Prospects for Qualcomm and CDMA in China
By Craig Watts
Interfax Information Services
(26 May 2000) Despite past public
pronouncements to the contrary from
no less than Chinese Premier Zhu
Rongji, rumors concerning the death of
plans to introduce second generation
commercial CDMA in China grow more
convincing daily. The top story in the
May 25 Asian Wall Street Journal, for
example, infers that Unicom will not
build CDMA networks. The story notes
the blaring absence of Qualcomm from Unicom's New York
filing with the Securities and Regulatory Commission in
preparation for its June IPO. Under the scrutiny of investors,
Unicom's plans will become clear when it launches its
roadshow on Monday, May 29.
Previous reports in the Western press would have us believe
that CDMA's star-crossed commercial introduction to China
has been on the verge of happening since at least 1997,
when China's Ministry of Information Industry (MII), under
pressure from US trade officials, agreed to the establishment
of non-commercial CDMA trials in four major Chinese cities.
Three years later - light years in an industry developing at
light speed - China's CDMA development remains arrested in
those same four cities supporting just 200,000 subscribers.
Estimates suggest that runaway numbers of GSM
subscribers in China, by contrast, may break the 70 mln
mark by the end of this year.
A host of infamous characters take the lead roles in China's
continuing CDMA drama: major telecom companies on both
sides of the GSM-CDMA divide; US, EU, and Chinese
politicians and government ministries; the People's Liberation
Army (PLA) even makes frequent CDMA guest appearances
to the consternation of most involved. The story plot-twists its
way through such historical landmarks as the US bombing of
the Chinese embassy in Belgrade last spring, the US-China
and EU-China WTO agreements, and the recent US passage
of Permanent Normal Trade Relations (PNTR) with China.
And there's no lull in the action yet to come. China's number
two carrier and CDMA designate China Unicom's impending
June IPO, China's actual accession to the WTO, and the
coming advance to third generation (3G) wireless technology
within the next two years are guaranteed to be showstoppers
as well.
Still in its infancy, and yet already the world's largest GSM
market, China is positioned to play a key role in global
balances of wireless technological power. Interfax explores
the CDMA-GSM debate, chronicles CDMA's frustrated
Chinese history up to and including its complicated present,
and then goes on to suggest directions in which China's
wireless market will move forward toward the 3G
transformation - a transformation that will likely tip world
scales. As Weir Capital Research Director Lilian Gohm
comments, "We see China's decision regarding its 3G
network as a sign for the 3G technology selection in other
countries."
GSM vs. CDMA: Global Clash of the Titans
GSM and CDMA, two incompatible second generation
wireless standards, now compete in the world arena, and
debate over their respective merits, a debate with billions of
dollars in the balance, falls along geographical lines. Put
simply, Europeans laud GSM and Americans lobby for
CDMA. While most technical experts agree that on the
purely technical plane CDMA is a superior second-generation
wireless standard, CDMA has been slower to emerge and be
taken up by markets. It remains largely shut out of Europe
and is now playing catch up in other world markets. It's a
race for the world against time. The CDMA Development
Group claims that the number of CDMA subscribers doubled
over the last 12 months, reaching 57 mln, with 32 mln of
those based in Asia (Korea and Japan in particular). GSM,
by contrast, claims 600-700 mln users worldwide. GSM
subscribers are now increasing at the rate of 200 mln per
year.
Key CDMA patents are largely held by Qualcomm, the
American firm that commercialized CDMA, a technology
originally developed by the Western military. Last year's
Nasdaq darling, Qualcomm charted a 2,397% rise in its
share price. The CDMA (Code Division Multiple Access)
standard makes use of the 800-megahertz frequency, divides
voice and data into "codes" rather than time slots, allows
more efficiency in the use of bandwidth (enabling a greater
volume of traffic), improved call quality (clarity), and fewer
dropped calls. The CDMA Development Group's Director of
Asia-Pacific Projects Terry Yen explained to Interfax how
CDMA's soft handoff feature works: Areas with cellular
coverage are divided geographically into cells, he said. When
a caller moves from one cell to the next, for example when
driving on the freeway, the call must be picked up by the
neighboring cell. CDMA technology enables the caller to
speak using several cells simultaneously. When the caller
reaches the next cell, the call is already being carried by the
next cell, meaning fewer dropped calls than in GSM and
analog systems.
