China Mobile is the world’s largest mobile telco by user-base with 787 million subscribers and the fifth-biggest company in China. Near the end of last year, it was the first telco in the country to receive a 4G license from China’s Ministry of Internet and Information Technology (MIIT), and the number of LTE subscribers on its network has grown strongly ever since.
China Unicom and China Telecom, the other two major telcos in China, were put at a disadvantage because they use the international 4G protocol, FDD-LTE. Despite applying for a license far in advance, China Unicom wasn’t allowed to offer 4G until almost four months after China Mobile, and China Telecom followed even later. To make matters worse, the MIIT only issued licenses for TD-LTE – the standard of 4G used by China Mobile – which is incompatible with the phones used by most of Unicom and Telecom’s 3G subscribers.
To this day, Unicom and Telecom still haven’t received their licenses for the 4G protocol that they want to use, so their FDD-LTE languish in an extended “testing” phase. FDD-LTE is the 4G standard used by the majority of phones and carriers in the rest of the world. Meanwhile, the two smaller telcos’ 3G subscribers have started migrating to China Mobile, seeking better coverage and higher speeds. China Unicom reported fewer new subscribers in Q1 2014 compared to the same period last year, and China Telecom reported it actually lost over four million subscribers in that period.
Now all this might sound deeply unfair to Unicom and Telecom, but remember: all three telcos are state-owned enterprises. Ultimately, they all play for the same team. In fact, the Chinese government through MIIT has orchestrated a scheme so elaborate and on such a grand scale that it would make Bond villains blush.
But to what purpose? Put simply, China makes oodles of money by pushing the TD-LTE protocol.
Boosting China patents
First of all, China claims to have a major stake in TD-LTE patents, so pushing the local standard is a method of reducing patent fees and lowering dependence on foreign IT firms – something the government is moving toward on a much broader scale than just telecommunications. Like other western technologies in the wake of Snowden/NSA, the Chinese government has raised questions over the security of FDD-LTE to discourage its use.
Furthermore, China’s domestic companies are leading manufacturers of the telecommunications equipment – towers, masts, signal boosters, etc – that work with TD-LTE. Companies like Huawei, Datang, and ZTE profit immensely, because they essentially monopolize the local market. Not only do these companies make money from equipment sales, they also receive royalties for the networks that use them.
If FDD-LTE is allowed in before TD-LTE gets a strong enough foothold, telcos could abandon TD-LTE to get better deals on equipment from companies like Lucent and Ericsson. They would no longer be restricted to Huawei, ZTE, and other domestic providers. In fact, all three telcos have applied for FDD-LTE licenses, but none have been granted by MIIT so far.
As a result of all of this, hundreds of millions of mobile data subscribers in China are left without 4G unless they choose to switch to China Mobile. Even though the technical difference between the two 4G protocols is minor – they operate on different frequency bandwidths – the large majority of smartphones can only use one or the other. China Mobile customers also have a much narrower range of devices to choose from.
Last year, China Mobile finally scored a long-awaited deal with Apple to sell a TD-LTE-compatible version of the iPhone on its network. Even though China Mobile’s iPhone came out several months later than Unicom’s and Telecom’s, China Mobile later reported the majority of its 4G subscribers are using iPhones as of March.
So why don’t phone manufacturers simply make phones that can pick up all bandwidths and not waste time making two separate versions? It is possible, but chip-makers like Qualcomm and Mediatek charge a hefty premium for it. Their business model is two-pronged – phone manufacturers have to pay the price of the chipsets and royalties based on the sale price of the phones. The more 3G and 4G protocols a phone supports, the more money phone manufacturers have to pay in both initial costs and royalties due to higher phone prices. In fact, China led an anti-trust investigation into Qualcomm, which makes the majority of chipsets used in China, alleging it charged Chinese companies more than other countries.
The illusion of competition
This isn’t the first time China has pushed its homegrown mobile data protocol. 3G was probably ready to roll out in China sometime around 2003, but it was repeatedly delayed until 2008 – just before the Beijing Summer Olympics – so that the homegrown 3G standard – called TD-SCDMA – could have time to mature. A paper by Hui Yan at the Danish Research Unit for Industrial Dynamics (PDF) called the government’s insistence that China Mobile use TD-SCDMA (as opposed to the more internationally compatible WCDMA or CDMA2000) an “arranged marriage” that the telco didn’t really want.
