Red Hot and Wireless
By Eric Ransdell, Thu Mar 14 00:00:00 GMT 2002

Can any one (foreign) company dominate the entire Chinese market?

Corporations spending like mad to gain market share. Older, established companies under constant threat from aggressive upstarts. Top-flight engineers commanding salaries that would have been unthinkable only a few years ago. And venture capitalists banging down the doors of even the smallest startups in the hopes of getting in on the ground floor of the Next Big Thing.

Sound familiar? No, it's not Silicon Valley in the mid- to late-1990s. It's the Chinese wireless market at the dawn of the new millennium. As most people know by now, in late 2001 China finally surpassed the United States to become the most mobile nation on earth. At present the country has 145 million mobile phone users and is adding 5 million new subscribers each month.

A downturn in subscriptions at the end of 2001 had many analysts claiming that the Chinese wireless bubble was about to burst. But since the beginning of 2002, subscriptions have returned to the 5 million a month range. On the whole, China's Ministry of Information Industry (MII) predicts the wireless market will grow by an astounding 40 percent in 2002.

"In terms of growth, this is a Golden Age," says Fan Zhang, a vice president with the global venture capital firm of Draper Fisher Jurvetson who leads the firm's investing activities in Greater China. "I think what happened at the end of last year was just a blip. If you look at the current penetration rate of 145 million out of a population approaching 1.4 billion, it's pretty apparent that this is not the moment when the growth curve is going to taper off."

So who's going to win in what has become the world's largest wireless marketplace? Ericsson, Motorola and Nokia have long dominated the Chinese mobile arena both in terms of handset manufacturing and infrastructure. And despite increasing competition from other foreign players as well as aggressive mainland manufacturers, the Big 3 show no sign of losing their lead.

Pole position

But can any one company dominate the entire Chinese market? It's doubtful. Ericsson, for example, went through a period of ups and downs in recent years and lost sizable market share in the handset business. Yet it has more than made up for that by capturing 40 percent of the infrastructure business, where it is the current leader. Nokia and Motorola are in hot pursuit, but should one take over the Number 1 slot, they are almost certain to lose it.

"It's a very difficult position to maintain," explains David Almstrom, a Beijing-based telecom consultant. "Because the Chinese government and the local operators are always looking for a balance. So much so that if you're in first place you almost can't do anything but lose market share."

"The feeling among Chinese operators is that if you partner with a single vendor you might be missing out on all the other technologies," says Connie Hsu, manager of Pyramid Research in Hong Kong. "Beyond that it's a pricing game, if you play vendors off each other you can get the lower prices."

Among other foreign players, both Germany's Siemens and France's Alcatel have made significant inroads into the Chinese wireless market through strategic partnerships with mainland companies. Alcatel's merger with Shanghai Bell gave it instant credibility and the company has been winning a succession of contracts. Siemens took a different route, partnering with Datang, a subsidiary of the government's Chinese Academy of Telecommunications Technology (CATT), to develop TD-SCDMA, a mainland alternative to foreign CDMA standards.

Trouble with the neighbors

This year China Unicom is launching the country's first nationwide CDMA network. While most foreign players are salivating over the prospect of a new wireless market, companies from Japan and Korea are in no position to gain dominance in a market despite the fact that they are on the cutting edge of CDMA research and development.

Thus far, the Koreans have fared better. Samsung's handsets have proven to be a hit among trendy urbanites and the company has won some contracts to build out the CDMA infrastructure. Yet few view Samsung or other Korean companies as a major threat. "In the China market you need to cooperate and communicate with domestic companies in order to get the kind of preferential treatment that results in big contracts," says one Chinese analyst based in Shanghai. "Korean companies always like to hide themselves. The reason is competition, they are afraid of giving too much technology to China. But it seems like arrogance, like they are number one and they are looking down on all the others."

The Japanese have problems of their own. The most formidable being the deep resentment most Chinese feel over the Japanese occupation of their country during WWII. Because of the fierce competition in their own domestic market, most Japanese companies were late to the China game. "The established players are so strong and so embedded here that the Japanese have never quite got their feet on the ground in China," says Craig Watts, a telecoms analyst with the Beijing-based consulting firm, BDA China Limited. "But they have good products and if they played their cards right they could do very well."

