2. Please comment on the fact that CDMA equipment costs 3x more than the analog equipment it replaced - resulting in a relatively small improvement in capx cost per erlang for the carrier community which deployed CDMA. Juxtapose that metric against those carriers which deployed other digital air interfaces.
"CDMA is cheaper and more efficient than GSM," says Pete Peterson, analyst with the
Prudential Volpe Technology Group. "And it's better suited to a market like China,
where you're trying to roll out services to a large number of people as quickly as you
can."
Full article follows:
Sunday, Apr 30, 2000 3:53 PM ET
Respond to Post # 9529 of 9533
Calling China
Westerners, including the folks at Qualcomm, want
Beijing's number.
By Dean Calbreath
STAFF WRITER
April 30, 2004
BEIJING -- The glass-enclosed shelves that line the walls of the Ministry of the
Information Industry bear stark witness to the swarm of foreigners who want to do
business in China.
The shelves are crammed with gifts from dozens of multinational companies seeking to
curry favor with the ministry, which oversees China' s telecom, Internet and broadcast
sectors.
There are miniature samurai helmets from Sumitomo and Mitsubishi, a model
communications satellite from Hughes Aircraft, a gold-plated mobile phone from Nokia,
a miniature phone set from Qualcomm in San Diego.
The gifts, which look like tribute to a trinket-happy potentate, only hint at what the
Chinese are really after: state-of-the-art technology and Western know-how.
"We hope in the future companies from San Diego can introduce advanced technology,
investments and trained personnel into China to help with our advancement," Zhao
Meizhuang, the ministry' s deputy director of policy and regulation, said in March after
meeting a trade mission led by Mayor Susan Golding.
Even if China is hungry for technology, doing business there can be daunting.
Over the past few months, numerous foreign firms, including Qualcomm, have been
caught up in a regulatory Ping-Pong match in Beijing, seeing projects postponed or
canceled as the Chinese struggle to keep the market under local control -- and jockey for
advantage in upcoming trade talks.
"Telecommunications is a highly restricted sector in China," says Pat Powers, who
leads the U.S.-China Business Council in Beijing. "There have been a lot of laws and
requirements issued over the past six to eight months regarding e-commerce,
encryption, market surveys and other items. The process by which these requirements
are issued has been frustrating for local investors."
Powers stresses that the Chinese recently have been working with foreign businesses
to clarify the regulatory changes.
Other sources, though, contend that foreign telecom firms are subjected to bureaucratic
infighting, resurgent protectionism, demands for transfers of technology and -- perhaps
most importantly -- behind-the-scenes maneuvering in China' s bid to join the World
Trade Organization. The trading club is designed to remove import barriers worldwide.
The promise of opening up the world' s largest telecommunications market has been one
of the primary bargaining chips to gain U.S. support for China' s drive to join the WTO,
which comes to a vote in the U.S. Congress in the coming weeks.
While the vast majority of China' s 1.3 billion people are too destitute for such luxuries
as personal phones -- some villages share a single phone -- there are tens of millions of
young urbanites with enough money to go wireless.
Last year, there were 39 million cell-phone users in China, an 80 percent gain from the
year before. By the end of this year, the total is projected to increase 63 percent to 70
million.
The process of modernizing China' s antiquated phone system, however, has been as
convoluted as a Chinese puzzle box, partially because of the internal squabbling
between three of the biggest players:
Premier Zhu Rongji, trying to placate U.S. business interests so he can gain entry to the
WTO; the Ministry of the Information Industry, trying to maintain a strong,
protectionist hand over the marketplace; and the People' s Liberation Army, which
wants to keep running its own phone network.
"You need a Ph.D. in cultural relations and the diplomatic experience of a Henry
Kissinger to understand what' s happening in China," says Mark McKechnie, a
telecommunications analyst with Bank of America Securities.
Qualcomm has been trying to crack the China code for six years, entering just after the
United States relaxed export restrictions that had been imposed following the
Tiananmen Square massacre.
By late 1994, Qualcomm was testing its code division multiple access, or CDMA,
technology in China, showing that it could handle 10 times as many calls as could the
analog system the Chinese were then using.
When Qualcomm entered the market, though, China already was switching to the global
system for mobile communications, or GSM, a European technology promoted by
Ericsson, Siemens and Nokia.
Most industry analysts say that was an unfortunate choice.
"CDMA is cheaper and more efficient than GSM," says Pete Peterson, analyst with the
Prudential Volpe Technology Group. "And it' s better suited to a market like China,
where you' re trying to roll out services to a large number of people as quickly as you
can."
