Beijing Correspondent - Special Report - LTE for China

Specia Report By Dr Lin Sun, Beijing Correspondent

At ITU Telecom World show in late October, China Mobile unveiled a multi-band smartphone. The ZTE phone is powered by an MTK chipset and runs on Android OS. It is designed for TD-SCDMA and GSM networks for voice and TD-LTE for high-speed data service.

China Mobile is keeping quiet on the launch of TD-LTE service and the cost of LTE phones, but I’d suspect it is at least 10 months away, as networks will undergo extensive testing; giving time for volume production of LTE handsets and data cards.

China Mobile is the largest wireless operator in the world in terms of customer numbers, but it is increasingly uneasy these days. TD-SCDMA, a Chinese 3G standard, is suffering widespread public revulsion due to lower speed and poor coverage. Although the operator claims a higher customer growth rate, the gap with rivals China Unicom and China Telecom is getting smaller by the month and it won’t be a surprise if WCDMA and/or EV-DO outstrip TD-SCDMA within a year.

Even more bizarre, most TD-SCDMA customers are not using bona fide 3G, but a home-based phone that does little beyond voice calls and text messaging, often running on GSM due to lack of indoor signal. China Mobile says it had 43.2 million TD-SCDMA customers as of September, of which 60-70% may be qualified as bogus 3G.

In the wake of an inferior standard and threat to its position, China Mobile in 2010 launched LTE, based on TDD transmission scheme. The main reason to opt for TDD instead of FDD is to ensure smooth migration from TD-SCDMA that uses the similar slotting for up- and down-stream traffic within a single channel.

In late 2010, China Mobile invited all major equipment makers to build pilot LTE networks in six cities. As of last summer, all construction was completed and extensive testing had begun, including network performance, chipsets, indoor coverage, terminals, as well as core and transport networks. The results are reportedly good with few serious issues.

The second phase testing is expected to begin shortly, and will last a few months, according to a senior researcher at MIIT. Most tests will focus on the R9 specs and terminals using a cross-check setup, i.e., every two network equipment makers for every two terminals, including compatibility for multi-band.

The reason is clear: China Mobile wants to ascertain a seamless environment for LTE users when roaming outside of range or having low signal strength.

Broad Support

Although TD-LTE is less popular compared to FDD-LTE, it makes a dramatic turn from the ill-fated TD-SCDMA, and it can help China Mobile maintain growth, which has slowed down in the past two years. The good news is, TD-LTE has received strong support from equipment makers, like Ericsson, Nokia Siemens Networks, Motorola, Samsung and Nokia, as well as Chinese counterparts like Huawei, ZTE, Datang Mobile and Shanghai Bell (owned by Alcatel-Lucent). As many as 17 chipmakers have also joined the race, including Qualcomm, Marvell, Spreadtrum, Leadcore, Sequans, Innofidei, and ST Ericsson, betting on LTE’s strong growth.

Unlike TD-SCDMA, China Mobile has good company with TD-LTE which has been adopted by a dozen countries that have or plan to build 26 networks. By the end of 2011, the total number of LTE BTSs will reach 6,500 and 30,000 by 2012, according to estimates from China Mobile.

Another source of support may come from the iPhone. Although Apple was unwilling to make iPhone for TD-SCDMA, it has expressed interest for a TD-LTE version. Wang Jianzhou, China Mobile chairman, said the two sides reached a “strategic understanding” last spring on iPhone for LTE, and the stance has not changed despite the passing of Steve Jobs.

If Apple does deliver, the iPhone should give a strong boost to TD-LTE and China Mobile especially for high-end customers.

Although commercial service is still months away, the sound of TD-LTE is good enough to bring China Mobile out of the doldrums of TD-SCDMA. A senior executive predicts China Mobile will build 40 TD-LTE trial networks in 2012 and ten will begin commercial service. He did not say how much LTE will cost, but it is estimated at RMB10-15bn ($1.6-2.4bn) including RMB1.5bn ($240m) already spent in the six cities.

A Solo Player

So far, China Mobile is the only player in LTE, as China Unicom and China Telecom have shown little interest to jump on the bandwagon. For one reason, unlike China Mobile, the two rivals are having the best time in 3G growth, and it doesn’t make sense to change course. Also, China Unicom has rolled out HSPA+ in some 60 cities which delivers up to 20Mbps, similar to what LTE can offer.

In the eye of Unicom, both WCDMA and HSPA+ should serve most demand and are cost-effective; a rush to a new platform would risk losing existing customers and revenue.

China Telecom, on the other hand, believes LTE is not commercially ready to replace 3G. The company chairman Wang Xiaochu recently said that massive adoption of 4G was not feasible until 2014, adding that there were many “unsolved problems” with handsets. What he did not say was that China Telecom would face mounting pressure in capex since EV-DO does not present a natural path to LTE migration.

