China's 3G Gambit

By Eugene Bukoveczky | May 08, 2008 AAA

It hasn't exactly been a medal winning performance, but Chinese telecom officials still managed to make it across the finish line last month when they finally began rolling out China's home-grown TD-SCDMA 3G mobile phone standard in time for the Olympic Games later this summer in Beijing. The standard should provide broadband-grade web service via mobile devices for visitors to the Beijing Olympics in August, but widespread commercial availability in China is not likely to likely to happen for at least another year to year-and-a-half.

Nevertheless, limited the eight city test rollout of TD-SCDMA by China's leading wireless operator, China Mobile (NYSE:CHL) could well be the first stage of a potential battle by the Chinese to regain control of the world's largest and fastest growing wireless telecom market. (To learn more about investing in this emerging market, read our related article Investing In China.)

Economic Nationalism Goes Wireless
Despite being almost universally panned by telecom analysts as overblown, technologically unnecessary and too costly, China continued to press ahead with the development of its own proprietary TD-SCDMA standard. It's a clear example of how capitalism in China these days includes a strong subtext of economic nationalism.

By pressing ahead with their own 3G standard, at whatever the cost, the planners in Beijing are sending a clear signal that they mean to take greater control of the China's domestic wireless market. If successful, the move could hand a significant piece of the Chinese handset market to local manufacturers. (For further reading, check out Financial Capitalism Opens Doors To Personal Fortune.)

And that represents a direct challenge to companies like Nokia (NYSE:NOK), Motorola (NYSE:MOT) and Samsung who currently hold the lion's share of the Chinese handset market. Over the last few years, cell phone use in China has soared. This year, the total number of cell phone users on the mainland is expected to top 600 million, with handset sales expected to exceed 140 million. It's been a great market for foreign handset makers. Nokia currently sells 31% of all handsets purchased in China, followed by Motorola with 22.5%, and Samsung with 9.8%. Local manufacturers have a less that 5% share.

No More Level Playing Field
Now that 3G service is being rolled out in China, these foreign handset manufacturers are looking to cash in on the new wave of handset sales that the upgrade to 3G will generate. This year alone about 20-50 million handsets that support TD-SCDMA could be sold in China. By 2012, there could be more than 100 million 3G connections in place. But the Chinese government and local Chinese mobile service operators may be stacking the deck in favor of local handset manufacturers as they conduct handset compatibility tests. More than half the units now being tested are from local manufacturers, while only a few foreign firms like Samsung have been allowed into the testing process.

The Bottom Line
In world dominated by other 3G protocols, it doesn't make a great deal of sense for global handset manufacturers like Nokia or Motorola to commit a huge amount of resources to making TD-SCDMA compliant handsets. Despite Beijing's lofty expectations, it's not likely TD-SCDMA will gain any traction outside of China itself. Moreover, given the apparent bias in the current testing process, it looks increasingly likely that local Chinese handset makers like Lenovo (OTC:LNVGY) and ZTE will likely take a nice chunk of the domestic handset market away from foreigner suppliers. But, there is one foreign company that stands to gain out of all this, regardless of who wins the pending handset war. Internet search provider Google (Nasdaq:GOOG) is positively salivating at the prospect of tens of millions of new web-enabled mobile handset users coming online and using its search engine.

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