麦肯锡中国移动总体战略e文版-ppt74页
- 1. CONFIDENTIALChina’s Mobile Telecom Services Industry OverviewGCO Practice DevelopmentMay 2002This report is solely for the use of Firm personnel. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from McKinsey & Company.
- 2. ACKNOWLEDGEMENTS AND REFERENCESMGMs and CSS involved in the relevant studies include the following:Tony Perkins (BEI) Stefan Albrecht (BEI) Chipper Boulas (HKO) Peter Kenevan (TOK) Perchow Joseph Chang (SHA) Andrew Wu (HKO) Hai Wu (BEI) Jane Xing (HK) Yi Feng (BEI) Sheng F Li (SHA) Yoshinobu Takanuki (TOK) Graeme Hunter (JOH) Julia Yang (BEI) Eric Xu (BEI) Jason Liu (BEI) Shirley Chen (BEI)The series of PDs include the following:# China Macroeconomic Environment # 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 Studies of MNCs Entry to China1
- 3. KEY MESSAGES1. China’s mobile telecom service market is huge and fast growing, representing US$21 billion market size in 2001 and US$38 billion in 2005. This market is supported by the world’s largest 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 2005 2. 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 Telecom is expected to form two large telecom operators, China Telecom and China Netcom Group, who are likely to receive mobile licenses. A fifth telecom operator, China Railcom, also has the potential of receiving a third generation license and building a mobile 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 competition. 3. Wireless data services are expected to grow quickly in China to a market of potentially over US$4 billion by 2005, used by 43% of all mobile users. Interest from consumer surveys have been high and operators and other players are actively building services in the market. While early WAP services have failed to catch on, SMS has grown exponentially with up to 20 billion SMS messages in 2001. The early adopters will be mobile professionals and modern youth, who will require services and devices tailored to their needs. 4. Regulatory changes loom, particularly with the accession of China to the WTO. While foreigners will be unlikely to set up MVNOs, WTO will allow greater participation of foreigners in 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 services). Regulatory risks remain, with no means to appeal regulator decisions, unclear interpretation of regulation including WTO commitments, and the government’s track record of intransparent and unpredictable decision making. (See separate regulatory PD for details) Appendix Players profiles 3G technology standards choices2
- 4. KEY MESSAGES1. China’s mobile telecom service market is huge and fast growing, representing US$21 billion market size in 2001 and US$38 billion in 2005. This market is supported by the world’s largest subscriber base at 145 million, already comprising 15% of the world’s total in 2001 and growing to potentially 218 million in a low case or 300 million in a high case by 20053
- 5. 1997-2001 MOBILE SERVICE REVENUE GROWTH OF 30% CAGR HAS OUTPACED OTHER TELECOM SERVICE SECTORS AND IS PROJECTED AT 16% THROUGH 2005Revenues US$ Billions CAGR vs. other industries (1997-2001) PercentMobile Fixed linePagingCAGR 30%CAGR 16% Source: Deutsche Bank; McKinsey analysis4
- 6. * 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 churn required for the calculation of average subscribers during a given year is not available ** All CAGRs are calculated on the announced data Source: Deutsche Bank; JP Morgan; MIIEXTRAORDINARY SUBSCRIBER GROWTH IS THE PRIMARY DRIVER OF REVENUE EVOLUTION, MORE THAN MAKING UP FOR LARGE DECLINES IN ARPU DUE TO STIFF COMPETITIONMobile revenues* $ Billions Number of subscribers – low case Millions CAGR 30%CAGR 16%CAGR 83%ARPU US$/monthCAGR -24%CAGR -7%Penetration initially low Government backing for increasing subscriber numbers Relatively low fixed line penetration Low-end prepaid subscriber increaseDrivers Decline due to increased prepaid and lower spending by late entrants Tariff reduction as competition increases Slightly off-set by increase in data traffic in later years CAGR 19%20823526329117161515Announced Effective 5
- 7. * 05 forecast use low case, net subs after inactive and multi-sim-card reduction ** Major European countries include: UK, France, Italy, Germany, Netherlands, Spain, Sweden Source: JP Morgan; WEFA-WMM; MII; McKinsey analysisJapanCHINA IS THE WORLD’S LARGEST MARKET IN TERMS OF SUBSCRIBERS, HAVING OVERTAKEN THE US IN 2001USMajor European** countriesCAGR = 30%CAGR = 14%CAGR = 7%Number of mobile subscribers MillionsCAGR = 13%2000 2005China – low case*China – high case*CAGR = 22%6
- 8. CHINA’S MOBILE SUBSCRIBER BASE IS GROWING MORE RAPIDLY THAN ANY OTHER MAJOR MARKET, COMPRISING 15% OF WORLD TOTAL IN 2001 * Afirca, Eastern Europe, Middle East, Canada ** Forecast of 02-05 use the high case, net subs after inactive and multi-sim-card reduction Source: JP Morgan; Gartner 2001; Deutsche Bank; Merrill Lynch; Piper Jaffray19971998199920002001E2073004827279651,1781,3931,633100% = Global mobile subscribers Million subscribers; percentWestern EuropeUSSouth and LatinJapan and Asia PacificChina**Rest of world*CAGR 1997-2005 percent2918452847452002E2003E2004E2005E1,8507
- 9. CHINA’S MOBILE MARKET IS PROJECTED TO GROW SIGNIFICANTLY * 02-05 forecast are net subs after inactive and multi-sim-card reduction Source: IDC report; JP Morgan report; McKinsey analysisNet subscriber* additions Millions199719981999200020012002E2003E2004E2005E–10847133-98-4711Annual growth Percent1237912131516Penetration Percent47.143.946.345.75.511.516.939.435.9Low caseHigh caseLow–10847103-9225-13HighLowHigh12379121619238
- 10. 0%5%10%15%20%25%CHINA’S SUBSCRIBER BASE OF 218 MILLION IMPLIES A 47% PENETRATION OF AN ADDRESSABLE MARKET OF 460 MILLION BY 2005 * Low case, net subs after inactive and multi-sim-card reduction Source: JP Morgan; DRI; Asiandemographics.com; Literature search; Analyst reports; Team analysisIncome per capita (US$ p.a.)2001Addressable market Number of mobile subscribers Implied penetration of the addressable market2005E345 mn 145 mn 42%463 mn 218 mn* 47%China income distribution and addressable market Percent1,8151,77220012005China’s addressable population for mobile services is projected to increase by 8% p.a. for the next five years to 460 million in 2005 The key assumptions in determining the income threshold are: Chinese consumers 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-essential goods as a result of China’s relatively low living cost Half of this assumed spent on mobile services (5.5%) Unicom’s prepaid ARPU will decrease from USD 8.3 for 2001 to USD 8.1 for 2005; therefore the threshold income will drop from USD 1,815 (8.3*12/5.5%) for 2001 to USD 1,772 for 2005 (8.1*12/5.5%)2005 Addressable market: 35% Addressable population: 460 mn persons2001 Addressable market: 27% Addressable population: 345 mn personsPercent of population9