The People' s Liberation Army apparently agreed. In 1997, the army, in partnership with
the information ministry, created China Great Wall Communications, a CDMA mobile-
phone company whose profits supplemented the army' s dwindling budget.
Working with such companies as Motorola, Lucent, Samsung and Nortel, Great Wall
ran CDMA tests in Beijing, Guangzhou, Shanghai and Xi' an. Qualcomm provided $300
million worth of phones -- the biggest deal it had ever signed.
Despite the army' s backing, however, CDMA has maintained only a tiny sliver of the
Chinese market over the past three years, with only 800,000 of the nation' s 39 million
wireless subscribers.
Some observers say one reason for the sluggish expansion is the government' s qualms
about having the army generate too much revenue through a commercial enterprise.
"Previously, the government was content to let the army run its own business
enterprises, so it could add more money to its budget," says Peterson of Prudential.
"Now the civilians in the government would like to have more control over the military.
But you can' t control the military without controlling its financing. The current policy
of government is to see the army taken out of commercial endeavor."
The army has since allowed Great Wall to wither, forming a company -- Century Mobile
Communications -- that somehow has avoided buying technology from Qualcomm or
other Western companies as it expands into China' s outlying provinces.
Instead, Qualcomm pursued a deal with China Unicom, the nation' s second-largest
telecom provider and a company well-experienced at dealing with Westerners.
It is a potentially lucrative deal. McKechnie, the BofA analyst, estimates that if Unicom
adds 5 million handsets in the first year of its operations -- he says that' s doable -- it
would add $xx million to Qualcomm' s annual earnings, or about a nickel per share.
As Unicom pushes toward its goal of 40 million subscribers by 2005, it could give
Qualcomm an additional 10 to 15 cents per share each year.
Qualcomm is not the only company that stands to gain through the deal. Analysts
predict that Nortel, Lucent and Motorola could get a major boost by helping Unicom
build its infrastructure.
The government' s response, however, has taken the deal into a series of hairpin curves,
each sharp enough to give anyone affiliated with Unicom a case of whiplash.
Early last year, Premier Zhu announced the government would let Unicom begin
building CDMA networks to supplement its GSM business. Within weeks, that green
light turned red, reportedly because the government wanted Unicom' s suppliers to
divulge their CDMA technology before entering the market.
By late summer, after some arm-
twisting by U.S. trade officials, Zhu announced that there was no problem and the
CDMA network would go ahead.
Armed with Zhu' s assurances, Qualcomm and Unicom in February hashed out an
agreement to work together, announcing the deal in a lavish ceremony in Beijing.
A month later, Zhu put the deal on hold, complaining that Unicom had not "maintained
appropriate contact with the related (governmental) departments" before embarking on
the deal. The deal could only go forward, he said, once Unicom is through "dealing with
those coordinating procedures that must be dealt with."
To many analysts, one of the biggest reasons for China' s on-again, off-again flirtation
with Qualcomm can be spelled with just three letters: WTO. Qualcomm' s chances in
China, they say, rise and fall with the prospects of China' s WTO bid passing through
Congress.
"Part of the carrot that is being held out to gain U.S. support for WTO is that U.S.
companies will be able to increase their sales in China. And one of the biggest areas for
potential sales is telecommunications equipment," says Peterson, the Prudential
analyst.
Peterson adds that if China caves in too quickly to U.S. demands to open up China' s
telecom market, it will lose a key bargaining chip in the negotiations. "That' s why
everything hangs in balance and never quite gets resolved," he says. "There' s a
political function in holding things up."
In addition, he suggests, the Chinese might be postponing the deal in order to pressure
Qualcomm to grant more access to the technological underpinnings of CDMA.
"CDMA entails a greater proportion of intellectual property than simpler generations of
technology, such as GSM," Peterson says. "So the Chinese feel that getting the
intellectual property gives them much more of the technological pie."
Qualcomm already has jumped through hoops to get the Unicom deal.
Under the agreement, Unicom' s Chinese subcontractors could make and sell wireless
phones and infrastructure equipment while paying royalties to Qualcomm. The
subcontractors, in turn, would promise to buy Qualcomm' s application-specific
integrated circuits -- the chips that make the phone run.
Anil Kripalani, Qualcomm' s senior vice president of technology marketing and
international administration, says the push to localize products came directly from the
top: the Chinese State Council headed by President Jiang Zemin and Premier Zhu.
"The State Council wants to see individual homegrown manufacturers both for wireless
sets and for the infrastructure," Kripalani says. "So do we. Our whole approach has
been to do that.
