Booster Shot

When Ted Dean heard in early January that the Chinese government had finally decided to allow the country's three mobile-phone carriers to upgrade to 3G (third generation) network technology, he could hardly believe the long-awaited day had finally arrived. "At one point it seemed like they were never going to make up their minds," recalls the Beijing-based head of telecommunications- and media-analysis firm BDA, "and I would spend my whole career waiting for Beijing to make this one decision."

Dean wasn't alone in his relief. Almost a decade after 3G services were first introduced elsewhere in the world, the Chinese government, which maintains tight control over the country's telecommunications networks, announced on Jan. 7 that China was finally ready to join the party. And despite its late arrival, the debut of 3G, which allows much faster data-transmission speeds and services like Web-surfing and video-streaming, promises to be quite a blowout. Government and private-sector estimates put total probable expenditure on 3G in China — whose 630 million users make up the world's largest group of mobile subscribers — at a whopping $59 billion over the next three years. That bonanza will be virtually the only bright spot in the otherwise gloomy outlook for Chinese and foreign cellular-network-equipment makers amid the global recession.

But while it's clear that there will be some big winners from the tidal wave of cash being spent by China's carriers — China Mobile, China Telecom and China Unicom — it remains to be seen which of the mobile-service providers and equipment manufacturers will manage to grab the largest slice of the pie. Another issue that remains very much in the balance is the fate of Beijing's attempt to bolster the country's technological chops by force-feeding the industry a homegrown version of 3G. More broadly, critics say that the long delay in granting 3G licenses — widely seen as an effort to allow more time for the development of China's own 3G technology to compete with established high-speed standards — means that tens of billions of dollars may be spent on networks that will be outdated within a few years when countries such as Japan are set to begin rolling out faster 4G services. "The life of 3G is almost over," Professor Kan Kaili of the Beijing University of Posts and Telecommunications told reporters when the licenses were announced. "There is no point in China getting on the last train to leave the station."

But as one senior industry executive in Beijing notes, a very strong argument exists against adopting the very latest technology in a country like China where the vast majority of subscribers and especially new subscribers are only interested in the bare minimum — and cheapest — service. "Continuing to use 2G allowed many rural users to subscribe who might not have been able to afford the additional cost" of 3G handsets and services, said the executive, who requested anonymity.

Still, further delay was increasingly difficult to justify. With the country's economy slowing, an upgrade of cellular networks is a way to stimulate growth. "These are exactly the kind of shovel-ready projects that [China] can start work on today, where the money you spend has an immediate impact on jobs," says the executive. Beijing officials have said they expect spending to upgrade networks will add between 0.5 and 1 percentage point to the country's GDP growth in 2009.

Stimulus or no, Kan, one of the fiercest critics of the rollout, maintains that the vast majority of China's mobile users have no interest in paying for faster phones. "Until now, 3G service providers across the world are all having a hard time struggling with little market demand."

Others in the industry disagree. While Dean of BDA acknowledges that the growth in mobile communications in China is mainly in rural areas where "your 700 millionth subscriber couldn't care less about 3G," he notes that the country's market is so huge there is room for 3G services to prosper. BDA projections put the total number of mobile subscribers in China at 1 billion by 2013, of which nearly a quarter — 247 million — will be 3G users.

Dai Jin, a senior engineer at Shenzhen-based TCL Mobile Communication, a subsidiary of one of the country's top handset makers, also supports the move to 3G. "I was doubtful about the future of 3G in China, but now I'm fairly optimistic, having witnessed the success of [Apple's] 3G iPhone" in the U.S. and Europe, he says. "Many people were concerned that there would be no use for 3G, since it is not a technology everyone will want to use. But I think we will be successful in promoting Internet-browsing on smart phones with 3G technology."

Not surprisingly given Beijing's stated policy of encouraging the development of domestic technological innovation, Chinese firms like TCL are set to be the biggest winners in the 3G boom. Foreign telecom-equipment vendors like Nokia-Siemens, Ericsson and Alcatel-Lucent now account for roughly two-thirds of the 2G market. That figure is expected to decline when 3G is fully in place with foreign companies accounting for only about a third. The lion's share of the market will be taken by China's two largest equipment vendors, Huawei and ZTE, which will between them share about half of the contracts, projections by BDA show. BDA says Huawei and ZTE will gain market share because of their "low prices, competitive 3G products and government support for domestic vendors."

The fate of the Chinese flavor of 3G technology — named TD-SCDMA while the two existing international standards are known as WCDMA and CDMA200 EV-DO — is less clear. The government has boosted its chances of success by awarding the license for use of the technology to the country's dominant service provider, China Mobile, which boasts a whopping 75% of the subscriber market. China Mobile has tried to get a jump on 3G by handing out free handsets to some 800,000 subscribers beginning last April as part of a trial rollout of the homegrown platform. But the service was plagued by complaints of dropped calls and poor reception, boding ill for its chances of competing against established, reliable standards operated by its two smaller rivals, China Unicom and China Telecom. BDA projects China Mobile's share of subscribers will plunge by 9% over the next four years, primarily because of its 3G handicap.

But other market watchers believe China Mobile may have a card up its sleeve: the powerful Ministry of Industry and Information Technology. The ministry, which is not exactly known for its reluctance to intervene where it sees the need, won't allow its efforts to nurture a domestic 3G standard to be derailed so easily, the industry executive in Beijing says. "They have spent many years and a lot of money on this. There's no way they'll let their baby get frozen out by foreign competition." China's 3G bonanza might seem like an industry windfall, but those who benefit most will be the ones with the Beijing winds at their backs.

— with reporting by Lin Yang/Beijing