For China Unicom and China Telecom, there is also the question of how much market LTE will gain, given a high cellphone penetration in the country (93%) and desire for advanced technology like LTE is tepid due to concerns over cost.

It may just be that China will be slower than other countries to adopt LTE given the country’s average income and value perception from users’ perspective. Both China Unicom and China Telecom have said they will need time to study the market for LTE, i.e., whether data traffic is large enough to justify a higher-speed service.

At present, mobile data accounts for less than 30% of total traffic volume, and a measly 10% in revenue, not to mention that most data traffic is generated by only 10-15% of customers while the rest make little contribution.

Outlook

As a government owned company, China Mobile’s push for LTE has received firm support from the government. A new policy directive by the MIIT says 3G and 4G will be made as the “twin engine” for telecom growth during 2011-15, and total investment will exceed RMB1 trillion ($160bn), half of which will be used for LTE. Approximately 60% will be for network equipment purchase, 30% for construction and 10% testing and other auxiliary products.

If the plan is carried out on schedule, it will certainly benefit many in the supply chain for LTE, from chipmakers to equipment manufacturers, from terminals to test instruments, and from operations support systems to mobile application.

However, before China Mobile can declare victory, we must remember LTE, like any new technology, comes mixed with promise and pitfalls. Wang Jianzhou, China Mobile chairman and an avid advocate for LTE, predicts TD-LTE would lift ARPU, which is in slump right now, if the service drives new customers, especially the high end.

Only time will tell if the causal link will hold. For example, few will feel motivated to move to LTE if they are happy with 3G speed and what they pay for the service. In China, 20Mbps offered by LTE sounds a true luxury for most people whether for business or personal use. And in theory, cost per MB on LTE is lower than 3G, but I doubt China Mobile will make the service look cheap in exchange for new customers. Without having a grip on public sentiment, too high or too low a rate can put LTE in jeopardy by losing customers and exacerbating financial loss.

Radio spectrum also can affect LTE schedule, and the regulators have yet to decide whether to use 2.3GHz for LTE service as in most countries. At present, all LTE testing is conducted on 2.6GHz for a bandwidth of 50MHz, but China Mobile hopes to use 2.3GHz when launching commercial service which will be easier for equipment makers.

Since 2.3GHz is already used for other services, it will be interesting to see what the government will do to resolve the issue. Some have proposed a mixed 2.3/2.6GHz band for outdoor transmission and indoors, but it may not be practical for equipment design, compatibility and is prone to interference.

China Mobile is also facing the dilemma with TD-SCDMA. Although the company has said it won’t abandon TD-SCDMA after LTE, it may have a hard time positioning TD-SCDMA between high-end LTE and extremely popular GSM.

Right now, most TD-SCDMA customers are in the low end, most making voice calls and SMS, but occasionally accessing the Internet. If the current patterns remain, these people will be unlikely to make the switch to LTE, but instead recede to GSM which also supports low-speed access on a good day.

TD-SCDMA will be a drag for many years to come. China Mobile has spent a staggering RMB140bn ($22bn) since 2008 and the service has been losing money ever since – RMB14bn ($2.1bn) in 2009, RMB30bn ($4.8 bn) last year and more is likely for 2011.

The reason? Low network usage – only 20% of the capacity is being utilized, and there’s a heavy subsidy for handsets. On the other hand, China Mobile must continue funding TD-SCDMA for expansion and upgrade lest it become a true white elephant. Recently, China Mobile began the fifth tender for over 50,000 BTSs, valued at RMB20bn ($3.2bn), and more is expected to make the service more accessible.

To be fair, spending on TD-SCDMA also saves on LTE equipment since the two share the same core network. Nonetheless, it remains to be seen if LTE will help ease the woes on TD-SCDMA or go down the drain with it.

Despite all the uncertainty, China Mobile has no choice but takes the plunge into LTE. And it wants to do it fast because delay could put the operator in limbo if equipment makers flock to FDD-LTE for more sales.

On the other hand, China Mobile could reap tremendous benefit from TD-LTE given its clout and a huge user base. “Population dividend,” as Wang calls it, is the largest advantage for sustained growth, and the challenge is how to make the “dividend” work for LTE without losing its edge for nearly two decades.

Beijing Correspondent Dr Lin Sun

Lin Sun, Ph.D., has 25 years of experience in China´s telecommunications industry. His career spans switching and transmission technology, wireless, broadband and broadcasting. He was a senior executive for China at various companies and is now a consultant on investment, technology and competition in China.

Dr. Sun has published and spoken extensively on the telecom issues. He received a Ph.D. in telecommunications from the United States.

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