Finally, Shanghai-based wireless solutions provider Intrisinic
Technology Limited CEO Jun Wu reports that CDMA has
"inherent technological advantages," particularly in data
transmission, a key feature in the move to 3G. Wu
characterizes the move toward broadband as more natural in
CDMA. Ericsson (China) Vice President of Business
Strategy David Almstrom argues, however, that GSM is the
de facto global standard. "While CDMA has a few specific
advantages, those improvements don't justify changing the
entire system." As the VHS-format victory over the
better-engineered Beta-format showed, the best technology
does not always win out in the market.
The GSM-CDMA battle is expected to extend into
incompatible third-generation technologies - WCDMA (GSM)
and CDMA2000 (CDMA) - making CDMA's move to get in
now at the ground floor in China, the world's largest
developing market, all the more crucial.
A Look at What's Behind the China CDMA Hold-up
So why are there only 200,000 CDMA subscribers stranded
on non-commercial, non-developing, non-national networks in
just four of China's cities? As mentioned, CDMA was later
out of the gate and, as GSM development further
accelerates, CDMA continues, for a number of possible
reasons, to be stiff-armed by China's MII.
Considering the way in which development of the US wireless
market has been hindered due to fragmentation among
competing standards (analog, TDMA, CDMA) the MII's
delays on CDMA could be viewed as an attempt to foster
rapid industry growth along European lines - a system where
2-5 carriers compete using a single standard. Analysts
speculate that CDMA has failed to penetrate Western
European markets because GSM has already established
itself with carriers there as the de facto standard. For
European and Chinese carriers, adoption of CDMA would
mean the payment of royalties to Qualcomm.
One possible reason for the hold-up on CDMA is that China,
concerned about expensive royalties draining profits
overseas, is accustomed to paying for hardware, but not for
the Intellectual Property (IP) software the CDMA package
requires. Other disadvantages to carriers include costly
investment in a second infrastructure, and internal
competition with their already thriving GSM market. Unicom,
China's CDMA designate, already has 5 mln subscribers on
GSM systems and is expanding at the rate of 200,000 per
month.
In addition to the incentives inherent in a single-standard
market, China has an open agenda to promote domestic
telecom manufacturing and local sourcing. Domestic
manufacturers and joint ventures are already intimately
included in and moving up China's GSM food chain. Earlier
this year, for example, Shenzhen-based Zhongxing Telecom
Co. Ltd announced that it had achieved development of
bottom-level GSM protocol (stack layer) software, and that by
early next year will own all the intellectual property (IP) used
to design and manufacture its cell phone, including hardware,
software, and chip designs. In another example, Huawei
Technologies recently announced a USD 10 mln contract to
supply China Mobile's Shanghai branch with network
infrastructure. "We're seeing increasing competition from
domestic manufacturers in the GSM sector," said Ericsson's
Almstrom. The introduction of CDMA would mean a second
round of initial dependence on foreign patents and
manufacturers (primarily North American and Korean) and the
start of a second and even more involved learning curve - and
with 3G just around the corner.
Another factor possibly at work in the Chinese Government's
foot-dragging on CDMA is its recent strenuous efforts to
develop and promote a proprietary 3G wireless standard of its
own, known as TD-SCDMA (Time Division Synchronous
Code Division Multiple Access). Although most of those
familiar with the project see it as too-little-too-late and
unlikely to succeed in the near term, the Chinese 3G
standard was accepted by the International
Telecommunications Union (ITU) last year and many expect
the government to make a run at pressuring the industry into
cooperating on its development.
