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3G in China: the challenge facing the three telco giants_Value Partners


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China, the largest mobile telecom market in the world, enters the 3G era. By Riccardo Ruggiero, director, and Sebastiano Rocca, manager of Value Partners, Italy.

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3G in China: the challenge facing the three telco giants_Value Partners

  1. 1. PERSPECTIVE 3G in China: the challenge facing the three teleco giants China, the largest mobile telecom market in the world, enters the 3G era. Riccardo Ruggiero Director Sebastiano Rocca Manager China, the mobile market with the greatest number of subscribers, has entered the 3G era. This event will affect not only the Chinese market, but also global markets of suppliers, service providers and vendors of terminals and network systems. With 650 million lines and a value of 514 billion Yuan in 2008, equivalent to 75 billion dollars, this is already an enormous market which is forecast a double digit growth rate in the coming years. Until the third quarter of 2008 only two players were present in the market; China Mobile and China Unicom, with an 80% and 20% market share respectively. But in recent months this situation has changed drastically as a result of a long restructuring process which has led to the founding of three fixed-mobile integrated giants – China Unicom, China Mobile and China Telecom – each of which has been granted a licence to develop third generation mobile networks. This marks a long expected turning-point, which will be faced by three players with vastly differing perspectives. China’s teleco reforms since 1994 has aimed to increase competition, whilst historically protecting the wireless industy Mobile Market share GSM GSM CDMA Fixed Market share The 3G licenses issued by the Information Ministry of Beijing will be compulsory, although any of three different standards can be used: WCDMA1, the most widely used standard in the international sphere, will be adopted by 1
  2. 2. PERSPECTIVE China Unicom, the historical challenger to the mobile market. Its rival China Telecom, after incorporating the ex China Unicom CDMA network, is developing a network based on EVDO . Meanwhile China Mobile, the most popular operator of Chinese consumers, will gamble on TD-SCDMA , a new standard developed in China which is promising on paper, but will not be able to offer the same guarantees as the other standards by its commercial launch. Indeed, the first tests carried out during the Olympics did not achieve the desired results, and in fact illustrated technical problems with the service. However, by controlling 70% of the market and 80% of overall revenues, China Mobile can utilize far greater resources than its competitors, allowing for the large scale promotion of its product. The development of 3G networks in such an enormous market, and indeed on three different standards, will lead to huge investments being made. The latest estimates forecast 400 billion Yuan – equal to 59 billion dollars – of investments in the next three years by the three Telco giants; a lifeline for vendors, who are facing a crisis as tough as the one affecting western markets, and who will see this investment program as one of the few opportunities available to them at present. Number of cities covered by 3G network in 2009* China Mobile China Unicom China Telecom of cities All China 282 238 180 38 55 End June 2009 End 2009 * According to operator declarations The scheduled roll-out plans of the three operators seem challenging and will involve several players: Unicom alone has invested in five International vendors - Motorola, Ericsson, ZTE, Nokia Siemens networks, Alcatel- Shanghai Bell - and in some local suppliers like Huawei. Their objective is to reach 282 cities by the end of 2009, and to reach 55 by the official launch date, expected to take place in the middle of May. China Mobile’s plan seems similarly demanding: according to official announcements they are aiming to achieve coverage of 70% of the country through the installation of an additional 60.000 base stations by the end of 2009; this is on top of the 20.000 that already exist. China is a country with extreme geographical complexity and a huge, non homogenous market composed of 31 regions, each with a population equal in size to most European countries but each with vastly differing economic and social dynamics. Therefore, it is inevitable that in order to maximize the return on investments operators will initially concentrate their efforts in Beijing, Shanghai, the coastal regions and in the north, which are home to the more mature markets for phone services. 2
