By the end of 2005, China had almost 400 million mobile phone subscribers and the Ministry of Information Industry (MII) predicts the number will reach 440 million this year. But with a national penetration rate of only 28%, as against 60% in the US and close to 100% in many European nations, China's mobile market is nowhere near saturation. Analysts have predicted the number of mobile subscribers will climb to almost 600 million by 2009, 200 million of whom will be using 3G services.
Though overtaken by mobile phones as the dominant communication medium in 2003, fixed-line numbers are equally impressive. China had 350 million fixed-line subscribers by the end of 2005, while around 100 million people had Internet access from home, including 38 million with broadband. The industry is expected to be worth US$100 billion a year by 2009, which is staggering given that it was virtually nonexistent well into the 1980s.
China is now regarded as the world's most important telecommunications battleground. As it has rolled out its communication networks, foreign manufacturers and sellers of network equipment have stolen a march on domestic competitors, with the likes of Siemens, Nokia and Ericsson not only building the networks, but also dominating the mobile phone handset market.
But domestic equipment makers like Huawei and ZTE are fighting back, helped by government loans, credit insurance and other preferential treatment. Faced with intense competition at home, they are also expanding overseas, opening offices in the US and Europe. Huawei's revenues hit US$5.9 billion in 2005, with overseas income surpassing domestic revenue for the first time at 58%.
While competition heats up in equipment, services are dominated by a small number of state-owned giants. However, from 2007, this market is also expected to be open to foreign operators in line with World Trade Organization (WTO) accession commitments.
In preparation, China is in the process of reforming the sector. This began in 1994 when China Telecom, the country's only telecom provider, was split, creating a duopoly in basic landline services. There are now four main operators – fixed-line providers China Telecom and China Netcom, and mobile providers China Mobile and China Unicom – and a host of smaller companies. The four main companies are listed on both the New York and Hong Kong stock exchanges.
The 3G revolution
Fixed line providers, which have been barred from investing in mobile technology, have invested heavily in broadband Internet services as per user revenues have declined, in line with global trends. But they have also developed a huge subscriber base for the popular Xiaolingtong ("little smart"), which is a pseudo-mobile service that only works within the subscriber's given region of China. The inclusion of basic data services, in addition to cheaper voice calling than on a true mobile phone, has seen Xiaolingtong users rocket to 65 million. The figure is expected to reach 90 million by 2007.
The advent of Xiaolingtong is a clear example of the value fixed-line operators place on offering mobile services. As the government prepares for the next stage of China's telecom revolution, the rollout of 3G networks, both China Telecom and China Netcom are looking likely to get sought-after access to the true mobile market, although it may not be on the terms they would wish.
In order to give domestic network equipment and handset providers a boost in the local and global markets, the government has poured enormous capital, both political and real, into developing a domestic 3G standard to compete with global standards WCDMA and CDMA2000. Although the government seems set to release licenses for all three standards in the second half of 2006, it is clear that it will leave no stone unturned in its effort to ensure its own standard has a future.
This means it is certain to entrust the home-grown TD-SCDMA standard to either China Telecom or China Mobile, the dominant fixed-line and mobile providers, respectively. But both have made it clear they would rather provide services on the tested international standards, rather than act as guinea-pigs for TD-SCDMA.
Industry insiders agree that the company awarded the license for the home-grown standard will be at a disadvantage to competitors. A lot of wrangling is still happening behind the scenes, but Beijing is unlikely to let its operators make a purely commercial decision.
Whatever happens, 3G licensing is likely to be combined with a further round of reform and consolidation. The volume of conflicting rumors circulating suggest no-one, and possibly not even the leadership in Beijing, yet know how the immediate future of the industry will play out.
But there is good reason to believe that China's telecom giants will retain the lion's share of the market, despite foreign access. The close attention the government has paid to what it considers a strategic sector, despite Chinese companies not being as competitive as they could be, suggests Beijing is loath to allow the market to become any more foreign-dominated than it is right now.
For overseas players, operating in China comes with a number of headaches. As in most industries, there have been ongoing reports of intellectual property violations, and during the WTO accession period there have been complaints that telecom has been a particularly slow industry to meet its obligations.
But considering the size of the market and the speed at which it is growing, the Motorolas, Nokias and Ericssons of the world will continue to invest.