The Wall Street Journal Interactive Edition -- September 14, 2000
Heard in Asia
Unicom's Plans to Expand
Network Are Delayed by Debt
By MATT FORNEY
Staff Reporter of THE WALL STREET JOURNAL
BEIJING -- In an about-face, China's No. 2 phone company plans to expand a mobile-phone
network using technology from the U.S., but the network is so riddled with debt and accounting
problems that the expansion could be delayed for months.
China United Telecommunications, or Unicom, startled the industry
earlier this year when it said it was abandoning plans to build a
network with technology known as CDMA. The announcement
dashed the hopes of San Diego-based Qualcomm Inc., which
developed the technology and would profit from licensing agreements
with companies providing equipment. But a directive issued by China's
cabinet, the State Council, last month ordered Unicom to begin
expanding the network quickly.
The biggest problem now is debt. Unicom, which recently listed shares in New York and Hong
Kong, last month inherited from the Chinese army a small CDMA network operating in seven
areas. The network was run by a company called Great Wall. The army had maintained control of
Great Wall until this year despite orders from the Communist Party in 1998 to sell or transfer most
military-run businesses. The army used that in-between period to transfer debt from its other
unprofitable enterprises into Great Wall, according to executives who work with Unicom's
accountants.
"We must resolve this problem of debt before expanding the network," says Li Zhengmao, a senior
Unicom official, adding that "we are still considering how to proceed." Mr. Li declines to confirm
how much debt comes with the network, but other industry executives put the figure as high as $4.4
billion. That amounts to about $10,000 for each mobile-phone subscriber using the network, or
roughly 20 times the average industry ratio.
Strategy Questions
Some also question the business rationale behind building a current-generation CDMA network, as
called for in the cabinet directive. Unicom already runs a national mobile-phone system using a
competing standard, popular in Europe and Asia, called GSM. Unicom's chairman, Yang Xianzu,
said in June that the company would wait until next year to test a next-generation CDMA system,
indicating he had no plans for a current-generation network this year. The sudden reversal could
owe to political pressure from Premier Zhu Rongji, who last year personally promised then-U.S.
Commerce Secretary William Daley that China would develop CDMA, and was known to be
angry that his plans were stymied.
"The decision to build a CDMA network now doesn't make a lot of sense to me," says John Ure,
who heads a telecommunications think tank at the University of Hong Kong. "It might be a shortcut
to signing up subscribers," he says, "but it's equally possible that this is a continuation of political
pressure."
The delay is the latest in CDMA's halting development in China, which recently surpassed Japan as
the world's second-largest mobile-phone market, after the U.S. The army originally planned to
cover the whole country with its network, but never won permission from the government to
expand beyond four "experimental cities" where Great Wall first established a presence in 1995.
Even without permission, the army added three more regions. In March last year, Mr. Zhu ordered
that Unicom develop a CDMA network, but bureaucrats overseeing the industry blocked the
project.
It is unlikely that Unicom will assume the debt of the Great Wall network. Government auditors
must first root through Great Wall's books and try to find the origins of its various debts. Most
industry executives expect that the government will then take responsibility for repayment. The
network will be built by the parent Unicom company and not by its listed subsidiary, China Unicom
Ltd.
Qualcomm Benefits
When Unicom finally begins building the network, U.S. vendors stand to gain. In particular, Lucent
Technologies Inc. has largely missed out on growth in China's mobile market because it offers an
extensive line of CDMA equipment but almost nothing for GSM. Qualcomm, too, will finally begin
to collect royalties in China for its technology. Qualcomm's stock has declined about 70% since the
start of this year, largely because of its difficulties in China.
"Regardless of the timing, Qualcomm will benefit through royalties from the licensing of our essential
CDMA patent portfolio and our supply of advanced CDMA chip sets," a Qualcomm
spokeswoman said.
In a sign of Qualcomm's growing focus on China, the company recently appointed a new president
for Greater China. Ming Louie joined Qualcomm in May from Globalstar, which provides
mobile-phone service around the world using satellite relays and is partly owned by Qualcomm.
But he, too, doesn't know when Unicom will begin developing CDMA. "Even though the central
government authorized the turnover" of the army's network, "the details still need to be worked
out," Mr. Louie said in a telephone interview.
Write to Matt Forney at matt.forney@wsj.com. |
