By staff reporter Ming Shuliang

From Caijing Magazine

China’s energetic climb up the telecommunications ladder is reaching a new step – third generation, or 3G, mobile phone technology – that’s a lot more slippery than the lower rungs.

Beijing policymakers and three telecoms slated to receive 3G system operating licenses are trying to find safe footing in the face of questions about consumer acceptance and the technical viability of China’s homegrown 3G standard, TD-SCDMA (TD), as a competitor of foreign 3G standards.

The nation’s industry leader China Mobile adopted TD and started testing the service in eight cities April 1, giving Chinese consumers their first chance to step up to 3G from basic 2G mobile services.

But interest in TD was disappointing in the test markets of Beijing, Shanghai, Shenyang, Guangzhou, Shenzhen, Xiamen and the northeast post of Qinhuangdao.

As a challenger of established 3G standards WCDMA, which debuted in Japan in 2001, and CDMA, TD has been forced to fight for a market niche. Consumer acceptance has been lackluster, said a China Mobile executive. And consumer caution can be “very harmful for the long-term development of TD,” the executive said.

Licensing Hurdle

But the key to TD’s future is connected to the government’s awarding of 3G licenses. China Mobile and several other TD mobile phone operators asked but were denied a six-month delay in a licensing decision by the Ministry of Industry and Information Technology (MIIT). In refusing the request, MIIT director Li Yi gave permission for a one-year commercial application trial.

MIIT has dropped several hints, but nothing firm, about its schedule for issuing 3G licenses. A government document in May linked the licensing to a nationwide reorganization of telecom companies, which the government launched last summer. And on July 17, MIIT deputy director Xi Guohua said he expected licensing in half a year.

The deputy director of MIIT’s electrical research institute, Cao Shumin, said slowing the license process would not support TD development. Rather, he said, commercial application should begin as soon as possible. He thinks the only way to perfect TD is through real-world application.

China Mobile is also facing competitive pressure in the wake of the telecom overhaul. Other 3G system developers China Telecom, which uses the CDMA standard, and China Unicom, which adopted WCDMA, are proceeding with company reorganizations more quickly than expected. One inside source said 3G licensing would give Telecom and Unicom a chance to catch up with China Mobile, so the earlier the government decision, the better.

Unlike China Mobile, China Unicom has pushed for speedier 3G licensing. Unicom claims its WCDMA network will be completed by the end of 2008.

Meanwhile, China Telecom President Wang Xiaochu said his company would invest several hundred million yuan to build a 3G network based on CDMA, mainly through software expansion. Commercial application could be a half-year away.

Handset Hurdle

In addition to network building, 3G operators face challenges posed by handset manufacturers. China Mobile was pleased when handset giant Nokia recently decided to launch a line of cell phones that uses TD as well as the 2G standard GSM. The announcement was made by China Mobile CEO Wang Jianzhou. But the popular iPhone, a 3G handset made by Apple, uses WCDMA technology.

In the 3G test cities this year “customer responses were not ideal,” China Mobile marketing manager Guang Ji told Caijing. “The handset problem is still serious.”

China Mobile mapped out a plan for handsets and commercial application testing in November 2007. Progress in TD handset technology lagged behind schedule until the government promised TD for the Beijing Olympics in August – a deadline China Mobile was able to meet. One month before the games, 10,000 TD cell phones were distributed to Olympics workers. An employee of marking department of China Mobile called the government decision “unusual.”

Since then, though, China Mobile has been hard-pressed to meet its plan to expand the TD customer base to 400,000 by the end of 2008. Sources say the expansion plan was premature.

But the plan is not dead. China Mobile plans to expand the TD network from the eight test sites to 28 cities by early 2009 and 162 cities by the end of 2009 at a cost of 30 billion yuan. The plan also calls for saving money by merging its GSM and TD networks by the end of 2008.

At an international telecom exhibit in Beijing in October, China Mobile Vice President Lu Xiangdong told Caijing that the company’s TD cell phones feature a high-speed transfer function and data cards. These handsets also support broadband Internet service based on TD, allowing China Mobile to compete against China Telecom and China Unicom for broadband customers.

Nevertheless, handsets based on TD are several steps behind those that rely on CDMA and WCDMA. The gap has contributed to China Mobile’s struggle with the 3G launch and forced the company to look toward the ladder’s next rung – a stepped-up 3G technology called TD-LTE.

Cao thinks TD-LTE won’t be ready for the market for at least another four years. Yet China Mobile still has an edge. As the country’s mobile phone market leader, the company has more capital, a 2G network advantage, and customer resources that rivals find hard to match.

Moreover, international experience shows that launching 3G is typically difficult. Consumers were often reluctant to switch during the early stages of 3G technology in other countries, Cao told Caijing. But the system’s popularity rose with large-scale commercial application. No wonder many experts, including Cao, think China’s commercial application of TD has now reached its most difficult phase.

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