What a difference 20 years makes in China - now that the government has discovered the telecom growth hormone in Chinese medicine.
Twenty years ago, China had some 260 million fewer people, and its market economy reforms had just begun. The country's one telephone company, China Telecom, had only about seven million customers, the majority being businesses, not homes. Today there is a new China, now the world's third largest economy, and the differences between old and new are most striking in its telecommunications sector.
Five major carriers and many lesser service providers are now serving some 145 million fixed line customers and 100 million mobile customers. Apart from mere numbers, China has one of the fastest growing telecom sectors in the world in terms of usage, services and infrastructure.
According to China's Ministry of Information Industry (MII), the country's telecom sector will grow at an average rate of at least 20 percent per annum over the next five years, and the total number of telephone users will reach 500 million, a penetration rate of 40 percent of this huge country. Currently, the penetration rate for all of China is 7.7 percent. In Beijing it is 27.7 percent and in Shanghai 24.5 percent.
Mobile communications, with 40 percent of all telephone subscribers, is the area of greatest telecom growth in China. While overall telecom revenues in 2000 increased an impressive 25 percent over the previous year, the revenues of China's two mobile carriers, China Mobile and China Unicom, increased by 31 percent and 58 percent respectively. According to Hanh Tu, vice president and general manager of service provider operations, Cisco Systems (China), the mobile market is growing at about 1.5 million per month, and will reach 300 million subscribers by 2005.
China's mobile usage is well past the tipping point. Kaili Kan, dean of the School of Business Management, Beijing University of Posts & Telecommunications, and former senior deputy director of the Economic & Technological Development Research Center of China's MII, predicts that the number of mobile subscribers will exceed the number of fixed subscribers well before 2005.
Chinese medicine and the brothers chen
The telecom growth hormone in Chinese medicine is IP (Internet Protocol) telephony. In China, this has had a lot to do with two brothers named Chen who ran a small computer shop in the Fujian Province.
In the mid 1990s, the Chens and other computer shops and Internet service providers discovered how to provide domestic long distance and international IP calls to the public over the country's telephone network backbone. By 1998 these small firms were hugely successful, taking more and more traffic and revenue away from China Telecom, which was the official domestic and international long distance monopoly. They charged a fraction of what China Telecom charged. Customers loved it.
China's MII and China Telecom resisted and blocked IP telephony operations at every opportunity. In March 1999, a local subsidiary of China Telecom confiscated the Chens' computers and IP equipment and sued them in court. China Telecom won at the trial level, but the Chens appealed and the decision was overturned.
The court observed that there was no law or regulation against the practice. Then, in a stunning reversal of policy, the government decided to fully authorize IP telephony as a new value-added service rather than a part of the long distance market. In that way China avoided spending years, as the United States did when AT&T was a long distance monopoly, debating whether to open the long distance market to competition.
In late 1999 the MII granted trial IP telephony licenses to three major carriers, China Telecom, China Unicom and Jitong Corporation. China Netcom and China Mobile were later granted licenses as well. The trials were all successful, and the licenses were soon made final.
The Chinese people have been flocking to IP services ever since, many buying mobile phones and prepaid calling cards, because they are less expensive than traditional circuit switched services. As a result, and because the business is profitable for the carriers, there are now strong motivations for the rapid expansion of China's packet switching infrastructure, especially for mobile services.
China Mobile, with a 75 percent market share of the mobile market, now provides IP telephony services to 262 cities in China, and China Unicom, with the remaining 25 percent market share, provides IP services to 293 cities. "I expect that China will make the transition from circuit switching to packet switching faster than any other country," says Kan.
And rates continue to drop. China Mobile lowered its rates to foreign countries up to 50 percent last month. Calls to the United States, Canada, Japan, Korea and Australia are now about $.29 per minute. Domestic long distance calls remain at about $.05 per minute.
Marching toward 3G
Strong demand for mobile services is driving development of new mobile technologies in China and a swift build out of infrastructure. Of China's 100 million mobile subscribers, more than 80 million are GSM (Global System for Mobile communications) users. The remainder are CDMA (Code Division Multiple Access) and analog users.