- 11. MOBILE SUBSCRIBER PENETRATION OF LESS THAN 7% IN 2000, LEAVES SIGNIFICANT ROOM FOR GROWTH Source: JP Morgan; IDC report; Gartner; Literature search, EIU100%199619971998199920002001E2002E2003E2004E2005EMobile subscriber penetration in 2000 PercentItalySwedenNetherlandsUKSpainGermanyFranceUSChina**All subscribersData service subscribers1,2181,2301,2421,2541,2651,2761,2871,2981,3091,319As percentage of total population – low case* Millions (total population)China Urban*** * 02-05 forecast are net subs after inactive and multi-sim-card reduction ** Penetration over total population *** Penetration over urban population.0.61.01.92.96.68.91.12.03.97.10.412.013.415.016.410
- 12. CHINA’S RICHER PROVINCES GENERALLY HAVE MORE SUSCRIBERS AND ARE GREATER PENETRATED…Population MillionsPenetration Percent, 2000Subscriber CAGR Percent, 1998-2000Number of subscribers MillionsProvinceGuangdongLiaoningZhejiangJiangsuShandongFujianHeilongjiangShanghaiHebeiSichuanBeijingHenanAnhuiHubeiHunan Source: China Statistical yearbook, JP Morgan Report, McKinsey analysis11
- 13. …WHILE THE POOR WESTERN AND INTERIOR PROVINCES HAVE LESS SUBSCRIBERS AND ARE LESS PENETRATED * Growth rate from 1999 - 2000 Source: China Statistical yearbook, JP Morgan Report, McKinsey analysisPopulation MillionsPenetration Percent, 2000Subscriber CAGR Percent, 1998-2000Number of subscribers MillionsProvinceJilinGuangxiYunnanShaanxiChongqingShanxiTianjinInner MongoliaJiangxiGansu XinjiangHainanNingxiaQinghai TibetGuizhou 12
- 14. KEY MESSAGES2.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 Telecom is expected to form two large telecom operators, China Telecom and China Netcom Group, who are likely to receive mobile licenses. A fifth telecom operator, China Railcom, also has the potential of receiving a third generation license and building a mobile 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 competition. www.21ask.com 中国管理资讯网www.21ask.com 中国管理资讯网13
- 15. CHINA’S MOBILE OPERATOR LANDSCAPE HAS EVOLVED SIGNIFICANTLY, CULMINATING IN SECOND BREAKUP OF CHINA TELECOMNo mobile licenses currently Source: Literature search; EIU Pyramid; Industry reportsChina TelecomChina UnicomBecame the second mobile network operator in mid 1994 However, China Telecom as the sole provider of both basic and wireless telephony services made it difficult for Unicom to growChina UnicomChina RailcomChina UnicomMinistry of Posts and TelecommunicationsCreated in 1994 when former MPT separated into regulatory and operating functions China Telecom ownership transferred to Ministry of Finance, with regulatory functions placed in the new Ministry of Information Industries (MII)China TelecomChina Mobile (CMCC)China TelecomChina Mobile (CMCC)Under the government’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 Satellite The change became official on April 20, 2000 Prior to 1994, the MPT acted as the regulator and sole operator of telecommunications In 1993, announcement was made to separate operating and regulatory functions along with the establishment of a 2nd operatorGreat WallEstablished in 1995 to harness PLA’s radio spectrum The company undertakes “the CDMA project” at the direction of the governmentGreat WallDue to government commitment to separate 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 network Established December 2000 Offers limited GSM service over it’s railway networkPre 1994 Regulator and Operator1994 to 1999 Virtual Monopoly1999 To 2002 Deregulation/Breakup2002 and beyond 2nd breakup and future landscapeChina NetcomEstablished in Sept.1999 with internet backbone Likely license winner Jitong JitongSetup in 1994 to develop data communication serviceBegan to offer VoIP services Leading player in voice over IPChina Netcom GroupChina RailcomChina Telecom broken up into North and South with CT North merging with China Netcom and Jitong to become China Netcom GroupChina Telecom South continues operation as China Telecom Operating CDMA local loop services in several citiesChina Mobile unaffected by second breakup, surviving proposal to merge it with Jitong, given concerns about consequences of forced mergers for publicly listed companiesChina Unicom unaffected by second breakup, surviving proposal to merge it with Railcom While Great Wall CDMA asset transfer has yet to be completed, Unicom will become first major operator in the world with both CDMA and GSM services, with launch of its own CDMA network in 2002Operator bidding for 3G license, with openness towards adopting China’s 3G standard, TD-SCDMA14
- 16. Source: Literature search; industry interviewsBeforeAfter CT break-upMOST RECENT BREAK-UP OF CHINA TELECOM TO LEAD TO A LANDSCAPE OF 5 OPERATORS COMPETING ACROSS BOTH MOBILE AND FIXEDLicensesLicensesAnnouncement on November 26 to merge Jitong with China Netcom and China Telecom Northern unit Competition will increase as merged telecom giants obtain licenses for comprehensive telecom operations, including Fixed-line phone Mobile phone Internet-related services Original 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 China Mobile and China Unicom’s governance as publicly held companiesMobileMobile FixedMobile (GSM-R) FixedFixedFixedFixedGROUPChina Telecom NorthChina Telecom SouthMobile FixedMobile FixedMobile FixedMobile FixedChina RailcomChina RailcomMobile FixedHave license15
- 17. PROFILES OF CURRENT AND LIKELY FUTURE PLAYERSChina assetsMobile strategyCurrent partnershipsLicense prospects*Still to be decided ~96 million mobile subscribers ~30 million mobile subscribers Services covering over 180 cities Largest national telecom network covering 2,000 cities First operator to introduce internet access cards, and announced on-line shopping card to be launched in 2001 Internet backbone covering 17 major cities Started IP phone services in January 2000 2nd largest network in China; covering all major cities (>500 cities) Be technology leader, thus eager to enter 3G Focus on high-end customers Trialing GPRS with 7 vendors Strongly supporting WAP Shifting attitudes on technology, now first player to cover both GSM and CDMA Focusing attention on developing CDMA networks Trialing GPRS with 4 vendors Compete on service offering with existing operators, leveraging government and supplier expertise Active with WLL and local mobility Go straight to 3G if possible Obtain mobile license as quick as possible regardless of technology standard Roll out wireless data services even if it means taking GSM/GPRS first May focus initially on GZ, BJ, SH Likely intends following 2-tier structure Obtain 3G license to target high-end users Use 2G PHS to target voice subscribers Vodafone HP Hutchison KDDI SK Telecom Telstra AT&T Japan Telecom British Telecom News Corporation Goldman Sachs SingTel NoneExistingExistingCurrent players China Mobile China Unicom Likely future players China Telecom China Netcom China Railcom * Government likely to grant 2 licenses; undecided when, and what type; none to be awarded in 2001 Source: Piper Jaffrey; Merrill Lynch; Literature search16
