Wireless China: Japan + 400 million

Back to Contents of Issue: July 2002

How the world's largest market is learning from the world's most advanced.
by Richard Meyer
AT FIRST GLANCE, CHINA'S wireless market looks remarkably open, free and competitive. Just about everyone is in China and everyone there is getting business. Nokia, Motorola, Ericsson, Qualcomm, Lucent, Samsung and LG are on the ground and battling for market share. The domestic mobile operators appear to be fighting hard as well. China Mobile and China Unicom are slugging it out like the giants of the West do in their home countries. Meanwhile, just about every standard known to mankind is present and being used in China and each has gained or is gaining critical mass. China's wireless industry appears to have no solid core and no set direction and is willing to try whatever new systems, products or technologies that come along. It looks a lot like the mobile phone industry in the US. If billboard advertising reflects the strength and vitality of a market, then China's mobile phone market is extremely dynamic. There is perhaps more signage dedicated to wireless products and technology in the country than to anything else. Billboards advertising mobile phones and services line streets in the city centers and highways leading to the airports and into the suburbs. A ride along the freeways is a blur of wireless acronyms and handset model numbers. There is even a China Mobile billboard stuck on a lonely stretch of road in remote western China. Only ads glorifying China's entrance to the World Trade Organization seem nearly as pervasive. But in reality, China may be more like Japan than the US. As in Japan, the mobile phone industry in China, while looking highly competitive and open, has a strong center of power and the companies within it cooperate a good deal. Standards are being set, directions are being given, strategies are being harmonized and the companies there are working together more than they are battling each other. "I don't see it being a free-for-all," says Jonathan Kahn of Ericsson China. At the heart of China Inc. are the two main carriers; China Mobile and China Unicom. The former has about three-quarters of the market while the latter controls the rest. Their confrontation seems a pitched battle. They fight on price, they post ads everywhere and they fight on services. They are also going head to head on technology. China Mobile is starting to offer general packet radio services (GPRS) and Unicom is bringing a code division multiple access (CDMA) network online. Both systems offer increased bandwidth for phones and allow the companies to bring their customers highly advanced services. But the companies are in fact more anti-competitive than they seem. They move in lock step. Their prices are about the same, their services are almost identical and their visions of the future are not far apart. Simple economics may be partly responsible for the convergence. Theory suggests that when only two competitors exist in a market, they will move quite naturally as one. China's mobile phone market is a neat little duopoly, and it shows. Official intervention is also a factor. The government is the main shareholder in both companies and also exerts significant regulatory influence over the industry. The similarities between Unicom and China Mobile are very much a matter of bureaucratic guidance. "There is no choice," says Amy Yuan, a 24-year-old secretary at Citibank and mobile phone consumer. "They are the same, like brothers. Same mother, same father." As in the rest of the world, the companies in the Chinese industry are brought together mainly during standards meetings. In China, it is the China Wireless Telecommunication Standard group, which is coordinated by the Ministry of Information Industry (MII), that leads. There is also the Research Institute of Telecommunications Transmission, an MII body that coordinates technical specification and standards work in the country, as well as a number of working groups, which primarily represent China's interests in international forums. These gatherings are, of course, perfectly legal and acceptable. But it is easy to view them as sort of a board of directors for China Inc. "It is the same 100 people at the standards meetings," says Kahn. Conditions are similar at the manufacturing level. On the surface, the market looks competitive to the extreme. China has 40 mobile phone makers and probably more brands than any other single country. Bird, Haier, Amoisonic, Kejian and TCL, to name but a few of the companies, do fight on price, style and features. But they are starting to see the advantages of working together. In February, the China Association of Quality Promotion gathered the country's mobile phone manufacturers together for a conference to discuss ways they could increase their domestic market share, which collectively sits at about 13 percent. Some officials suggested forming an industry association to battle the foreign competition. The People's Daily, an official newspaper, has cast the industry's consolidation efforts as preparations for 'war' against the foreign manufacturers. The government has also pressured state-backed agencies and companies to buy a certain percentage of their handsets from domestic manufacturers, industry executives say. While the overseas manufacturers are seen as the enemy, they are also indispensable allies. They have the capital and technology China needs to develop its mobile phone industry. As