Do-or-die trial set for China's homegrown 3G

By Mike Clendenin

EE Times

Nov 21, 2005

Hong Kong - China is preparing to launch the final trial of its domestic third-generation cellular standard, TD-SCDMA. The trial, which will last about six months and focus on applications development and testing, will serve as a dress rehearsal of sorts, offering government officials a final look at the technology before they issue licenses next year.

Time is running out for 3G in China if the networks-especially TD-SCDMA-are to be up and running by the Beijing Olympics in 2008. China's telecom operators and the government would like to showcase China's prowess in 3G there.

Chip makers, handset designers and telecom infrastructure equipment makers are all eagerly watching developments in China's market, which has more than 370 million users-the largest mobile subscriber base in the world. Although spending on telecom infrastructure has slowed to low-double-digit growth in the past few years, China is still poised to spend nearly $200 billion over the next couple of years in the run-up to the Olympics.

But the rollout of 3G services is becoming increasingly muddled with politics and nationalism as China does everything possible to ensure that its local standard succeeds. Now telecom executives are hinting the government may need to give TD-SCDMA a head start by issuing a license for that technology before doing so for the others.

Political capital

In terms of maturity and economy of scale, TD-SCDMA is at a severe disadvantage compared with cdma2000 1xEV DO and wideband CDMA. Yet few think it will rust on the scrap heap of technology has-beens. "The government has invested too much capital in this, not just money but also political capital, so it has to happen," said Tim Storey, managing director of Asia-Pacific telecom research at JP Morgan.

At last week's 3G World Congress in Hong Kong, chip makers and handset suppliers insisted that most of the bugs have been worked out and the technology will be ready for commercialization in 2006. "The chips are there. That's not the problem. We have to look to this final field test in the coming months and make sure that the systems work," said Johan Pross, CEO of T3G Technology Co. Ltd., a Beijing-based joint venture among Philips, Samsung, Motorola and Datang Mobile, the local TD-SCDMA intellectual-property owner.

While the final field trial is under way, Chinese officials will be tinkering with the market, initiating a restructuring of the nation's four telecom operators to ease fierce competition among them while also building in protections to foster the growth of China's domestic 3G technology.

Here is how the restructuring will likely shape up, according to China watchers. The largest operator-GSM provider China Mobile-will probably remain untouched. Its much smaller competitor- CDMA/GSM provider China Unicom-will be broken up, with its GSM network sold to fixed-line provider China Telecom and its CDMA network merged with that of fixed-line provider China Netcom.

This would be the second major shake-up in the Chinese telecom industry, following a 2001 restructuring of China Telecom that led to the establishment of China Netcom. After this latest round of musical chairs, there will be three operators, each of which will be given a 3G license for a particular technology. China Telecom is the likely recipient of the TD-SCDMA franchise-a trade-off for its being able to buy up the Unicom GSM network and the 92 million subscribers and extra profit that come with it.

To many chip makers, the restructuring isn't much to worry about, aside from the delay it imposes on 3G licensing. But if fixed-line providers pick up 3G licenses, then there is a risk to a handful of chip makers in the Personal Handyphone System (PHS) market, like Airoha, Atheros, Sunplus Technology, Terax Communication Technologies and Toshiba.

China is by far the largest market for PHS phones, with 65 million subscribers at the end of 2004. Beijing-based BDA Research estimates that 22 million more people will subscribe this year, pushing the subscriber base to more than 87 million. Even conservative estimates of new subscribers in 2006 put the China PHS market at more than 100 million-about three times higher than the market for CDMA.

But by 2007 the PHS market will add only 1.7 new subscriptions, and the next year it is expected to decline by 9.5 million, according to BDA. "Starting this year, we have seen the carriers slow investment in PHS, anticipating 3G licenses," said Zhang Dongming, BDA's research director.

Even if the government does force a three-horse operator scenario, there is still uncertainty hovering over TD-SCDMA. The main concern is how much China Telecom is willing to spend on building a TD-SCDMA network, and how much it will have to subsidize the handsets to encourage users to buy them. "They will have to invest something, because the government will tell them to," said David Wang, country manager of China for RF Micro Devices, which is supplying power amplifiers to the TD-SCDMA market. "They want to see the TD-SCDMA industry succeed so that Chinese companies can succeed."

Tough to crack

Those companies have missed out on most of the growth of China's massive telecom market. By one estimate, they get less than 5 percent of infrastructure contracts. Even Huawei Technologies, a rising star in infrastructure equipment, is barely able to crack the market in its home province of Guangdong, long dominated by Ericsson.

But critics don't see TD-SCDMA as the way for Chinese telecom equipment and chip suppliers to beef up their market share, especially domestic chip makers starting from scratch. The better opportunity for local players like Huawei and ZTE will be in wideband-CDMA and cdma2000 1x. Though they missed the boat on 2G in China, telecom providers are poised to reap larger gains in their home market at the expense of Nokia, Ericsson and Motorola.

A recent survey by a Chinese-language IT magazine noted that Huawei and ZTE are now among Chinese operators' top preferred equipment providers. The companies are pushing aggressively to capitalize on this fact. They are rolling out new 3G phones, developing their own ASICs for core network equipment and spending relatively large amounts on R&D-Huawei, for instance, claims that nearly half of its 34,000 employees are dedicated to research and development.

"GSM was a very closed market and we didn't get in early enough," said Zhu Tan, director of UMTS marketing at Huawei Technologies. "But in 3G, it's a totally new market. We have an equal starting point with our competitors."

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