CONFIDENTIALChina’s Mobile Telecom Services Industry OverviewGCO Pract
ice DevelopmentMay 2002This report is solely for the use of Firm
personnel. No part of it may be circulated, quoted, or reproduce
d for distribution without prior written approval from McKinsey &
Company. ACKNOWLEDGEMENTS AND REFERENCESMGMs and CSS involved in
the relevant studies include the following:Tony Perkins (BEI)Ste
fan Albrecht (BEI)Chipper Boulas (HKO)Peter Kenevan (TOK)Perchow
Joseph Chang (SHA)Andrew Wu (HKO)Hai Wu (BEI)Jane Xing (HK)Yi Fen
g (BEI)Sheng F Li (SHA)Yoshinobu Takanuki (TOK)Graeme Hunter (JOH
)Julia Yang (BEI)Eric Xu (BEI)Jason Liu (BEI)Shirley Chen (BEI)Th
e series of PDs include the following:# China Macroeconomic Envir
onment# China’s Mobile Telecom Service Industry Overview# China’s
Internet Industry Overview# China Telecom Equipment and Services
Overview# China’s Mobile Handset Sector Overview# China Telecom
Industry Regulatory Overview# Key Success Factors and Case Studie
s of MNCs Entry to ChinaKEY MESSAGES1. China’s mobile telecom ser
vice market is huge and fast growing, representing US$21 billion
market size in 2001 and US$38 billion in 2005. This market is sup
ported by the world’s largest subscriber base at 145 million, alr
eady comprising 15% of the world’s total in 2001 and growing to p
otentially 218 million in a low case or 300 million in a high cas
e by 20052. The competitive landscape for mobile services has evo
lved from a single regulator and operator to today’s duopoly of C
hina Unicom and China Mobile, both of whom are unassociated with
the Ministry of Information Industries. A second breakup of China
Telecom is expected to form two large telecom operators, China T
elecom and China Netcom Group, who are likely to receive mobile l
icenses. A fifth telecom operator, China Railcom, also has the po
tential of receiving a third generation license and building a mo
bile business. For now, China Mobile dominates the market with 82
% value share and 72% subscriber share and owns much of the high
value user base. However churn is already high and is expected to
increase with continuing pricing pressures and increased competi
tion.3. Wireless data services are expected to grow quickly in Ch
ina to a market of potentially over US$4 billion by 2005, used by
43% of all mobile users. Interest from consumer surveys have bee
n high and operators and other players are actively building serv
ices in the market. While early WAP services have failed to catch
on, SMS has grown exponentially with up to 20 billion SMS messag
es in 2001. The early adopters will be mobile professionals and m
odern youth, who will require services and devices tailored to th
eir needs. 4. Regulatory changes loom, particularly with the acce
ssion of China to the WTO. While foreigners will be unlikely to s
et up MVNOs, WTO will allow greater participation of foreigners i
n basic and value added services, although geographic limitations
will exist through 2004 and Chinese players will be required to
own at least 50% of telecom service ventures (51% for basic serv
ices). Regulatory risks remain, with no means to appeal regulator
decisions, unclear interpretation of regulation including WTO co
mmitments, and the government’s track record of intransparent and
unpredictable decision making. (See separate regulatory PD for d
etails)AppendixPlayers profiles3G technology standards choicesKEY
MESSAGES1. China’s mobile telecom service market is huge and fas
t growing, representing US$21 billion market size in 2001 and US$
38 billion in 2005. This market is supported by the world’s large
st subscriber base at 145 million, already comprising 15% of the
world’s total in 2001 and growing to potentially 218 million in a
low case or 300 million in a high case by 20051997-2001 MOBILE S
ERVICE REVENUE GROWTH OF 30% CAGR HAS OUTPACED OTHER TELECOM SERV
ICE SECTORS AND IS PROJECTED AT 16% THROUGH 2005Revenues US$ Bill
ions CAGR vs. other industries (1997-2001)PercentMobile Fixed lin
ePagingCAGR30%CAGR16% Source: Deutsche Bank; McKinsey analysis
Revenues do not equal the product of ARPU as subscriber figures
are provided for year end, not average subscribers during a year.
Detailed information on the timing of new subscriptions and chur
n required for the calculation of average subscribers during a gi
ven year is not available All CAGRs are calculated
on the announced dataSource: Deutsche Bank; JP Morgan; MIIEXTRAOR
DINARY SUBSCRIBER GROWTH IS THE PRIMARY DRIVER OF REVENUE EVOLUTI
ON, MORE THAN MAKING UP FOR LARGE DECLINES IN ARPU DUE TO STIFF C
OMPETITIONMobile revenues $ Billions Number of subscribers – low
case Millions CAGR 30%CAGR 16%CAGR 83%ARPUUS$/monthCAGR -24%CAG
R -7%Penetration initially lowGovernment backing for increasing s
ubscriber numbersRelatively low fixed line penetrationLow-end pre
paid subscriber increaseDrivers Decline due to increased prepaid
and lower spending by late entrants Tariff reduction as competiti
on increasesSlightly off-set by increase in data traffic in later
years CAGR 19%20823526329117161515Announced Effective 05 for
ecast use low case, net subs after inactive and multi-sim-card re
duction Major European countries include: UK, Fra
nce, Italy, Germany, Netherlands, Spain, Sweden Source: JP Morgan
; WEFA-WMM; MII; McKinsey analysisJapanCHINA IS THE WORLD’S LARGE
ST MARKET IN TERMS OF SUBSCRIBERS, HAVING OVERTAKEN THE US IN 200
1USMajor European countriesCAGR = 30%CAGR = 14%CAGR = 7%Number
of mobile subscribersMillionsCAGR = 13%China – low caseChina – h
igh caseCAGR = 22%CHINA’S MOBILE SUBSCRIBER BASE IS GROWING MORE
RAPIDLY THAN ANY OTHER MAJOR MARKET, COMPRISING 15% OF WORLD TOT
AL IN 2001 Afirca, Eastern Europe, Middle East, Canada Fore
cast of 02-05 use the high case, net subs after inactive and mult
i-sim-card reduction Source: JP Morgan; Gartner 2001; Deutsche Ba
nk; Merrill Lynch; Piper Jaffray19971998199920002001E207300482727
9651,1781,3931,633100% = Global mobile subscribersMillion subscri
bers; percentWestern EuropeUSSouth and LatinJapan and Asia Pacifi
cChinaRest of worldCAGR1997-2005percent2918452847452002E2003E2
004E2005E1,850CHINA’S MOBILE MARKET IS PROJECTED TO GROW SIGNIFIC
ANTLY 02-05 forecast are net subs after inactive and multi-sim
-card reduction Source: IDC report; JP Morgan report; McKinsey
analysisNet subscriber additionsMillions199719981999200020012002
E2003E2004E2005E–10847133-98-4711Annual growth Percent12379121315
16PenetrationPercent47.143.946.345.75.511.516.939.435.9Low caseHi
gh caseLow–10847103-9225-13HighLowHigh12379121619230%5%10%15%20%2
5%CHINA’S SUBSCRIBER BASE OF 218 MILLION IMPLIES A 47% PENETRATIO
N OF AN ADDRESSABLE MARKET OF 460 MILLION BY 2005 Low
case, net subs after inactive and multi-sim-card reduction Sourc
e: JP Morgan; DRI; Asiandemographics.com; Literature search; Anal
yst reports; Team analysisIncome per capita (US$ p.a.)2001Address
able marketNumber of mobile subscribersImplied penetration of the
addressable market2005E345 mn145 mn42%463 mn 218 mn47%China in
come distribution and addressable marketPercent1,8151,772China’s
addressable population for mobile services is projected to increa
se by 8% p.a. for the next five years to 460 million in 2005The k
ey assumptions in determining the income threshold are: Chinese c
onsumers willing to spend 5-10%% of their income on communication
services – higher than the average of 3.5-4% for more developed
markets as a greater portion of income is available for non-essen
tial goods as a result of China’s relatively low living costHalf
of this assumed spent on mobile services (5.5%)Unicom’s prepaid A
RPU will decrease from USD 8.3 for 2001 to USD 8.1 for 2005; ther
efore the threshold income will drop from USD 1,815 (8.312/5.5%)
for 2001 to USD 1,772 for 2005 (8.112/5.5%)2005Addressable mark
et: 35%Addressable population: 460 mn persons2001 Addressable mar
ket: 27%Addressable population: 345 mn personsPercent of populati
onMOBILE SUBSCRIBER PENETRATION OF LESS THAN 7% IN 2000, LEAVES
SIGNIFICANT ROOM FOR GROWTH Source: JP Morgan; IDC report; Gartne
r; Literature search, EIU100%199619971998199920002001E2002E2003E2
004E2005EMobile subscriber penetration in 2000PercentItalySwedenN
etherlandsUKSpainGermanyFranceUSChinaAll subscribersData servic
esubscribers1,2181,2301,2421,2541,2651,2761,2871,2981,3091,319As
percentage of total population – low caseMillions (total populat
ion)China Urban 02-05 forecast are net subs after inactive
and multi-sim-card reduction Penetration over total