- 18. OTHER PLAYERS UNLIKELY TO ATTAIN MOBILE LICENSES Source: Goldman Sachs; EIU Pyramid; McKinsey analysisCentury Mobile Jitong Foreign JV Entrants New telcosWho they areBasis for entryObstaclesConsortium of 10 enterprises who have joined together to try to set up mobile enterprise Set up in 1994 to develop data communication services Potential JVs involving foreign companies New players expanding into telecom Some government contacts Originally considered takeover of Great Wall’s assets Owns 70% of VoIP market Government has indicated desire to see multiple operations with multiple service offerings Government may be pressured to show market progress and WTO benefits Foreign operators and entities eager to invest Desire to enter wireless given opportunities and convergence of technologiesGreat Wall assets moved to China Unicom No current discussion regarding mobile services observed Low capability to utilize mobile spectrum if allocated WTO agreements do not require that new telecom licenses be issued to new entrants Nationwide presence of foreign investment not possible for initial 3 years under WTO MII will likely limit the influence of other ministries on their turf (e.g., blocking SARFT entry into Internet)17
- 19. EXISTING AND POTENTIAL MOBILE OPERATORS HOLD BROAD BUT DIFFERENT COMPETITIVE POSITIONINGS AND SERVICE OFFERINGSBasic services China MobileChina Unicom China TelecomChina Netcom Mobile voice service Mobile data service IP Multimedia service Mobile voice service Mobile data service IP Multimedia service Local call DLD IDD Paging IP Multimedia service Local call DLD IDD Web hosting Network element lease and sale IP IDD Web hosting Lease and sale of bandwidthValue-added services Fax Voice mail Caller ID Call waiting SMS VPN/VPDN IDC Fax Voice mail Caller ID Call waiting SMS VPN Fax Voice VAS Caller ID VPN IDC ISDN/DDN EDI ISP E-mail Data communication Public multimedia services Source: MII; Asiacom; Analyst report18
- 20. EACH EXISTING/POTENTIAL MOBILE OPERATOR HAS STRENGTHS AND WEAKNESSES Source: Literature Research; McKinsey Analysis; IDCChina Mobile China Unicom China Netcom China Telecom China RailcomStrengthsWeaknessesIncumbent operator serving higher value customers Dominates market with 74% of subscribers and 84% of revenues Allied with Vodafone whose CEO sits on board Access to global capital via CMHK Offers complete package to corporate customers Able to underprice CM and attain market share Government and policy support to promote competition No frequency constraint due to CDMA network (13 m sub capacity) Access to global capital via Unicom Hong Kong Strong management team with executives hailing from successful startup (Asia-info), consulting firms and bulge bracket investment banks Strong governmental connections with Jiang Zemin's son onboard Remains dominant fixed-line operator Dominant in data communications and in Internet service 2nd largest fixed-line network Facing 2G spectrum shortage in major cities 2002/2003 Unicom has 10% price advantage by regulation Management and business structure not yet completely set up Weaker brand and public penetration than CMHK Facing complexity of dual network management Infrastructure spend high to build CDMA network Lacks fixed-network reach Has no mobile operating license Lacks mobile expertise Regulatory concerns as MII law prohibiting JVs with SOEs targets relationship with SARFT (one of the founders) Has no mobile operating license Lacks mobile expertise Carries monopoly culture and lacks business-driven aggressiveness Bound to financially nonviable rural area expansion of fixed-line network Uncertainties in its break-up plan Has no mobile operating license Lacks mobile expertise Lacks scale and supportExisting/ potential operator19
- 21. MOST OPERATORS HAVE EXISTING PARTNERSHIPS WITH FOREIGN PLAYERS * China Railcom is involved in no relevant partnerships Source: Literature Research; Analyst reportsChina Mobile China Unicom China Telecom China NetcomPartnerType of partnership Vodafone HP Hutchison Telecom KDDI SK Telecom Telstra AT&T Japan Telecom British Telecom News Corporation, Goldman Sachs, etc. SingTel EquantVodafone owns 2% equity share in China Mobile (HK) Strategic alliance agreement with Vodafone to be CMHK’s long term preferred partner in areas including R&D technical expertise, standard and protocol development etc. Wireless data R&D JV between majority owned subsidiary Aspire and HP Hutchison owns 1.5% of China Unicom (listed) Joint development of technology for high speed mobile phone KDDI to supply CDMAOne mobile phones Strategic Alliance to aid China Unicom’s CDMAOne network development and 3G transition Strategic alliance to aid Unicom develop CDMA network AT&T owns 25% of Shanghai Symphony Telecommunications MOU in fixed line, mobile phone and fast-data transmission areas for client companies MOU signed in 1998 to cooperate in technology and business opportunities Joint venture providing end-to-end data communication service for MNCs set up in 1999 Partners bought 12% of China Netcom for $324 million in private placement Strategic alliance to provide safe, efficient data transmission for Singapore companies with subsidiaries, partners in China Service agreement to co-develop VPN offeringsOperator*20
- 22. IN MOBILE TELECOM SERVICE MARKET, CHINA MOBILE WILL LIKELY REMAIN THE DOMINANT OPERATOR IN BOTH REVENUE… 100%= 1998199920002001E2002E2004EChina UnicomChina Mobile2003E2005E363710Other operators 000008.411.816.221.127.932.034.538.4US$ Billions, percentCAGR 1998-2005E Percent6718N/A Source: McKinsey Analysis21
- 23. …AND SUBSCRIBER* SHARE1997China UnicomChina Mobile3100%=5112543851451551761972181998199920002001E2002E2003E2004E2005EOther operator(s)Millions, percent * 02-05 forecast are net subs after inactive and multi-sim-card reduction Source: Deutsche Bank; JP Morgan; McKinsey analysis22
- 24. * 02-05 forecast are net subs after inactive and multi-sim-card reduction ** Acquired by CMHK from parent in Oct 2000 Source: JP Morgan; Industry interviews; McKinsey analysisPROPORTION OF EACH OPERATORS’ SUBSCRIBERS* INCLUDED IN LISTED ENTITYMillions, percentChina Mobile23.537.866.3111.0108.4112.9118.7126.61998199920002001E2002E2003E2004E2005E666168656666CMHK100%=Unicom1.55.218.744.047.055.263.567.81998199920002001E2002E2003E2004E2005E626365616162Unicom Listed100%=8682CMHK Provinces Beijing** Fujian Guangdong Guangxi** Hainan Hebei** Henan Jiangsu Liaoning** Shandong** Shanghai** Tianjin** ZhejiangUnicom (HK) Provinces Anhui Beijing Fujian Guangdong Hebei Hubei Jiangsu Liaoning Shandong Shanghai Tianjin Zhejiang4128Listed company23
