China's 3G Mobile Marathon

A new homegrown wireless standard, TD-SCDMA, is being rolled out in time for the Beijing Olympics. Will it win gold or create headaches for global players?

by Brian Bremner

China has been a holdout in joining the world of next-generation mobile telephony, while consumers in Seoul and Tokyo enjoy blistering network speeds, greater voice capacity, and a range of interactive data features.

The go-slow approach has had its benefits. It has given Chinese telecom-equipment makers time to develop and debug a homegrown wireless standard that's likely to upend competitive dynamics in the world's biggest mobile-phone market.

Showtime is finally nearing for the standard, TD-SCDMA, or time division synchronous code division multiple access. It has been billed as a sign of China's growing technological sophistication, and China's Ministry of Information Industry is expected to hand out licenses early next year so that providers and handset vendors will be fully operational by the 2008 Beijing Olympics.

Licensing Rights Bonanza

It remains to be seen whether TD-SCDMA will evolve, as China hopes, into a rival global standard to W-CDMA (wideband CDMA) and CDMA2000 EV-DO (evolution data optimized). But the standard will surely give the mainland wireless industry a boost. "A lot of the core TD-SCDMA intellectual protection (IP) rights are held by Chinese companies, which means IP licensing fees will be lower than for competing international standards," says Vincent Dong, a Beijing-based senior analyst with Norson Telecom Consulting. "And the standard's Chinese origins mean that most of the major players in the TD-SCDMA value chain are Chinese."

True as that may be, the standard will also make life a lot more complicated for the mainland's big mobile service providers, such as China Mobile (CHL) and China Unicom (CHU)—and possible new competitors China Telecom (CHA) and China Netcom (CN) (see BusinessWeek.com, 11/1/06, "BW CEO Forum: China Mobile at Full Speed"). Now, the country's 420 million mobile-phone users primarily use one of two major 2G wireless networks: China Mobile's GSM (global system for mobile communications) or that of China Unicom, which supports both GSM and CDMA standards.

Of course, not everyone in China is going to trade up to a next-gen mobile handset, and those who do may not be keen on a TD-SCDMA 3G phone right away. It's new, untested commercially, and won't be available in overseas markets for some time, so Chinese consumers can't take advantage of 3G services abroad.

Challenges for Handset Makers

The new standard will need to be reliable and gain scale to succeed, analysts contend. "There will be some sort of regulatory support for the Chinese standard, but it will have to prove itself," figures Ted Dean, managing director at telecom research and advisory firm BDA China, based in Beijing.

So how will mobile-phone operators and handset manufacturers cope with the fledgling standard? For starters, they will probably need to develop hybrid 3G networks and phones that use both the Chinese standard and one of the established rivals, either W-CDMA or CDMA2000. Meshing these networks will be a real headache for Chinese telecoms. "Integrating these into a single hybrid network will increase the complexity and therefore the cost, and operators run the risk of poor service quality," says Dong, the Norson analyst.

For major foreign handset manufacturers such as Nokia (NOK), Motorola (MOT), Samsung (SAMCF) and LG, as well as Chinese players like ZTE and Huawei, there are some big challenges, too. They will need to fashion multimode chipsets to support two 3G standards, and these new products probably won't be available until late next year.

Gaining Goodwill in Beijing

Like it or not, handset makers will swallow the additional costs and cope with the new design issues. China is too colossal and critical a market to ignore. What's more, it's probably wise to stay in the good graces of Beijing's telecom regulatory mandarins by supporting the fledgling Chinese standard.

Korean handset makers such as Samsung and LG have already developed and begun testing TD-SCDMA handsets. "Even if TD-SCDMA turns out to be niche and not mainstream, the Korean companies' efforts will probably be appreciated by the Chinese authorities," says Sam Hahn, a telecom equipment analyst at Samsung Securities in Seoul.

There are strategic reasons for doing so, too. Both companies are focusing on mid- to high-end markets, and view the arrival of 3G services in China as a choice opportunity for a market-share grab. "Our basic stance is to supply whatever handsets our clients want, as long as we see certain margins," says a spokesman with Samsung Electronics, which is No. 3 in China, behind Nokia and Motorola. "We already have several W-CDMA phones being marketed elsewhere in the world, so whether China goes for W-CDMA or TD-SCDMA for the country's 3G standard, we are prepared."

The wild card is how quickly the public will clamor for 3G phones and data services. Players are betting that tech-happy, early adopters will surely be interested. "There are still many users who want access to improved data services and other 3G value-added services, such as full-track music downloads," Dong says. And for those who want more data services but don't want to pay more for a 3G handset, Chinese telecoms will continue to upgrade existing 2G networks.

For everyone else, come 2007, China's 3G race is on.

Bremner is Asia Regional Editor for BusinessWeek in Hong Kong.