population Penetration over urban population.0.61.0
1.92.96.68.91.12.03.97.10.412.013.415.016.4CHINA’S RICHER PROVINC
ES GENERALLY HAVE MORE SUSCRIBERS AND ARE GREATER PENETRATED…Popu
lationMillionsPenetrationPercent, 2000Subscriber CAGRPercent, 199
8-2000Number of subscribersMillionsProvinceGuangdongLiaoningZheji
angJiangsuShandongFujianHeilongjiangShanghaiHebeiSichuanBeijingHe
nanAnhuiHubeiHunan Source: China Statistical yearbook, JP Morgan
Report, McKinsey analysis…WHILE THE POOR WESTERN AND INTERIOR PR
OVINCES HAVE LESS SUBSCRIBERS AND ARE LESS PENETRATED Growth ra
te from 1999 - 2000 Source: China Statistical yearbook, JP Morgan
Report, McKinsey analysisPopulationMillionsPenetrationPercent, 2
000Subscriber CAGRPercent, 1998-2000Number of subscribersMillions
ProvinceJilinGuangxiYunnanShaanxiChongqingShanxiTianjinInner Mong
oliaJiangxiGansu XinjiangHainanNingxiaQinghai TibetGuizhou KEY ME
SSAGES2.The competitive landscape for mobile services has evolved
from a single regulator and operator to today’s duopoly of China
Unicom and China Mobile, both of whom are unassociated with the
Ministry of Information Industries. A second breakup of China Tel
ecom is expected to form two large telecom operators, China Telec
om and China Netcom Group, who are likely to receive mobile licen
ses. A fifth telecom operator, China Railcom, also has the potent
ial of receiving a third generation license and building a mobile
business. For now, China Mobile dominates the market with 82% va
lue share and 72% subscriber share and owns much of the high valu
e user base. However churn is already high and is expected to inc
rease with continuing pricing pressures and increased competition
.CHINA’S MOBILE OPERATOR LANDSCAPE HAS EVOLVED SIGNIFICANTLY, CUL
MINATING IN SECOND BREAKUP OF CHINA TELECOMNo mobile licenses cur
rently Source: Literature search; EIU Pyramid; Industry reportsC
hina TelecomChina UnicomBecame the second mobile network operator
in mid 1994However, China Telecom as the sole provider of both b
asic and wireless telephony services made it difficult for Unicom
to growChina UnicomChina RailcomChina UnicomMinistry of Posts an
d TelecommunicationsCreated in 1994 when former MPT separated int
o regulatory and operating functionsChina Telecom ownership trans
ferred to Ministry of Finance, with regulatory functions placed i
n the new Ministry of Information Industries (MII)China TelecomCh
ina Mobile (CMCC)China TelecomChina Mobile (CMCC)Under the govern
ment’s anti-monopoly plan, in the 1st half of 1999, China Telecom
was split into 4 operating companies: CT fixed, China Mobile, CT
Paging, CT?SatelliteThe change became official on April 20, 2000
Prior to 1994, the MPT acted as the regulator and sole operator
of telecommunicationsIn 1993, announcement was made to separate o
perating and regulatory functions along with the establishment of
a 2nd operatorGreat WallEstablished in 1995 to harness PLA’s rad
io spectrumThe company undertakes “the CDMA project” at the direc
tion of the governmentGreat WallDue to government commitment to s
eparate PLA from commercial activities, Great Wall dissolved with
decision to transfer CDMA assets to China Unicom made in October
2000 (transfer yet to be completed)2nd largest fixed line networ
kEstablished December 2000Offers limited GSM service over it’s ra
ilway network2002 and beyond 2nd breakupand future landscapeChina
NetcomEstablished in Sept.1999 with internet backboneLikely lice
nse winner Jitong JitongSetup in 1994 to develop data communicati
on serviceBegan to offer VoIP servicesLeading player in voice ove
r IPChina Netcom GroupChina RailcomChina Telecom broken up into N
orth and South with CT North merging with China Netcom and Jitong
to become China Netcom GroupChina Telecom South continues operat
ion as China TelecomOperating CDMA local loop services in several
citiesChina Mobile unaffected by second breakup, surviving propo
sal to merge it with Jitong, given concerns about consequences of
forced mergers for publicly listed companiesChina Unicom unaffec
ted by second breakup, surviving proposal to merge it with Railco
mWhile Great Wall CDMA asset transfer has yet to be completed, Un
icom will become first major operator in the world with both CDMA
and GSM services, with launch of its own CDMA network in 2002Ope
rator bidding for 3G license, with openness towards adopting Chin
a’s 3G standard, TD-SCDMA Source: Literature search; industry int
erviewsBeforeAfter CT break-upMOST RECENT BREAK-UP OF CHINA TELEC
OM TO LEAD TO A LANDSCAPE OF 5 OPERATORS COMPETING ACROSS BOTH MO
BILE AND FIXEDLicensesLicensesAnnouncement on November 26 to merg
e Jitong with China Netcom and China Telecom Northern unitCompeti
tion will increase as merged telecom giants obtain licenses for c
omprehensive telecom operations, includingFixed-line phoneMobile
phoneInternet-related servicesOriginal plan to merge China Mobile
with Jitong and China Unicom with China Railcom, met with strong
dissent from the capital markets who saw this as an affront to C
hina Mobile and China Unicom’s governance as publicly held compan
iesMobileMobileFixedMobile (GSM-R)FixedFixedFixedFixedChina Telec
om NorthChina Telecom SouthMobileFixedMobileFixedMobileFixedMobil
eFixedChina RailcomChina RailcomMobileFixedHave licensePROFILES O
F CURRENT AND LIKELY FUTURE PLAYERSChina assetsMobile strategyCur
rent partnershipsLicense prospectsStill to be decided~96 million
mobile subscribers~30 million mobile subscribersServices coverin
g over 180 citiesLargest national telecom network covering 2,000
?citiesFirst operator to introduce internet access cards, and ann
ounced on-line shopping card to be launched in 2001Internet backb
one covering 17 major citiesStarted IP phone services in January
20002nd largest network in China; covering all major cities (>500
cities)Be technology leader, thus eager to enter 3GFocus on high
-end customersTrialing GPRS with 7 vendorsStrongly supporting WAP
Shifting attitudes on technology, now first player to cover both
GSM and CDMAFocusing attention on developing CDMA networksTrialin
g GPRS with 4 vendorsCompete on service offering with existing op
erators, leveraging government and supplier expertiseActive with
WLL and local mobilityGo straight to 3G if possibleObtain mobile
license as quick as possible regardless of technology standardRol
l out wireless data services even if it means taking GSM/GPRS fir
stMay focus initially on GZ, BJ, SHLikely intends following 2-tie
r structureObtain 3G license to target high-end usersUse 2G PHS t
o target voice subscribersVodafoneHPHutchisonKDDISK TelecomTelstr
aAT&TJapan TelecomBritish TelecomNews CorporationGoldman SachsSin
gTelNoneExistingExistingCurrent playersChina MobileChina UnicomLi
kely future playersChina TelecomChina NetcomChina Railcom Gover
nment likely to grant 2 licenses; undecided when, and what type;
none to be awarded in 2001 Source: Piper Jaffrey; Merrill Lynch;
Literature searchOTHER PLAYERS UNLIKELY TO ATTAIN MOBILE LICENSE
S Source: Goldman Sachs; EIU Pyramid; McKinsey analysisCentury M
obileJitongForeign JV EntrantsNew telcosWho they areBasis for ent
ryObstaclesConsortium of 10 enterprises who have joined together
to try to set up mobile enterpriseSet up in 1994 to develop data
communication servicesPotential JVs involving foreign companiesNe
w players expanding into telecomSome government contactsOriginall
y considered takeover of Great Wall’s assetsOwns 70% of VoIP mark
et Government has indicated desire to see multiple operations wit
h multiple service offeringsGovernment may be pressured to show m
arket progress and WTO benefitsForeign operators and entities eag
er to investDesire to enter wireless given opportunities and conv
ergence of technologiesGreat Wall assets moved to China UnicomNo
current discussion regarding mobile services observedLow capabil
ity to utilize mobile spectrum if allocatedWTO agreements do not
require that new telecom licenses be issued to new entrantsNation
wide presence of foreign investment not possible for initial 3 ye
ars under WTOMII will likely limit the influence of other ministr
ies on their turf (e.g., blocking SARFT entry into Internet)EXIST
ING AND POTENTIAL MOBILE OPERATORS HOLD BROAD BUT DIFFERENT COMPE
TITIVE POSITIONINGS AND SERVICE OFFERINGSBasic services China Mob
ileChina Unicom China TelecomChina Netcom Mobile voice serviceMob
ile data serviceIPMultimedia service Mobile voice serviceMob
ile data serviceIPMultimedia serviceLocal callDLDIDDPaging IP