- 25. CHURN IS ALREADY SIGNIFICANT WITH BOTH OPERATORS AND WILL CONTINUE TO INCREASE DRIVEN BY INCREASING COMPETITION WITH IMPACT GREATEST ON CHINA MOBILEPercentChina Mobile HKChina Unicom Comments China Mobile's broader network coverage leads initially to far lower churn rate than for China Unicom China Unicom's rapidly expanding network and higher-quality CDMA connection will increase CMHK's churn going forward Intensifying competition causes both sets of churn rates to rise As networks become similar, customers appreciate lower China Unicom price Source: Analyst report; Company annual report24
- 26. Comments Decreasing trend due to Increased competition and lower tariffs Increased mix of low-value prepaid users Deepening penetration which increases low-value usership China Mobile's ARPU higher due to Higher prices than China Unicom Greater concentration of high-end users because of breadth of coverage and market presenceCHINA MOBILE ENJOYS GREATER ARPU, ALTHOUGH LISTED COMPANIES FOR BOTH OPERATORS GENERATE GREATER ARPU THAN UNLISTEDCMHKUnicom (listed)CM (unlisted)Unicom (unlisted)US$/month Source: Deutsche Bank; McKinsey analysis25
- 27. * 100% = 75.9 million subscribers in 2001 and 111.9 million in 2005 ** 100% = 28.6 million subscribers in 2001 and 54.9 million in 2005 Source: Goldman Sachs; Morgan Stanley; Team analysis-6CHINA MOBILE'S ARPU EXCEEDS CHINA UNICOM'S DESPITE A LARGER PROPORTION OF PREPAID CUSTOMERSBlended ARPU US$/monthCMHKChina Unicom (listed)20012005CAGR Percent-5Prepaid vs. postpaid ARPU comparison USD/monthCAGR Percent-5200120050CMHKChina Unicom (listed)-1-4Prepaid subscribers as percentage of total subscribers PercentCAGR Percent19*20012005CMHKChina Unicom (listed)43**WAChina Mobile’s ARPU exceeds China Unicom's despite a larger proportion of prepaid customers due to a far higher postpaid ARPU China Mobile's higher postpaid ARPU is due to its high-end customer base and superior marketing as well as China Unicom's lower tariffs chargedPrepaid Postpaid Blended26
- 28. Share price HK$SHARE PRICES FOR BOTH OPERATORS HAVE DETERIORATED IN 2001 PRIMARILY DUE TO PRICING PRESSURESCMHKChina UnicomChina Mobile announces new lower tariff packagesShare price took a hit on fears that tariff cuts and spending on a new CDMA network will eat into earningsMII announces cancellation of registration feeMarket capitalization US$ billions120.469.520.917.5 Source: Hong Kong stock exchange; DataStream27
- 29. NONETHELESS, BOTH OPERATORS STILL ENJOY HEALTHY EBITDA AND RETURN ON ASSETS, DRIVEN BY LOWER COST BASES, ESPECIALLY COMPARED TO CHINA TELECOMUS$ Billions, 2000Player*** RevenuePercent of revenue Percent of revenue CMHKChina Unicom (listed)China TelecomEBITDAN/ANet profitROA Percent0.154.744.8N/A18.813.80.5 * Total China Mobile revenue 14.3 billion ** Total China Unicom(Listed + unlisted) mobile revenue is US$1.9 billion; listed portion contributes 1.5 billion (balance paging and fixed line) *** Netcom and Railcom financials N/A Source: JP Morgan 28
- 30. KEY MESSAGES3. Wireless data services are expected to grow quickly in China to a market of potentially over US$4 billion by 2005, used by 43% of all mobile users. Interest from consumer surveys have been high and operators and other players are actively building services in the market. While early WAP services have failed to catch on, SMS has grown exponentially with up to 20 billion SMS messages estimated for 2001. The early adopters will be mobile professionals and modern youth, who will require services and devices tailored to their needs. 29
- 31. RESULTS OF A CHINESE 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 access among users Source: Mobile user survey, 2000Very interestedInterestedNot interestedNeutralVery disinterestedKey sample characteristics Interview of 100 randomly chosen respondents in Shanghai, Beijing and Guangzhou, representing a good cross-section of different types of mobile users 68% of respondents express interest in receiving data services 20% of respondents are fixed line internet users* Median Internet usage of 30 hours/month Median mobile bill of RMB 300/month30
- 32. CONSUMERS HAVE GREATEST INTEREST IN EMAIL AND MOBILE VAS Source: Mobile user survey, 2000 InterestedNeutralNot interestedE-mailInter-net brows-ingNews/ sports/ Enter-tain-mentStock quotesCity mapFlight/ train sche-dule and reser-vationYellow pagesPercentage of respondentsInterest in content delivered over mobileFor content, Chinese consumers show greatest interest in email, flight/train scheduling and reservation, and news For transaction, mobile VAS and m-banking are the most popular m-commerce applications for Chinese consumersMobile VAS (billing, location, etc.)Mobile bankingInter- active gamesPercentage of respondentsInterest in transactions delivered over mobile31
- 33. CHINA’S WIRELESS DATA SERVICES EXPECTED TO GROW QUICKLY Source: IDC report; Literature research; McKinsey analysisESTIMATEVoice only Data and voiceNumber of mobile subscribers Millions, Percent4387145155-161176-207197-253218-30005E04E03E02E01E'00'9943%26%15%9%4%Revenue from wireless data US$ billions05E04E03E02E01E2.61713.33.02.7Wireless data service ARPU/month/actual user US$Low case High case5.42.51.10.40.1155CAGR32
- 34. HANDSET AND PDA MANUFACTURERS WILL FURTHER DRIVE MOBILE DATASource: IDC; CCID; SINO-MR; Gartner; Interviews; Cahners In-Stat Group; literature search; Team analysisNumber of handset units sold Millions20002001E2002E2003E2004E2005E23%30%45%63%86%90%45.054.946.657.565.644.6Number of PDA units sold Millions20002001E2002E2003E2004E2005E2%2%11%31%56%82%6.88.311.917.325.05.6Number of mobile device units sold Millions20002001E2002E2003E2004E2005E23%30%44%58%74%69%45.255.850.367.286.144.7CAGRCAGRNon-internet enabledInternet enabledOther Wireless 24%14%7%2%0.3%0.3%Internet enabled handset Wireless PDA14%42%-28%42%8%-28%CAGR193%35%-4%183%Non-data enabled20012005Comparison of unit shipment in China vs. US MillionsChina US33
- 35. NUMEROUS PLAYERS INVOLVED IN THE PRC WIRELESS DATA MARKET Source: Literature search Leading PRC portals launched WAP site Supported by equipment vendors and local operatorsPRC wire-line portalsPlayersEstimated numberSummaryKey Player (examples)Actively launching WAP / GPRS trials in Hong Kong Announced interest in PRC Acquiring startups to strengthen capability Developing relationships with PRC OperatorsInternational m-portals/HK operatorsSmarTone /BT Sonera SK Telecom Hutchison New WorldWAP sites launched M-commerce enabler emerging and forming partnership with content suppliers or/and PRC operatorsPRC wire- less portal platformsMonternet (China Mobile) Uni-info (China Unicom)Launched WAP service/portals with support of partners GPRS trials in progress and scheduled for launch in October, 2001 China Unicom launched CDMA (64kbps) and 1XRITT (140kbps) in Jan 2002 China Mobile initiated 3G trials in November, 2001 PRC mobile operators10-20 5-10 2-52China Mobile China Unicom Sohu.com China.com Sina.com Equipment Vendors34
