The gung-ho days of the global telecommunications market seem finally to have hit the wall. Worldwide handset sales are stalling.
Nokia recently estimated 2001 handset sales would show only ?very modest growth? over last year's 405m units – while infrastructure suppliers have been hard hit by delayed rollouts of new third generation (3G) technology, together with a capital crunch in the US equity markets.
At the same time, European network operators are being forced to sell off their crown jewels in order to raise the billions needed to pay for foolish over-investments in 3G licences. The future appears bleak, but not apparently in China.
Defying the worldwide slump, mobile sales in China continue barrel along at a prodigious rate. In the first quarter of this year, there were 15m new mobile subscribers, bringing the total user base to some 100m. That represents an annual growth rate of 70 soon surpass the US (with 110m subscribers at end-2000) to become the world's largest mobile market.
This is all well and good, but such a rapid rate of subscriber growth is not easy to manage. More subscribers bring with them an equivalent demand for new network planning and build-out, huge amounts of infrastructure investment to pay for that build-out (some US$28bn over the next three years) and the development of a regulatory frame-work that oils the wheels of the industry's expansion. The main problem for China's operators and regulators, therefore, is not to sustain growth, but to manage it effectively.
Various potential pitfalls lie ahead, including the choice of technology. The vast majority of networks run by China's two licensed operators are based on GSM technology, with erstwhile monopoly China Mobile holding a 77.5 percent market share and rival China Unicom the remainder.
All things being equal, continued use of this platform would seem in the best interests of consumers and of the industry. Not only does the standardised interface make it easy for different networks to set up roaming facilities, it brings with it economies of scale that allow networks to be developed faster and more cheaply.
On the face of it, therefore, the recent decision by Chinese authorities (see box) to expand Unicom's network by deploying CDMA technology – apparently against Unicom's wishes – is not in the industry's best interests and is almost certainly politically motivated. This is so, even though the capital expense involved in this project will be about 10 percent less than that required for an equivalent GSM project.
Extracting favourable terms
According to Merrill Lynch, total investment over three years is expected to reach Yn7Obn, with 40m CDMA subscribers by 2005. These deals will go some way to soothing current worries over the balance sheets of foreign equipment suppliers. But in a buyer's market, the Chinese have used this leverage to extract favourable terms. In particular, profit margins for foreign suppliers are thought to be lower than normal. At the same time, Qualcomm has awarded domestic suppliers licences to make and sell CDMA equipment in China and worldwide at reduced royalty rates – according to Chinese press reports, 2.65 percent for handsets and one percent for network equipment, down from the standard eight percent.
Another major pitfall is the lack of a satisfactory legal framework. The Telecommunications Law remains in draft stage and is not expected to be issued before the end of next year at the earliest. This means that the industry remains subject to ?policy? decisions emanating from the Ministry of Information Industry and in particular its hawkish head Wu Jichuan.
More important, rules are needed to regulate how foreign investors are allowed to participate in the telecoms build-out. Currently, all foreign investment in any type of telecoms services is banned. Although this is set to change in accordance with China's World Trade Organisation accession commitments (see table), the relevant rules, known as the Regulations on Foreign Invested Telecoms Enterprises, have yet to be approved by the State Council and are unlikely to appear until Chinese accession is imminent.
In the meantime, foreign operators anxious to get a foot in the door are lining up to create alliances with foreign-listed arms of the two domestic operators. Last October, UK-based Vodafone took a two percent stake in China Mobile's listed subsidiary China Mobile (Hong Kong) for US$2.5bn. Although China Unicom has expressed interest in striking a similar deal between its own Hong Kong subsidiary and various suitors ranging from Japan's NTT Docomo to Deutsche Telekom, it has so far only agreed to a (non-equity) partnership with Japan's KDDI. This deal is clearly aimed at exploiting KDDI's experience in running its own CDMA network.
But as a result of the regulatory vacuum, uncertainty prevails. Foreign telecoms investors have been stung before, when in July 1999 the government unilaterally rescinded agreements (known as China-China-foreign contracts) that had allowed them to invest in China Unicom's early net-work expansion. Once bitten, they are now twice shy. Until the government is able, or willing, to issue a comprehensive set of rules, it will have to do without the heavyweight foreign investment China needs to finance the immense cost of network build-out, not simply for mobile operators, but for all types of wireline and data purposes too.