Multimedia serviceLocal callDLDIDD Web hostingNetwork element lea
se and sale IP IDD Web hostingLease and sale of bandwidthVa
lue-added services FaxVoice mailCaller IDCall waitingSMSVPN/VPDNI
DC FaxVoice mailCaller IDCall waitingSMSVPN FaxVoice VASCa
ller ID VPNIDCISDN/DDNEDIISPE-mail Data communicationPubl
ic multimedia services Source: MII; Asiacom; Analyst reportEACH
EXISTING/POTENTIAL MOBILE OPERATOR HAS STRENGTHS AND WEAKNESSES
Source: Literature Research; McKinsey Analysis; IDCChina MobileCh
ina UnicomChina NetcomChina TelecomChina RailcomStrengthsWeakness
esIncumbent operator serving higher value customersDominates mark
et with 74% of subscribers and 84% of revenuesAllied with Vodafon
e whose CEO sits on boardAccess to global capital via CMHKOffers
complete package to corporate customersAble to underprice CM and
attain market shareGovernment and policy support to promote compe
titionNo frequency constraint due to CDMA network (13 m sub capac
ity)Access to global capital via Unicom Hong KongStrong managemen
t team with executives hailing from successful startup (Asia-info
), consulting firms and bulge bracket investment banksStrong gove
rnmental connections with Jiang Zemin''s son onboardRemains domina
nt fixed-line operatorDominant in data communications and in Inte
rnet service2nd largest fixed-line networkFacing 2G spectrum shor
tage in major cities 2002/2003Unicom has 10% price advantage by r
egulationManagement and business structure not yet completely set
upWeaker brand and public penetration than CMHKFacing complexity
of dual network managementInfrastructure spend high to build CDM
A networkLacks fixed-network reachHas no mobile operating license
Lacks mobile expertiseRegulatory concerns as MII law prohibiting
JVs with SOEs targets relationship with SARFT (one of the founder
s) Has no mobile operating licenseLacks mobile expertiseCarries m
onopoly culture and lacks business-driven aggressivenessBound to
financially nonviable rural area expansion of fixed-line networkU
ncertainties in its break-up planHas no mobile operating licenseL
acks mobile expertiseLacks scale and supportExisting/potential op
eratorMOST OPERATORS HAVE EXISTING PARTNERSHIPS WITH FOREIGN PLAY
ERS China Railcom is involved in no relevant partnershipsSource
: Literature Research; Analyst reportsChina MobileChina UnicomCh
ina TelecomChina NetcomPartnerType of partnership VodafoneHPHutch
ison TelecomKDDISK TelecomTelstraAT&TJapan TelecomBritish Telecom
News Corporation, Goldman Sachs, etc.SingTelEquantVodafone owns
2% equity share in China Mobile (HK)Strategic alliance agreemen
t with Vodafone to be CMHK’s long term preferred partner in areas
including R&D technical expertise, standard and protocol develop
ment etc.Wireless data R&D JV between majority owned subsidiary A
spire and HPHutchison owns 1.5% of China Unicom (listed) Joint de
velopment of technology for high speed mobile phoneKDDI to supply
CDMAOne mobile phonesStrategic Alliance to aid China Unicom’s CD
MAOne network development and 3G transitionStrategic alliance to
aid Unicom develop CDMA networkAT&T owns 25% of Shanghai Symphony
TelecommunicationsMOU in fixed line, mobile phone and fast-data
transmission areas for client companiesMOU signed in 1998 to coop
erate in technology and business opportunitiesJoint venture provi
ding end-to-end data communication service for MNCs set up in 199
9Partners bought 12% of China Netcom for $324 million in private
placementStrategic alliance to provide safe, efficient data trans
mission for Singapore companies with subsidiaries, partners in Ch
inaService agreement to co-develop VPN offeringsOperatorIN MOBIL
E TELECOM SERVICE MARKET, CHINA MOBILE WILL LIKELY REMAIN THE DOM
INANT OPERATOR IN BOTH REVENUE… 100%= 1998199920002001E2002E2004E
China UnicomChina Mobile2003E2005E363710Other operators 000008.41
1.816.221.127.932.034.538.4US$ Billions, percentCAGR 1998-2005EP
ercent6718N/A Source: McKinsey Analysis…AND SUBSCRIBER SHARE199
7China UnicomChina Mobile3100%=5112543851451551761972181998199920
002001E2002E2003E2004E2005EOther operator(s)Millions, percent
02-05 forecast are net subs after inactive and multi-sim-card red
uction Source: Deutsche Bank; JP Morgan; McKinsey analysis 02
-05 forecast are net subs after inactive and multi-sim-card reduc
tion Acquired by CMHK from parent in Oct 2000 Sourc
e: JP Morgan; Industry interviews; McKinsey analysisPROPORTION OF
EACH OPERATORS’ SUBSCRIBERS INCLUDED IN LISTED ENTITYMillions,
percentChina Mobile23.537.866.3111.0108.4112.9118.7126.6199819992
0002001E2002E2003E2004E2005E666168656666CMHK100%=Unicom1.55.218.7
44.047.055.263.567.81998199920002001E2002E2003E2004E2005E62636561
6162Unicom Listed100%=8682CMHK ProvincesBeijingFujianGuangdong
GuangxiHainanHebeiHenan JiangsuLiaoningShandongShanghai
TianjinZhejiangUnicom (HK) ProvincesAnhuiBeijingFujianGuangdong
HebeiHubei JiangsuLiaoningShandongShanghaiTianjin Zhejiang4128CHU
RN IS ALREADY SIGNIFICANT WITH BOTH OPERATORS AND WILL CONTINUE T
O INCREASE DRIVEN BY INCREASING COMPETITION WITH IMPACT GREATEST
ON CHINA MOBILEPercentChina Mobile HKChina Unicom CommentsChina M
obile''s broader network coverage leads initially to far lower ch
urn rate than for China UnicomChina Unicom''s rapidly expanding ne
twork and higher-quality CDMA connection will increase CMHK''s chu
rn going forwardIntensifying competition causes both sets of chur
n rates to riseAs networks become similar, customers appreciate l
ower China Unicom price Source: Analyst report; Company annual r
eportCommentsDecreasing trend due toIncreased competition and low
er tariffsIncreased mix of low-value prepaid usersDeepening penet
ration which increases low-value usershipChina Mobile''s ARPU high
er due toHigher prices than China UnicomGreater concentration of
high-end users because of breadth of coverage and market presence
CHINA MOBILE ENJOYS GREATER ARPU, ALTHOUGH LISTED COMPANIES FOR B
OTH OPERATORS GENERATE GREATER ARPU THAN UNLISTEDCMHKUnicom (list
ed)CM (unlisted)Unicom (unlisted)US$/month Source: Deutsche Bank
; McKinsey analysis 100% = 75.9 million subscribers in 2001 and
111.9 million in 2005 100% = 28.6 million subscribers in 2001
and 54.9 million in 2005 Source: Goldman Sachs; Morgan Stanley;
Team analysis-6CHINA MOBILE''S ARPU EXCEEDS CHINA UNICOM''S DESPITE
A LARGER PROPORTION OF PREPAID CUSTOMERSBlended ARPUUS$/monthCM
HKChina Unicom (listed)20012005CAGRPercent-5Prepaid vs. postpaid
ARPU comparisonUSD/monthCAGRPercent-5200120050CMHKChina Unicom (l
isted)-1-4Prepaid subscribers as percentage of total subscribersP
ercentCAGRPercent1920012005CMHKChina Unicom (listed)43WAChina
Mobile’s ARPU exceeds China Unicom''s despite a larger proportion
of prepaid customers due to a far higher postpaid ARPUChina Mobil
e''s higher postpaid ARPU is due to its high-end customer base and
superior marketing as well as China Unicom''s lower tariffs charg
edPrepaidPostpaidBlendedShare priceHK$SHARE PRICES FOR BOTH OPERA
TORS HAVE DETERIORATED IN 2001 PRIMARILY DUE TO PRICING PRESSURES
CMHKChina UnicomChina Mobile announces new lower tariff packagesS
hare price took a hit on fears that tariff cuts and spending on a
new CDMA network will eat into earningsMII announces cancellatio
n of registration feeMarket capitalizationUS$ billions120.469.520
.917.5 Source: Hong Kong stock exchange; DataStreamNONETHELESS,
BOTH OPERATORS STILL ENJOY HEALTHY EBITDA AND RETURN ON ASSETS, D
RIVEN BY LOWER COST BASES, ESPECIALLY COMPARED TO CHINA TELECOMUS
$ Billions, 2000Player RevenuePercent of revenue Percent of
revenue CMHKChina Unicom(listed)China TelecomEBITDAN/ANet profi
tROAPercent0.154.744.8N/A18.813.80.5 Total China Mobile revenue
14.3 billion Total China Unicom(Listed + unlisted) mobile rev
enue is US$1.9 billion; listed portion contributes 1.5 billion (b
alance paging and fixed line) Netcom and Railcom financials N
/A Source: JP Morgan KEY MESSAGES3. Wireless data services are ex
pected to grow quickly in China to a market of potentially over U
S$4 billion by 2005, used by 43% of all mobile users. Interest fr
om consumer surveys have been high and operators and other player
s are actively building services in the market. While early WAP s
ervices have failed to catch on, SMS has grown exponentially with
up to 20 billion SMS messages estimated for 2001. The early adop
ters will be mobile professionals and modern youth, who will requ
ire services and devices tailored to their needs. RESULTS OF A CH