- 36. OPERATORS ARE ESPECIALLY ACTIVE IN PURSUING WIRELESS DATA Source: Literature search; Analyst reports; Team analysisOperators are actively pursuing wireless data servicesCompetitive pressureChina Mobile’s domination of the market is threatened by Unicom’s aggressive low price and value added services offerings 2 new operators may be granted licenses to enter wireless market after 2002 The lever of competition in mobile communication market will be VAS High value mobile users express their willingness to switch operators in order to access wireless data servicesChina Mobile offers WAP service in all cities, and has gateways in 4 cities Unicom also launched WAP service in 6 major cities Both China Mobile and China Unicom are actively forming partnerships with mobile Internet application providers and ICPs to boost up their WAP offerings Potential new operators, China Telecom and China Netcom also express strong desires to focus on wireless data services as a tool to gain customer base Operators have introduced own wireless portals Monternet by China Mobile Uni-info by China Unicom35
- 37. WAP SERVICES HAVE FAILED TO TAKE OFF IN CHINA… Source: Literature search; Gartner GroupWAP has failed to take offContent Mainly informational services such as news, weather Text content Slow take off 450,000 subscribers in 2000 Less than 300,000 users in 2000 Major roadblocks to success Slow speed (download, processing) Limited compelling WAP content Initial premium pricing and limited availability of WAP enabled handsets Difficult input Unstable connection Limited coverage Relative high mobile Internet charge Small screen with unclear Chinese character displays Hard to navigate Lack of security36
- 38. ...BUT SMS IS TAKING CHINA BY STORM Source: Literature search; Team analysisLesson learned Mobile data services need to be simple, cheap, reliable, and fun20 million active users currently 19.9 billion messages sent in 2001 2% of CMCC revenue in 2000 was from SMS Average daily SMS volume in Shanghai is 3 million in July 2001 China Mobile and China Unicom linking their SMS services SMS enabled PDAs launched Key success factorsFunContentGet and send text messages Play simple games Real time contest Download ring tones Download screen savers Exchange jokesSMS is enjoying a fast take offLow usage cost 0.10 RMB per message Reliable service Proven technology Improved and easier input Nationwide coverage by CMCC and now by Unicom too No new handset needed37
- 39. EARLY TAKE UP OF MOBILE DATA IS ENCOURAGING AS CONSUMERS ARE DEMONSTRATING WILLINGNESS TO PAYData service offeringsData service performanceBy operators China Mobile Product/service SMS, including personalized information, flight/train schedule inquiry, stock quote and online chatting WAP, including email, gaming and PIM Pricing RMB0.1 per ordinary message for sending with free for reception; RMB0.2-2 charged by service provider and CM for each specialized SMS WAP pricing: RMB0.15 per minute for first 200 minutes, free for another 300 minutes and RMB0.15 per minute for any extra China Unicom Product/service SMS, including personalized information, PIM, entertainment and stock quote Online pager Pricing RMB0.1 per ordinary message for sending with free for reception; same charge for specialized SMS as CMBy ICPS Mobile QQ (WWW.TENCENT.COM) Product/service Unified instant messenger (mobile QQ) enabling mobile to PC communication Pricing 5 RMB monthly fee + 0.1 RMB per out going message with free incoming messages via CM mobile No monthly fee, but 0.1 RMB per out going message and 0.05 RMB per incoming message via CU mobileChina Mobile 2001 China Unicom 2001Number of short messageSMS Penetration in user base***Percent of total revenue*15.9 billion29%4 billionN/A1.2%N/ASource: Semi-annual reports; Press release; Website; Interviews; Team analysis* Include both wireless data and VAS ** only CM QQ subs included *** CMHK Number of short messageSMS Penetration in user basePercent of total revenue*QQ 1st half 2001Total subsMobile QQ subs20 million0.9 million**38
- 40. “VIRTUAL PETS” IS ONE EXAMPLE OF SMS APPLICATION IN CHINA Source: Linktone website; literature search Linktone’s “Virtual Pets” SMS game allows subscribers to educate their animal of choice - ranging from tigers to pigs to the popular koala - send it on dates and put it to bed, rather like the Japanese electronic pet, Tamagotchi The cost is very affordable at RMB0.10 per SMSMoreBackMoreBack------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 more, please.” Use 10 gold coins to buy 5 rice units, add one experience 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3 Your pet was successfully hired as a waiter. Because of his hard 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 named 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”39
- 41. 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 internet based instant chatting and messaging application, I.e., OICQ, where subscribers can chat with each other and be notified if their friends are on line at real time Basic functions: Sending SMS between mobile phone and QQ Using 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 phone Fee structure for China mobile subscribers is : 5 RMB monthly fee + 0.1 RMB per out going message, incoming message is free of change* Fee structure for Unicom subscribers is : no monthly fee, but 0.1 RMB per out going message and 0.05 RMB per incoming message TenCent claims to have 20 million subscribers in total In fact, only 0.9 million of which are actual mobile QQ users from whom China Mobile collects monthly subscription fee for Ten Cent * While subscribers don’t need to pay for incoming messages, TenCent is required to pay 0.05 RMB for each incoming message to China Mobile Source: Ten Cent, team analysis 40
- 42. FOUR KEY MOBILE DATA USER SEGMENTS CAN BE IDENTIFIEDSource: Survey research on 18 cities and >2500 mobile users; Team analysisMobile professionalsModern youthDescription Segment Conservative mainstreamIndifferent laggard Mostly managers or entrepreneurs Use mobile phone mainly for business Travel a lot and have significant roaming needs Care about voice quality and network coverage High personal income High mobile data potential: already 25% of them use SMS frequentlyMostly under 30 years old Use mobile phone mainly for personal communication convenience Interested in new technologies and willing to try out new things Many unmarried people, with high educational level High mobile data potential: already 47% use SMS regularlyCare the most of mobile communication cost Relatively lower income Older than average and less educated Lots of pre-paid users Lowest ARPU Very low SMS usage currently: <13% Little potential for mobile dataMostly married, over 30 years old and under college education Don't care much about technology and trend Mainly use voice services for local calls Very low SMS usage currently: <15% Little potential for mobile dataShare of sub base %41
