A move by the Chinese government is sure to develop a new wireless telecommunications landscape in China but also may create an uncertain future for foreign wireless infrastructure and handset vendors selling equipment there.
The Chinese government is urging the country’s wireless operators to purchase equipment from local manufacturers when possible and has said it will stop approving new joint ventures between Chinese and foreign manufacturers to give Chinese-based vendors more of an advantage in the market. Existing joint ventures have been told to speed up technology transfers to local Chinese plants.
“Local companies have struck out on their own to make products to international standards,” said one source in China. “The Chinese believe they need to be given a chance to prove themselves, and the instruction is to give them that chance when and only when the quality of the product coming from these vendors meets acceptable standards.”
Nearly all major manufacturers around the world already are established in joint ventures in China. Mobile phone and infrastructure joint ventures today number about 17, say sources, and are expected to rack up about $11 billion in sales this year. Only two Chinese-based vendors have the capability to produce their own equipment.
“China believes these joint ventures and Chinese companies are enough for the network construction need,” said Hui Pan, chief economist with Information Gatekeepers in Boston. “For existing joint ventures, it’s advantageous. No other competitors will be allowed to get into the market.”
Pan believes China’s decision also centers around third-generation technology. The Chinese government has been reluctant to allow the commercialization of Code Division Multiple Access, or cdmaOne, technology. U.S. officials have said China would rather push ahead with Global System for Mobile communications technology for a nationally compatible system and wait for 3G technology. Government-run China Telecom and competitor China Unicom operate GSM systems and plan to devote major resources to expanding the capacity and coverage of their GSM networks with dual-band GSM systems, said a recent report from China. China Unicom once planned to deploy cdmaOne technology, but the government ordered the carrier to compete with China Telecom on services rather than differentiating itself using technology, said Pan.
“The Chinese stance is: `Why do we have to adopt cdmaOne when in three years 3G may be mainstream?’ Their view is that they can wait another three years … Existing production capacity is adequate enough,” said Pan.
To further aid native Chinese manufacturers, the Chinese Ministry of Information Industry also plans to put pressure on foreign companies to speed up their transfer of existing technology to native manufacturers. The government has found that some existing joint ventures are mere distribution channels and assembly houses rather than real production entities, say sources.
“Some foreign parties have not been living up to their agreed-to obligation in joint-venture contracts in terms of transferring meaningful technology to those joint ventures,” said one source.
Pan said Chinese officials are concerned that the country has given up so much of its market to foreign vendors in exchange for their mobile phone technology, but still has not gained from the process.
“Chinese companies are still very weak in producing equipment because they don’t have the technology, and the joint ventures didn’t transfer much,” said Pan.
The immediate future is expected to remain stable for today’s joint ventures, but Chinese manufacturers eventually could erode market share owned by joint ventures severely. China’s landline telecommunications industry saw this phenomenon when the Chinese government began pushing local suppliers on fixed-line telephone companies.
“The indigenous companies quickly replaced foreign companies in the wireline market,” said Jeffrey Schlesinger, senior technology analyst with Warburg Dillon Read in New York. “It may not be as easy in wireless because of interoperability issues. It’s tougher to displace Nokia and Ericsson in the mobile industry, but it’s an issue.”
Sweden-based L.M. Ericsson and Nokia Oy of Finland have supplied the bulk of GSM equipment in China. Schlesinger estimates Ericsson will generate about $1 billion to $2 billion in revenue from China this year and has captured more than 45 percent of the $3.8 billion in announced orders in the country during the first nine months of the year. Nokia captured about 17 percent of the country’s mobile infrastructure orders during the first nine months, Schlesinger estimates.
“In two year’s time, the industry will look very different in the mobile production area in China,” said Pan. “Joint ventures will be competing with domestic companies for the mobile market.”