INESE WIRELESS SURVEY (2000) INDICATED STRONG INTEREST IN MOBILE
DATA SERVICES Internet user number is significantly higher than
Internet subscription number, because of the sharing Internet ac
cess among users Source: Mobile user survey, 2000Very interestedI
nterestedNot interestedNeutralVery disinterestedKey sample charac
teristicsInterview of 100 randomly chosen respondents in Shanghai
, Beijing and Guangzhou, representing a good cross-section of dif
ferent types of mobile users68% of respondents express interest i
n receiving data services20% of respondents are fixed line intern
et usersMedian Internet usage of 30 hours/monthMedian mobile bil
l of RMB 300/monthCONSUMERS HAVE GREATEST INTEREST IN EMAIL AND M
OBILE VAS Source: Mobile user survey, 2000 InterestedNeutralNot
interestedE-mailInter-net brows-ingNews/sports/Enter-tain-mentSto
ck quotesCity mapFlight/ train sche-dule and reser-vationYellow p
agesPercentage of respondentsInterest in content delivered over m
obileFor content, Chinese consumers show greatest interest in ema
il, flight/train scheduling and reservation, and newsFor transact
ion, mobile VAS and m-banking are the most popular m-commerce app
lications for Chinese consumersMobile VAS (billing, location, etc
.)Mobile bankingInter- active gamesPercentage of respondentsInter
est in transactions delivered over mobileCHINA’S WIRELESS DATA SE
RVICES EXPECTED TO GROW QUICKLY Source: IDC report; Literature r
esearch; McKinsey analysisESTIMATEVoice onlyData and voiceNumber
of mobile subscribersMillions, Percent4387145155-161176-207197-25
3218-30005E04E03E02E01E''00''9943%26%15%9%4%Revenue from wireless d
ataUS$ billions05E04E03E02E01E2.61713.33.02.7Wireless data servic
e ARPU/month/actual user US$Low caseHigh case5.42.51.10.40.1155C
AGRHANDSET AND PDA MANUFACTURERS WILL FURTHER DRIVE MOBILE DATASo
urce: IDC; CCID; SINO-MR; Gartner; Interviews; Cahners In-Stat Gr
oup; literature search; Team analysisNumber of handset units sold
Millions20002001E2002E2003E2004E2005E23%30%45%63%86%90%45.054.946
.657.565.644.6Number of PDA units soldMillions20002001E2002E2003E
2004E2005E2%2%11%31%56%82%6.88.311.917.325.05.6Number of mobile d
evice units soldMillions20002001E2002E2003E2004E2005E23%30%44%58%
74%69%45.255.850.367.286.144.7CAGRCAGRNon-internet enabledInterne
t enabledOther Wireless 24%14%7%2%0.3%0.3%Internet enabled handse
t Wireless PDA14%42%-28%42%8%-28%CAGR193%35%-4%183%Non-data enabl
ed20012005Comparison of unit shipment in China vs. USMillionsChin
aUSNUMEROUS PLAYERS INVOLVED IN THE PRC WIRELESS DATA MARKET Sou
rce: Literature search Leading PRC portals launched WAP site Supp
orted by equipment vendors and local operatorsPRC wire-lineportal
sPlayersEstimated numberSummaryKey Player (examples)Actively lau
nching WAP / GPRS trials in Hong KongAnnounced interest in PRCAcq
uiring startups to strengthen capabilityDeveloping relationships
with PRC OperatorsInternational m-portals/HK operatorsSmarTone /B
TSoneraSK TelecomHutchison New WorldWAP sites launchedM-commerce
enabler emerging and forming partnership with content suppliers o
r/and PRC operatorsPRC wire- less portal platformsMonternet (Ch
ina Mobile)Uni-info (China Unicom)Launched WAP service/portals w
ith support of partnersGPRS trials in progress and scheduled for
launch in October, 2001China Unicom launched CDMA (64kbps) and 1X
RITT (140kbps) in Jan 2002China Mobile initiated 3G trials in Nov
ember, 2001 PRC mobileoperators10-205-10 2-52China MobileChina Un
icomSohu.comChina.comSina.comEquipment VendorsOPERATORS ARE ESPEC
IALLY ACTIVE IN PURSUING WIRELESS DATA Source: Literature search
; Analyst reports; Team analysisOperators are actively pursuing w
ireless data servicesCompetitive pressureChina Mobile’s dominatio
n of the market is threatened by Unicom’s aggressive low price a
nd value added services offerings2 new operators may be granted l
icenses to enter wireless market after 2002The lever of competiti
on in mobile communication market will be VAS High value mobile u
sers express their willingness to switch operators in order to ac
cess wireless data servicesChina Mobile offers WAP service in all
cities, and has gateways in 4 cities Unicom also launched WAP se
rvice in 6 major citiesBoth China Mobile and China Unicom are act
ively forming partnerships with mobile Internet application provi
ders and ICPs to boost up their WAP offeringsPotential new operat
ors, China Telecom and China Netcom also express strong desires t
o focus on wireless data services as a tool to gain customer base
Operators have introduced own wireless portalsMonternet by China
MobileUni-info by China UnicomWAP SERVICES HAVE FAILED TO TAKE OF
F IN CHINA… Source: Literature search; Gartner GroupWAP has fail
ed to take offContent Mainly informational services such as news,
weatherText contentSlow take off450,000 subscribers in 2000Less
than 300,000 users in 2000Major roadblocks to successSlow speed (
download, processing)Limited compelling WAP contentInitial premiu
m pricing and limited availability of WAP enabled handsetsDifficu
lt inputUnstable connectionLimited coverageRelative high mobile I
nternet charge Small screen with unclear Chinese character displ
aysHard to navigateLack of security...BUT SMS IS TAKING CHINA BY
STORM Source: Literature search; Team analysisLesson learnedMobi
le data services need to be simple, cheap, reliable, and fun20 mi
llion active users currently19.9 billion messages sent in 20012%
of CMCC revenue in 2000 was from SMSAverage daily SMS volume in S
hanghai is 3 million in July 2001China Mobile and China Unicom li
nking their SMS servicesSMS enabled PDAs launchedKey success fact
orsFunContentGet and send text messagesPlay simple gamesReal time
contestDownload ring tonesDownload screen saversExchange jokesSM
S is enjoying a fast take offLow usage cost 0.10 RMB per message
Reliable serviceProven technologyImproved and easier inputNationw
ide coverage by CMCC and now by Unicom tooNo new handset neededE
ARLY TAKE UP OF MOBILE DATA IS ENCOURAGING AS CONSUMERS ARE DEMON
STRATING WILLINGNESS TO PAYData service offeringsData service per
formanceBy operatorsChina MobileProduct/service SMS, including pe
rsonalized information, flight/train schedule inquiry, stock quot
e and online chattingWAP, including email, gaming and PIM Pricin
g RMB0.1 per ordinary message for sending with free for reception
; RMB0.2-2 charged by service provider and CM for each specialize
d SMSWAP pricing: RMB0.15 per minute for first 200 minutes, free
for another 300 minutes and RMB0.15 per minute for any extraChina
UnicomProduct/serviceSMS, including personalized information, PI
M, entertainment and stock quote Online pagerPricing RMB0.1 per o
rdinary message for sending with free for reception; same charge
for specialized SMS as CMBy ICPSMobile QQ (WWW.TENCENT.COM)Produc
t/serviceUnified instant messenger (mobile QQ) enabling mobile to
PC communicationPricing5 RMB monthly fee + 0.1 RMB per out going
message with free incoming messages via CM mobileNo monthly fee,
but 0.1 RMB per out going message and 0.05 RMB per incoming mess
age via CU mobileChina Mobile2001 China Unicom 2001Number of shor
t messageSMS Penetration in user basePercent of total revenue
15.9 billion29%4 billionN/A1.2%N/ASource: Semi-annual reports; P
ress release; Website; Interviews; Team analysis Include both w
ireless data and VAS only CM QQ subs included CMHK Number of
short messageSMS Penetration in user basePercent of total revenu
eQQ1st half 2001Total subsMobile QQ subs20 million0.9 million“
VIRTUAL PETS” IS ONE EXAMPLE OF SMS APPLICATION IN CHINA Source:
Linktone website; literature searchLinktone’s “Virtual Pets” SMS
game allows subscribers to educate their animal of choice - rang
ing from tigers to pigs to the popular koala - send it on dates a
nd put it to bed, rather like the Japanese electronic pet, Tamago
tchi The cost is very affordable at RMB0.10 per SMSMoreBackMoreB
ack------2000------Lunar狼吞虎咽的把饭吃光了。"谢谢主人，再来点吧。"米增加5；金币减少10；经验增加1。
Lunar has eaten the food like a tiger. “Thank you, master. Some m
ore, please.” Use 10 gold coins to buy 5 rice units, add one expe
rience point.MoreBack------2000------申请侍应生职位成功，由于工作努力，获得30个金币！经验增
加3Your pet was successfully hired as a waiter. Because of his har
d work, he has earned 30 gold coins, and three experience points.
MoreBack------2000------你的宠物魅力十足，cici想跟你做朋友 （跟对方说话请输入P空格cici空格再写
内容），30字以内。Someone has a crush on your pet! (To talk to the pig na
med cici, enter P_cici_ and a note) Do not exceed 30 characters.