Because it already held such a huge portion of the nation’s 2G subscribers, China Mobile managed to maintain the majority share of China’s 3G subscriptions despite using an inferior technology that wasn’t necessarily ready for market. Local chipset makers like Sequans, Leadcore, HiSilicon, Spreadtrum, and Chongyou all benefitted, even if customers didn’t.
All this raises the question, if China wants to push local standards so bad, why doesn’t it mandate the entire country use it and ban FDD-LTE, WCDMA, and CDMA2000 outright?
China Mobile will never completely dominate, as that would defeat the purpose of China Unicom and China Telecom’s existence as mobile carriers. The two smaller companies were created by China’s government to give some semblance of competition in the first place. There are a couple reasons for this.
Hui Yan notes that mobile telcos are listed in overseas stock markets. If the government looks like it overtly favors certain data protocols, it could give investors an impression of excessive government intervention. That would give the telcos an unfavorable profile and raise eyebrows at the World Trade Organization.
To keep just enough balance so as to appease foreign markets and regulators, the Chinese government has swapped around CEOs and other executives amongst the telcos in an attempt to “cross-pollinate China Mobile’s knowledge to the other operators.” The government has also encouraged all three operators to share towers and masts for network rollouts. This would actually negatively impact China Mobile because it would lower the costs for its competitors’ rollouts.
Learning from 3G screw-ups
The ultimate goal of all this scheming is, according to Hui Yan, “They hope to change the monopoly of foreign standards by supporting domestic development and thereby to reduce patent fees to foreign corporations.” Those royalties and patent fees are instead funneled to domestic companies.
China Mobile’s belated 3G rollout didn’t quite go as planned, however. Because of its TD-SCDMA phones, China Mobile did not dominate the 3G era as much as it did with 2G, and China Unicom closed the gap very closely in terms of 3G subscriber numbers. Plus, the homegrown 3G protocol never really caught on outside the mainland. But 4G is another story entirely, as pointed out in an analyst report by Ross MacMillan at Morningstar.
TD-LTE is being adopted by big mobile carriers outside of China (PDF), including Sprint in the US and SoftBank in Japan. Some operators in India are also looking into TD-LTE, led by Qualcomm and its local partners. Ericsson also owns some of the patents behind TD-LTE and is one of the biggest telecommunications equipment providers in the world, so it probably won’t be putting up a fight.
More countries and carriers jumping on board gives phone makers enough incentive to make more TD-LTE-compatible versions of their phones. Larger scale also means lower costs across the board.
So it seems the strategy is finally starting to pay off, and China doesn’t have to worry about other 4G protocols approaching from behind, either. There’s simply not enough bandwidth left for a third party to rival FDD-LTE and TD-LTE.
China recently started allowing private companies in the country to set up as ‘mobile virtual operators’ – essentially repackaging data plans and selling them with perks to consumers. But it will have a minimal effect in the grand scheme of things. Alibaba, for example, will start selling mobile 3G subscriptions through China Unicom in the near future. Even if Alibaba gets five million subscribers, that’s still just a tiny fraction of what the big three have, and those customers will still really be China Unicom users.
The cunning of “indigenous innovation”
Fighting fire with fire, China effectively used protectionism to break up a Western monopoly with a surprising level of success. Next up is the battle for 5G, which Huawei is currently developing to compete with Samsung and Ericsson. If China continues its current path, expect its domestic brand of 5G to take an even bigger portion of the global market in the long term. 5G technologies are expected to start rolling out around 2020.
China is probably the only country on Earth capable of pulling off such a maneuver thanks in no small part due to its massive population. Hui Yan calls practices like this “indigenous innovation,” wherein China shuts out foreign influence to force domestic players to up their game until their own technology can compete on a global scale. The Chinese market is too big for global companies to ignore, so they are forced to comply with local standards.
Censorship has been the preferred method for internet companies. Who knows if Baidu, Weibo, and WeChat would have ever caught on had Google, Twitter, and Facebook been allowed to operate on the mainland? Another method is through heavy subsidies, which got China into a scuffle with the European Union over its solar panel technology.
TD-LTE 4G is no exception, and it could prove to be China’s most successful commercial technology foray beyond its borders yet. The country is on track to have 50 million 4G subscribers by the end of this year.Editing by Steven Millward