  3. 3. PERSPECTIVE Regional mobile penetrations rates Area with penetration > 60% Area with penetration 40%-60% Area with penetration < 40% Heilongjiang Inner Jilin Mongolia Liaoning Xinjiang Gansu Beijing Tianjin Hebei Shanxi Ningxia Shandong Qinghai Jiangsu Shaanxi Henan Xizang Anhui Shanghai Hubei Sichuan Zhejiang Chongqing Jiangxi Hunan Guizhou Fujian Yunnan Guangxi Guangdong Hainan % of % of mobile Mobile Rate Penetration Population Mobile user population users penetration Tier >60% 2 188 40% - 60% 478 154 207 15% 37% 28% 38% 83% 43% Tier 3 40% - 60% < 40% 478 626 207 186 48% 37% 34% 38% 29% 43% Source: MIIT <40% 626 186 48% 34% 29% Optimizing investments is essential as the growth of 3G lines will not be overly fast: it is forecasted that in the next 4 years they will make up only 16% of total market lines. This is a conservative estimate when the reliability of the technology (at least for the China Unicom and China Telecom networks) and the vast availability of terminals is taken into account. But the first signals of the financial and economic crisis has reached China. The closure of plants in Guandong, for example, has not only left millions of workers, who had emigrated from rural areas, unemployed, but has also undermined the confidence of Chinese consumers. Thus it is inevitable that people will be inclined to save money and will not incur unnecessary expenses such as 3G. Comparison of 3G: China vs. other countries 3G lines weight % on total 50 Korea (2005-2009F) 45 40 Japan (2002-2006F) 35 Western 30 Europe (2005-2009F) 25 20 15 China (2008-2012F) 10 USA 5 (2005-2009F) 0 Launch 1st year 2nd year 3rd year 4th year Year 3
  4. 4. PERSPECTIVE One of the key battlegrounds will therefore be in the handsets market; due to the incompatibility of technologies used by the three operators, terminals will become the key instrument in acquiring and retaining subscribers. This may favor China Unicom, who from the beginning will be able to bring to market a wide terminal portfolio with a history of reliable performance, and above all will be able to easily address all price segments. This represents a unique opportunity for China Unicom to increase its market share and improve its relationship with its distribution partners, who are today more heavily dependent on China Mobile. However it seems at present that Unicom is not willing to play an active role in terminal distribution, but prefers leaving it in the hands of local distribution chains and leveraging their major interest on the WCDMA standard. This puts particular pressure on retailers dedicated to the WCDMA standard that Unicom will be using. There is a product, though, that could awake particularly the interest of Unicom: the i-Phone. Negotiations with Apple were held last October, but are currently on hold, due to both alterations in the business model and the incompatibility of the i-Phone with laws of the Chinese government which do not allow mobile terminals to be sold with Wi-Fi capabilities. On the other side of the table China Telecom and China Mobile are preparing their moves, and in light of recent announcements seem to be holding the upper hand. China Telecom, for example, has stated its willingness to purchase and distribute 50 million terminals, of which 20 million would be 3G CDMA EVDO; a very aggressive move considering that in 2008 about 130 million terminals were distributed and 180 million are expected for 2009. With the volumes stated, China Telecom would attain a 25% market share, an ambitious objective in a market controlled by powerful retailers. It seems as though China Mobile will face the toughest chanllenges in this emerging 3G market: the two giants of Nokia and Sony Ericsson have initially remained passive (Nokia will be ready to launch a TD-SCDMA terminal only by the end of 2009, while Sony Ericsson is still evaluating the opportunity to develop products for this standard). Thus the operator will be forced to lean mainly on Samsung and on local producers like ZTE. The financial strain will be significant and China Mobile has already declared to be willing to invest 10 billion Yuan in subsidies to bring terminals to market at a competitive price. Apart from terminals, the 3G launch will require the two contenders of China Mobile to rethink their market control strategy, especially with regard to distribution models. China Mobile owns a huge share of distribution chains and so its competitors will find it extremely difficult to gain visibility in the market through these channels. China Telecom and China Unicom will have to bank, at lest initially, on direct channels to gain visibility, that until today have mainly provided post-sale services. Thus it will be necessary not only to update the concept of retail outlets, but also to strengthen the relationship with the consumer which may entail a greater development of alternative channels like web. The strategy that will be chosen by the operators is not entirely clear, but their plans will be influenced by the latest phase of restructuring in the sector. China Mobile already benefits from good positioning within the customer market, with a high ARPU , and has demonstrated