Mixed fortunes for CDMA
Although China shows signs of warming again to CDMA, South Korea appears to be cooling its interest.
Graham Wilde
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The world of second generation digital technology has always been, and continues to be, dominated by GSM, a European-inspired digital cellular technology. Thanks to the efforts of the European Commission, which wanted to eliminate the confusion and lack of interoperability in Europe caused by numerous competing first generation systems, Europe became a GSM zone. This instantly created a huge area of demand for a single technology, and gave GSM the momentum it needed to conquer most of Asia and Africa too.
But GSM was never the only second generation technology, and many argued it was not even the best. CDMA, which has since been re-christened cdmaOne by the CDMA Development Group, was developed primarily by US-based Qualcomm from military spread spectrum capacity, and in the minds of many cellular experts offered a superior air interface, allowing greater flexibility to support more users and traffic than GSM. But the European technology had critical mass on its side -- Scandinavia already boasted the highest cellular penetration levels in the world, and many other European countries were following close behind. Furthermore, European second generation operators were mandated to use a common standard. Meanwhile, in the US, cellular penetration was well behind that of Europe, and take-up was dogged by the lack of a common standard and by the regionalisation of cellular services, with limited inter-city roaming capabilities.
However, the cdmaOne camp, and particularly Qualcomm, did not give up and continued to market the technology both inside and outside the US. The first commercial CDMA service was launched by Hong Kong's Hutchison Telecom in September 1995. The Asia-Pacific area soon became a major powerhouse of growth for cdmaOne technology. In 1996, it was launched in Korea, which now has five operators, each with millions of subscribers. In Japan, DDI Corporation launched cdmaOne in July 1998, and IDO Corporation's April 1999 launch completed a nationwide network. In India, Bharti Telenet, Tata Teleservices, Shyam Telelink and MTNL have also adopted CDMA, along with Telstra in Australia.
The China question
It is far from the end of the road for cdmaOne, despite the rush to award 3G licences. Indeed, the biggest prize was only recently claimed. On 19 October 2000, China's second largest operator, China Unicom, announced that it would deploy cdmaOne technology in China's major cities, opening a potentially enormous market for the technology.
The decision to use cdmaOne took many observers by surprise, given that Unicom had earlier been granted the right to use the technology, only to see this revoked in June last year.
China Unicom has established a subsidiary to operate four existing CDMA networks to be acquired from People's Liberation Army-backed Great Wall Communications. Unicom's parent company will finance the rollout, while the listed arm, China Unicom Ltd, will have the option to purchase the networks when they become profitable.
Unicom has not revealed the exact size of the networks, where they will be built, or the rollout schedules. Unicom executive vice president Wang Jianzhou would only say that such decisions would 'be determined by the market'. However, some sources believe that Unicom could have the capacity to support ten million cdmaOne subscribers by the end of 2001.
CDMA's origins in China
The final decision to use cdmaOne in China -- if indeed it is the final decision -- is the culmination of a frustrating stop-start process which began with lobbying by Qualcomm in 1994. Initially, four trial networks were established by the PLA in various locations across China (these are the networks which will be purchased by Unicom). But the networks' trial status was never officially upgraded to full commercial operation, with the result that, although they have paying customers, they were unable to expand their coverage. Their combined share is now one per cent of the Chinese market, with the other 99 per cent of the country's 65 million subscribers being held by the GSM networks of China Mobile and China Unicom.
The State Council, China's most powerful executive body, has conducted a long-standing campaign to limit the commercial activities of the PLA, which at one time ranged from agriculture to nightclubs, and included the four cdmaOne networks. It seemed that transferring ownership of these networks to China Unicom was the perfect solution, but other obstacles lay in the path of full deployment, not least the issue of Qualcomm's royalties. Agreements on these have finally been hammered out, and will see Qualcomm gain 2.5 per cent royalties on cdmaOne equipment sales and a reported US$27 per chip set installed in handsets.
Meanwhile, in the background, a political battle appeared to be raging between China's Ministry of Information Industries (MII) which began to favour killing the deployment of narrowband CDMA in favour of a 3G-based system, and Premier Zhu Rongji who saw a link between the adoption of cdmaOne technology and China's entry into the World Trade Organisation (WTO). The June 2000 decision to abandon cdmaOne was made by the MII's head, Wu Jichuan, who decided that the delays in deployment of cdmaOne had killed the rationale for its use.
In the end, however, it may not have been WTO-related factors that won the day for cdmaOne. Pressure from domestic manufacturers of cdmaOne played a major part. Before CDMA development was put on hold last year, Qualcomm shrewdly licensed a select group of domestic telecom equipment manufacturers to produce cdmaOne equipment. Estimates suggest these manufacturers have poured more than US$200 m into developing manufacturing capabilities. These firms pressured the government to introduce cdmaOne.
Furthermore, cdmaOne's efficient use of spectrum may also have had a part to play. The number of cellular subscribers in China is growing faster than even the most optimistic forecasts, with the result that urban areas are already facing pressure on radio spectrum. Granting the right to build out cdmaOne at 800MHz will help to alleviate problems on some GSM900 and GSM1800 networks.
