China Unicom: Free at Last

Posted by: Bruce Einhorn on June 2, 2008

China Unicom, the country’s also-ran cellular player, has always had to operate with a major handicap. Back in the 1990s, Zhu Rongji, the economic czar who later became premier, wanted to score some points with the U.S. and so decreed that one of the state-owned cellular operators would adopt the CDMA standard developed by San Diego-based Qualcomm.

Never mind that China already had embraced the rival GSM standard. And never mind that building a parallel CDMA network would be wasteful and put whatever company operated it at a big disadvantage. This was about politics, not business. China Unicom, the company that got stuck with the chore of building and operating that CDMA network, never really recovered from the blow. The company struggled on, trying to run both the CDMA network that the government wanted and the GSM network that users wanted.

But Unicom couldn’t compete with China Mobile, which not only was the only other company allowed to operate cellular service, but also ran a GSM-only network and didn’t have to worry about CDMA at all. Not surprisingly, China Mobile became the world’s largest cellular operator, with over 300 million subscribers and a dominant share of the Chinese market. China Unicom was a very distant second.

Well, Unicom’s misery is finally over. After trading ended in Hong Kong this afternoon, the company announced it will merge with China Netcom, one of two fixed-line operators, in a deal worth $56 billion. The merger has been the subject of much speculation for months, if not years, and the government on May 24 more or less said it would be happening. A joint statement from the Ministry of Finance, the Ministry of Information Industry, and the National Development Reform Commission on May 24 urged the companies to join forces.

The idea is a combined Unicom and Netcom would have some heft so the merged entity can compete better against its bigger rivals as Beijing finally opens up the country to 3G. At the same time, Unicom also will be shedding its CDMA network, selling it to state-owned rival China Telecom for $15.8 billion.

But still unclear is what type of 3G network the new-and-improved Unicom will be operating. For most of the past decade, Chinese engineers have been hard at work on a local alternative, TD-SCDMA, to the 3G standards popular in the rest of the world. The Chinese government has invested a lot of money, time and prestige in this project, but it’s no secret that the telecom operators themselves would much rather stick with the already-developed standards that have proven track records outside the country. So Beijing is probably going to have only one company operate the Chinese-made standard. Will China Unicom, having operated a network for political reasons once before, have to do it again?

Reader Comments

Dan Butterfield

June 2, 2008 7:04 PM

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It may be China Mobile's turn to fly the Spruce Goose. But I doubt the world's largest carrier will be left alone to pilot TD-SCDMA. My guess is that China Unicom will sit in the navigator's seat.

When the telecom restructuring dust settles and 3G licenses are finally issued (after the Olympics), I expect that TD-SCDMA and W-CDMA licenses will be issued to both China Mobile and China Unicom. China Telecom will run CDMA2000.

http://idannyb.wordpress.com/2008/05/26/china-telecom-restructuring-and-iphone-in-china/

http://idannyb.wordpress.com/2008/02/01/rumor-china’s-td-scdma-3g-may-not-be-long-for-this-world/

Goulin

June 3, 2008 12:38 AM

The Chinese Telecom industry is experiencing a dramatic change. With the opening of the market, foreign companies are coming to compete with Chinese companies side by side. With the advanced technologies, it is hard for Chinese comapnies to win. With this in mind, Chinene government has put lots of money and efforts to improve the technology with the goal of building a technology country. Under this circumstance, TD-SCDA was generated which is latest standard deployed in this word with the other two adopted by USA and EN countries separately. This new standard has several meanings. It shows Chinese companies are equally important as many other western companies. Also when a new rule is to be set to govern the telecommunication industry, Chinese company also has something to say. Above all, Chinese company can have is own standart, unlike 10 years ago when all the stardards were made by USA. Certainly this could break the monoply by USA companies. Also lots of patent fee can be saved. But there is no need to use all the three different standards. It is right to use market force to decide which one will last and consumer's approval. I am afraid what it will be if the Chinese standard can't stand out with the other two standars. That will definitely put Chinese companies in a embarrassing situation because lots of money were spent and this is still consideres as a national pride. I pray that the TD-SCDA will dominat eventually so that these companies can live up with the consumers. But it is still too earlier to make a judgement. The recent merger of these mobile operator is to consolidate them to form a more flexible and more competitive new companies which can face international competition. Is there going to be a layoff? Will there be more bureaucracy? Who knows? But these companies are still publicaly traded companies. The transparency should prevent this kind of things to happen. Overall, it will be a win-win situation.

Brent Loo

June 3, 2008 1:30 AM

i think this move will better facilitate the competition and let the consumers enjoy benefits in this merger. Let's just see the results.

Kevin Prest

June 3, 2008 2:11 AM

I can't see Unicom-Netcom being the only operator to be saddled with TD-SCDMA. The Chinese government cares enough about TD to delay 3G licenses for 4+ years to wait until it's ready, not to mention sinking tens of billions into equipment companies like Datang, so they're definitely going to support it in the market too. And the whole point of the restructuring was to increase competition, which definitely won't happen if Mobile is given the more mature standard. If China Mobile is allowed to construct a WCDMA network and Unicom-Netcom is given TD, the smaller company will be completely crushed - in addition to the lack of handsets and the technical difficulties TD is still facing, Mobile has over three times as many subscribers, and you can see from the ARPU figures that most of Unicom's GSM customers are pretty low-end users.