Finally, over the past few years China has found in CDMA an
effective card to hold in its important trade play-offs with both
the EU and the US. Now that China has been given the green
light on WTO membership by both sides and achieved PNTR
with the US, the relative importance of this factor is likely to
diminish, but its past delay effects on China's CDMA
introduction during a most crucial time period should not be
underestimated.
Chronology of the Saga
In China the 800-megahertz frequency had been allocated to
the People's Liberation Army (PLA), an early snag on CDMA
introduction. But in 1997, under US pressure, MII agreed to
launch CDMA "feasibility studies" in Beijing, Shanghai, Xian,
and Guangzhou by Great Wall Communications, a 50-50
joint venture between China Telecom and China Electronic
System Engineering Co. (CESEC), a commercial arm of the
PLA. Euphoric rumors over huge impending CDMA network
deals wafted in the wake of US President Bill Clinton's visit to
China in the summer of 1998. Qualcomm regional director for
China Martin Chang observed: "China is the No. 1
battleground and will be the most important market. We're
talking about billions of dollars."
By the spring of 1999, China's State Council deemed the
feasibility studies a success and announced plans to
proceed with CDMA introduction, signing contracts with
Motorola and Lucent. As Zhu Rongji headed to the US for
talks concerning China's entrance into the WTO, the number
of China's CDMA users had reached 800,000, and total
mobile subscribers had climbed to 26 mln. A split, however,
was becoming apparent between MII head Wu Jichuan who
called for supporting GSM systems and the efforts of GSM
giants Ericsson and Nokia to produce locally in China and
Premier Zhu who seemed to favor CDMA introduction. Many
believed that if Zhu could push through a WTO deal with the
US, he could push through CDMA. When pushed on CDMA
by Clinton, however, Zhu - in words that may yet turn out to
be prophetic - reportedly said, "If you want too much too
soon, in the end you may wind up with nothing." Zhu returned
from the talks domestically weakened, with some Chinese
even going so far as to accuse him of selling out the country.
The May 1999 US bombing of the Chinese embassy in
Belgrade put CDMA introduction into deep freeze.
The situation began to thaw in the fall of 1999 with discussion
of an October IPO for China Unicom, China's second largest
carrier established in 1994, and set to become a competitor
with both CDMA and GSM licenses (under the instigation of
Zhu and in preparation for WTO entrance, many say) to the
dominant China Mobile. Qualcomm opened a China office in
October and analysts speculated that funds garnered from
the October IPO would possibly be used to build CDMA
networks. The process was quickly de-railed, however, when
Unicom's IPO was postponed due to fiercer-than-expected
resistance from companies unhappy with the settlement
terms on their C-C-F investments in China Unicom (a system
later overturned whereby nearly USD 1 bln of foreign
investment was channeled into the closed Chinese telecom
sector through a Chinese-to-Chinese-to-foreign investment
path).
On Dec 1, 1999, China's sole CDMA operator, PLA-affiliated
Beijing Great Wall slashed subscriber prices and demand for
CDMA surged. Qualcomm launched an offensive, introducing
Chinese original equipment manufacturers (OEMs) to its
latest technologies, including CDMA chip sets, software,
reference designs, and development tools. "We'd like to work
very closely with Chinese manufacturers to enable Chinese
industry to be a major force in developing CDMA equipment,"
said Qualcomm Vice President John Lodenius.
