than the personal WiBro concept in S.Korea

Whilst the MII presents a vision of WiMAX and 3G TD-SCDMA as complementary technologies, the informal view suggested that, unlike S.Korea where the Govt led the drive for WiBro, there will not be a policy that could undermine 3G market growth



An interesting SME Jushri which is a spin-off from the Shanghai Wireless Research Centre, well supported by both local and national govt, is set up to develop and industrialise BWA, first fixed and then upgrading to mobile access

Working with China Netcom ‘to deploy WiMAX equipment for the 2008 Olympics’

Their two target markets include Metropolitan Area Networks and the Emergency Services, plus, in the longer term, Interactive Broadcasting



Interactive Broadcasting - an initiative to evolve a Chinese development of WiMax dubbed "ChiMax“

Designed to support converged telecom and broadcast services in the UHF broadcast spectrum Based upon IEEE802.16e but incorporating additional

locally developed IPR to overcome some inherent problems in current technology for this application

A drive towards national and international standardisation

ChiMax is a significant development but current regulatory differences between MII and SARFT could hold this back. Support from national government may be an indication of a change of approach

WiMAX an internal market, not one for external players


Impact Assessment


Impact Assessment

3G TD-SCDMA The early cooperation between Datang and Siemens,

followed by joint ventures and further foreign direct investment, has accelerated the development of the technology

TD-SCDMA accepted at the ITU as a 3G Standard. Development continues but still lags behind W-CDMA development. This may hinder export potential, although domestic market potential is huge. (…and, China Mobile is looking for acquisitions in Africa)

Despite 3G licence delays, Chinese companies such as ZTE and Huawei have firmly established themselves as major international players in all 3G technologies


Impact Assessment

Mobile TV Yet to happen in China

A potential market enabler for 3G particularly for the Olympics in 2008

Subject to significant regulatory hurdles

TV over TD-SCDMA seems the most likely prospect in the first instance, although other standards being reviewed.

Even if regulatory hurdles are overcome, mass market scalability and capacity issues of a comparatively immature technology would still give some concern for real time broadcast.


Impact Assessment

WiMAX WiMAX not a central plank of telecom policy in China International Chinese companies have WiMAX within their product

portfolio but potentially not as mature as companies such as Samsung, for whom it is a major product investment

In 2004 Chinese universities were noted to be carrying out WiMAX R&D for Korean Companies, so expertise will be available in China

The developments by Jushri in this area for Civic networks, including the Olympics and their development of ChiMAX to support converged telecom and broadcast services in the UHF band, are very significant but still potentially subject to regulatory difficulties

There are significant opportunities in the Domestic market for Jushri but it seems unlikely they will be able to develop and grow rapidly enough to make an impact in both the domestic and international arena

Strategically it seems unlikely that the government would support a technology competing with TD-SCDMA at this delicate point in the proceedings


Conclusion

Since the 2004 mission there is no doubt that Chinese Since the 2004 mission there is no doubt that Chinese telecoms infrastructure companies such as ZTE and telecoms infrastructure companies such as ZTE and particularly Huawei have become major international particularly Huawei have become major international companies, supplying networks of all types worldwide. companies, supplying networks of all types worldwide.

The sheer market size and revenue potential, albeit at a The sheer market size and revenue potential, albeit at a lower ARPU than Europe, makes companies such as China lower ARPU than Europe, makes companies such as China Mobile hugely powerful in developing and fulfilling Mobile hugely powerful in developing and fulfilling Government telecoms policy and there is no doubt that they Government telecoms policy and there is no doubt that they will succeed in driving 3G TD-SCDMA forward. will succeed in driving 3G TD-SCDMA forward.

Irrespective of the fact that the products are well made, much Irrespective of the fact that the products are well made, much of the early success of Huawei and other major Chinese of the early success of Huawei and other major Chinese companies was because of the very favourable price companies was because of the very favourable price differential between them and US/European manufacturers, differential between them and US/European manufacturers, due to the much lower cost base. due to the much lower cost base.

With the growing economy and improving living standards for With the growing economy and improving living standards for the city dwellers, and increased expectations, one can the city dwellers, and increased expectations, one can envisage this may not be the case in the longer termenvisage this may not be the case in the longer term

Wireless in China Today

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