China, like Japan, combines a love of gadgets with a “cult of the
cute”QQ HAS BEEN VERY SUCCESSFUL IN GAINING SUBSCRIBER BASE WITH
UNIFIED MESSENGINGMobile QQ in a semi-instant messaging type of
mobile data application, which originated from the popular intern
et based instant chatting and messaging application, I.e., OICQ,
where subscribers can chat with each other and be notified if the
ir friends are on line at real time Basic functions:Sending SMS b
etween mobile phone and QQUsing mobile phone to check information
stored on QQ Using mobile phone to check if friends are on-line
Service fee:Services are free for users who only use OICQ on the
Internet Subscribers are charged for using mobile QQ via mobile p
hone Fee structure for China mobile subscribers is : 5 RMB monthl
y fee + 0.1 RMB per out going message, incoming message is free o
f changeFee structure for Unicom subscribers is : no monthly fee
, but 0.1 RMB per out going message and 0.05 RMB per incoming me
ssage TenCent claims to have 20 million subscribers in total In f
act, only 0.9 million of which are actual mobile QQ users from wh
om China Mobile collects monthly subscription fee for Ten Cent
While subscribers don’t need to pay for incoming messages, TenCe
nt is required to pay 0.05 RMB for each incoming message to China
Mobile Source: Ten Cent, team analysis FOUR KEY MOBILE DATA USE
R SEGMENTS CAN BE IDENTIFIEDSource: Survey research on 18 cities
and >2500 mobile users; Team analysisMobile professionalsModern
youthDescription Segment Conservative mainstreamIndifferent lagga
rd Mostly managers or entrepreneurs Use mobile phone mainly for b
usiness Travel a lot and have significant roaming needsCare about
voice quality and network coverage High personal incomeHigh mobi
le data potential: already 25% of them use SMS frequentlyMostly u
nder 30 years old Use mobile phone mainly for personal communicat
ion convenience Interested in new technologies and willing to try
out new thingsMany unmarried people, with high educational level
High mobile data potential: already 47% use SMS regularlyCare the
most of mobile communication costRelatively lower income Older t
han average and less educated Lots of pre-paid users Lowest ARPUV
ery low SMS usage currently: <13%Little potential for mobile data
Mostly married, over 30 years old and under college education Don
''t care much about technology and trend Mainly use voice services
for local callsVery low SMS usage currently: <15% Little potenti
al for mobile dataShare of sub base%MOBILE PROFESSIONALS, YOUTH M
OST ATTRACTIVE BECAUSE OF HEAVY DATA USAGE AND HIGHER ARPU Source
: Judgment and analysis based on survey research on 18 cities and
>2,500 users for China Mobile and rough estimates for China Unic
omSegmentShare of total revenuesPercent of total revenueSMS usePe
rcentPC internet usePercent47<13ESTIMATEBOTH TARGET SEGMENTS WILL
REQUIRE DEVICES WITH FEATURES CUSTOMIZED TO THEIR NEEDS Source:
Team analysisMobile professionalCustomer segmentMostly managers
or entrepreneurs Use mobile phone mainly for business Travel a lo
t and have significant roaming needsCare about voice quality and
network coverage High personal incomeHigh mobile data potential:
already 25% of them use SMS frequentlyMostly under 30 years old U
se mobile phone mainly for personal communication convenience Int
erested in new technologies and willing to try out new thingsMany
unmarried people, with high educational levelHigh mobile data po
tential: already 47% use UMS regularlyDescriptionMessaging/email
on the goInformation (e.g., stock quotes, weather, news, local gu
ide)Personal information managementMobile commerceMobile stock tr
adingMobile officeMessaging/emailInformation (local news, weather
, event)Games/entertainmentKey user needsAlways up-to-date unifie
d messaging (hotmail, voice mail, 2-way SMS, IM)Customized inform
ationAlways up-to-date PIM, notifications, alerts, outlook sync.C
ommerce and stock trading capabilitiesSecure browser of corporate
intranet and internetAlways up-to-date unified messaging (hotmai
l, voice mail, IM, 2-ways SMS)Customized informationNetwork gamin
gDownloads (rig tone, basic image, music and video clips) through
PCPIM, PIP, notification, alerts, outlook syncKey featuresModern
youthMESSAGING, INFORMATION AND ENTERTAINMENT WILL BE KEY OFFERI
NGS FOR MOBILE PROFESSIONALS AND MODERN YOUTH IN THE NEAR TERM% o
f people interestedMobile professionals, N ? 370Messaging/emailIn
formation (stock quotes, news, weather, restaurants)M-shoppingM-s
tock tradingM-advertisingEntertainment (ring tone & screen downlo
ad) Source: Survey research; Team analysisModern youth, N ? 50017
.119.821.022.161.290.019.535.123.725.768.786.3KEY MESSAGES4. Regu
latory changes loom, particularly with the accession of China to
the WTO. While foreigners will be unlikely to set up MVNOs, WTO w
ill allow greater participation of foreigners in basic and value
added services, although geographic limitations will exist throug
h 2004 and Chinese players will be required to own at least 50%
of telecom service ventures (51% for basic services). Regulatory
risks remain, with no means to appeal regulator decisions, unclea
r interpretation of regulation including WTO commitments, and the
government’s track record of intransparent and unpredictable dec
ision making. (See separate regulatory PD for details)
Mobile virtual network operatorREGULATORY AND POLITICAL CHANGES
AND IMPLICATIONS FOR FOREIGNERS PLAYING IN telecom LOOM2001200220
0320042005WTOAccessionChange in political leadershipAnnouncement
of successionTransition of power in senior leadershipImplications
for foreignersLimitations on partnership structures lifted gradua
llyOperators will be more deal ready once laws are officialForeig
n investments will still be initially restricted geographicallyRi
sk for shift in regulatory direction and policy makingChange may
make relationship investments obsoleteMaximum fore-seeable openin
g of VAS in China telecom marketUp to 30% within operatingDecisio
n pointKey events3 cities (BJ, SH, GZ)17 citiesnationwidePromulga
tion of Telecommunications LawMobilization of telecommunications
commissionZhu Rongji to mobilize commission and lead sector refor
mDrafting of foreign investment law in telecommunicationsUp to 50
% within operationForeign and geographical restrictionsDecember,
2001Must be completed before/at time of WTO accession Not likely
to expand beyond WTO concessionsWu Jichuan promised a draft by J
anuary 1st. However, comprehensive law not likely to be drafted i
n that time according to industry insiders. Law not likely to exp
and beyond WTO concessions Relevant legislationDrafting of a deve
lopment blueprint for the telecommunication industry to manage op
eration of fixed-line, mobile and Internet businessMobile voice a
nd data servicesValue-Added ServicesUp to 25% within operatingUp
to 35% within operating3 cities (BJ, SH, GZ)17 citiesNation-wideU
p to 49% within operatingUp to 49%Maximum fore-seeable opening o
f basic services in China telecom market Source: Legal and indu
stry interviews; team analysisMVNOs ARE NOT LIKELY TO BE VIABLE I
N THE FORSEEABLE FUTURELegal statusCurrent activityFuture prospec
tsMVNO operation would require a licenseLicenses would be subject
to government approvalRegulations governing basic services and v
alue-added services would apply to MVNOs including restrictions o
n foreign participationCurrently a hot topic discussed by industr
y followers as a means to help transform service orientation of C
hina’s telecom landscapeMVNOs or services running on equipment in
frastructure of licensed operators do exist, including in fixed l
ine; however, these are illegal and the government is currently c
racking down on these infractions in an effort reminiscent of cra
ckdown of Chinese-Chinese-Foreign companies (CCFs)MVNO activity i
s reportedly present in Liaoning and Southern provinces; these ar
e also not recognized legally by the government and have been ret
ained by disgruntled investors of the PLA''s Great Wall CDMA netwo
rk and will likely disappear after asset transfer to Unicom is co
mpletedChinese government is discussing MVNO concept as a means t
o avoid capacity overbuild, particularly with new licenseesExisti
ng operators unlikely to consider MVNOs, particularly in key and
attractive regions given spectrum shortages and no desire to incr
ease competitionMVNOs would still require a license from the gove
rnment, will be limited geographically through 2004, and even by
then, require 50% or more Chinese ownershipMVNOs are not likely t
o be introduced in the foreseeable future Source: Legal intervie
ws; Industry interviews Source: Legal and industry interviewsFor
eign operators can obtain up to 30% ownership in Beijing, Shangha
i, GuangzhouForeign operators can obtain up to 49% ownership in 1
7 cities Foreign operators can obtain up to 50% ownership nationw
ideVALUE ADDED SERVICES WILL BE LIBERATED UNDER WTO QUICKER THAN
BASIC TELECOM SERVICES BUT LIMITATIONS WILL REMAIN WTO entry po
tentially effective January 2002 with likely November 2001 ratifi
cation Source: Literature search; WTO Working Team Report Novemb
er 13, 2001Mobile voice anddata servicesUpon entry (2002)Foreign
investors can obtain up to 25% ownership Beijing, Shanghai, Guan
gzhouAfter 3 years (2005)After 1 year (2003)Telecom VAS(mobile an
d wireline) After 2 years (2004)Foreign investors can obtain up t
o 35% ownership in 17 cities Foreign investors can obtain up to 4
9% ownership in 17 citiesForeigners will still be prohibited from
investing or operating in fiber-optic network License availabil
ity will be strictly limited even after WTO accession and subject
