China, the largest mobile telecom market in the world, enters the 3G era. By Riccardo Ruggiero, director, and Sebastiano Rocca, manager of Value Partners, Italy.

1. PERSPECTIVE
3G in China: the challenge facing the three teleco giants
China, the largest mobile telecom market in the world, enters the 3G era.
Riccardo Ruggiero
Director
Sebastiano Rocca
Manager
China, the mobile market with the greatest number of subscribers, has entered the 3G era. This event will affect
not only the Chinese market, but also global markets of suppliers, service providers and vendors of terminals and
network systems.
With 650 million lines and a value of 514 billion Yuan in 2008, equivalent to 75 billion dollars, this is already an
enormous market which is forecast a double digit growth rate in the coming years. Until the third quarter of 2008
only two players were present in the market; China Mobile and China Unicom, with an 80% and 20% market share
respectively. But in recent months this situation has changed drastically as a result of a long restructuring process
which has led to the founding of three fixed-mobile integrated giants – China Unicom, China Mobile and China
Telecom – each of which has been granted a licence to develop third generation mobile networks. This marks a
long expected turning-point, which will be faced by three players with vastly differing perspectives.
China’s teleco reforms since 1994 has aimed to increase competition, whilst historically protecting the wireless industy
Mobile Market share
GSM GSM CDMA
Fixed Market share
The 3G licenses issued by the Information Ministry of Beijing will be compulsory, although any of three different
standards can be used: WCDMA1, the most widely used standard in the international sphere, will be adopted by
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2. PERSPECTIVE
China Unicom, the historical challenger to the mobile market. Its rival China Telecom, after incorporating the
ex China Unicom CDMA network, is developing a network based on EVDO . Meanwhile China Mobile, the
most popular operator of Chinese consumers, will gamble on TD-SCDMA , a new standard developed in China
which is promising on paper, but will not be able to offer the same guarantees as the other standards by its
commercial launch. Indeed, the first tests carried out during the Olympics did not achieve the desired results,
and in fact illustrated technical problems with the service. However, by controlling 70% of the market and 80%
of overall revenues, China Mobile can utilize far greater resources than its competitors, allowing for the large scale
promotion of its product.
The development of 3G networks in such an enormous market, and indeed on three different standards, will lead
to huge investments being made. The latest estimates forecast 400 billion Yuan – equal to 59 billion dollars – of
investments in the next three years by the three Telco giants; a lifeline for vendors, who are facing a crisis as tough
as the one affecting western markets, and who will see this investment program as one of the few opportunities
available to them at present.
Number of cities covered by 3G network in 2009*
China Mobile
China Unicom
China Telecom
of cities
All China
282
238
180
38 55
End June 2009 End 2009
* According to operator declarations
The scheduled roll-out plans of the three operators seem challenging and will involve several players: Unicom
alone has invested in five International vendors - Motorola, Ericsson, ZTE, Nokia Siemens networks, Alcatel-
Shanghai Bell - and in some local suppliers like Huawei.
Their objective is to reach 282 cities by the end of 2009, and to reach 55 by the official launch date, expected to take
place in the middle of May. China Mobile’s plan seems similarly demanding: according to official announcements
they are aiming to achieve coverage of 70% of the country through the installation of an additional 60.000 base
stations by the end of 2009; this is on top of the 20.000 that already exist.
China is a country with extreme geographical complexity and a huge, non homogenous market composed of 31
regions, each with a population equal in size to most European countries but each with vastly differing economic
and social dynamics. Therefore, it is inevitable that in order to maximize the return on investments operators will
initially concentrate their efforts in Beijing, Shanghai, the coastal regions and in the north, which are home to the
more mature markets for phone services.
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3. PERSPECTIVE
Regional mobile penetrations rates
Area with penetration > 60%
Area with penetration 40%-60%
Area with penetration < 40%
Heilongjiang
Inner Jilin
Mongolia
Liaoning
Xinjiang
Gansu Beijing
Tianjin
Hebei
Shanxi
Ningxia Shandong
Qinghai
Jiangsu
Shaanxi Henan
Xizang Anhui Shanghai
Hubei
Sichuan Zhejiang
Chongqing
Jiangxi
Hunan
Guizhou Fujian
Yunnan Guangxi Guangdong
Hainan
% of % of mobile Mobile
Rate
Penetration Population Mobile user population users penetration
Tier >60%
2 188
40% - 60% 478 154 207 15%
37% 28%
38% 83%
43%
Tier 3
40% - 60% < 40% 478 626 207 186 48%
37% 34%
38% 29%
43%
Source: MIIT
<40% 626 186 48% 34% 29%
Optimizing investments is essential as the growth of 3G lines will not be overly fast: it is forecasted that in the next
4 years they will make up only 16% of total market lines. This is a conservative estimate when the reliability of the
technology (at least for the China Unicom and China Telecom networks) and the vast availability of terminals is
taken into account. But the first signals of the financial and economic crisis has reached China. The closure of plants
in Guandong, for example, has not only left millions of workers, who had emigrated from rural areas, unemployed,
but has also undermined the confidence of Chinese consumers. Thus it is inevitable that people will be inclined to
save money and will not incur unnecessary expenses such as 3G.
Comparison of 3G: China vs. other countries
3G lines weight % on total
50
Korea
(2005-2009F)
45
40 Japan
(2002-2006F)
35
Western
30 Europe
(2005-2009F)
25
20
15 China
(2008-2012F)
10
USA
5 (2005-2009F)
0
Launch 1st year 2nd year 3rd year 4th year
Year
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4. PERSPECTIVE
One of the key battlegrounds will therefore be in the handsets market; due to the incompatibility of technologies
used by the three operators, terminals will become the key instrument in acquiring and retaining subscribers.
