Near-term hope for China Unicom CDMA seen dead
By Tony Munroe
HONG KONG, May 30 (Reuters) - In a potentially serious blow to U.S.-based Qualcomm Inc (NasdaqNM:QCOM - news), China Unicom said it would not adopt current-generation CDMA wireless telephone standards, industry analysts said on Tuesday.
China's number two state telecom carrier said it had no reason to use the current-generation Qualcomm technology at a meeting with analysts on Monday in Hong Kong, where it kicked off a road show for a stock market listing, according to analysts in attendance.
Unicom officials said the CDMA standard was a possibility for later generation systems, the analysts said. Unicom's estimated seven million subscribers now use the GSM wireless standard.
An analyst who attended the meeting said Unicom told them that ``the GSM networks have reached a 'critical mass.' (They) have no plans to roll out CDMA until there's a third-generation technology.''
Another analyst who was there said: ``The evidence certainly seems to point to them delaying CDMA deployment until next-generation technology is available.''
Said telecoms analyst Hani Abuali of Donaldson, Lufkin & Jenrette: ``it's fair to say that they're not going to go with narrowband CDMA.''
Unicom is launching a potential $5.26 billion initial public offering to raise funds for network expansion that will help it compete with state giant China Telecom, which is the parent of Hong Kong-listed China Mobile (Hong Kong) Ltd .
Qualcomm's once-soaring stock has been hammered in recent weeks, partly on worries over China prospects for its code division multiple access (CDMA) standard. The stock, which hit US$200 in January, slipped on Friday to US$65-7/8.
Wireless equipment makers Lucent Technologies (NYSE:LU - news), Motorola (NYSE:MOT - news) and Samsung also stand to lose out on network equipment sales.
COSTLY DELAYS
In February, Qualcomm seemed almost certain to grab a big chunk of China's fast-growing wireless market when it signed a CDMA royalty agreement with Unicom.
At the time, Unicom said it hoped to have a CDMA network capable of serving 10 million subscribers by the end of the year.
But a week after the deal was inked, Beijing suspended the rollout of CDMA. Many analysts believed the delay was a Chinese negotiating tactic during talks with the United States on China's entry to the World Trade Organisation.
The talks led to a China-U.S. market-opening agreement in November last year, and this month the U.S. House of Representatives endorsed the deal by passing a bill that gives China permanent normal trade status (PNTR).
But the longer China Unicom's CDMA rollout was delayed, the less sense a new network made, analysts said.
Although there are concerns Unicom could face a capacity squeeze on its existing GSM network, industry sources said it made little sense for Unicom to deploy a second-generation CDMA network to compete with its GSM business -- especially with 2.5 and 3G coming soon.
``There is a sense that China Unicom may continue to look at CDMA, but perhaps that would be using 2.5 generation technologies,'' Tim Luke, vice president of equity research at Lehman Brothers, told Reuters in Beijing.
Lehman is one of the managers of the Unicom IPO.
``There is no business case for investing in second-generation CDMA today,'' added Abuali of DLJ.
OUTDATED TECHNOLOGY?
Generation 2.5 CDMA allows for higher-speed data transfer, while 3G will be capable of broadband multimedia applications.
China Unicom's GSM standard is also used by China Mobile.
``There is a looming capacity issue and 2.5 generation would be a good solution for that,'' Luke said.
Unicom has already been allocated spectrum at 800 megahertz -- the airwaves on which CDMA rides -- leaving an incentive to deploy CDMA generation 2.5.
But Luke said Unicom probably would not start building those networks until early next year -- and on a smaller scale than was planned for current-generation CDMA.
``It's becoming completely outdated,'' said analyst Connie Hsu of Hong Kong-based Pyramid Research, speaking of current-generation CDMA. ``Unicom doesn't really need it. They should be expanding the coverage of their GSM network.''
``The argument for China to launch CDMA was never that strong,'' Hsu said.
Qualcomm officials could not be reached for comment during a U.S. holiday on Monday, but the company said last week that the PNTR vote reduced uncertainty over a CDMA rollout in China.
China Unicom officials could not be reached for comment.
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