- 43. MOBILE PROFESSIONALS, YOUTH MOST 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 UnicomSegmentShare of total revenues Percent of total revenueSMS use PercentPC internet use PercentMobile professionalsARPU USDShare of total subscribers PercentModern youthConservative mainstreamIndifferent laggard47<13ESTIMATE42
- 44. BOTH 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 lot and have significant roaming needs Care about voice quality and network coverage High personal income High mobile data potential: already 25% of them use SMS frequentlyMostly under 30 years old Use mobile phone mainly for personal communication convenience Interested in new technologies and willing to try out new things Many unmarried people, with high educational level High mobile data potential: already 47% use UMS regularlyDescriptionMessaging/email on the go Information (e.g., stock quotes, weather, news, local guide) Personal information management Mobile commerce Mobile stock trading Mobile officeMessaging/email Information (local news, weather, event) Games/entertainmentKey user needsAlways up-to-date unified messaging (hotmail, voice mail, 2-way SMS, IM) Customized information Always up-to-date PIM, notifications, alerts, outlook sync. Commerce and stock trading capabilities Secure browser of corporate intranet and internetAlways up-to-date unified messaging (hotmail, voice mail, IM, 2-ways SMS) Customized information Network gaming Downloads (rig tone, basic image, music and video clips) through PC PIM, PIP, notification, alerts, outlook syncKey featuresModern youth43
- 45. MESSAGING, INFORMATION AND ENTERTAINMENT WILL BE KEY OFFERINGS FOR MOBILE PROFESSIONALS AND MODERN YOUTH IN THE NEAR TERM% of people interestedMobile professionals, N 370Messaging/emailInformation (stock quotes, news, weather, restaurants)M-shoppingM-stock tradingM-advertisingEntertainment (ring tone & screen download) Source: Survey research; Team analysisModern youth, N 50017.119.821.022.161.290.019.535.123.725.768.786.344
- 46. KEY MESSAGES4. Regulatory changes loom, particularly with the accession of China to the WTO. While foreigners will be unlikely to set up MVNOs, WTO will allow greater participation of foreigners in 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 services). Regulatory risks remain, with no means to appeal regulator decisions, unclear interpretation of regulation including WTO commitments, and the government’s track record of intransparent and unpredictable decision making. (See separate regulatory PD for details) * Mobile virtual network operator45
- 47. REGULATORY AND POLITICAL CHANGES AND IMPLICATIONS FOR FOREIGNERS PLAYING IN telecom LOOM20012002200320042005WTOAccessionChange in political leadership Announcement of succession Transition of power in senior leadershipImplications for foreignersLimitations on partnership structures lifted gradually Operators will be more deal ready once laws are official Foreign investments will still be initially restricted geographically Risk for shift in regulatory direction and policy making Change may make relationship investments obsoleteMaximum fore-seeable opening of VAS in China telecom marketUp to 30% within operatingDecision pointKey events3 cities (BJ, SH, GZ)17 citiesnationwidePromulgation of Telecommunications LawMobilization of telecommunications commissionZhu Rongji to mobilize commission and lead sector reform Drafting 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 January 1st. However, comprehensive law not likely to be drafted in that time according to industry insiders. Law not likely to expand beyond WTO concessions Relevant legislationDrafting of a development blueprint for the telecommunication industry to manage operation of fixed-line, mobile and Internet businessMobile voice and data servicesValue-Added ServicesUp to 25% within operatingUp to 35% within operating3 cities (BJ, SH, GZ)17 citiesNation- wideUp to 49% within operatingUp to 49%Maximum fore-seeable opening of basic services in China telecom market Source: Legal and industry interviews; team analysis46
- 48. MVNOs ARE NOT LIKELY TO BE VIABLE IN THE FORSEEABLE FUTURELegal statusCurrent activityFuture prospectsMVNO operation would require a license Licenses would be subject to government approval Regulations governing basic services and value-added services would apply to MVNOs including restrictions on foreign participationCurrently a hot topic discussed by industry followers as a means to help transform service orientation of China’s telecom landscape MVNOs or services running on equipment infrastructure of licensed operators do exist, including in fixed line; however, these are illegal and the government is currently cracking down on these infractions in an effort reminiscent of crackdown of Chinese-Chinese-Foreign companies (CCFs) MVNO activity is reportedly present in Liaoning and Southern provinces; these are also not recognized legally by the government and have been retained by disgruntled investors of the PLA's Great Wall CDMA network and will likely disappear after asset transfer to Unicom is completedChinese government is discussing MVNO concept as a means to avoid capacity overbuild, particularly with new licensees Existing operators unlikely to consider MVNOs, particularly in key and attractive regions given spectrum shortages and no desire to increase competition MVNOs would still require a license from the government, will be limited geographically through 2004, and even by then, require 50% or more Chinese ownershipMVNOs are not likely to be introduced in the foreseeable future Source: Legal interviews; Industry interviews Source: Legal and industry interviews47
- 49. Foreign operators can obtain up to 30% ownership in Beijing, Shanghai, GuangzhouForeign operators can obtain up to 49% ownership in 17 cities Foreign operators can obtain up to 50% ownership nationwideVALUE ADDED SERVICES WILL BE LIBERATED UNDER WTO QUICKER THAN BASIC TELECOM SERVICES BUT LIMITATIONS WILL REMAIN * WTO entry potentially effective January 2002 with likely November 2001 ratification Source: Literature search; WTO Working Team Report November 13, 2001Mobile voice and data servicesUpon entry (2002)*Foreign investors can obtain up to 25% ownership Beijing, Shanghai, GuangzhouAfter 3 years (2005)After 1 year (2003)Telecom VAS (mobile and wireline) After 2 years (2004)Foreign investors can obtain up to 35% ownership in 17 cities Foreign investors can obtain up to 49% ownership in 17 citiesForeigners will still be prohibited from investing or operating in fiber-optic network License availability will be strictly limited even after WTO accession and subject to Chinese government approval Foreign investment is limited to no more than 50% even post WTO After 5 years (2007)Foreign investors can obtain up to 49% ownership nationwideUnchanged (foreign participation not allowed)Foreign investors can obtain up to 25% ownership in Beijing, Shanghai, GuangzhouForeign investors can obtain up to 35% ownership in 17 citiesDomestic services (wireline) Foreign investors can obtain up to 49% ownership nationwideAfter 6 years (2008)Period Basic Telecommunication services48