Major Agreement, Major Delays
On Feb 1, 2000 Qualcomm announced a breakthrough: an
agreement that provides guidelines and framework for the
licensing of Qualcomm's intellectual property for the
manufacture and sale of CDMA wireless equipment by
domestic Chinese manufacturers. Qualcomm reported: "The
installation of CDMA equipment in China Unicom's wireless
network is expected to begin promptly." China Unicom
Chairman and General Manager Yang Xianzu said, "This
agreement enables China Unicom to move forward
aggressively with plans to deploy a commercial CDMA
network with an initial capacity of 10 million subscribers this
year." Despite the fact that no CDMA equipment contracts
had been announced, Qualcomm's shares rose 6% on the
news. Analysts speculated that Motorola, Ericsson, Lucent,
and Nortel would be among foreign suppliers, and Datang
Telecommunications, Eastern Communications, Shanghai
Bell, and TCL would be among domestic OEMs. Details of
the licensing agreement remain murky, but insiders suggest
Qualcomm reduced its standard 5% licensing fee to 3.5% in
order to clinch the deal. Qualcomm royalties on handsets
were expected to fall between USD 5-8 per handset. CDMA
chipsets used to power phones would earn Qualcomm an
estimated USD 8 per handset. In a separate development,
Motorola and Compaq announced contracts with Great Wall
in mid-February to enhance its CDMA network.
Shortly after, the agreement was apparently put on
"temporary" hold by MII when the government ordered
Unicom to stop accepting bids and postpone contracts with
foreign suppliers. Insiders speculate that Unicom failed to
adequately consult with the MII before accepting contract
bids from foreign vendors. With the exception of positive
comments on CDMA by Premier Zhu on two separate
occasions, a blanketed silence concerning the temporary
hold has prevailed over the past four months. Speaking to
foreign reporters following the Ninth National People's
Congress on March 15, Premier Zhu Rongji denied reports
that China had suspended the introduction of Code Division
Multiple Access (CDMA) technology, saying "China will go
ahead with its introduction of US CDMA systems," while
continuing to use GSM technologies. Zhu reiterated that the
State Council has entrusted China Unicom to take charge of
all relevant purchasing affairs, but it must coordinate the
purchases with the Ministry of Information Industry (MII) and
the State Development Planning Commission (SDPC). "It will
not be long" before the purchase issue is settled, following
the completion of necessary procedures." On April 6, Zhu
promised US Commerce Secretary William Daley that he
would encourage the ministry to move forward on CDMA.
Other swirling factors behind China's long CDMA silence
include the CDMA-hold's usefulness in WTO trade talks with
the EU, and as pressure on US businesses that would profit
from CDMA introduction to lobby the US Congress for PNTR.
Now that both hurdles have been cleared, and the China
Unicom IPO looks set to happen in June, some might argue
that CDMA's prospects again look promising, despite the late
date and overwhelming dominance of GSM in China.
Recent movements on the PLA front suggest incremental
progress as well. The May 18 Wenwei Po and the Huasheng
Bao reported that the PLA signed a 28-year leasing
agreement with Shantou-based Longteng Technology, giving
Longteng the nationwide rights to the PLA's Shenzhou Great
Wall communications station, and its nationwide satellite,
wireless, microwave and network systems. Shenzhou Great
Wall, which in early March reported USD 25.4 mln in
investment from Beijing Zhongguancun Technology
Development Company, is set to provide channels and
equipment for Longteng to enhance the CDMA infrastructure.
Longteng reportedly plans to seek additional foreign capital
for expansion upon China's accession to the WTO. A source
at Shenzhou Great Wall, however, confirmed to Interfax that
the company is PLA-owned, but that a great number of its
employees hailed from China Telecom, a former 50% investor
in the project. The source was unaware of any lease
agreement made with Longteng, and insistent that only
China's State Council, and not MII, had any jurisdiction over
their business practice. The CDMA Development Group's
Terry Yen estimates that the network now includes an
estimated 200,000 subscribers, and that while he remained
unsure of Great Wall's development plans, "they are a
competitor today." The per-minute carrier charges for Great
Wall and Hebei Century Mobile Corp, the subsidiary linked to
its network, are currently set at half those of GSM services,
but the phones lack nationwide roaming services.