This may favor China Unicom, who from the beginning will be able to bring to market a wide terminal portfolio with
a history of reliable performance, and above all will be able to easily address all price segments. This represents a
unique opportunity for China Unicom to increase its market share and improve its relationship with its distribution
partners, who are today more heavily dependent on China Mobile.
However it seems at present that Unicom is not willing to play an active role in terminal distribution, but prefers
leaving it in the hands of local distribution chains and leveraging their major interest on the WCDMA standard.
This puts particular pressure on retailers dedicated to the WCDMA standard that Unicom will be using. There is a
product, though, that could awake particularly the interest of Unicom: the i-Phone. Negotiations with Apple were
held last October, but are currently on hold, due to both alterations in the business model and the incompatibility
of the i-Phone with laws of the Chinese government which do not allow mobile terminals to be sold with Wi-Fi
capabilities.
On the other side of the table China Telecom and China Mobile are preparing their moves, and in light of recent
announcements seem to be holding the upper hand. China Telecom, for example, has stated its willingness to
purchase and distribute 50 million terminals, of which 20 million would be 3G CDMA EVDO; a very aggressive move
considering that in 2008 about 130 million terminals were distributed and 180 million are expected for 2009. With
the volumes stated, China Telecom would attain a 25% market share, an ambitious objective in a market controlled
by powerful retailers.
It seems as though China Mobile will face the toughest chanllenges in this emerging 3G market: the two giants of
Nokia and Sony Ericsson have initially remained passive (Nokia will be ready to launch a TD-SCDMA terminal only
by the end of 2009, while Sony Ericsson is still evaluating the opportunity to develop products for this standard).
Thus the operator will be forced to lean mainly on Samsung and on local producers like ZTE. The financial strain
will be significant and China Mobile has already declared to be willing to invest 10 billion Yuan in subsidies to bring
terminals to market at a competitive price.
Apart from terminals, the 3G launch will require the two contenders of China Mobile to rethink their market control
strategy, especially with regard to distribution models. China Mobile owns a huge share of distribution chains
and so its competitors will find it extremely difficult to gain visibility in the market through these channels. China
Telecom and China Unicom will have to bank, at lest initially, on direct channels to gain visibility, that until today
have mainly provided post-sale services. Thus it will be necessary not only to update the concept of retail outlets,
but also to strengthen the relationship with the consumer which may entail a greater development of alternative
channels like web.
The strategy that will be chosen by the operators is not entirely clear, but their plans will be influenced by the latest
phase of restructuring in the sector. China Mobile already benefits from good positioning within the customer
market, with a high ARPU , and has demonstrated in the past to be more effective than its competitors in promoting
value added services (28% of revenues in 2008 against 21% of China Telecom and 25% of China Unicom). From this
angle China Mobile seem to be the best suited brand to introduce to the market a multimedia value proposition
of 3G services. Moreover, given the weakness of its fixed phone branch – China Tetiong joined together with China
Mobile after a restructuring – China Mobile will be able to aggressively target the mobile broadband market without
having to manage the possible cannibalization of 3G over cable broadband. Thus, it is expected that a strategy of
“pure mobile” and in this case an alliance with Vodafone, which has already faced this problem in Europe, will be
employed.
It seems inevitable that China Telecom will also target mobile broadband, both to capitalize on its valuable
positioning in the business segment of the market, and to exploit the superior performance of the EVDO standard
for data services. Nevertheless China Telecom will have to work hard in order to manage “internal” competition with
its fixed broadband service. It is not yet clear which strategy will be adopted by China Unicom; the current impression
given is that it will launch a “typical” set of 3G services (mobile TV, music provision, mobile broadband,…), but there
are not yet clear signals indicating where their commercial strategy is hinged.
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5. PERSPECTIVE
The launch of 3G will bring novel initiatives to other aspects of the “go to market”, such as branding. All three operators
have a rather complicated brand architecture (corporate brand + sub-brand for specialised market segments) which
is likely to be expanded further. For China Telecom and Unicom it is a unique chance for repositioning, and it seems
the two companies may radically rethink their current brands. In this way, the decision of China Telecom to roll out
its new brand “e-surfing”, fits well with the company’s attempt to revamp its image and confirm its focus on mobile
internet and data services. China Mobile on the other hand has developed a new brand dedicated to 3G products
that will be additional to its existing brands; however, due to its solid position within the market, the development
of this new brand seems to be more a matter of style rather than a real necessity. China Unicom, the weakest brand
in the market, will have the greatest repositioning opportunities and will be able to explore potential partnerships
with international companies such as Nokia and Apple.
Ultimately the 3G launch will have an impact not only on technological modernization and on the development of
countrywide networks, but it will alter the way that Telco services are perceived in China, requiring the operators to
undergo a radical makeover. However many unknown quantities remain: will the three operators be able to reinvent
themselves so quickly? Will they be able to fulfill their network roll-out plans and sustain rapid customer growth?
These are questions that will remain for some months. The only certainty is that on this side of the world both
vendors and suppliers are rooting for the fast growth of 3G beyond the Great Wall.
About Value Partners
Value Partners media practice, as expansion, and operational For more information on the issues
one of the largest TMT practices effectiveness. It comprises two raised in this note please contact
worldwide, works across all sister companies: Value Partners riccardo.ruggiero@valuepartners.com
sectors of the digital marketplace Management Consulting and or sebastiano.rocca@valuepartners.
with a particular focus on Value Team IT Consulting & com or one of our offices below. Find
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