Warning, long article
Telecom Industry: The Effects On Telecom Manufactures From Unicom's Bidding
Computer World(3/8/01)
From the middle of this month, China United will start equipment bidding for it's CDMA network. Every manufacture will present own technologies and answer Unicom's questions. At the same time, on the request of Unicom, ten domestic post planning institutions will write purchasing proposals.
Among them, Beijing Post Planning Institution will undertake the design for 9 provinces, and Zhengzhou's will undertake 5 provinces. When the proposals finish, it will be already in the middle of March. Time left for vendors to prepare is only about 10 days. For such a very complicated system construction, time is very short. It will also be a critical test for vendors' competitiveness. Based on current available information, following is our analysis on the effects on domestic telecom manufactures.
1. Current Bidding Projection
Based on Unicom's plan for 10 million capacity CDMA network before year end, the capacity will be more than 10 million lines calculated by switching capacity(?). Price for mobile switches is about 170(~$20) per line. Generally speaking, the investment ratio for switching is about 2:8. For the bidding of main equipment, it will result in 20(~$2.5)billion. Adding power supply and remote control equipment, the total investment will not be much higher than this number. Besides these, bidding for mobile intelligent network should also be considered. Detailed reasons will be discussed later. Right now, there are different talks about Unicom's total capital investment. The widely known figure is that Unicom will spend $12 billion for the CDMA network. This number should be the total for next few years, including equipment purchasing, construction, cost for upgrading of narrow band to broad band CDMA, as well as operation cost.
2. CDMA's IPR
Nobody can avoid paying license fees to Qualcomm for manufacturing CDMA equipment. Chinese companies are no exception. MII on behalf of Chinese government, has reached an agreement with Qualcomm for Chinese manufactures. The agreement will guarantee Chinese manufactures to have the lowest license fees. The bilateral MOU includes:
*By mutual agreement, the right to use patents awarded to Chinese manufactures is limited to CDMA 95A. License fees for future generation products will be decided separately. License for products at level above CDMA2000 will be re-negotiated later;
*The license fee for Chinese manufactures are: System equipment will be charged at about 2% on the net sale price, handsets will be charged at about 3.5%. The license fees charged on foreign firms is about 6% or higher. However, the lower license fees are only allowed for Chinese firms to sell CDMA equipment inside China. If any firms sells products to other regions, they must re-negotiate new license agreements.
*This most favored license agreement between Qualcomm and Chinese government is only valid for equipment purely developed by Chinese firms. Any joint ventures, no matter the ratio of capital involvement, is not covered by this agreement. Any bundled equipment will strictly be excluded from this agreement.
3. The Effects On Major Vendors From The Bidding
It is unquestionable, there will be huge effects on participating major equipment manufactures. This is indeed a major market share redistribution for domestic telecom firms. Following is our current analysis on participating firms:
Motorola
Advantages: Major supplier for domestic telecom equipment. Good reputation among Chinese telecom carriers;
Posses relative mature narrow band CDMA products, with successful cases of commercial applications in north America;
Best partner relationship with China Unicom;
Many firms(domestic) do not have mobile switching system. But most of them have related switching products compatible with Motorola's system. This will be easier for Unicom to choose. At the same time, it will help Unicom to meet the government's requirement of certain proportional participation of domestic equipment.
Disadvantage: lack of leadership in 3G development. But we do not consider it as big negative.
Ericsson
Advantages: The largest mobile equipment supplier in China;
Absolute leadership in 3G mobile communications, currently has won 2/3 of global 3G contracts;
Company owns 100% of Qualcomm's infra structure division. Has better understanding of CDMA than other pure GSM manufactures;
Disadvantages: relationship with China Unicom is so so;
Partner Nanjing Panda is not very competitive in the communication industry. However, Panda has close relationship with Unicom's major shareholder;
Panda is short in technology services, little experience of engineering techniques.
Korean Companies
Advantages: Korean owns the largest and most mature commercial CDMA networks. Korean products are most tested and proven;
Korean companies are very experienced in network planning, which is very precious for Unicom;
Disadvantages: Korean is a small country with big trade surplus from China. Chinese government is less willing to welcome their invasion;
Korean mobile networks are leaning toward wCDMA, not CDMA2000. This worries Unicom about their commitment for future developments;
They have not established relationship with Chinese carriers;
Without proper understanding and trust with Chinese carriers, lack of strong sales and technical maintenance, timely problem solving cannot be ensured.