to Chinese government approvalForeign investment is limited to n
o more than 50% even post WTO After 5 years (2007)Foreign investo
rs can obtain up to 49% ownership nationwideUnchanged (foreign pa
rticipation not allowed)Foreign investors can obtain up to 25% ow
nership in Beijing, Shanghai, GuangzhouForeign investors can obta
in up to 35% ownership in 17 citiesDomestic services (wireline) F
oreign investors can obtain up to 49% ownership nationwideAfter 6
years (2008)Period Basic Telecommunication servicesVALUE ADDED S
ERVICES (VAS) ARE DEFINED AS PROVISION OF SERVICES OVER SOMEONE E
LSE’S NETWORK Basic Telecommunication servicesTelecommunications
VASPaging servicesMobile voice and data services:Analog/digital/c
ellular servicesPersonal communication servicesDomestic ServicesV
oice servicesPacket-switched data transmission servicesCircuit-sw
itched data transmission servicesFacsimile servicesDomestic priva
te leased circuit servicesInternational ServicesVoice servicesPac
ket-switched data transmission servicesCircuit-switched data tran
smission servicesFacsimile servicesInternational closed user grou
p voice and data services (use of private leased circuit service
is permitted)Provision of services over other''s network Source:
WTO Working Team Report November 13, 2001Ownership of networksFix
ed, domestic, long distance and local telephoneElectronic mailVoi
ce mailOn-line information and database retrievalElectronic data
interchangeEnhanced/Value-added facsimile services (including sto
re and forward, store and retrieve)Code and protocol conversionOn
-line information and/or data processing (including transaction p
rocessing)BACK UPAPPENDIX- PLAYERS PROFILEChina Mobile and China
Unicom are duopoly in China’s mobile telecom service market. Chin
a telecom, China Netcom, China Railcom, and Jitong(newly merged b
y China Netcom) are potential players of this market.PLAYER PROFI
LE – CHINA MOBILEStrategic DirectionSubscriber BaseFinancial High
lightsMarket CapService OfferingMain PartnershipStrengths & Weakn
essesOwnership StructureImpact of China Telecom BreakupRevenue B
reakdownBasic InformationLargest mobile operator in China Own and
operate mobile networks across China since early 1990sEstablishe
d: 1999Head office: BeijingCEO: Zhang Ligui# of employee: 38,343
(CMHK)StrategyMaintain market share & keep high-end customers in
mobile businessEnter Internet business – mobile and fixedBe on le
ading edge of technology30% of 2005 revenue from non-voice servic
esNew initiativesLaunched “Monternet” to actively prepare for 3GC
MHK will acquire mobile network in the rest 18 provinces from CMC
C early next year(CMHK)US$ BillionRevenueEBITDAProfitROE11.78.56
.44.72.20.630%14%20001999Stock price: HK$24.10Market Cap: ~HK$440
bn(Oct. 30, 2001)UsagefeesMonthly feesConnection feesOtherChina M
obileMinistry of Finance100%75%25%100%UnlistedProvincialnetworkCM
HK (listed)Public shareholder Includes Vodafone (2.0%) Tota
l China Mobile revenue is US$ 14.3 billionStrengthLeader in China
’s mobile market Extensive coverage & comprehensive networkStrong
strategic partner like VodafoneStrong brandQuicker to market new
value-added serviceOwns its own R&D armWeaknessUnder constant th
reat due to Unicom’s low price policy ARPU is threatened by the i
ncrease in prepaid subscriber Source: Literature search; industry
interviews; IDC; Team analysis100%Vodafone has 2% stake in CMHKS
ubscriberMillionARPUUS$/m199920003867199920003022Mobile voice ser
viceMobile data serviceNo impactOriginal proposal to merge with J
itong rejected based on conflict with corporate governance of pub
licly held firmPLAYER PROFILE – CHINA UNICOMStrategic DirectionSu
bscriber BaseFinancial HighlightsMarket CapService OfferingMain
PartnershipStrengths & WeaknessesOwnership StructureImpact of Chi
na Telecom BreakupRevenue BreakdownBasic InformationThe 1st opera
tor in the world outside US to operate large scale CDMA & GSM net
worksOwn and operate 2nd largest mobile network across China sinc
e 1996Established: 1994Head office: BeijingCEO: Yang Xian Zhu# of
employee: ~35,400 (listed company)StrategyBetting on CDMA to win
high value subscribers from China Mobile30% of 2005 revenue from
non-voice servicesIncrease network coverage and quality in fixed
-line Focus fixed-line business on corporate usersNew initiatives
Invest USD 18mm to build up ethernet fiber across 9 provinces and
invest USD ~30 bn in next 5 years in its voice and data business
US$ BillionRevenueEBITDAProfitROE2.92.11.30.70.40.16%7.6%20001999
Stock price: HK$7.35Market Cap: ~HK$ 91bn(Oct. 31, 2001)Cellulars
erviceFixedline &dataPagingserviceincluding MII, MOR & MOEP1
.5% held by Hutchison All the data are of CU(listed)StrengthData
speed advantage over China mobile with CDMA networkNo spectrum s
hortage on CDMAFirst mover in building high-capacity backbone wit
h national reachWeaknessNetwork uses hybrid ATM/IP-based technolo
gy, which is more expensive to operate compared to a pure IP netw
orkMinistry of Finance77%23%Public Sharehol-ders79%21%100% Sou
rce: Literature search; industry interviews; Team analysisHutchis
on has 1.5% stake in China Unicom Ltd. (listed)SubscriberMillionA
RPUUS$/m19992000519199920001914Fixed-line telecom serviceMobile v
oice and data service (GSM & CDMA) Internet-related servicePagerN
o impactOriginal proposal to merge with China Railcom rejected ba
sed on conflict with corporate governance of publicly held firmPO
TENTIAL PLAYER PROFILE – CHINA TELECOMStrategic DirectionSubscrib
er BaseFinancial HighlightsMarket CapService OfferingMain Partner
shipStrengths & WeaknessesOwnership StructureImpact of China Tele
com BreakupRevenue BreakdownBasic InformationIncumbent fixed-line
provider in ChinaOwn and operate fixed-line networks covering ac
ross China, and its fiber lines is 1.2 million km, covering 75%+
of China cities & countiesEstablished: 1994Head office: BeijingC
EO: Zhou Deqing# of staff: 533,000StrategyStrengthen fixed-line s
tatus, doubling its fiber network over the next 5 yearsSupplement
fixed-line business with fast-growing mobile businessNew initiat
ivesIPO in 2002 or 2003Facing breakup to 2 companiesUS$ BillionRe
venueProfitROA19.818.60.11N/A0.17%N/A20001999LongdistanceserviceD
ata/internetLocalvoiceStrengthComprehensive nationwide network wh
ich dominates last-mile access to customersExtensive customer rel
ationships given its status as the incumbentWeaknessLikely to be
saddle with national service obligation, a big issue given the wi
de income disparities in China Source: Literature search; industr
y interviews; Team analysisLocalAcrossISPChina TelecomMinistry of
Finance100%100%100%FixedDatacom100%AT&T invested 25% in Shanghai
Symphony TelecomOther cooperation''s with J-phone and British Tel
ecomFixed-line19992000109144Local and long distance voice service
Data/InternetISP20002001E4.17.4InternetNOT LISTEDSpilt into two c
ompaniesTwo regional monopolies be created out of one national in
cumbentNorthern Unit will merge with CNC and JitongBoth units wil
l be released from public obligationBoth units likely to receive
mobile licensesPOTENTIAL PLAYER PROFILE – CHINA NETCOMStrategic D
irectionStrategic DirectionFinancial HighlightsMarket CapService
OfferingMain PartnershipStrengths & WeaknessesOwnership Structure
Impact of China Telecom BreakupBasic Information Source: Literat
ure search; industry interviews; Team analysis; JP MorganRevenue
BreakdownOwns 9,376km 40GB trunk network connecting 17 major citi
esEstablished: 1999Head office: BeijingCEO: Edward Tian# of Emplo
yees: 2,674Raised $325 million for 12% stake through private plac
ement in 2001Identity of JV partners remains unclearStrengthHigh
quality managementHigh capacity backbone based on IP technologySt
rongly positioned on international bandwidth through alliance wit
h C2C and potential international link through its Hong Kong gate
wayWeaknessInadequate last-mile access to customers currentlyStra
tegyFocus on providing high quality, low-cost infrastructure & va
lue added services & solutionsTarget communication-intensive corp
orate and high-end residential customersCompete through different
iation & distinctive value propositionBuild a strong brandEstabli
sh strategic partnership with world-class tech/biz leadersVoIP ca
rd & Corporate Data ServicesBackbone & bandwidth wholesaleVPN, hi
gh speed bandwidth, international integrated data servicesRevenue
2000US$million65Chinese Academy of ScienceSARFT15%40%100%SH Gov’t
CNCMinistry of RailwayPrivate investors15%15%15%NOT LISTEDTurned
profit in Sept., 2001LeaseBandwidthDataVoiceMerge with China Tel
ecom Northern Unit and JitongObtain valuable fixed-line infrastru
cture and businessGet access to last mile to boost existing backb
one networks and businessNew initiativesPrivate equity replacemen
t in Feb 2001Corporate data service launchedStrong take-up in Net
com’s IDCSigned agreement with Sing Tel thus become less reliant
on CT in international bandwidthPOTENTIAL PLAYER PROFILE – CHINA
RAILCOMStrategic DirectionSubscriber BaseFinancial HighlightsMark
et CapService OfferingMain PartnershipStrengths & WeaknessesOwner
ship StructureImpact of China Telecom BreakupRevenue BreakdownBas
ic InformationOwn 2nd largest fixed-line network(120,000+ km) in
China covering 500+ citiesInternet covers 36 cities; paging netwo
rk 1300+ cities; IP 16 citiesFiber network is 42,000km in length
and 10,000km of its backbone has been updated with DWDMEstablishe
d: Dec., 2000Head office: BeijingCEO: Cui Qing# of employee: 65,0
00StrategyStrengthen the service to railway transportationExplore
public marketEnhance service qualityFocus on HR and TechnologyNe