Where Things Sit
When contacted by Interfax, neither Unicom nor Qualcomm
reported any new developments on MII's extended
"temporary" CDMA hold. A Unicom source could not confirm
recent statements to the effect that Unicom had abandoned
its CDMA plans in favor of GSM development. He did say,
however, that resources that might have gone into CDMA
development were now being channeled into GSM
development because the company could not afford to sit idle
as China Mobile's GSM subscriber base continues to enjoy
rapid growth. The source repeatedly referred to Premier Zhu
Rongji's past public commitments to implement CDMA, but
added that changes in technology over the past year and the
approaching shift to 3G systems had altered Unicom's plans.
"While waiting for word from the government, Unicom is in the
process of determining what system to use, how much of it
to use, and on what time frame."
Qualcomm spokesperson Christine Trimble confirmed to
Interfax that Qualcomm is in discussions with several
manufacturers, but has yet to make announcements on any
agreements. Trimble reiterated that the framework agreement
with Unicom includes "assurances on ASIC [Application
Specific Integrated Circuits] purchases from Qualcomm."
She adds that Qualcomm views passage of PNTR as "very
favorable," setting a positive tone for US-China cooperation.
And despite the recent negative reports concerning China's
CDMA deployment, a raft of major Chinese domestic
telecoms manufacturers have in recent weeks announced
CDMA projects. Names include Huawei, Datang, Shouxing,
and Zhongxing. Foreign suppliers of CDMA equipment also
implied that they were prepared for active bidding on projects
to begin at any time.
A 3G Possible Path with European Characteristics
Interfax analysts believe that the decision concerning
Unicom's deployment of CDMA will be made clear on
Monday, May 29 when Unicom launches its roadshow. A
Unicom decision against CDMA may turn world tables
against the aspirations of CDMA's backers for dominance in
second-generation technology. Given the unpredictable state
of China's telecom market, a slim possibility will always
remain that Unicom may reverse such a decision or that
other CDMA operating licenses will be granted.
Longteng-operated Great Wall CDMA network may be
allowed to expand and compete with China Mobile and
Unicom. But Interfax analysts see Unicom's decision as
pivotal to CDMA's prospects. Interfax analysts lean slightly
toward the belief that China will continue along its current
path toward a single standard GSM mobile telecom market.
Rumors suggest that at least one additional mobile operating
license will be granted to China Telecom in the near term to
spur competition between carriers over the single GSM
standard.
An indefinite postponement of Unicom's contract with
Qualcomm will generate spin that, in tandem with its past
C-C-F scandal, will have a negative influence on its IPO. The
contract's "assurances on ASIC purchases from Qualcomm"
may cost Unicom directly.
Moving into 3G, Interfax analysts expect China to follow in
lockstep with the Europeans into GPRS and WCDMA. The
accelerated time frame for China mobile telecom market
access for foreign companies (25% on accession; 35% after
1 year; full minority ownership after 3 years) negotiated by
the EU will further speed the development of China's mobile
sector into GSM territory. China's attempts to develop its
own 3G proprietary standard will fall short, and may
temporarily drain resources from and lower the
competitiveness of domestic carriers and manufacturers
coerced into cooperation. According to Weir Capital's Lilian
Gohm, if "Unicom chooses to focus on the deployment of
GSM, then Qualcomm will certainly not profit as much as
other telecommunication companies, like Nokia and
Ericsson." Unlike Nokia, which has put all of its eggs in the
GSM basket, Ericsson, with its purchase of Qualcomm's
network division, has positioned itself to benefit from
movement toward either market. In GSM's 3G (WCDMA)
world, Qualcomm, Gohm notes, holds more than 100
essential patents related to WCDMA technology and will still
play a role, however, "Qualcomm's revenue stream will
certainly be thinner if WCDMA is deployed."
If Unicom surprises observers and decides instead on full
competing deployment of CDMA, Interfax expects a tooling
up of Ericsson, Motorola, Nortel, along with Korean (Daewoo,
LG) and Chinese CDMA suppliers for a real
second-generation dogfight. Such news would also be a
welcome surprise for Qualcomm, whose shares are
languishing around 70 after hitting 136 in February.
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