CDMA's drive to digital dominance
By Craig Watts in Shanghai
ChinaOnline News
(24 October 2000) In a move that took many by surprise, China’s second-largest mobile carrier China Unicom confirmed on Oct. 19 that it will build a narrowband code division multiple access (CDMA) mobile phone network based on Qualcomm Inc.’s technology, reversing a June decision against deployment.
The first round of project bidding has already been completed, according to a source at a domestic CDMA equipment supplier.
Some speculate CDMA introduction foreshadows a three-way path to 3G in China: GSM to W-CDMA, CDMA to cdma2000, and GSM to TD-SCDMA.
Unicom Chairman Yang Xianzu confirmed that the company will establish a subsidiary to operate four existing CDMA networks to be acquired from People’s Liberation Army (PLA)-backed Great Wall Communications. Unicom’s parent company will finance the CDMA build-out, while the listed arm, China Unicom Ltd., will have the option to purchase the networks when they become profitable.
Unicom declined to reveal the exact size of the networks and the timetable for the rollout of services. Unicom Executive Vice President Wang Jianzhou would only say that such decisions would "be determined by the market." Industry sources speculate that the new network could accommodate 10 million CDMA subscribers by the end of next year.
Better late than never . . .
Because the victory for CDMA advocates has been such a long time in coming, some suggest that the delays, due to international politics, differences in cultural values and domestic political infighting, have diminished—if not erased—the commercial rationale for narrowband CDMA deployment. Ninety-nine percent of China’s 65 million mobile subscribers are already using the European global system for mobile communications (GSM) network.
But as David Almstrom, business strategy vice president at Ericsson (China), explains: "In China, with this booming market, nothing is late."
Almstrom’s point suggests one answer to the question as to why Unicom finally made the CDMA breakthrough. The Ministry of Information Industry (MII) is aware that the number of mobile subscribers in China is growing faster than even the most aggressive predictions, creating a potential shortage in urban frequency allocation among operators. CDMA squeezes more subscribers efficiently on the 800 frequency. Granting Unicom a green light on CDMA development will help the MII to alleviate bottlenecks as the GSM 900 and 1800 frequencies move toward capacity.
Pressure from domestic manufacturers of CDMA equipment is a second factor that precipitated the go-ahead. Analysts note that before CDMA development was put on hold this past March, Qualcomm shrewdly licensed a select group of domestic telecom equipment manufacturers to produce CDMA equipment. Estimates suggest these manufacturers have poured more than US$200 million into developing manufacturing capabilities. These firms pressured the government to introduce CDMA.
Difficulty wrenching the CDMA networks from PLA-backed New Century Communications and ongoing disputes over Qualcomm royalties have been two other factors that have kept Unicom’s CDMA build-out in limbo. The first was resolved in June when the State Council ordered that the PLA networks be handed over to Unicom. The details of the handover—particularly concerning the debt incurred by Great Wall—remain to be worked out, but the deal is done. Royalty agreements, a cultural sticking point, have also been reached with Qualcomm, which will exact 2.5 percent royalties on CDMA equipment sales and a reported US$27 per chip set installed in CDMA handsets.
Despite the above "contributing factors," CDMA in China has lived and (almost) died in the political arena. Insiders agree that the initial decision to grant CDMA to Unicom was a political gambit meant to win U.S. support for China’s bid to enter WTO in the spring of 1999.
This was followed by a period where CDMA deployment had a commercial rationale, argues Patrick Horgan, director of Apco China's telecoms and information-technology practice, that led up to the February Qualcomm-Unicom agreement.
That agreement was promptly put on ice by Wu and the MII, despite Zhu Rongji’s public commitment that CDMA would be speedily deployed. As the delays dragged on, it required a swing back to politics for CDMA to get a second wind. Pressure from a Qualcomm-led U.S. coalition of businesses came to a head when Qualcomm CEO Irwin Jacobs visited Beijing, joining Premier Zhu Rongji and MII head Wu Jichuan on Oct. 6 at Qinghua University.
What it means for Unicom
Despite the conviction held by most China telecom observers that Unicom has been continuously enthusiastic about the prospect of building out CDMA networks, the late approval makes commercial success more challenging. The only operator in the world running GSM and CDMA networks, Unicom will have to invest to build two infrastructures, while cross-marketing the competing standards.
But telecom analyst Zhu Zhanbei suggests that CDMA provides Unicom with the tool it needs to compete with China Mobile.
"Because Unicom is much smaller and lacks the financial strength of China Mobile," Zhu said, "it would have a difficult time gaining market share unless it could offer a superior service.
"CDMA’s network technology is more advanced, giving it advantages over GSM, particularly in the transition to 3G," he says.
When its CDMA networks attain scale, Unicom may sell its GSM networks to China Mobile or another operator to fund 3G build-outs of cdma2000. Intrinsic Technology CEO Jun Wu calls the CDMA 3G transition "more natural" than the GSM transition and suggests that Qualcomm, with its leading technology, will make "an interesting partner for Unicom."
What CDMA means to suppliers, operators, WAP providers
Analysts estimate that a 10 million-subscriber CDMA network will require US$2 billion in infrastructure, the lion’s share of which will go to American equipment suppliers such as Lucent Technologies, Motorola and Nortel. Ericsson, which purchased Qualcomm’s networking division will also earn contracts. Zhu Zhanbei notes that Lucent, which has steadily lost market share in China’s GSM expansion, has renewed its focus on the China market and stands to gain the most from Unicom’s CDMA launch.
On Oct. 18, South Korean President Kim Dae-jung met with Zhu and gained assurances that South Korean CDMA manufacturers LG, Samsung and Hyundai will also be included in the build-out. The short-list of domestic CDMA equipment suppliers includes Datang, China Eastern Communications, Huawei, Shanghai Bell and Zhongxin.
For operators, CDMA represents a further liberalizing and fragmenting of China’s telecom market. The introduction of competing technologies in tandem with the issuance of more operating licenses complicates the competition. Many speculate that at least one more mobile license will be granted, probably to China Telecom, which may have the option to choose CDMA or buy Unicom’s GSM networks.
Jun Wu interprets the government’s go-ahead on CDMA for Unicom as a way to potentially speed the deployment of 3G systems in China.
"3G is the endgame," says Wu. "The government is finding ways to move to 3G as quickly as possible."
Some speculate CDMA’s introduction foreshadows a three-way path to 3G in China: GSM to W-CDMA, CDMA to cdma2000, and GSM to TD-SCDMA. Technical experts suggest that the domestic 3G technology, TD-SCDMA, heavily backed by Siemens, may take market share from W-CDMA. In short, GSM’s current mobile monopoly in China could crack three ways as we approach 3G.
Both Intrinsic’s Jun Wu and GWcom’s operations manager, Bill Li, agree that CDMA introduction will invigorate their wireless application industry, as carriers increasingly compete with one another by making their own decisions from an array of technology choices and application partners.
"Carriers will increasingly rely on application partners to help them make smart business decisions and to improve their offerings to customers," Li said. "Carriers see that the market is huge, especially for value-added services."
The introduction of CDMA will not affect the overall strategy of application providers, but it will mean more work for them to adapt their services to two systems, Wu said, describing it as a challenge that "raises the technical entry barrier for other system builders."
Qualcomm, which first began negotiations for entry into China back in 1994, has at last gained entry. Unicom, faced with the challenge of building a nearly outmoded 2G CDMA network from scratch in a market that already has 65 million GSM subscribers, appears undaunted. And China’s mobile telecom industry, despite its vagaries, may be the most promising on the globe.
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