Lucent, Nortel:
Advantages: Main international telecom equipment suppliers, good relationship with Chinese carriers;
Partner Datang has long been supported by MII. Partner is very strong is technology and engineering, with nationwide sales and maintenance services;
Commercial experiences in north America;
Disadvantages: not real leaders in mobile communications, nor main mobile telecom manufactures;
Zhongxing
Advantages: The only domestic firm with total CDMA system, supported by government, fully supported for commercial applications;
Currently, Zhongxing's BTS system has undergone the most compatibility tests(with four systems includes Datang's and Zhongxing's);
Zhongxing's technical service is the best in China. Problems are often solved within 24 hours. At the same time, with total solution developed by themselves, problem solving can be strongly supported by system developers;
Disadvantages: To compete with China Mobile, quality is the best tool. Domestic mobile equipment makers are so far lagging in quality behind foreign firms;
Zhongxing's CDMA equipment have yet undertake large scale commercial applications, lacking experience of network planning and problem solving;
A so so relationship with Unicom.
Huawei:
Advantages: the most successful domestic mobile equipment maker. Owns the strongest technical, maintenance, and problem solving capability;
Relatively mature mobile switching products;
Huawei's mobile intelligent network has successful case, which will help them to compete.
Disadvantages: lacking mobile BTS systems, lacking strong government support.
Other participating companies, such as Eastcom, are mainly partners of foreign firms. Their competitiveness are mainly on production cost and some technical and engineering capability. Their success will be mostly depended on their foreign partners.
4. Bidding Procedures
This time, bidding will still be in the form of regional distribution. China United will split municipal areas into several regions. Vendors will be asked to bid in certain regions. In a particular region, only 2-3 vendors are allowed by Unicom. From carrier's consideration, this will balance each side's benefit and needs, and also give Unicom a better position in the bidding process. From suppliers' consideration, each could obtain bidding rights in multiple provinces. However, it will not ensure them of obtaining supply rights. They must consider the competitor's power, as well as the region's economic power(capacity for future expansion) and many complex factors to decide the degree of their participation. If not careful, all could be lost. Before the opening of the bids and judged only by current conditions, promotions and propaganda here and there will have no use.
5. Mobile Intelligent Network Program
Judged by current situations, big win by domestic switching system makers is expected. Domestic mobile BTS system(in fact, Zhongxing's system) will also gain certain market share. The critical questions is whether they can get breakthrough rather than symbolized contracts. Datang and others put their hope on partners. If their partners succeed, they will have sharply higher sales. These estimates are either very clear or very vague. Destination is not in their own hands.
However, on the mobile intelligent network, domestic firms have much better control. From the experience of carriers here and abroad, mobile intelligent network is beneficial to carriers in lowering operation risks, and increasing capacity. When building the CDMA network, Unicom will no doubt be focusing on mobile intelligent network. For manufactures, mobile intelligent is a low cost, high profit business. It is where the sure place that domestic equipment can achieve growing profit from Unicom's CDMA project. Huawei won the construction right for China Mobile's phase two main intelligent network projects in year 2000. It made Zhongxing and many foreign firms very jealous.
This time, the mobile intelligent network will be fiercely contested.
Domestic intelligent networks contenders are mainly still Zhongxing and Huawei. Huawei's advantages reside in maturity and large scale commercial applications of its intelligent networks. Zhongxing's advantages are coming from its technical presentation before the bidding. Zhongxing presented innovative intelligent network solutions. It differs from the design idea of stacking intelligent network onto the system. Zhongxing's solution is to integrate intelligent network directly into mobile switching system and thus make the integrity of the system much better.
This new solution looks very attractive, but is not sure to be accepted by manufactures. However, Zhongxing is also able to switch back to traditional intelligent solution. From domestic telecom manufactures' view, the intelligent network is very important part of this bidding. Many related technical details are yet to be known.
6. CDMA Handsets
Traditional CDMA handsets use burn in numbers. It is said designed for the purpose to combat smuggling. However, Chinese are inclined to use separated handset and SIM card. Also, more and more handset are becoming a consumption rather than luxury item. Separated handset and SIM card is more practical.
From technical point view, SIM card is not difficult. Foreign firms usually can finish remodeling in less than half-year time. Qualcomm claims roll out new chips supporting UIM card in the middle to second half of this year.
Zhongxing is the only manufacture with UIM card capable handset. Also, the company's research and development talent are mostly lured from Korean mainstream firms. The reliability of its core technology and products are more competitive than their GSM handsets. Additionally, the earlier that Unicom rolls out the CDMA service, the more advantages of Zhongxing's time to market will show up.
However, CDMA handset is only one move of Zhongxing total game. The combination of all resources inside the company will depend it's market success. On the production front, the current handset assemble line is hard to meet the demand. They could still out-source the assembly. Critical thing is whether they could obtain capital resources.
(form Security Times)
Have a good weekend, everyone.
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