- 50. VALUE ADDED SERVICES (VAS) ARE DEFINED AS PROVISION OF SERVICES OVER SOMEONE ELSE’S NETWORK Basic Telecommunication servicesTelecommunications VASDefinitionServices includedPaging services Mobile voice and data services: Analog/digital/cellular services Personal communication services Domestic Services Voice services Packet-switched data transmission services Circuit-switched data transmission services Facsimile services Domestic private leased circuit services International Services Voice services Packet-switched data transmission services Circuit-switched data transmission services Facsimile services International closed user group 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 networks Fixed, domestic, long distance and local telephoneElectronic mail Voice mail On-line information and database retrieval Electronic data interchange Enhanced/Value-added facsimile services (including store and forward, store and retrieve) Code and protocol conversion On-line information and/or data processing (including transaction processing)BACK UP49
- 51. APPENDIX- PLAYERS PROFILEChina Mobile and China Unicom are duopoly in China’s mobile telecom service market. China telecom, China Netcom, China Railcom, and Jitong(newly merged by China Netcom) are potential players of this market.50
- 52. PLAYER PROFILE – CHINA MOBILEStrategic DirectionSubscriber BaseFinancial HighlightsMarket CapService OfferingMain PartnershipStrengths & WeaknessesOwnership StructureImpact of China Telecom Breakup*Revenue BreakdownBasic InformationLargest mobile operator in China Own and operate mobile networks across China since early 1990s Established: 1999 Head office: Beijing CEO: Zhang Ligui # of employee: 38,343 (CMHK)Strategy Maintain market share & keep high-end customers in mobile business Enter Internet business – mobile and fixed Be on leading edge of technology 30% of 2005 revenue from non-voice services New initiatives Launched “Monternet” to actively prepare for 3G CMHK will acquire mobile network in the rest 18 provinces from CMCC early next year(CMHK) US$ Billion Revenue EBITDA Profit ROE11.7*8.56.44.72.20.630%14%20001999Stock price: HK$24.10 Market Cap: ~HK$440bn (Oct. 30, 2001)Usage feesMonthly feesConnection feesOtherChina MobileMinistry of Finance100%75%25%100%Unlisted Provincial networkCMHK (listed)Public shareholder**** Includes Vodafone (2.0%)* Total China Mobile revenue is US$ 14.3 billionStrength Leader in China’s mobile market Extensive coverage & comprehensive network Strong strategic partner like Vodafone Strong brand Quicker to market new value-added service Owns its own R&D arm Weakness Under constant threat due to Unicom’s low price policy ARPU is threatened by the increase in prepaid subscriber Source: Literature search; industry interviews; IDC; Team analysis100%Vodafone has 2% stake in CMHKSubscriber Million ARPU US$/m 199920003867199920003022Mobile voice service Mobile data serviceNo impact Original proposal to merge with Jitong rejected based on conflict with corporate governance of publicly held firm51
- 53. PLAYER PROFILE – CHINA UNICOMStrategic DirectionSubscriber BaseFinancial Highlights*Market CapService OfferingMain PartnershipStrengths & WeaknessesOwnership StructureImpact of China Telecom BreakupRevenue BreakdownBasic InformationThe 1st operator in the world outside US to operate large scale CDMA & GSM networks Own and operate 2nd largest mobile network across China since 1996 Established: 1994 Head office: Beijing CEO: Yang Xian Zhu # of employee: ~35,400 (listed company)Strategy Betting on CDMA to win high value subscribers from China Mobile 30% of 2005 revenue from non-voice services Increase network coverage and quality in fixed-line Focus fixed-line business on corporate users New initiatives Invest USD 18mm to build up ethernet fiber across 9 provinces and invest USD ~30 bn in next 5 years in its voice and data businessUS$ Billion Revenue EBITDA Profit ROE2.92.11.30.70.40.16%7.6%20001999Stock price: HK$7.35 Market Cap: ~HK$ 91bn (Oct. 31, 2001)Cellular serviceFixed line & dataPaging service**including MII, MOR & MOEP ***1.5% held by Hutchison* All the data are of CU(listed)Strength Data speed advantage over China mobile with CDMA network No spectrum shortage on CDMA First mover in building high-capacity backbone with national reach Weakness Network uses hybrid ATM/IP-based technology, which is more expensive to operate compared to a pure IP networkMinistry of Finance77%23%Unlisted network & CDMA nationwideCU (Parent)China Unicom (listed)Public Sharehol -ders***79%13 minority shareholders**21%100% Source: Literature search; industry interviews; Team analysisHutchison has 1.5% stake in China Unicom Ltd. (listed)Subscriber Million ARPU US$/m 19992000519199920001914Fixed-line telecom service Mobile voice and data service (GSM & CDMA) Internet-related service PagerNo impact Original proposal to merge with China Railcom rejected based on conflict with corporate governance of publicly held firm52
- 54. POTENTIAL PLAYER PROFILE – CHINA TELECOMStrategic DirectionSubscriber BaseFinancial HighlightsMarket CapService OfferingMain PartnershipStrengths & WeaknessesOwnership StructureImpact of China Telecom BreakupRevenue BreakdownBasic InformationIncumbent fixed-line provider in China Own and operate fixed-line networks covering across China, and its fiber lines is 1.2 million km, covering 75%+ of China cities & counties Established: 1994 Head office: Beijing CEO: Zhou Deqing # of staff: 533,000Strategy Strengthen fixed-line status, doubling its fiber network over the next 5 years Supplement fixed-line business with fast-growing mobile business New initiatives IPO in 2002 or 2003 Facing breakup to 2 companies US$ Billion Revenue Profit ROA19.818.60.11N/A0.17%N/A20001999Long distance serviceData/ internetLocal voiceStrength Comprehensive nationwide network which dominates last-mile access to customers Extensive customer relationships given its status as the incumbent Weakness Likely to be saddle with national service obligation, a big issue given the wide income disparities in China Source: Literature search; industry interviews; Team analysisLocal Across ISPChina TelecomMinistry of Finance100%100%100%FixedDatacom100%AT&T invested 25% in Shanghai Symphony Telecom Other cooperation's with J-phone and British TelecomFixed-line19992000109144Local and long distance voice service Data/Internet ISP20002001E4.17.4InternetNOT LISTEDSpilt into two companies Two regional monopolies be created out of one national incumbent Northern Unit will merge with CNC and Jitong Both units will be released from public obligation Both units likely to receive mobile licenses53