w initiativesInvest $ 240mn in broadband network constructionInve
st $384mn in fixed-line network constructionEnter satellite commu
nication businessStrengthExisting nationwide network10-20% price
advantageWeaknessNetwork are all constructed along railway, restr
icting development of service to publicNetwork need to be upgrade
to meet the massive communication demand of publicFinancing chan
nel need to be exploredLack of talent Source: Literature search;
industry interviews; Team analysisAcquired 20% share of Shin Stae
llite PCL (Thailand) with cash and stock exchange49%100%CRCMinist
ry of Railway15 china railway branches51%NOT LISTEDFixed line vo
ice servicePagingIP, DLDBackbone leasingRevenueAssetRegisteredCap
ital 2000US$billion0.121.61.3Fixed-linePager 2000million1.01.4N
.A.No impactOriginal proposal to merge with Jitong rejected based
on conflict with corporate governance of publicly held firmCandi
date for mobile license (likely TD-SCDMA)POTENTIAL PLAYER PROFILE
–JITONGStrategic DirectionSubscriber BaseFinancial HighlightsMar
ket CapService OfferingMain PartnershipStrengths & WeaknessesOwne
rship StructureImpact of China Telecom BreakupRevenue BreakdownBa
sic InformationStrategyLeading comprehensive telecommunication co
mpanyMeet customers’ demands with tailored servicesNew initiative
sIPO 2nd time postponedSigned agreement with Nortel and Digital C
hina to build self-owned backboneStrengthA market leader in VoIPN
ationwide network and various technologies, e.g. satellite & SDH
Own customer loyaltyStrong in sales given its smaller scale of op
erationWeaknessFinancially weak for further expansion and infrast
ructure investmentManagement style is strongly entrenched with SO
E mentalityQuality personnel leaving to join other telecom co.Hea
vily dependant on VoIP revenues Source: Literature search; indust
ry interviews; Team analysisiPassNortel, Digital ChinaNOT LISTEDS
hanghaiHua HongIRICO45%0.14%SDICElectronicsJiTong<5%OtherSOEsMII4
0%10%Internet connectivity-dial up permanent ( via fiber, microwa
ve, & satellite)VoIPVAS & VPNIDC199920000.31.1SubscribermnRevenue
2000US$million60IP infrastructure and value-added service provide
rLeading ISP & VoIP player in China with telecom service market s
hare of 10%Established in 1994ISP licensed in 1995IP phone licens
ed in 2000Licensed in 1998 to operate ChinaGBN, China’s national
public computer networkCoverage: 200 cities# of employee: ~2000Me
rging into China Netcom in April 2002ISPVoIP &others43%57%To be m
erged with China Netcom and the Northern Unit of China TelecomAPP
ENDIX- 3G TECHNOLOGY STANDARDS CHOICESMobile technology in China
is advanced and cutting edge. Operators are launching packet swit
ch networks in GPRS and CDMA 1XRTT, and plan to launch 3G by 2003
. The country will likely three technologies—W-CDMA, TD-SCDMA and
CDMA2000—in some form or another. China has actively been develo
ping TD-SCDMA, which has significant benefits over other alternat
ives, as an ITU approved 3G standard. CURRENT PUBLIC MOBILE SERVI
CE SPECTRUM RESOURCE ALLOCATION IN CHINA COVERS BOTH GSM AND CDMA
825835870880885890909915930935954960ETSI GSM spectrumUp DownUpDow
nUnicom CDMA 10 mhzCMCC Analog reallocation 5 mhzCMCC GSM 19 mhzU
nicom GSM 6 mhz1710172017451755178518051815184018501880ETSI GSM s
pectrumUp UpCMCC GSM 19 mhzDownDownUnicom GSM 10mhz Source: Oper
ator interviewsCHINESE OPERATORS MOVING AGGRESSIVELY TO ROLL OUT
PACKET NETWORKSKey eventsTransfer of non CMHK operators to CMHKLa
unch of GPRS3G trialsLaunch of 3GLaunch of GPRSCDMA launch Sourc
e: Interviews; literature searchNow2002200320042005Existing opera
tors preparing for wireless dataCrucial time period for 3G decisi
on and positioning with new operators3G networks and new mobile o
perators emergingGrowth and maturation of 3G applicationsOctoberc
ommercialtrialsOctober trials (64 Kbps)I x RTT (140 kbps)3 - 4 a
dditional provincial operatorsLaunchLaunchExisting networksGSMGSM
/CDMABOTH CHINA MOBILE AND UNICOM FOCUSED THEIR GPRS PILOTS IN C
OASTAL AREASBeijing Mobile/ Motorola, 1.4m subsTianjin Mobile/ Mo
torola, 500,000 subsLiaoning Mobile/ Huawei, 1.3m subsShanghai M
obile/ Siemens, 2m subsZhejiang Mobile/ Alcatel, 2.5m subsFujian
Mobile/ Nokia, 2m subsGuangdong Mobile/ Ericsson, 5.7m subsRation
ale Voice will remain key revenue source for mobile operators in
the short runDemands for data service will primarily originate fr
om developed coastal area & major inland citiesMobile data servic
e is far from developed, which limits it to coastal areasIt is es
timated by China Mobile that GPRS market size will reach 1 millio
n by end of 2001China MobileUnicomWuXi Unicom / Ericsson, Sub
scribers N/AShanghai Unicom / Nokia, 360,000 subsShenzhen Unicom
/ Motorola, 270,000 subsGuangdong Unicom / Nokia, 1m subs Unic
om GPRS trials on hold as attention has shifted to CDMA Subscr
iber numbers from early 2000Source: Literature search, industry i
nterviews CHINA UNICOM HAS LAUNCHED NATIONWIDE CDMA NETWORK AS BA
SIS OF CDMA2000 NETWORKCapacity of subs, Million20012002E2005E152
050CDMA20001XRTTIS-95Source: Literature search, industry intervie
ws Technology CAGR 35%EVOLUTION OF MOBILE RADIO STANDARDS IN CHIN
A LEADS TO THREE 3G ALTERNATIVES Available by end of 2002 A
ssuming dual mode GSM/W-CDMA solution Source: Various vendors; M
cKinsey analysis2G2.5GIS-95AGSMCDMA20001x RTTCDMA(China Unicom)GS
M(China Mobile, Unicom)IS-95BGPRS China timingPresent2002W-CDMA
(UTRA FDD)CDMA2000 3x RTT TD-SCDMA3G2003TSM2003-2004OUTLOOK FOR
3G STANDARDS IN CHINAAll 3 standards likely to exist in some capa
city in ChinaW-CDMATD-SCDMACDMA2000 Source: McKinsey analysis; I
ndustry interviews3G SPECTRUM HAS ALREADY BEEN ALLOCATED FOR W-CD
MA AND TD-SCDMA, ALTHOUGH FDD SPECTRUM (W-CDMA) IS CURRENTLY USED
FOR WLL IN SOME CITIES20 mhz30 mhz60 mhz15 mhz60 mhzVoidTDDFDD
(uplink)SatelliteTDDVoidFDD (downlink)Void18851900192019802010202
5211021702200Air interfaceModeSpectrum rangeTotal spectrumBandwid
thAvailabilityTD-SCDMATDD1900 - 1920 2010 - 202535 mhz1.6 mhzAvai
lable nowW-CDMAFDD1920 - 1980 (UL) 2110 - 2170 (DL)60 mhz5.0 mhzC
urrently being used in certain cities for WLL, and expected to be
cleaned up by 2003-2004 Source: The International Engineering Co
nsortium (IEC); Interviews; MIIW-CDMA IS SCHEDULED FOR LAUNCH PER
CHINA MOBILE BY 2003, ALTHOUGH SOME QUESTIONS REMAIN ABOUT VIABI
LITY OF TECHNOLOGY AND AVAILABILITY OF DUAL MODE HANDSETSLaunch i
n 2003-2004 Not available until 2H 2002 at the earli
est when the W-CDMA/GPRS dual-mode phone become available, and ma
y be delayed until TD-SCDMA launched Source: Industry interviews;
Government interviews; McKinsey analysis20022003200420052001Tech
nologyPossible launch scheduleAllocated to FDD but not ready to a
ward to operatorsFDD SpectrumFDD spectrum and license will be awa
rded to operatorsCommercially availableTD-SCDMA IS LAGGING BEHIN
D IN TERMS OF COMMERCIALIZATION AMONG 3G CANDIDATESMobile network
equipmentMarket awarenessCDMA 2000 1 X RTT technology commerci
al with 400,000 users in KoreaChina Unicom will construct CDMA 20
00 1X test networks in 10-15 major Chinese citiesCDMA 2000 3XRTT
is in preliminary R&D phaseCDMA 2000Growing support especially by
US operators400,000 1XRTT users in Korea todayJapanese operator
s will also adoptPrimarily supported by US and Korean vendorsEqui
pment commercialization nearly finished in Japan44 contracts for
W-CDMA sourcing finalizedTest networks are not performing wellW-C
DMAPreviously, the most widely accepted technologyFor a time, has
been preferred option for 3G technology by most operatorsLarge v
endor base support led by Ericsson, NokiaMobile terminalLucent ha
s CDMA 2000 (1XRTT handset prototype, later this year mass produc
tion startsQualcomm developing dual mode chipset for CDMA 2000 an
d W-CDMAChipset design completed No prototype availableUnclear wh
en W-CDMA terminals will be available outside of JapanSome questi
on whether dual mode GSM W-CDMA handsets will be available before
2004Time to marketCDMA 2000 1 X RTT to be launched in early 2002
No time schedule for CDMA 2000 3XRTT introductionUnclear whether
CDMA license includes 1XRTT or 3XRTTOverall postponing of W-CDMA
time to market.Possibly not launched on large scale nationwide f
or 2 - 3 years, due to complexities of dual mode solutionNetwork
equipment prototype will be available by end of 2001Call between
terminal prototype completed on April 27Video transmitted between
base stations and terminals on July 4 TD-SCDMASigns of mobilizat
ion for chipset development have appeared (Qualcomm,TI, Phillips)
Chipset design is expected by proponents to be completed in 2002P
rototype and commercial handsets will potentially be available by
late 2002Proponents expect to launch in China by end of 2002Pro
ponents expect TD-SCDMA to potentially enter international marke
ts after China launchViewed as inferior Chinese technology despit
e technical advantages and significant Siemens contribution Lower
awareness and acceptance by industry though accepted by ITU and
3GPPCurrently Siemens and Datang are the key supporting vendors S
ource: Industry interviews; Analyst reports TD-SCDMA’S PROSPECTS
LARGELY DEPENDS ON THE TIMING AND VIABILITY OF TECHNOLOGYTD-SCDM
A TechnologyPossible launch schedule2002200320042005TDD spectrum
is ready to be distributed to operators as soon as technology is
ready2001Scenario 1TrialCommercially availableScenario 2TrialCom
mercially availableScenario 3TrialFailsScenario 1Launch in 2003Sc
enario 1Scenario 2Launch in 2004Scenario 2Scenario 3TD-SCDMA neve
r launchesScenario 3TDD SpectrumThe timing of the commercial avai
lability of TD-SCDMA technology can be summarized in 3 scenarios.
