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Switching telecoms in China

01 December 2004

As Chinese operators await possible reorganization, Alan Burkitt-Gray interviews Li Zhengmao, vice president of China Unicom, the country's only integrated operator, with both GSM and CDMA mobile networks, and likely to be central to the country's telecoms strategy

  The Chinese telecoms business is in a state of rapid change. While manufacturers such as ZTE are busy expanding into international markets, telecoms operators at home in China are facing the prospect of reorganization.

The first hint of that started in October when — with inevitable government influence — the largest operators swapped their management around. This was believed to be part of an attempt to head off fierce competition from the main competitors over who would get China's imminent 3G licences.

Wang Jianzhou, until now president of China Unicom, became president of China Mobile, replacing Zhang Ligui who retired because of age. On the same day, Wang Xiaochu left China Mobile, where he was vice president, to become president of China Telecom.

Meanwhile Chang Xiaobing, former deputy general manager at China Telecom, has become the new chairman of China Unicom.

Such senior management changes could only have occurred with government backing. Although only China Mobile and China Unicom are licensed mobile operators, all six of China's big operators, including Netcom, Telecom, SatCom and TieTong, are vying for 3G licenses from the Beijing government.

Merger predictions

The executive switch could also improve cooperation between the operators, possibly helping avoid network construction duplications. But Michael Newlands, on page 27, also draws attention to suggestions that the government may be looking at merging operators, reducing the number in the market while giving each a wider range of products and services.

China Unicom will be central to any reorganization. As this management whirl was just about to start, Global Telecoms Business interviewed vice president Li Zhengmao. "China Unicom is the only integrated operator in China," he said.

"We provide mobile services, including both GSM and CDMA, which is unusual and not easy to do, and a fixed line business. We provide limited local telephony services in three provinces — not the whole country, because it is not our priority strategy to invest in local telephony. On the fixed line side we provide long distance services, data communications and internet services to our customers."

There's also, he notes, a paging business, with five million customers. It's China's largest, but it is well down from 40 million in 2000.

Mobile focus

The company's priority is, of course, investment in its mobile operations. "This is the first priority of China Unicom over the next couple of years," says Li. "Almost 85% of our revenue comes from the mobile business. If we think about our priorities over the next couple of years, the most important area for China Unicom is to focus more on the mobile side, the GSM operation and the CDMA operation."

Unicom is one few operators in the world to run both GSM and CDMA services side by side, something that increases the complexity of network operations. Why?

"Our basic strategy for the mobile business is to focus our GSM product on the mass market. Basically with the GSM product we can provide the subscriber with voice and short message services — this is the basic, simple service — but with CDMA we focus on medium to high-end customers because our CDMA product can provide much higher speeds for data services and value added services."

Yet GSM has the advantage that customers can roam to networks in almost any country in the world, something that must surely appeal to the increasingly international Chinese business community?

Dual mode handsets

Unicom has an answer to that, says Li. "Just two months ago we launched a range of dual mode handsets. By dual mode we mean both GSM and CDMA, integrated."

The first handsets are made by South Korean company LG, made under licence from Unicom. "It is our intellectual property, owned by China Unicom for dual mode handsets," smiles Li, who hints that other manufacturers may follow LG.

Unicom markets these dual mode handsets under the brand name World Wind. Motorola and Samsung are also believed to be making models.

"If you use this phone, you can receive international roaming services — it doesn't matter if you are in European countries, or Asian countries, or South American countries," says Li. "The world has two large mobile systems, GSM and CDMA. You can put two SIM cards into this, one for CDMA and one for GSM."

The current version has a switch to allow users to click between CDMA and GSM, as appropriate. There will be a subsequent model, he adds, with a single SIM card. "This card can support both GSM and CDMA for security certification."

Unicom is discussing the phone with two US companies, says Li. "One is Verizon, the largest CDMA operator in the world. Today we are the second largest, but next year we should be larger. And also we have a very good relationship with Sprint, which is also CDMA. We will provide roaming services with them."