in the past to be more effective than its competitors in promoting value added services (28% of revenues in 2008 against 21% of China Telecom and 25% of China Unicom). From this angle China Mobile seem to be the best suited brand to introduce to the market a multimedia value proposition of 3G services. Moreover, given the weakness of its fixed phone branch – China Tetiong joined together with China Mobile after a restructuring – China Mobile will be able to aggressively target the mobile broadband market without having to manage the possible cannibalization of 3G over cable broadband. Thus, it is expected that a strategy of “pure mobile” and in this case an alliance with Vodafone, which has already faced this problem in Europe, will be employed. It seems inevitable that China Telecom will also target mobile broadband, both to capitalize on its valuable positioning in the business segment of the market, and to exploit the superior performance of the EVDO standard for data services. Nevertheless China Telecom will have to work hard in order to manage “internal” competition with its fixed broadband service. It is not yet clear which strategy will be adopted by China Unicom; the current impression given is that it will launch a “typical” set of 3G services (mobile TV, music provision, mobile broadband,…), but there are not yet clear signals indicating where their commercial strategy is hinged. 4
  5. 5. PERSPECTIVE The launch of 3G will bring novel initiatives to other aspects of the “go to market”, such as branding. All three operators have a rather complicated brand architecture (corporate brand + sub-brand for specialised market segments) which is likely to be expanded further. For China Telecom and Unicom it is a unique chance for repositioning, and it seems the two companies may radically rethink their current brands. In this way, the decision of China Telecom to roll out its new brand “e-surfing”, fits well with the company’s attempt to revamp its image and confirm its focus on mobile internet and data services. China Mobile on the other hand has developed a new brand dedicated to 3G products that will be additional to its existing brands; however, due to its solid position within the market, the development of this new brand seems to be more a matter of style rather than a real necessity. China Unicom, the weakest brand in the market, will have the greatest repositioning opportunities and will be able to explore potential partnerships with international companies such as Nokia and Apple. Ultimately the 3G launch will have an impact not only on technological modernization and on the development of countrywide networks, but it will alter the way that Telco services are perceived in China, requiring the operators to undergo a radical makeover. However many unknown quantities remain: will the three operators be able to reinvent themselves so quickly? Will they be able to fulfill their network roll-out plans and sustain rapid customer growth? These are questions that will remain for some months. The only certainty is that on this side of the world both vendors and suppliers are rooting for the fast growth of 3G beyond the Great Wall. About Value Partners Value Partners media practice, as expansion, and operational For more information on the issues one of the largest TMT practices effectiveness. It comprises two raised in this note please contact worldwide, works across all sister companies: Value Partners sectors of the digital marketplace Management Consulting and or sebastiano.rocca@valuepartners. with a particular focus on Value Team IT Consulting & com or one of our offices below. Find broadcasting, publishing, Solutions. all the contacts details on www. policy and regulation, media technology and sport. At the With 16 offices across Europe, forefront of the convergence Asia, South America and Milan trend, we can help our media MENA, Value Partners expertise Rome and telecommunications clients spans corporate strategy and London maximise impact and return from financial business planning, cost Munich digital media. We also consult transformation & organizational Helsinki on the areas of operational development, commercial Istanbul improvement, policy and planning, technology decisions, Dubai regulation, and investment in and change management. São Paulo these markets. Its 3,000 professionals, Rio de Janeiro from 25 nations, combine Buenos Aires Founded in 1993, Value Partners methodological approach and Mumbai is a global management analytical frameworks with Shanghai consulting firm that works with hands-on attitude and practical Beijing multinational corporations and industry experience developed Hong Kong high-potential entrepreneurial in executive capacity within Singapore businesses to identify and pursue their sectors of focus: media & value enhancement initiatives telecoms, luxury goods, financial across innovation, international services, energy, manufacturing and hi-tech. 5