Having said that, I'm still pretty sceptical about the conventional wisdom that Unicom-Netcom will be given a WCDMA license (even with a 6-month delay) - my guess is that the government will want to protect their domestic standard from even this much competition, so Unicom-Netcom could well get TD-SCDMA as well.

Jason Zhan

June 3, 2008 7:28 PM

This time the telecom reform is still a bureaucratic balance which has happened before during the first telecom reform in China. After reforming, China government released three different 3G licenses to each of them, China Mobile, China Unicom and China Telecom, respectively. Since China Telecom only held fix-line business, after acquiring the CDMA-X1 (which can be smoothly updated to CDMA2000) asset from China Unicom, it will possess the CDMA infrastructure to provide mobile service to enter this lucrative market. TD-CDMA is a tremendous step for China to wean from foreign technologies. It has to demonstrate an excellent performance, since lots of efforts have involved in. It’s shrewd to issue the TD-CDMA license to China Telecom in terms of its market shares and capabilities. I believe during the Olympic Games, the TD-CDMA will be established in Beijing by China Telecom. On the other hand, the new formed China Unicom is allowed to import WCDMA which is an almost mature and demonstrated technology. This helps China Unicom to launch its CDMA business without too much technology handicaps.

Dan B

June 4, 2008 1:19 AM

Assuredly China Unicom will not be the sole supporter of TD-SCDMA in China.

In the aftermath there will be three (3) newly re-organized China telecom – China Mobile, China Telecom and China Unicom/Netcom – each with a 3G license. None yet officially have a 3G license. Last May (2007) China made it clear that there would be three (3) 3G standards approved for use in China and they would be China’s own TD-SCDMA, and global standards W-CDMA and CDMA2000.

China has been deliberately coy about which China carrier will gain each particular 3G license. According to the China Ministries overseeing this process, 3G licenses will be put off until after the China telecom industry restructuring process has been completed. This delay is really a subterfuge that buys time for the nascent "China built" TD-SCDMA 3G to overcome its many technical shortcomings. Billions have been spent and TD-SCDMA is years late. “Hard cold truth,” TD-SCDMA may soon be allowed to fade out like an Olympic flame after the closing ceremonies. Despite TD’s dimming prospects, there is national "face" to be lost if TD-SCDMA does not demonstrate its ability to fly ... Think Spruce Goose.

Based on the unfortunate political reality of China’s “TD” 3G needing to fly, I expect no 3G licenses to be issued for at least another 3 months. If China really wants TD-SCDMA to win the “3G gold,” the Ministry of Information & Industry may choose to delay issuance of the 3G licenses until late 2009. In my view China cabinet officials will be making a serious mistake if they drag out issuance of 3G licenses past the Olympics. Government shouldn't be in the business of picking technologies! And providing excessive advantages to TD-SCDMA would be folly. History might just repeat and you needn't look far for a good example. In the 1990s Japan effectively walled off their telecom market by dictating a national wireless standard known as PDC. Foreign tourists and business travelers couldn't use their handsets while visiting in Japan and the PDC experiment ultimately failed. Now Japan has adopted world wireless standards, notably W-CDMA and CDMA2000, and they are taking a leadership role in advancing 3G and soon 4G standards.

Thus far China’s "TD" experiment shows no signs that it will provide any payback on the billions that have already been expended. One can only hope that China will listen to many of their own carriers and equipment vendors who are privately suggesting that "indigenous" TD-SCDMA is not helping their cause.

Okay ... I digress ... Back to China 3G sleuthing ... It has been assumed that each China wireless carriers would obtain just one (1) of the aforementioned 3G protocols. I think that assumption will prove wrong. The only certainty is that China Mobile will be assigned TD-SCDMA. In my view, China Mobile and their partners in China will be obligated to put forth "best efforts" to make TD-SCDMA work. Yet China Mobile understands that this task is daunting and hence they will need a backup plan. Call it a 3G disaster recovery plan. China Mobile has already committed to development of 4G LTE. Despite its promise LTE is not ready and China needs a reliable high-speed network now. So China Mobile’s best disaster recovery plan, in my view, will be to obtain a second 3G license. Wang Jianzhou, China Mobile's Chairman, was rumored to be retiring. Yet very recently we have learned that he will be staying in his CEO role. Wang knows how to build out networks and I think (complete guess) he is staying with the foreknowledge that W-CDMA is "in the bag" for China Mobile.

Bottom-line ... just a my guess ... China Mobile and China Unicom will both receive TD-SCDMA and W-CDMA 3G licenses. China Telecom gets CDMA2000.

To carry my Spruce Goose metaphor a bit further, China Mobile will pilot TD-SCDMA and China Unicom will be in the Navigator's seat

Dan Butterfield
Editor, iPhonAsia
http://idannyb.wordpress.com/

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