such, the government is using its significant power to convince the foreigners to commit resources to China. The pressure is both overt, in the form of laws requiring investment and domestic partners, and implied: Companies have seen a direct correlation between the capital, people and technology they put into China and the success of their operations there. Wireless companies go to great, perhaps excessive, lengths to make sure that the world knows just how dedicated they are to China and its mobile industry. "We are already a very local company," says Colin Giles, vice president of sales and marketing at Nokia Mobile Phone China. He goes on to detail the great commitment the company has made to the country. Nokia, he says, has invested about $2 billion in China, and has 20 offices, eight joint ventures, two research centers and over 5,000 employees in the country. The Chinese "are not interested in companies that come here with the salesman of the month," says Jay Rothstein, president of China Venture Advisors, a Shanghai-based consultancy firm that works with a number of wireless and telecommunications firms. China's power is already starting to be felt. Because of its massive size, its centralized authority and its high degree of coordination and cooperation, the country's wireless industry has the might to develop and push technologies of its own. Unlike Japan, China may be able to get the world to follow its lead. Most CDMA phones, for example, are sold with the phone number built into the handset. There is no removable card. But China's standards bodies felt that CDMA phones should have such a feature; it required that all new CDMA phones in China have a user identity module (UIM); the equivalent of the subscriber identity module (SIM) in a GSM phone. Manufacturers from outside China say that they like the idea and may adopt it in other parts of the world. Then there's Time Division Synchronous Code Division Multiple Access (TD-SCDMA), China Mobile's answer to CDMA and possibly the country's 3G. The technology was developed along with Siemens and offers transfer speeds that match those of wideband-CDMA. While few people are saying it yet, China could become a leader in mobile telephony worldwide. With its low-cost labor, the cooperation of the world's most advanced telcos and the backing of the state, the wireless industry in China could very well take a strong role in the future of wireless communications outside its borders. It is already exporting over 20 million phones a year and its local companies are quickly bringing their products up to international levels. China's mobile phone ascendancy is still a long way off, however. The industry is very much in its infancy. Right now, only 12 percent of people in China use mobile phones, compared with 56 percent in Japan. On Nanjing Road, Shanghai's main shopping district, and the Bund, the old, now renovated, waterfront, it is easy to see that China, phone-wise at least, is no Japan. Most people in these affluent areas walk around without handsets. On a recent day, a reporter counted more ice cream cones than mobile phones in the hands of people on Nanjing Road. What's more, those with handsets seemed less than comfortable with them. They looked surprised when their phones rang. Some peered at the screens apparently trying to figure out what they were looking at. In places like Japan and Singapore, phones are treated like natural appendages, users comfortably chatting, typing and surfing as they walk. They are much more at ease than their Chinese counterparts with their handsets. But every once in a while on Nanjing Road, a young man or woman will come into view, decked out in the latest trendy fashion with a phone to match. Some chat away naturally, while others seem to regard their handsets as high-end fashion accessories. They would look at home in Shibuya. Some observers argue, however, that this is as good as its gets and that the China market is not worth the trouble. They believe that low incomes will lead to low use, low margins and low utilization of services. With the average income in China's cities at less than $850 a year, the typical i-mode user in Japan is probably spending more on fees and services every month than the average person in China earns in total in a month. The Chinese are not going to be able to afford high value added services, critics say. They may not even be able to pay their phone bills. Already, there are signs that the Chinese consumer is less likely to spend, or be able to spend, than consumers in Japan. While most Chinese will happily part with a month's salary on a handset, they don't use those handsets much and tend to use them mainly for voice calls. The problem may go beyond economics. While China is less developed than Japan, in some ways it is more sophisticated. The people there appear to be less likely to fall for fads or be caught up in the latest marketing campaigns. Perhaps they are inured to utopian promises. Perhaps they are simply like consumers in the rest of the world, and the Japanese are the exception. Like the Chinese, people in the US are more reluctant than the Japanese to buy the latest gadgets and pay for advanced services. Consider Ms. Yuan. She spent more than a month of her salary on her phone. But she explains that she did so because she liked the quality of the Nokia handset she bought. She uses the phone mainly for talking and has little interest in the Internet, fixed or mobile. She says she is rather traditional and believes