ECONOMIC CONTEXT OF ECONOMIC CONTEXT OF 3G LICENSING IN CHINA3G LICENSING IN CHINA

Xu Yan (xuyan@ust.hk)

Hong Kong University of Science and Technology

Growth of Mobile Users in ChinaGrowth of Mobile Users in China

Growth of cellular subscribers in China (Source: The Ministry of Information Industry)

-

50,000

100,000

150,000

200,000

Digital

AnalogDigital 0 0 0 0 1 157 1648 6387 17255 38290 82020 144800

Analog 18.300 48.000 177.00 638.00 1567.0 3472.0 5205.0 6846.0 6608.0 4950.0 3240 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Subscribers are not Necessarily UsersSubscribers are not Necessarily Users

431

366

299

221

145

241

199

8772

0

50

100

150

200

250

300

350

400

450

500

1996 1997 1998 1999 2000 2001

AR

PU

(Y

uan

)

Blended ARPU Contract User Prepaid User

Explosive Growth of SMSExplosive Growth of SMS

126.7313.4

1,299.70

4,775.70

0

1000

2000

3000

4000

5000Million Messages

1H 2000 2H 2000 1H 2001 2H 2001

SMS usage volume of China Mobile (HK) in 2001Source: 2001 China Mobile (HK) Annual Report

Model of B2B Mobile Commerce: The Model of B2B Mobile Commerce: The Case of Cyber-on-AirCase of Cyber-on-Air

                                                                                

Bank

Security

…….

China is Calling for 3GChina is Calling for 3G

Feasibility: SMS shows the demand to mobile data communication is encouraging

Urgency: The slow speed is currently a bottleneck for the application of mobile data communications

Spectrum Auction is not an OptionSpectrum Auction is not an Option

Global Trend of 3G Auction Price (Euro, million)

111117

2,400

7,000

8,400

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

4/2000 UK 8/2000 Germany 10/2000 Italy 11/2000 Austria 4/2001 Australia

Spectrum Occupation Fee: Spectrum Occupation Fee: US$6.06 Per Subscriber Per YearUS$6.06 Per Subscriber Per Year

Department of Radio Administration, Ministry of Information Industry

New Initiative on Spectrum FeeNew Initiative on Spectrum Fee

Operators are asked to pay the spectrum fee directly and spectrum occupation fee will be suspended from 1 July 2002

Price is defined by regulator in the way of benchmarking 7.5 million Yuan (US$0.91 million) per MHz in

the first year, 11.25 million Yuan (US$1.36 million) per MHz in the second year, and 15 million Yuan (US$1.82 million) per MHz in each of the third, fourth and fifth years.

Key Question in 3G Licensing: Key Question in 3G Licensing: Which Standard to Use?Which Standard to Use?

CDMA2000

WCDMA

TD-SCDMA

TD-SCDMA: Can a Dream become TD-SCDMA: Can a Dream become True?True?

What is TD-SCDMA Proposed by Datang One of the three 3G standards of ITU First ITU standard proposed by China Asymmetric transmission Software-defined radio Efficient spectrum usage Smart antenna Smooth migration from 2G to 3G

Close cooperation with Siemens

FDI in Telecom ManufacturingFDI in Telecom Manufacturing

No digital system before 1982 Equipment import boom after Fujian installed the

first SPC switch of Fujitsu Policy of using market in exchange for

technology: import, digestion, absorption and creation

joint ventures were highly encouraged with agreement on technology transference: Shanghai Bell was established in 1984

Shanghai Bell: A Successful CaseShanghai Bell: A Successful Case

In 1998, more than 74% of Shanghai Bell’s hardware and 90% of its software products were developed and made in China.

quotas for domestic market. By 1999, its products have been exported to

Korea, Vietnam, Philippine, Germany, Spain, Australia, Belgium and other countries with a total revenue of 282 billion Yuan, or US$34.18 billion.

