China's (maybe) brilliant telecom call
By Peter Navarro
In an impressive display of 1980s-style industrial policy, Chinese officials
have come up with a brilliant telecom restructuring plan. Paradoxically, this
heavy hand of regulation should significantly increase market competition,
rapidly accelerate technological development and open the doors to more foreign
participation in Chinese markets.
China's current telecom market features a near-monopoly in its mobile phone
sector in the form of China Mobile. With almost 400,000 million subscribers and
68% of China's market, China
Mobile is the largest carrier in the world while its closest rival, with only
about 120 million subscribers, is China Unicom.
China's telecom market structure is also plagued by a schism between its
cellular players and its fixed-line players, like China Telecom and China
Netcom. This schism has prevented a business model convergence of the fixed and
mobile platforms so critical to efficiently providing integrated voice, data
and other services.
Worst of all, Chinese regulators have not been "technologically neutral". In
the hopes of strategically developing their own third-generation (3G) cellular
standard, these regulators have blocked the widespread use of other 3G
standards, such as the European W-CDMA. As a result, Chinese businesses and
consumers have toiled in an outmoded 2G world that significantly restricts
network capacity and severely limits the use of video, broadband wireless and
other services.
China’s recently announced restructuring plan sweeps away virtually all of
these problems. At its centerpiece, the restructuring creates three companies
of roughly equal size and strength with highly convergent mobile phone and
fixed-line capacity.
In particular, a reconstituted China Mobile acquires the fixed-line company
China Tietong while China Unicom likewise acquires a fixed-line capacity by
buying China Netcom. Fixed-line player China Telecom likewise converges, this
time into the cellular space by buying one of China Unicom's two cell-phone
networks.
This should be a huge win for consumers and businesses. The new market
structure not only creates more competition in the domestic market,
particularly as it challenges the hegemony of China Mobile. It also allows each
of the new "Big Three" to provide integrated voice, data and other services far
more efficiently and at lower prices.
Most important, as a key part of the restructuring plan, Chinese regulators
also appear to be moving rapidly to a "technology neutral" world as they have
promised to issue a new 3G license to each of the Big Three players. The
interesting twist on this particular part of the plan is that it aims to set up
a very robust competition between three major competing 3G technologies - all
the while allowing China to hedge its 3G bets.
For its part, China Mobile gets the rights, and responsibility, to launch
China's homegrown standard known as TD-SCDMA. China Unicom gets the European
standard of W-CDMA. Most intriguing, China Telecom gets to use CDMA2000 and,
better yet, possibly upgrade that technology to the evolutionary, cutting-edge
EV-DO standard.
China's new technology neutral stance may well prove to be a bonanza for
foreign companies seeking to sell into the Chinese market. For example, the new
configuration should be a big boon for America's Qualcomm. It will rake in its
2% royalty rate on its CDMA patents while helping both China Unicom and China
Telecom serve their markets.
Another likely winner is Apple. Once China Unicom gets its W-CDMA license,
Apple will have a new partner for selling its iPhone into the largest and
fastest-growing market in the world at the highest technological standard.
Other foreign companies likely to benefit include Britain's Vodafone, Italy's
Telefonica and South Korea's SK Telecom. Each holds a minority (less than 10%)
share in one of the Big Three players.
While Chinese regulators should be praised for their far-reaching and
well-thought out plan, there is one big question hanging over the whole
restructuring: How fast will Chinese regulators issue the 3G licenses and allow
3G development?
The concern is this: Chinese officials may drag their heels on the prompt
issuance of 3G licenses to China Unicom and China Telecom as a backdoor way of
giving China Mobile yet more time to develop China's homegrown TD-SCDMA
standard. Such a move would not only further stunt 3G growth in China. It would
also allow China Mobile to further consolidate its monopoly power.
Peter Navarro is a business professor at the University of
California-Irvine, a CNBC contributor and author of The Coming China
Wars (FT Press). www.peternavarro.com.
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