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This year could be a crucial one for the development of 3G (third generation) mobile communications in China.
The industry widely expects the Chinese Government will, this year, award operators licences to start building 3G networks.
That will spark a big investment boom in the country.
The prospects for 3G services in China could be very bright due to the government's careful approach to 3G-related policies, operators' prudence on 3G investment, the success of 3G development globally and Chinese mobile phone users' increasing anticipation of 3G services.
The actual size of 3G investment in China in the years to come could be affected by market demand, operators' financial strength, and mostly the government's macro-economic policies.
Rational investment
Reports about a possible reshuffle in the domestic telecoms industry have hit the headlines in recent months.
But such reports have yet to be proven true.
If they are true, what is clearly behind the government-led reshuffle is the authorities' desire to rein in operators' investment in 3G networks and avoid bitter price wars.
The actual amount of 3G investment in China could be affected by the number of 3G operators and the licences.
But that is not the decisive factor.
Operators' investment in 3G will not only depend on market demand and the firms' financial strength, but also China's overall macro-economic development.
Currently, the industry expects four operators to obtain 3G licences and build three nationwide 3G networks.
China Mobile and China Unicom are expected to build two nationwide networks.
While China Telecom and China Netcom are expected to build a partial networks in their respective domains and connect them, turning them into a nationwide network.
In fact, operators will not start building 3G networks immediately upon obtaining the licences.
Operators will also focus on building networks in affluent regions where demand for 3G services could be higher.
Besides, after the operators start building 3G networks, their spending on 2G (second generation) networks and the PHS (personal handy service) networks - also known as xiaolingtong - will be limited.
As a result, initial investment in 3G in China will not be large.
The telecoms industry is largely characterized by its huge initial investment and capital expenditure.
The "output," brought about by the investment, always comes late.
Fixed-asset investment in China's telecoms industry stood at 105.6 billion yuan (US$12.7 billion) in 1997, and more than doubled to reach 222.4 billion yuan (US$26.8 billion) in 2000.
In the past five years, annual investment has experienced ups and downs, remaining at around 200 billion yuan (US$24.1 billion).
In stark contrast, annual telecoms revenues have been growing at an average rate of 13 per cent from 2000-05.
We expect operators to start reaping returns four or five years after the beginning of the initial 3G investment.
Expanding user base
According to the global development of 3G, subscriber numbers increase suddenly when the technology matures and really reaches the mass market.
But such a sudden spurt may not happen in China as 3G services will come to the country much later than other countries and regions.
This means that Chinese operators may not have a very long period to develop the 3G market.
Besides, as the Chinese market has long been preparing for 3G and the mobile phone subscription base is quite big, the number of 3G users may immediately see exponential growth.
Such growth will ensure operators get some revenues in the initial stage of 3G investment, which will lead to a new wave of investment and ease operators' financial burdens and difficulties in raising capital.
ARPU growth
A number of global 3G operators have managed to rapidly increase their revenues from data services and significantly improved the average revenue per user (ARPU).
In China, voice communications are expected to remain the major offering in future 3G services.
At the initial stage, the ARPU of 3G services will not be higher than the average figure of overall mobile offerings throughout the industry.
Besides, as the number of 3G service offerings will be quite few while business models remain ill-defined at the initial stage of 3G roll-outs, 3G ARPU will remain low.
With the development of 3G services, Chinese operators' ARPU will become higher than that of overall mobile offerings.
With the intensifying competition and predictable price cuts, ARPU will gradually fall.
Auction of licences?
Many European 3G operators spent heavily to obtain 3G licences in government-run auctions.
Some operators became cash-strapped when starting their 3G network deployment.
Learning the lesson, the Chinese Government is unlikely to auction 3G licences but instead award State-owned operators licences at no charge.
That would help domestic operators decrease their operating risks and save a great deal of money.
As a result, it will take a much shorter time for Chinese operators to reap returns from their 3G investment compared with their foreign counterparts.
Important policy tool
Many researchers have found that building a single nationwide 3G network in China could cost tens of billions of US dollars.
If the government awards all of the top four telecoms operators with 3G licences, the expenditure on building the 3G network alone could be more than 1 trillion yuan (US$120 billion).
If other parts of the industrial chain, such as the 3G content offerings and mobile phones, are also taken into account, the market could be worth more than 10 trillion yuan (US$1.2 trillion).
The Chinese Government's 3G-related policies are very likely to become a major tool for it to conduct macro-economic adjustment.
The size of 3G investment is largely dependent on the overall growth of the nation's fixed-asset investment.
If the economy is overheated, 3G investment will be curbed; while 3G investment will be relaxed if fixed-asset investment slows.
Fixed-asset investment in rural and township areas is expected to grow about 25 per cent year-on-year in 2005.
That would lead to the government's curbing of 3G investment to a certain extent.
Many industry insiders now believe 3G licences will be issued in the second half of this year, at the earliest.
But operators will make some initial investment in 3G even before they get their hands on the licences.
China's 3G investment this year is expected to reach 55 billion yuan (US$6.63 billion), 60 per cent of which will be spent on equipment.
And we expect Chinese operators' 3G revenues will exceed their 3G investment starting from 2008, the year Beijing hosts the 2008 Olympics.
After that, annual investment on 3G will remain around 100 billion yuan (US$12.1 billion) while the annual growth of revenues from 3G will exceed 20 per cent.
The 3G technology is gaining strong momentum globally and China should not miss the boat.
We believe it is better for China to roll out 3G services at an earlier time.
(China Daily March 16, 2005)
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