Local manufacturers
Both foreign and domestic equipment manufacturers are delighted with the final decision on cdmaOne. Local companies such as Datang, China Eastern Communications, Huawei, Shanghai Bell and Zhongxin are gearing up to do battle over infrastructure contracts which are likely to top US$2 bn in the first phase. Despite the impressive advances made by Chinese companies, it is still likely that western manufacturers such as Ericsson (which bought Qualcomm's cdmaOne manufacturing business) Lucent, Motorola and Nortel Networks will win the lion's share of the initial phase of contracts. Nevertheless, local players will expect to do well later -- Huawei Technologies has galloped ahead of foreign manufacturers to be the dominant provider of optical access equipment in China, for example, and sees no reason why it cannot repeat the same trick with cdmaOne.
Korean manufacturers are also keen not to be excluded. South Korean President Kim Dae-jung met with Zhu Rongji in October last year (a visit which closely coincided with the announcement to use cdmaOne) to press for Korean manufacturers such as LG, Samsung and Hyundai to be included in the build-out.
A route to 3G
But while equipment vendors may be lining up to take part in China Unicom's new venture, how keen can China Unicom be on the prospect of rolling out 2G technology when 3G is just around the corner? BWCS's Arthur Drewitt believes the executive team of Unicom may see a way to deal themselves neatly into 3G by using cdmaOne: "Qualcomm and the CDG members have spent a good deal of time developing a relatively smooth upgrade path from cdmaOne to cmda2000. Arguably this is a smoother transition than from GSM to W-CDMA. So Unicom may not perceive that it is wasting money on an outdated technology."
Add to this view the speculation that Unicom's GSM networks may be sold to China Telecom (which would become the third cellular operator, having only recently been forced to spin off its cellular operations into China Mobile) and a potential new order for the Chinese cellular industry emerges.
If Unicom does choose to go to 3G using cdma2000 this will be a major boost for the CDG-backed 3G technology. Ironically, although 3G developers from all corners have recognised the suitability of spread spectrum technology for the next generation of cellular systems, Qualcomm and its associates still find themselves pitted against a powerful opposing lobby in the 3G world. W-CDMA is heavily backed by the GSM world, and, like GSM itself, appears to be gaining momentum outside the US. cdma2000 -- specifically designed to allow a relatively painless upgrade to 3G from cdmaOne -- is the major opposing system to W-CDMA, but has suffered a number of setbacks on the international stage.
The greatest of these came in Korea, which is the largest market for cdmaOne technology outside the US, and traditionally a beacon of success for Qualcomm. Fearing that Korea may find itself isolated on the 3G stage, the Korean government decided to award three 3G licences but to split the awards between two W-CDMA licences and only one cdma2000 licence. South Korea's three established mobile operators -- SK Telecom, state-run Korea Telecom, and LG Telecom -- each applied for the two W-CDMA licences, publicly stating they believed that the standard would account for up to 80 per cent of all 3G cellular subscribers.
Meanwhile, Hanaro Telecom, a local fixed-line operator, submitted the sole bid for a cdma2000 licence in an effort to break into the cellular market. Worse news was yet to come: while SK Telecom and KT Freetel were awarded W-CDMA licences, Hanaro Telecom's cdma2000 bid was rejected by the government on the grounds of lack of technological know-how, despite the fact that the operator had signed development agreements with Ericsson and Marconi. Many observers believe that the government was attempting to force LG Telecom into using cdma2000, but the operator has not yet said publicly whether it will re-submit a bid for cdma2000. The Korean government has said that it intends to award the cdma2000 licence in March this year.
In what looked like a desperate move to shore up cdma2000, Qualcomm's Seoul office declared that the company would join forces with any company wishing to bid for the outstanding cdma2000 licence. On 9 January this year, Park Moon-suh, director at Qualcomm Korea, said: "Qualcomm is ready to partner with Korean firms in bidding for 3G services, which includes equity participation if they want."
Meanwhile, Hanaro Telecom executives were in the US in talks with Qualcomm management about a potential tie-up for the new bid. "Qualcomm will be tempted to forge an alliance with a Korean telecom company to help maintain its revenues from Korea," said Doo Wan-soo, a director at Hanaro. There can be little argument with this assertion, given the statement by Qualcomm's Park Moon-suh, but the question on the minds of Qualcomm's executives must be which operator to partner with.
LG Telecom would perhaps be a better bet than Hanaro, given that it already has operational cellular experience, but LG has yet to commit itself to bidding. Qualcomm could conceivably back more than one bid, but to some extent this would negate its value as a partner to the competing bidders. It could attempt to shoehorn both LG and Hanaro into a single bidding consortium, but from LG's perspective Hanaro may not be bringing much to the table.
Against this background in Korea, the news that Unicom will push ahead with cdmaOne and the speculation that it may move on to use cdma2000 is a welcome relief for Qualcomm's international team. Ultimately, the potential demand in China far outweighs anything that could be achieved in Korea, even if all the 3G licensees used cdma2000. But, as Qualcomm knows from bitter experience, China is an unpredictable market, so it needs to devote some effort to developing cdma2000 in other countries. *
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Graham Wilde, freelance writer |