China Mobile, the larger of China's two mobile telecoms, has announced that it will soon terminate its analog services, which currently have only 3.25 million subscribers, and will concentrate on expanding its GSM services and implementing GPRS (General Packet Radio Services) and 3G (third generation) services. It plans to introduce GPRS services next month.
China Unicom is also on the move. Last month it selected Lucent Technologies Inc., Motorola Inc., Nortel Networks Corp., Samsung Electronics Co., Telefon AB L.M. Ericsson and five Chinese manufacturers as their partners to deploy an $8.5 billion CDMA system for 50 million users throughout the country. The foreign vendors are participating in the deployment via local joint ventures with the Chinese partners.
Qualcomm Inc., which developed the CDMA technology, stands to earn tens of millions of dollars in royalties on CDMA equipment and handset sales and possibly hundreds of millions if handset sales grow and China Unicom follows through with its plans for the network.
In addition, China Unicom is expanding its GSM capacity to support another 200 million users, extending the coverage of its digital and IP networks to over 300 cities. Currently, China Unicom has 550,000 CDMA users on small-scale networks in Beijing, Shanghai, Tianjin, Xian and Guangzhou.
According to Peter Lovelock of Madeforchina, a telecoms and Internet consultancy in Beijing, the success of foreign companies in winning contracts for China Unicom's CDMA deployment indicates that foreign investment and technology transfer continue to be important factors in China's mobile development.
"It also demonstrates that there are still significant opportunities for foreign involvement in this sector," Lovelock says. Lovelock heads the Insight Division of Madeforchina and is also deputy director of the Telecommunications Research Project at the University of Hong Kong.
China's fastest growing mobile communications service, says Lovelock, is Mobile OICQ - to be known in China as QQ - a short message service (SMS) that in some provinces accounts for 400,000 messages per day. The service, provided through inter-linkages of mobile operators' GSM, SMS and WAP (Wireless Application Protocol) systems, enables mobile phone users to exchange short messages while online with other users. Rough statistics show that at least three million messages are exchanged through Mobile OICQ each day in China. The total volume this year is forecast to be over ten billion messages.
3G or not 3G
Despite strong mobile growth and demand, China's 3G strategies and commitment seem tentative. According to Kan, the government is still considering which 3G system or systems it will adopt. "The government and operators do not see the 3G market coming soon in China. Thus, China is most likely to take a wait and see attitude," he says. The decision will not be made before 2002, according to the MII.
One reason for the government's delay in adopting a 3G system might be its hope that a proprietary Chinese system will emerge. The Chinese Academy of Telecommunications Technology, with help from Siemens of Germany, has developed and patented a 3G technology for China called TD-SCDMA (for Time Division-Synchronous Code Division Multiple Access). The system was tested last month in Beijing, but the trials were widely deemed unsuccessful. China's two mobile operators are provisionally planning to adopt versions of CDMA, CDMAOne for China Mobile and CDMA2000 for China Unicom.
Meanwhile, according to Lovelock, Japan has proposed to China that the two countries jointly develop a new low-cost Internet technology for 3G mobile phones that will enable users to send and receive dynamic pictures smoothly.
For Japan, the main purpose of cooperating with China on this project is to establish an international standard for 3G mobile communications. According to the Japan Economic News, the participants would include Japanese mobile phone operators NTT DoCoMo and KDDI and mobile phone manufacturers Sony, NEC and Fujitsu.
"Given China's success with the International Telecommunication Union in having its 3G technology standardized, Japan obviously hopes that its cooperation with China will gain it a voice in the standardization process," says Lovelock. When 3G comes to China, it will be big, claims David Williams, director of technology investment banking in Merrill Lynch's Corporate and Institutional Client Group in Palo Alto, California. "There will be immense opportunities for investors as well as Chinese and foreign companies," he says.
"Once technology issues are resolved and the market starts to move, 3G will be a platform shift with a new playing field. Legacy companies will find it hard to compete in this market owing to a more bureaucratic mentality and ties to older technologies."
Taking their medicine
The important thing about Chinese medicine is that most of the ingredients are natural. In economic terms, nothing is more natural than the laws of supply and demand. The huge demand for mobile communications in China suggests that the Chinese mobile Internet is just around the corner.
David James is president of Business Strategies International, a San Francisco-based consulting and venture-development firm specializing in Asia-Pacific business opportunities.