Vendors Chase Chinese Riches

Wireless equipment behemoths Lucent Technologies Inc. (NYSE: LU) and Qualcomm Inc. (Nasdaq: QCOM) have outlined independent plans for a major financial blitz on China in an effort to boost the chances of their infrastructure technology being picked for the region’s potentially lucrative 3G market (see Lucent Invests $50M in China and Q'com Invests $100M in China).

As the world’s largest single cellular market -- 221 million mobile subscribers as of March 2003 -- China looks to be a hotbed for equipment vendors aiming to grab a slice of revenue from the buildout of next-generation 3G technology.

Although it is widely assumed by analysts that four 3G licenses will be awarded in the coming year (most likely to China Mobile Communications Corp., China Netcom Corp. Ltd., China Telecommunications Corp., and China Unicom Ltd.), the Chinese government has yet to confirm which technology -- W-CDMA (Wideband Code-Division Multiple Access), CDMA2000, or the homegrown TD-SCDMA (Time-Division Synchronous Code Division Multiple Access) -- will get the green light.

The W-CDMA air interface is part of the universal mobile telecommunications standard (UMTS), which has already been adopted as the European 3G standard. Used with existing Global System for Mobile Communications (GSM) core networks, W-CDMA-compliant handsets and base stations can increase wireless data transfer rates to a maximum of 2 Mbit/s (in theory).

CDMA2000 technology is a packet-based extension to CDMA networks that can theoretically support data rates of 144 kbit/s.

The TD-SCMA standard is an entirely different kettle of pandas. Developed by the Chinese Academy of Telecommunications Technology (CATT), it combines older Time-Division Multiple Access (TDMA) with Time-Division Duplexing (TDD) techniques of broadcasting on a single chunk of spectrum rather than the normal two bands -- making for a system that is more spectrally efficient and cheaper to implement than GSM, for instance, but with less range. Datang Mobile Communications Equipment Co. Ltd. and Siemens AG (NYSE: SI; Frankfurt: SIE) have also developed TD-SCDMA technology that can be connected to existing GSM networks.

Lucent and Qualcomm’s moves this week are attempts to establish credibility in an uncertain market. The award of W-CDMA licences would give Lucent the opportunity to secure a long-awaited first W-CDMA core network contract (see Lucent Sticking With UMTS), while Qualcomm will favor approval of CDMA2000 networks, given the company’s pioneering role in the development of the technology. In light of such market uncertainty, both companies have recognized the need to step up their presence in the region.

Lucent is to spend $50 million on a R&D center in the country to develop third-generation wireless technology. According to company spokesman Eric Xu, the center will open by the end of this year and will have a heavy focus on W-CDMA technology. Xu would not be drawn on specific details but says the site will house “several hundred” staff, the majority of which will be spawned by a major recruitment drive.

Analysts, however, remain skeptical of the vendor’s ability to play a dominant role in the W-CDMA market. “Lucent has been virtually non-existent in the Chinese GSM market, and it is unlikely it will claim an exclusive relationship with one of the operators,” says Ross O’Brien, Asia/Pacific director for Pyramid Research. “The only place where they have a track record and traction is in CDMA.”

Qualcomm meanwhile has announced plans to invest $100 million in Chinese companies developing CDMA-based products. “They will be early-to-mid stage, entrepreuerial companies in the region,” says director of corporate relations, Richard Tinkler. “We are beginning to evaluate the companies to be chosen.” Such a move is in line with previous efforts by the vendor to tout the benefits of its CDMA patents to the watching government (see Qualcomm Courts Chinese 3G).

“Qualcomm’s latest move represents an attempt to capitalize on the CDMA market,” says Pyramid’s O’Brien. “By showing commitment to a single standard they are hoping they will be rewarded with a definitive slice of the next-generation CDMA market.”

Despite their efforts, both companies remain hindered by a lack of clear guidance on when a final decision on future technologies will actually be made. A statement from analysts at Lehman Brothers this week declares that Chinese 3G licensing will be “possibly delayed into 2004,” with “technology preference for 3G still uncertain and seemingly highly changeable.”

— Justin Springham, Senior Editor, Europe, Unstrung

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