CDMA in China
By Eric Ransdell, Wed Jul 24 00:00:00 GMT 2002

What a long strange trip it's been...

Though it’s never been scientifically proven, it’s fairly safe to say that the Chinese are the most number-obsessed people on earth. When municipalities hold auctions for vanity automobile license plates, bidding for the lucky number 8 – whose pronunciation is the same as that of the Mandarin word for “make profits" - often reaches into the hundreds of thousands of dollars.

Similarly, throughout China most high-rise apartment buildings and skyscrapers have no fourth floor. The reason being that the number 4 is the unluckiest of all numbers because its pronunciation is identical to that of the Chinese word for death.

No one in China is equating the numbers 133 with death, but it has proven to be a very unlucky number for China Unicom, the nation’s second-largest mobile operator. 133 are the first three digits for subscribers on China Unicom’s new CDMA network that was launched in 12 of the country’s wealthiest provinces in January of this year. And despite a society that is almost as obsessed with its mobile phones as it is with lucky numbers, very few Chinese are dialing 133.

China currently has 176 million mobile subscribers – a figure that not only makes it far and away the world’s largest wireless nation., but also points out the failure of CDMA to find an audience in the world’s fastest growing mobile market. By the end of June, Unicom had only 936,000 users, whereas in the first six months of 2002, the number of Chinese mobile subscribers grew by 31.35 million.

Its inability to attract more than 3 percent of this year’s new subscribers has sent the company’s shares tumbling. In late June, shares of China Unicom, which is publicly listed on Hong Kong’s Hang Seng exchange, hit an all-time low of HK$5.90, with investors worried the operator would have to resort to cost-cutting and incentives to lure new subscribers onto its network.

The bigger question is why has China Unicom’s CDMA offering fared so dismally in a market growing by 4-5 million subscribers a month? Most analysts agree the problem isn’t the technology. In neighboring Korea and Japan, CDMA has been a big win for mobile operators. And in China CDMA is reportedly living up to its promise of better voice quality.

Trouble at the Top

So what happened? CDMA’s torturous road to official acceptance is part of the problem. Qualcomm, the San Diego-based corporation that invented CDMA, began negotiating with the Chinese government for a CDMA network in the early 1990s. Unlike European manufacturers, who entered the wireless market primarily through deals with regional players, Qualcomm embarked on a strategy of negotiating with the very highest officials – enlisting no less a personage than Bill Clinton (whose commerce secretary Bill Daley raised the issue at least three times with Prime Minister Zhu Rhongji) in support of its cause.

Qualcomm’s value proposition to the Chinese wasn’t just what it claimed was a superior wireless technology. It also positioned CDMA as an antidote to foreign dominance of the Chinese wireless market, pointing to South Korea as an example, where Qualcomm had worked early on with manufacturers and operators with the result that Korean companies were able dominate their home market.

“Qualcomm had a good product and a good strategy that appealed to domestic vendors, but it got tangled in politics between US and China,” says Craig Watts, a telecom analyst with Norson Telecom Consulting in Bejing. "It was turned into a bargaining chip that the Chinese government could use.”

And use it they did. When American warplanes bombed the Chinese Embassy in Belgrade in 1999, China’s CDMA plans were suddenly put on hold. But that was nothing compared to the use of CDMA as a political football during the protracted negotiations over China’s entry into the World Trade Organization. As Terry Yen, a Beijing-based official with the CDMA Development Group told Newsweek last year,” "China knew that America cared about this issue. They've viewed CDMA as a way to signal their displeasure with U.S. policy or events."

Not surprisingly, it was Prime Minister Zhu Rongji who finally pushed the deal through. The Chinese Prime Minister has long been viewed as the nation’s biggest proponent for entry into the WTO. So it was seen as more than a coincidence when after China gained full-fledged WTO membership in December of last year, Unicom was able to launch its network a month later.

Yesterday’s Network Today

And therein lies the second problem with CDMA in China. The network Unicom debuted in January 2002 is based on Qualcomm’s CDMA95 technology – a standard the rest of the world is busily migrating away from. With few exceptions, it offered Chinese consumers little to differentiate itself from its GSM competitors. “CDMA was such a fiasco getting off the ground,” says Norson’s Craig Watts. “And when it finally did it was a network that was 2-3 years behind schedule in a market where GSM is already running the show.”

China Unicom’s marketing strategy didn’t help matters. The company’s attempts to position its new network as the choice for high-end users has largely failed to convince China’s early adopters to make the switch. The biggest deterrents have been handset prices and availability. Though China Unicom has been offering discounts and bundling minutes, CDMA handset prices range from US $375 to $1000 in a market where a GSM handset can be had for under $100.

What’s more, these handsets are not generally available. “Even in Unicom’s branded CDMA stores, you only find a two or three different models,” says Kenneth Leung, chairman of Irwin Capital, a Hong Kong-based venture capital and consulting firm that works with CDMA manufacturers in China and Korea.

According to Leung, most of the 19 manufacturers (Motorola and 18 mainland companies) who were given licenses to produce CDMA handsets are taking a wait-and-see approach. “They’re not being very aggressive in trying to start their own manufacturing,” says Leung. “Most of them are just buying them from Korea on an OEM basis for $200 and reselling them in China for $375 to $500.”

Through the Cdma LookingGlass

Yet as strange as it may sound, Leung and almost every other analyst believe that CDMA will be a success in China. With China Unicom scheduled to roll out its CDMA2000 1x network in Beijing and Shanghai in October, CDMA will finally have something with which to differentiate itself. Most analysts feel the Chinese market is ripe for 3G CDMA, which has already proved to be a huge hit in neighboring Korea.

But unlike Korea, where the transition from CDMA95 to CDMA2000 was a natural progression, China is dominated by GSM and getting users to switch to a new system (not to mention changing phone numbers) isn’t going to be easy. Leung anticipates the government will use its price controls, possibly by lowering CDMA data rates, to try and drive more users onto Unicom’s network.

In fact, many feel CDMA will succeed simply because the government wants it to. “The decision to adopt CDMA was basically state-mandated and one of the major reasons the government supported CDMA was to cultivate the local manufacturing industry, which it couldn’t do with GSM because local players entered too late in the game,” explains Connie Hsu, a manager with Pyramid Research in Hong Kong. “So they see CDMA as their opportunity to develop a local mobile manufacturing industry that can migrate on past 3G.”

That’s important to China. As is the fact that China Unicom (which is partially state-owned) is one of the mainland’s flagship companies and one of the few to be allowed to list on a foreign stock exchange. Allowing it to fail, and squander a $1.5 billion investment, is simply not an option.

Yet CDMA’s future in China remains murky at best. The government desperately wants it to succeed. But just today it quashed plans for China Unicom to hold an initial public offering on the Shanghai Stock Exchange. According to the Shanghai Daily newspaper, China’s Securities Regulatory Commission spiked the deal because it was afraid China Unicom’s $1.45 billion IPO – which would have been the largest in mainland history – would sour an already sluggish market.

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.