China Mobile to remain dominant as China begins 3G rollout - 3G connections to account for 2% of world's largest mobile market by 2010

Following the large-scale restructuring of its telecoms industry last year, China has now awarded 3G licenses to its three mobile operators and the first commercial 3G services are expected to launch later this year. This week, China's Ministry of Industry and Information Technology (MIIT) awarded the 3G licenses based on three different technologies: market-leader China Mobile has been assigned a license based on TD-SCDMA, China's home-grown 3G standard, China Unicom will use WCDMA, and new mobile player China Telecom will use CDMA2000 1xEV-DO. It is estimated that the three players will spend about US$41 billion on building-out the new networks over the next two years, establishing China as a major source of revenue for both local and international equipment vendors over the coming years.

As with last year's restructuring, a key consideration around the issuing of the new licenses has been how to reduce the market dominance of China Mobile, which continues to account for over three-quarters of the world's largest mobile market. Among the so-called 'asymmetric regulations' being deployed by China with regards to 3G will be a 3G network-sharing policy designed to allow the two smaller mobile operators to benefit from China Mobile's greater network reach. However, according to new GSMA Intelligence forecasts, the market shares of the three Chinese mobile operators will remain largely unchanged over the next two years as the country's first nationwide 3G networks go live. Total connections across all three 3G networks are forecast to reach around 16 million by the end of 2010, accounting for just under 2% of all connections.

China Mobile, which famously showcased its TD-SCDMA network at the Beijing Olympic Games last August, is forecast to have around 9.4 million connections on its new network by the end of 2010, an approximate 58% share of China's 3G market. The operator is conducting numerous trials of the technology in various cities and provinces and plans to have rolled out the network to some 38 cities by June this year. Once nationwide commercial 3G services go live, China Mobile will therefore immediately benefit from superior network coverage, as its two smaller rivals will likely still be in the process of building-out and testing their new networks. However, the proprietary (and largely untested) nature of TD-SCDMA may yet create problems and the lack of compatible handsets could also affect subscriber uptake.

China Unicom is forecast to have around 3.3 million connections on its WCDMA network by the end of 2010, representing some 2.5% of its total customer base. As part of last year's restructuring, Unicom was merged with fixed-line player China Netcom, which suggests fixed-mobile convergence could be a key area for its new network. However, with fixed-line broadband still a largely untapped opportunity in China, Unicom may be compromised in how aggressively it can promote HSPA-based mobile broadband. A key advantage for Unicom in using WCDMA will be its ability to offer a wide range of WCDMA and HSPA compatible handsets (and other products such as dongles) at affordable price points. Unicom will reportedly complete its 3G rollout in the major Chinese cities by the middle of the year, with medium-sized cities covered by the end of 2009.

China Telecom is a new entrant to the country's mobile market following its acquisition last year of China Unicom's CDMA business. Following a clean-up of the newly-acquired mobile business, China Telecom recently reduced its total mobile customer base from 41 million to 29 million, meaning it is likely to fall short of its previous target of 100 million subscribers by 2010. With its existing network widely perceived to be unprofitable, China Telecom looks likely to aggressively focus on its new EV-DO 3G network over the next couple of years. By the end of 2010, we forecast that the operator will have around 3.5 million connections on its new network, roughly similar in size to Unicom's WCDMA subscriber base by this point. However, China Telecom faces some notable challenges, including a lack of brand in the mobile sector, fierce competition from its two larger rivals, poor network coverage, and the current lack of EV-DO handsets customised for the Chinese market.

Joss Gillet, Senior Analyst, GSMA Intelligence:

China will remain an unbalanced market over the next couple of years. China Mobile is likely to retain its strong position due to its extended network, strong financials, its focus on added-value services, and its brand. In order to compete, China Unicom and China Telecom will need to focus on fixed-mobile convergence, innovative tariffs and effective consumer segmentation to differentiate their offerings. The latter will be crucial in introducing high-speed services to a market that is around 70% prepay. However, convergent operators will need to keep a close eye on price elasticity and possibly avoid rushing for market share. Once high-speed networks are commercially available, all three players are likely to initially target high-value consumer segments, which could limit the appeal for the mass market. In terms of handset affordability, China Unicom has the advantage since it can offer a wide portfolio of WCDMA devices, including low cost handsets from Chinese manufacturers. By contrast, the TD-SCDMA handset portfolio is expected to be fairly limited at network launch with a focus on mid- to high-end price tiers.