"We' ve already done it in Japan and Korea. We' re planning on doing it in the near
future in Latin America and India. It' s just our normal course of business."
Nevertheless, some analysts suggest that one reason that the deal fell apart is that the
Chinese hope to get ahold of Qualcomm' s chips rather than mere subcontractor work.
Another issue is the role of the information ministry. The ministry, after all, owns China
Telecom, the nation' s largest telephone company, which specializes in GSM. Although
China has officially liberalized some domestic competition, the market remains firmly
under China Telecom' s control.
The ministry seems to have a grudge against Unicom, Telecom' s main competitor.
Chinese law -- slated to change under WTO -- bans foreigners from owning stakes in its
telecom networks.
Until recently, Unicom evaded the ban by creating joint ventures with such partners as
Sprint, France Telecom or Hong Kong' s First Pacific. The joint ventures then invested
in Unicom, giving the foreigners an indirect stake.
The government' s blocking of the CDMA deal came at the same time as a general
crackdown on Unicom' s ventures. By March 31, Unicom had pushed its foreign
partners out of a dozen major projects totaling $200 million.
In addition, there' s an ideological underpinning to the ministry' s cold feet on CDMA.
Wu Jichuan, who heads the ministry, makes clear that his aim is to support Chinese
companies. The telecom regulators have been key opponents of making concessions to
join the WTO.
Sources close to the telephone industry suggest that there are hidden reasons why the
ministry continues to support GSM.
"In China, there are sometimes interesting financial arrangements that take place
between government bodies and the private corporations they do business with," says
one telecommunications analyst, who declines to be named.
The analyst says that the arrangements can sometimes involve outright bribes, which
are now the focus of a crackdown by the Chinese government.
"But more typically they involve services and power, such as fancy cars,
state-of-the-art phones or the ability to find high-salary jobs for the people you know
and love," he says.
"Also, if, as a government minister, you' re able to enrich your ministry, that means that
you can better use your ministerial power to obtain more benefits."
Other than the trinkets in the glass-walled shelves, there was little sign of personal
enrichment at the ministry. The lobby of the ministry is so old-fashioned that it has a
coin-
operated phone, instead of the card-
operated phones that are standard fare on Chinese streets.
Although most of the bureaucrats at the information ministry quietly oppose WTO --
membership, in their view, would chip away at China' s sovereignty -- most of their
discussions with foreigners parrot the official government line.
After telling visitors that China warmly encourages foreign companies to manufacture
telephone equipment within its borders, Deputy Director Zhao quickly adds that "after
China' s entry into the WTO, this cooperation will be broadened."
When will the ministry relax its rules on the Internet? "After China enters the WTO."
When will foreigners be able to invest inChina' s telecommunications services? "After
the WTO agreement."
When the topic shifts to CDMA, however, Zhao steers clear of mentioning the WTO,
which, among other things, provides that foreign suppliers will be able to use any
technology they choose to provide telecommunication services.
Just a week after Premier Zhu assured reporters that China had not "suspended or
stopped its cooperation" with CDMA, Zhao made clear to the San Diego trade mission
that his ministry still leans heavily toward GSM.
"When we first began to draw on technology, CDMA was not very developed, so we
chose GSM instead," Zhao told the trade mission, largely composed of civic officials.
"Since the beginning of its adoption, GSM has enjoyed rapid growth. We believe that in
the future it will continue to grow more than CDMA."
Mayor Golding pushed for greater openness to CDMA, adding that there would be a
"tremendous advantage to bridging San Diego' s telecommunications expertise and the
needs of China."
Julie Meier Wright, chief of the San Diego Economic Development Corp., tried to lobby
Zhao into accepting CDMA with a whiff of free-
market logic.
"It' s been our experience that the marketplace is the best way of ensuring advances in
technology," she said, adding that Qualcomm would appreciate any efforts by the
ministry to advance its contracts in China.
To parry the lobbying efforts, Zhao sounded a conciliatory note.
"We' re not giving up on CDMA. We have conducted experiments in four major cities in
China for CDMA, and the results have been very promising. But CDMA is still at the
second stage of its development. Things could change when it reaches the third stage."
Nevertheless, he concluded the talk by pulling out his own GSM mobile phone and
complaining about the problem he has receiving calls when he travels to such CDMA
markets as Japan, South Korea and the United States.
"I understand," Golding said, showing him the GSM phone she leased for the trip. "We
have the same problem in China."
Copyright 2004 Union-Tribune Publishing Co. |