In scenario 1, TD-SCDMA is available by the end of 2002. In sc
enario 2, development is delayed due to terminal inavailability,
and launch occurs in 2003. In scenario 3, TD-SCDMA fails to laun
ch Trials will include infrastructure buildout in 2002 Source:
Industry interviews; McKinsey analysisTD-SCDMA ALSO HAS ADVANTAGE
S IN MIGRATING FROM GSMNew hardware investments9.6 KbpsBoth paths
begin from GSM network2 G115 KbpsPath convergence continues thro
ugh 2.5 G2.5 GMigrationData trans- mission rate Comment 384 Kbps
(mobile)2 Mbps (stationary)Continued leverage of GSM network for
TD-SCDMAMixed application capabilityInvolves widespread new inves
tment384 KbpsTSM: 3G like performance with minimal added investme
nt to GSM network2001Late2001/200220032003-2004TD-SCDMA pathW-CDM
A pathGSMW-CDMA3G TD-SCDMATD-SCDMA3 GGSM Source: Industry inter
viewsOPERATORS WILL NOT NECESSARILY DECIDE 3G STANDARD, AS MANY S
TAKEHOLDERS WILL HAVE INFLUENCE, AND THE GOVERNMENT HEADS THE LIS
T StakeholderRelevant entitiesGeneral positionDegree of influence
Operators ExistingNewChina Mobile China UnicomPrefers W-CDMA, due
to lack of confidence will support TD-SCDMA if in national inter
estWill try to develop CDMA 2000. Unclear how to develop GSM net
workStronger confidence in W-CDMA, but less strong view on import
ance of standardUnclear about technologies. Will support nationa
l interestsEager to adopt and roll out TD-SCDMA as play for gover
nment support State owned flagship operator; will accept governme
nt decisions in interest of countryMay have general "bargaining c
hip" with CDMA decisionWill take whatever spectrum is granted by
MIIWill do whatever MII plansLittle direct influence given owners
hip by Ministry of RailwaysChina Netcom China Telecom China Railc
omLocal equipment vendorsDatangHuaweiZTECo-developer of TD-SCDMAS
upports TD-SCDMA but investing heavily in W-CDMAStrong support fo
r CDMA given Qualcomm supportFavored son of MII given historic af
filiation but questions about capability of CATTPrivatized but m
ost competent local vendorViewed as successful SOE Source: Indus
try interviews3G REGULATORY RESPONSIBILITIES3G regulatory tasksRe
sponsible organizationProgressFrequency allocationRadio Frequency
Administration Dept., MII3G spectrum specification completedFDD
spectrums need to be cleaned-up3G standard decisionState Council
Science & Technology Dept., MIIScience & Technology Dept., SPDC V
arious research institutes(CATT, RITT)Currently 3G radio standard
s setting are still under discussionWaiting and hoping that TD-SC
DMA is viable3G timingScience & Technology Dept., MIITD-SCDMA can
begin anytimeOther standards in 2002 or 2003Telecom Admin Dept.,
MIIState CouncilSPDCMost likely would award to existing operator
s and 1 - 2 new operators 3G supplier qualification (licensing)Pl
anning Department., MIITelecom Administration Department., MIIAll
existing MNC suppliers are likely to receive licenses, if produc
ts meet specificationLocal suppliers will be preferredNew entrant
s reviewed on technology and subject to import restriction if not
manufactured locally; approval for entry of new vendors likely t
o be limited3G operator licensing and allocation of spectrumDecis
ion maker Source: Ministry of Information Industries; CITIC CIECSPDC & MII''s CURRENT POSITION ON 3G STANDARDSProblem areasCurrent positionView this as a success of Chinese technologyView this as opportunities for local industry to succeedLocal manufacturer''s support outside of DatangMNC terminal manufacturer''s supportTD-SCDMAThe government clearly supports TD-SCDMAAnticipated announcement of support for TD-SCDMA contingent on success of trialsTDD spectrum allocated for TD-SCDMATD-SCDMA trials to be permitted whenever product is availableFDD licensing may be delayed for one yearMNCs being pressured to support TD-SCDMAW-CDMAMonitor and studyConsidering holding off licenses for one year after TD-SCDMAPressure from EU for fair tradeLobbying by MNCsCDMA 2000Not as actively monitored and studied as W-CDMAWhether 2G CDMA will be widely deployedPressure from US for fair tradeNot confident yet about the technology pending trialsNeed commitment of other local equipment suppliers besides DatangNeed commitment of terminal suppliersHowever, the government is not ready to make a final decision Source: Ministry of Information Industries; Industry interviewsGOVERNMENT RATIONALE FOR TD-SCDMA POSITION BASED ON DESIRE TO INCREASE COMPETITIVENESS OF CHINESE TECHNOLOGY AND CAPABILITY OF LOCAL VENDORS Source: MII Interviews; RITT interviews; CITIC CIECFactors for considerationSupport of local industriesIPRs for ChinaProtecting existing network infra-structure investmentPolitical considerations, i.e., trade relationsDesire to lead the technology developmentDesire to conform with global standardSupporting TD-SCDMA becauseAvoiding foreign IPRsPromoting Chinese technology and standardTime to market advantage for local suppliersPotential for exportNot promoting TD-SCDMA exclusively becauseThreat of unfair trade practice accusationsPressure from EU and USUncertainty in standard, product development and terminal availabilityGovernment wants to avoid a market dominated by foreign players as experienced in 2GCHINA MOBILE MAY ADOPT BOTH TD-SCDMA AND W-CDMA WHILE CHINA UNICOM WILL LIKELY EMPHASIZE DEVELOPMENT OF ITS CDMA NETWORKApproach Probability Rationale Quotes China MobileChina UnicomMediumHighChina Mobile will be experiencing GSM capacity shortfalls in many major cities, which may influence 3G decisionGiven its advantages in assymetric transfer, TD-SCDMA being considered for data servicing roleChina Mobile is likely to adopt TD-SCDMA under government instructions to support national interestsChina Mobile prefers and will likely to adopt W-CDMA jointly with TD-SCDMA to complement each other“China Mobile will adopt W-CDMA and use TD-SCDMA as complementary technology" – Li Mofang, China Mobile “CDMA 1XRTT will be released commercially by early 2002" – China UnicomMediumMediumHighChina Unicom will focus on expanding CDMA network to build national coverage in the coming 1-2 yearsChina Unicom will attempt to win high-value clients from China Mobile by leveraging CDMA strengths in quality and capacityChina Unicom will not build GPRS, focusing instead on rollout of CDMA in October, and CDMA 2000 1xRTT in early 2002China Unicom has little pressure to upgrade the GSM network given new spectrum availability on the CDMA network. Migrating to TD-SCDMA or W-CDMA remains an option but not a priority nor a necessityInternal competition will happen between CDMA and GSM; China Unicom may position the CDMA network as a high-end network, and the GSM one as low-end Source: InterviewsTECHNOLOGY PATHS OF NEW OPERATORS WILL LIKELY AVOID SIGNIFICANT INVESTMENTS IN 2G INFRASTRUCTUREApproach Probability Rationale Quotes China TelecomChina NetcomLowHighMediumLow Regulatory bodies are not inclined to award a 2G license to China TelecomPlans to wait until 3G enters market and adopt 3G directlyLack of experience in mobile will make China Telecom more attentive to government mandates and open to TD-SCDMACDMA remains a remote possibility depending on inavailability of TD-SCDMA or W-CDMA and migration of CDMA based WLL network“As almost all of our mobile experts are allocated to China Mobile, we have to rely on government mandates. We will adopt whatever technology based on whichever bandwidth the government allocates" – China Telecom“We wiill do what we can to prevent CM and CU from taking a first mover advantage in mobile data. We must enter into mobile data service quickly” – China NetcomLowMediumMediumVendors for 2 standards are being assessed: Motorola and Nokia (W-CDMA) and Siemens (TD-SCDMA)Agreement on partnership with Nokia to allow Nokia provide basic skill trainingMotorola are introducing W-CDMA to CNC instead of CDMA2000Siemens is invited to present on TD-SCDMAPrefer to choose standard that will get them fastest to market Railroad spectrum Source: Industry interviewsChina Railcom“We would like to enter mobile services with TD-SCDMA " – China RailcomChina Railcom believes adopting TD-SCDMA would increase likelihood of gaining broad mobile service licenseHigh |
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