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Analyst: China Unicom Breakup Likely

The Chinese government is still preparing to award the country’s long-awaited 3G licenses, but the latest scuttlebutt has it that China Unicom Ltd. (NYSE: CHU) –- the second largest Chinese mobile operator –- will be a casualty of industry restructuring, according to Jefferies & Co. Inc.

Analyst George Notter writes in a research note today that "collective wisdom" from the 3GSM World Congress in Barcelona "has the Chinese government awarding three 3G licenses and breaking up China Unicom."

According to Notter, the thinking goes that fixed-line carrier China Telecom Corp. Ltd. (NYSE: CHA) would get Unicom's GSM network and combine it with TD-SCDMA -- China's home-grown 3G standard -- while a second fixed-line operator, China Netcom Corp. Ltd. (NYSE: CN; Hong Kong: 0906), would acquire Unicom's CDMA networks. China Mobile Communications Corp. , the country's largest wireless carrier, would be left untouched.

China Telecom would then be awarded the TD-SCDMA license first to give it a headstart, since the technology is immature and "doesn't have an ecosystem of vendors and the economies of scale that WCDMA and CDMA EVDO offer," writes Notter. It's worth noting to that end that officials from China's Ministry of Information Industries (MII) have ordered the mobile operators to stop trialing W-CDMA networks, according to China Business News.

After several hiccups in the development process, the Chinese government recently declared TD-SCDMA ready to be deployed as the national standard for 3G as an alternative to Europe's wideband-CDMA and the CDMA2000 standard used in the U.S. (See China's 3G Gets Green Light.)

As the government has continued to mull over the idea of restructuring the industry for 3G, carriers have scaled back their spending in preparation for investment in new equipment once the licenses are awarded, which has in turn had an impact on vendors. (See Falling Chinese Capex Hits ZTE and HR: 3G to Shake up China .)

Notter writes that Nortel Networks Ltd. and particularly Lucent Technologies Inc. (NYSE: LU) would gain from Unicom being split up: "Unicom, given all the uncertainty surrounding its future, has been pulling back investment in its CDMA network for many quarters now. Any lifting of that uncertainty -- with China Netcom getting that network -- would be a positive for these vendors." Unicom is a repeat customer for Lucent, which accounts for 15 percent for the carrier's base-station footprint. (See China Unicom Accepts Lucent , Lucent Wins Chinese Deals, Lucent Expands China Unicom, Lucent Builds Hunan Network, and Lucent Builds Out Shandong Unicom.)

Siemens Communications Group claims to be in a strong position to win TD-SCDMA business once it gets rolling, announcing last week that it'll be ready to ship equipment by mid-2006. The vendor has formed a joint venture for that purpose with Huawei Technologies Co. Ltd. , and has been working with the MII on testing. (See Siemens Touts TD-SCDMA.)

The licenses are now expected to be awarded during the second quarter of the year.

— Nicole Willing, Reporter, Light Reading

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