US opportunity

There is an opportunity here for dual mode handsets, he hints, when Verizon Wireless or Sprint customers want a phone that will work in most of the world, where GSM dominates.

Unicom is close to other CDMA operators, including both Reliance and Bharti from India. Indeed, only a couple of hours before Global Telecoms Business met Li in his Beijing office, senior executives of Bharti were there with him "to discuss the cooperation issue", says Li.

The biggest uncertainty in the future of telecoms in China, apart from any drastic merger policy imposed by the government, is the issue of 3G licences. When does he think they will be offered?

"I don't think that will be long: 3G has been discussed in China for almost five years," says Li. "In the near future — six months or 12 months — the government may give us some answer. The main issue now is how many licences — that's the most important issue. There are currently only two mobile operators but the fixed operators, like China Telecom and China Netcom, they also want to do 3G. So the number may be four."

But, of course, four operators might become two, if rumours are accurate.

Next year in Beijing

"The second question is when," says Li. "People think next year may be a good time in China to start 3G, so next year is our focus. That is the date we think is quite important."

And the third question? "What kind of standard each operator may choose," says Li. That's more complicated in China than in other countries, because Chinese manufacturers have developed their own 3G version of CDMA, called TDS-CDMA, which they are touting around in competition with W CDMA and CDMA 2000 (simplistically, the 3G versions of GSM and of current CDMA respectively).

"It's very complicated issue," says Li. "It's not a government issue, it's up to each operator to make their own decision, because the decision is so important to shape their future. Each operator will answer. It's important, especially for China Unicom, because we have GSM and CDMA."

So which solution would Unicom choose? "This is a very big issue for China Unicom," says Li. "Of course we could do two 3G networks." But that would be expensive, he admits.

"So what is our best solution?" He holds up the World Wind handset. "This kind of handset can give the solution. We can build out one 3G network." Offer customers a multi-standard handset "and users of the other network can also receive the new network".

Voice and video over IP

But mobile isn't the only side of Unicom. The fixed line side of the company is important, says Li, and not only because it provides the infrastructure linking the company's cellphone base stations. "Based on this infrastructure, we also provide some unique services in China. We are the largest voice over IP supplier in China. Our backbone network using IP technology is today the most advanced in China. It's a new network, built in the past five years, and we are a pioneer in providing video over IP services."

These were launched in the second half of 2003, "and today we have more than half a million subscribers already for video over IP services".

Services were launched "across the country and internationally", he adds. "We provide this service in Hong Kong, in Singapore, in Taiwan, in Japan and the US. Because it's an IP service, if you have access to the internet anywhere in the world you can access the service."

Most of the customers are businesses, "but the residential customer numbers are growing very fast, so I personally believe in the next few years the major incremental addition of video over IP services will come from residential customers". And, of course, the residential cake in China is very big indeed.

At the moment video over IP is used for video telephony, but "television programmes are the next stage", says Li. "We are carefully looking at them. We are looking at the progress of IP TV. I am happy to see that many vendors can provide IP TV equipment to us, so this is what we are thinking about. In the next couple of years we may start to do this."

Interactive competition

He sees the possibility of Unicom competing in China against the 60-80 channel service offered by cable and satellite networks. "People want to use interactive TV on demand. That's important and that can be profitable. This is what we're looking at. We have a very strong IP infrastructure that can support this."

To emphasise that point, he notes that China Unicom carried 20 billion minutes of long distance voice over IP traffic last year, making it one of the largest VoIP carriers in the world.

"The next step we are considering is the possibility to provide voice over IP services to end customers through next generation networks. We have some trials in several cities already in China. The technology is successful, it is good."

But there are regulatory questions, he adds. If an operator provides local voice over IP telephony services, it should have a local telephony licence and provide all the other services associated with local telephony. "There is a very big impact on the traditional local telephony operators," concedes Li. "I personally believe that it will be available in future. People should accept the progress of technology. People should not be against that."

Of course, though Li didn't say it, maybe any forthcoming reorganization of Chinese operators will sort out those contradictions. GTB