China has over the past several months scaled back plans for a multibillion-dollar upgrade of its wireless networks, dealing a possible blow to U.S. and European phone-equipment firms that hope to cash in on the construction.
China's state-controlled phone companies are now expected to deploy fewer -- and smaller -- "third-generation," or 3G, wireless networks across the country in the next few years, industry executives and analysts say.
That means significantly less spending on big-ticket equipment from Western suppliers.
Those companies built most of China's existing wireless infrastructure and were hoping for big upgrade contracts under some Chinese carriers' original, more ambitious plans.
Expectation of a "gold rush" from 3G network-building in China "is a little bit over," said Christoph Caselitz, head of mobile networks for Siemens AG's communications group in Munich. There is now "a more realistic view" about spending, he said. Big suppliers also are still waiting for the Chinese government to issue basic licenses to authorize phone carriers to offer 3G service, a waiting game that continues to frustrate some firms.
Western firms such as Siemens, as well as giants Telefon AB L.M. Ericsson, Nokia Corp., Motorola Inc., Lucent Technologies Inc., Alcatel SA and Nortel Networks Corp., have been banking on growth from China to bolster their bottom lines, particularly as they face more-saturated phone markets in Europe and Japan. With 330 million subscribers, China is the world's biggest cell phone market. Only 26 percent of the population has a cell phone subscription.
Chinese authorities are proceeding more cautiously with their rollout of fancy 3G networks, mostly because of cost concerns, industry executives and Chinese authorities say. Third-generation phones offer greater Internet bandwidth and more sophisticated services, such as allowing people to watch TV and hold videoconferences on their phones.
China is mindful that many companies have run into debt building such networks in Europe and Japan and that many customers are using expensive 3G phones mostly for old-fashioned services, such as placing regular calls.
Those services don't help carriers rack up the hefty fees necessary to make 3G networks profitable. That is a concern for China as it ponders big 3G investments, says Guo Gan, a researcher at a think tank affiliated with China's Ministry of Information Industry, which regulates phone companies.
Some analysts now expect China's phone companies to fork out just $10 billion to $12 billion in the next two or three years to build 3G networks, down from estimates of three or four times that a year ago. Still, given the need for new sources of revenue in the industry, "$10 billion over three years is not a bad deal," says Caselitz of Siemens.
Simon L.K. Leung, the new president of Motorola's Asia-Pacific operations, remains cautious. He expects 3G networks to be confined initially to China's populous cities and developed coastal provinces, where consumers are wealthier and presumably would be able to pay for advanced services.
Still, government 3G licenses may not be awarded until later this year or early 2006, and officials seem in no hurry to hand them out. Western industry executives -- some of whom had expected licenses to be issued last year and are frustrated by the delays -- say the government is still studying 3G deployments abroad and how to consolidate the country's own phone industry.
That would reduce the number of phone companies and cut overall spending on network equipment.
Mats H. Olsson, who runs Ericsson's greater China business, and many industry analysts think China will award just three 3G licenses, as opposed to the four or five that had originally been anticipated. Right now, Ericsson has the largest chunk of wireless-infrastructure business in China, controlling more than 35 percent of the market.
China may be holding back on issuing licenses for another reason: to buy time to develop its controversial, homegrown technical standard, TD-SCDMA, which stands for "time-division synchronous code-division multiple access."
That standard favors domestic vendors, such as Huawei Technologies Co. and ZTE Corp., which have been tapped by regulators to develop products based on it. If China widely deploys TD-SCDMA, U.S. and European telecom vendors could lose out.
The technology is an alternative to the two other global 3G standards, which hail from Europe and the United States. It is new and didn't perform well in some government-sponsored tests last year. But TD-SCDMA is improving, and "it's very likely that all three technologies . . . will be deployed in some fashion in China," says Robert Y.L. Mao, president and chief executive of Nortel's greater China business.
Beijing is thought to be intent on promoting its own standard, partly to try to lessen China's dependence on technology developed by companies such as Qualcomm Inc. of San Diego. China has been trying to develop its own standards in an array of sectors, with the aim of decreasing royalty fees Chinese companies pay to foreign firms and leveraging China's growing market heft on the global technology scene. China is also seeking to develop its own standards in video compression and radio-identification tags, which help track goods along the production and retail chain, among others.
That is why some Western companies are scrambling to hook up with Chinese partners who are developing TD-SCDMA. Nortel has a deal to develop the technology with phone maker China Putian Corp., while Ericsson last month cemented a venture with ZTE. Siemens has a deal with Huawei, and Alcatel, through its Alcatel Shanghai Bell unit, works with a subsidiary of Datang Telecom Technology Group. Others, such as Motorola, have invested in ventures that are making TD-SCDMA chipsets.
TD-SCDMA also raises big questions for Qualcomm. The company insists that parts of the technology rely on its core "code division multiple access" technology, and Qualcomm would be owed royalties by companies that deploy TD-SCDMA equipment.
The Chinese government disagrees. TD-SCDMA "is a domestic patent," says Xin Yongfei, another official with the Ministry of Information Industry-affiliated think tank. Xin says the government is in negotiations with Qualcomm over the royalty issue, which he describes as "very difficult."
Qualcomm officials declined to comment on the talks or on whether the company might offer reduced royalty rates to Chinese companies. They say, however, that at least 60 companies already have licensing agreements with Qualcomm that would cover TD-SCDMA if and when that technology hits the market.
But none of these companies, they say, is Chinese.
Ivy Zhang in Shanghai contributed to this report.