that the Internet is killing the written word. But manufacturers and companies providing software and applications aren't daunted. They are excited. They argue that most of the subscribers in markets worldwide are 'voice-centric' anyhow and that China is no different. If most mobile users in China buy handsets and use them only to talk occasionally, that won't surprise or worry them. China currently has more than 150 million mobile phone subscribers, making it the largest wireless market in the world. Estimates place total users at half a billion in five years. The vast numbers alone mean great profits, even if margins are low. Then there are the people who want to do more than just talk on their phones. With such a large overall market, the high-end subset could have between 50 million to 100 million subscribers. That's another Japan right there in size and profits. "Many of the same applications that were popular in Japan will be popular in China," says Kevin Wang, director of E4E Communications in Guangzhou. "The teenagers may be different, but the spirit is the same." Because of this potential opportunity, the Koreans are actively pursuing business in China. Their country has had a fully operational CDMA network for six years, not to mention the world's highest rate for fixed-line broadband usage. As a result, the applications and services offered in South Korea are some of the best on the planet. At a recent developers conference in Beijing, the Koreans were showing off technology that was as good as or better than what is available in Japan: streaming video, graphically intense games and PC-like mail and messaging functions. "There will be an explosion of mobile Internet users in China. I am sure if it," says Yong Sik Son, president of Korea's WeeW communications. Indeed, many Koreans think they may be best suited to provide the services and applications that will be powering China's new wireless generation. The Koreans are several miles down the road that China is now taking, while Japanese companies are just now starting to work with CDMA and high-speed Internet connections. Some Koreans even scoff at Japan's mobile phone industry, unimpressed by its offerings. "I-mode is not a real multimedia solution," sniffs Jeong Jin-Gak of GEO Tel, a Korean mobile technology company. Still, Japan remains the model for China. It is now a given that i-mode was not a technological feat -- just about any company could have done the same in the US or Europe. It was a marketing feat. Through some combination of push and pull, yin and yang, money and might, Japan turned a service into a movement. It is an achievement that has gained the attention of companies world over and the attention of companies developing business in China. "At the end of the day, it is not the technology that wins the battle," says David Hind, general manager of Qualcomm China. "Who provides the services wins. DoCoMo taught us that." That does give rise to some concern. The technology that exists today brings unprecedented power into the hands of users. CDMA, GPRS and technologies beyond offer bandwidth that matches or exceeds that available on most fixed lines. But consumers and companies are realizing that speed is not the point. They are slowly understanding that it is what you do with that speed that counts. It is the applications that make the phone. The problem is, of course, that there exists little software and few services that fully utilize the wireless pipe and that which does exist just don't seem to be worth the money. Everything that has wowed the world, everything that has been considered so 'cool' so far, can be done on existing networks. Talking, chatting and limited Web browsing can be made available now, even in China. "You can do everything in Japan with 9.6Kbps," says Albert Lu, director of strategic development at Ericsson China. "It has to do more with content that the bit and the byte." The rest of the world is already seeing this problem feed through in sales numbers and stock prices. Users in the US and Europe just aren't taking advantage of the power they already have. Even in Japan, the customers seem to have had their fill for now. A CDMA network has potential, but maybe more than is necessary in China, it may be a bit much for anyone. The offerings in Beijing recently from the Koreans and others, while utilizing the bandwidth offered by CDMA, did not seem like the products that would motivate people anywhere to spend their hard-earned money. Grainy soccer clips and graphically intense games may not be enough. Most developers were particularly excited about the potential for Go, the traditional Asian game that is played in China, Japan and Korea. It's a compelling idea: People from the three countries can play each other real time on their handsets. There is no language barrier in a board game that uses black and white circles. But, as attractive as the idea sounds, it may not justify the world's largest country building a massive high-speed network. However, in China, supply and demand don't always dictate what happens. The country is known for its zeal when it comes to development and technology and has often been willing to ignore declining returns and other signs that it has gone too far. And some people argue that too much, sometimes, is just enough. Lu of Ericsson recalls that when IBM first came out with a 100MB hard drive, many people wondered if they weren't offering too much capacity. @

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