Japanese handset designs appeal to Chinese consumers, especially young urbanites who look to Tokyo as the trendsetter for all Asia. Features such as color screens and digital picture phones that have been pioneered by Japanese firms are expected to be huge sellers in China. The question is - how can the Japanese capitalize on a market that is shaping up to most closely resemble their own? Many analysts feel one answer can be found in the Sony-Ericsson partnership, whereby the Japanese enter China by joining forces with an established foreign player.

But the days when foreign companies were assured of their domination may be coming to an end. When the government granted licenses to manufacture CDMA handsets, out of 19 companies only one (Motorola) was non-Chinese. One the infrastructure side, mainland companies like Huawei and Jingxing are rapidly gaining market share thanks to heavy spending on research and development. "The speed of their market share growth and technology development is impressive," says Draper Fisher Jurvetson's Zhang. "They're fearless, they're aggressive and they are not satisfied with their current position of being younger brothers here."

What's happening with mainland handset manufacturers may offer a preview of things to come in the infrastructure business. "We're seeing more phones being produced by Chinese manufacturers with Chinese brand names," says Zhang. "That's a trend that's going to be hard to reverse. I think it's pretty certain that mobile phone manufacturing by domestic companies is going along the same path television and home appliances have gone through."

From rice cookers to 3G handsets

Not surprisingly, some of the companies attempting to take market share away from the foreign handset manufacturers are the same companies that overtook Sony, General Electric and Sharp in the Chinese television and home appliance markets. One of the most successful is TCL, a home appliance conglomerate that makes everything from televisions to washing machines. The company only entered the handset business three years ago, but it is already the most profitable and third largest of Chinese handset manufacturers.

Ningbo-Bird is China's leading handset maker. In its previous incarnation, it was the country's biggest pager manufacturer. Because of the affinity of its previous business, Ningbo-Bird was one of the first mainland companies to move into handsets. Like TCL, it utilized a pre-existing sales channel to flood the market with handsets that, generally, were cheaper than foreign models while offering similar functionality.

The domestic handset manufacturing sector has exploded in the last few years. At the moment, there are 49 licensed mainland handset manufacturers - 30 GSM and 19 CDMA. Almost all of them were in previous businesses ranging from software to former state-owned enterprises. Because of their lack of telecom expertise, almost all are dependent upon technology and designs they outsource from foreign manufacturers.

Ningbo-Bird, for example, uses Sagem design and technology. TCL had a hit last year with a branded version of Samsung's Anycall phone which it sold for $121 less than Samsung could sell the original in China.

With their extensive research and development capabilities, Nokia, Ericsson and Motorola are expected to dominate the high-end handset market (above $480) where margins reach 40 percent. Surprisingly, the Big 3 have also fared extremely well in the low-end market ($120 and below). But the fiercest competition lies in the mid-range where mainland manufacturers are concentrating their efforts. While foreign firms still enjoy the lion's share, that may not last long.

One domestic manufacturer that everyone is watching is Keijian, a former research institute affiliated to the Chinese Academy of Sciences. Unlike other domestic players, Keijian is attempting to free itself from a reliance on foreign technology and design by using its own R&D to produce phones that are tailor-made for the Chinese market. "Their technology is very strong," says Yuzhu Xiong, CFO of Xel Limited, a Beijing-based provider of embedded Bluetooth solutions. "In a handset business like this one, where companies are putting out new models every 3-4 months, if you have a strong technology team, you're capable of doing everything that's new and profitable."

Like the handset business, the mobile services sector is also experiencing exponential growth. Because of foreign-ownership restrictions, all MSPs (mobile service providers) are mainland companies. Yet almost every MSP is funded by foreign capital or through partnerships with foreign companies. Analysts expect that Chinese companies will dominate this market even after WTO agreements allow foreigners a 51 percent ownership stake. "There's no doubt the locals will have a huge share of this market," says Tom Kirkwood, CEO of Mobile Internet Asia Limited, a Beijing-based venture capital firm, "but in reality you won't be able to distinguish between local companies and foreign players because of the amount of foreign investment."

For the near term, Nokia, Motorola and Ericsson are all expected to dominate. But with tough mainland competitors such as Huawei coming on strong and new hybrid companies such as Alcatel-Shanghai Bell emerging, the competitive landscape is changing almost as fast as the technology itself. So who's going to win in the long haul? As Zhou Enlai, the popular Prime Minister under Mao Tse-Tung, once said when asked what he thought of the French Revolution: "It's still much too early to tell."

Eric Ransdell is the former Silicon Valley Bureau Chief for US News and World Report magazine. Now living in Shanghai, he covers mobile technology in Asia.