Government’s Support To Domestic Government’s Support To Domestic VendorsVendors

assignment of research grant for R&D low interest loans discounted tax rates generous provision of land in high-tech industrial

parks Operators are encouraged to purchase products of

domestic vendors: Supply-demand coordination conference

Ju Da Zhong Hua: Julong, Datang, Ju Da Zhong Hua: Julong, Datang, Zhongxing (ZTE) and Huawei.Zhongxing (ZTE) and Huawei.

In 1992, the first SPC of 10,000 lines was made in China with China-owned intellectual property rights

In 1998, 98% of the newly increased switching equipment for fixed local networks and 50% of newly increased optical transmission system.

In 1999, the market share of local vendors in switching equipment rose to over 99%.

In 1999, the total revenues from exporting telecommunication equipment and systems reached US$ 46.6 billion

Government InterventionGovernment Intervention

“Government Guideline for Foreign Investment in Telecommunications”

Three categories of FDI (1995): Encouraged: Digital Cellular, SDH, ATM switching

system, satellite communications system, digital microwave system

Restricted: analogue wireless system, PABX, non-ATM central office switches, TV and Radio Broadcasting systems, Fax machines, low speed digital microwave system

Forbidden: Telecom operation

                                                                                

                                                                  

Product Portfolio of HuaweiProduct Portfolio of Huawei

Global Representing Offices and Global Representing Offices and joint Laboratories of Huaweijoint Laboratories of Huawei

                                                                                         

           

Human and Capital Resource on Human and Capital Resource on R&DR&D

45% human resource (9000 out of 19000 ) on R&D

85% hold bachelors degree or above

No less than 10% of annual revenues go to R&D

R&D Personnel

Marketing, Sales andCustomer Service

Production

Administration

Revenue (Yuan, billion)Revenue (Yuan, billion)

1.4 2.64.1

8.92

12

22

25.5

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001

Chinese Telecom Manufacturing Chinese Telecom Manufacturing Industry: market or competitor?Industry: market or competitor?

In 1999, the total revenues from exporting telecommunication equipment and systems reached US$ 46.6 billion

Ambitions in MobileAmbitions in Mobile

In January 1999, “Several Issues on Speeding up the Development of Chinese Mobile Communications Industry” by the State Council .

From 1999 to 2003, 5% of fixed-line telephone connection fee as a special grant for the R&D of mobile technologies.

In 1999, the MII invested 1.4 billion Yuan (US$169.70 million) from mobile connection fee to support R&D of mobile technology.

In addition, the State Planning Commission and the Ministry of Finance raised 570 million Yuan, or US$ 69 million, to support 31 projects in 7 categories relating to mobile communication technology.

0%2%

10%

0%

3%

10%

15%

30%

0%

4%

12%

0%

5%

10%

15%

20%

25%

30%

35%

1998 1999 2000 2001 2002

Base Station

Handset

Switching System

Growth of market share of Chinese domestic Growth of market share of Chinese domestic vendors in mobile equipment supply vendors in mobile equipment supply Source: Ministry of Information Industry of ChinaSource: Ministry of Information Industry of China

Strategies of Local Handset Strategies of Local Handset ManufacturersManufacturers

Good after-sale service quality Low price Target the urban area from country-side High class: diamond handset of TCL999D

CDMA: A Short-cut?CDMA: A Short-cut?

Unicom Horizon: a CDMA network of China Unicom

ZTE: 7.5% market share. Future CDMA2000: avoid the opportunity

cost Local CDMA handsets: 18 licenses to local

venders (but all have foreign partners) except MOTOROLA

3G Licensing in China: 3G Licensing in China: Who will be the winner?Who will be the winner?

•Xu Yan (2001) 3G Licensing Policy in China and Hong Kong SAR: Research Report for ITU, http://www.itu.int/3g

•Xu Yan, Douglas Pitt (2002) Chinese Telecommunications Policy, Artech House Books: Boston, London

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