- 55. POTENTIAL PLAYER PROFILE – CHINA NETCOMStrategic DirectionStrategic DirectionFinancial HighlightsMarket CapService OfferingMain PartnershipStrengths & WeaknessesOwnership StructureImpact of China Telecom Breakup*Basic Information Source: Literature search; industry interviews; Team analysis; JP MorganRevenue BreakdownOwns 9,376km 40GB trunk network connecting 17 major cities Established: 1999 Head office: Beijing CEO: Edward Tian # of Employees: 2,674Raised $325 million for 12% stake through private placement in 2001 Identity of JV partners remains unclearStrength High quality management High capacity backbone based on IP technology Strongly positioned on international bandwidth through alliance with C2C and potential international link through its Hong Kong gateway Weakness Inadequate last-mile access to customers currentlyStrategy Focus on providing high quality, low-cost infrastructure & value added services & solutions Target communication-intensive corporate and high-end residential customers Compete through differentiation & distinctive value proposition Build a strong brand Establish strategic partnership with world-class tech/biz leadersVoIP card & Corporate Data Services Backbone & bandwidth wholesale VPN, high speed bandwidth, international integrated data services Revenue2000 US$million 65Chinese Academy of ScienceSARFT15%40%100%SH Gov’tCNCMinistry of RailwayPrivate investors15%15%15%NOT LISTED Turned profit in Sept., 2001Lease BandwidthDataVoiceMerge with China Telecom Northern Unit and Jitong Obtain valuable fixed-line infrastructure and business Get access to last mile to boost existing backbone networks and businessNew initiatives Private equity replacement in Feb 2001 Corporate data service launched Strong take-up in Netcom’s IDC Signed agreement with Sing Tel thus become less reliant on CT in international bandwidth54
- 56. POTENTIAL PLAYER PROFILE – CHINA RAILCOMStrategic DirectionSubscriber BaseFinancial HighlightsMarket CapService OfferingMain PartnershipStrengths & WeaknessesOwnership StructureImpact of China Telecom BreakupRevenue BreakdownBasic InformationOwn 2nd largest fixed-line network(120,000+ km) in China covering 500+ cities Internet covers 36 cities; paging network 1300+ cities; IP 16 cities Fiber network is 42,000km in length and 10,000km of its backbone has been updated with DWDM Established: Dec., 2000 Head office: Beijing CEO: Cui Qing # of employee: 65,000Strategy Strengthen the service to railway transportation Explore public market Enhance service quality Focus on HR and Technology New initiatives Invest $ 240mn in broadband network construction Invest $384mn in fixed-line network construction Enter satellite communication businessStrength Existing nationwide network 10-20% price advantage Weakness Network are all constructed along railway, restricting development of service to public Network need to be upgrade to meet the massive communication demand of public Financing channel need to be explored Lack of talent Source: Literature search; industry interviews; Team analysisAcquired 20% share of Shin Staellite PCL (Thailand) with cash and stock exchange 49%100%CRCMinistry of Railway15 china railway branches51%NOT LISTEDFixed line voice service Paging IP, DLD Backbone leasing Revenue Asset Registered Capital 2000 US$billion 0.12 1.6 1.3 Fixed-line Pager 2000 million 1.0 1.4N.A.No impact Original proposal to merge with Jitong rejected based on conflict with corporate governance of publicly held firm Candidate for mobile license (likely TD-SCDMA)55
- 57. POTENTIAL PLAYER PROFILE –JITONGStrategic DirectionSubscriber BaseFinancial HighlightsMarket CapService OfferingMain PartnershipStrengths & WeaknessesOwnership StructureImpact of China Telecom BreakupRevenue BreakdownBasic InformationStrategy Leading comprehensive telecommunication company Meet customers’ demands with tailored services New initiatives IPO 2nd time postponed Signed agreement with Nortel and Digital China to build self-owned backbone Strength A market leader in VoIP Nationwide network and various technologies, e.g. satellite & SDH Own customer loyalty Strong in sales given its smaller scale of operation Weakness Financially weak for further expansion and infrastructure investment Management style is strongly entrenched with SOE mentality Quality personnel leaving to join other telecom co. Heavily dependant on VoIP revenues Source: Literature search; industry interviews; Team analysisiPass Nortel, Digital ChinaNOT LISTEDShanghai Hua HongIRICO45%0.14%SDIC ElectronicsJiTong<5%Other SOEsMII40%10%Internet connectivity-dial up permanent ( via fiber, microwave, & satellite) VoIP VAS & VPN IDC199920000.31.1Subscriber mn Revenue2000 US$million 60IP infrastructure and value-added service provider Leading ISP & VoIP player in China with telecom service market share of 10% Established in 1994 ISP licensed in 1995 IP phone licensed in 2000 Licensed in 1998 to operate ChinaGBN, China’s national public computer network Coverage: 200 cities # of employee: ~2000 Merging into China Netcom in April 2002ISPVoIP & others43%57%To be merged with China Netcom and the Northern Unit of China Telecom56
- 58. APPENDIX- 3G TECHNOLOGY STANDARDS CHOICESMobile technology in China is advanced and cutting edge. Operators are launching packet switch 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 developing TD-SCDMA, which has significant benefits over other alternatives, as an ITU approved 3G standard. 57
- 59. CURRENT PUBLIC MOBILE SERVICE SPECTRUM RESOURCE ALLOCATION IN CHINA COVERS BOTH GSM AND CDMA825835870880885890909915930935954960ETSI GSM spectrumUp DownUpDownUnicom CDMA 10 mhzCMCC Analog reallocation 5 mhzCMCC GSM 19 mhzUnicom GSM 6 mhz1710172017451755178518051815184018501880ETSI GSM spectrumUp UpCMCC GSM 19 mhzDownDownUnicom GSM 10mhz Source: Operator interviews58
- 60. CHINESE OPERATORS MOVING AGGRESSIVELY TO ROLL OUT PACKET NETWORKSKey eventsTransfer of non CMHK operators to CMHKLaunch of GPRS3G trialsLaunch of 3GLaunch of GPRSCDMA launchImplication by periodProjected dateProjected timing range Source: Interviews; literature searchNow2002200320042005Existing operators preparing for wireless dataCrucial time period for 3G decision and positioning with new operators3G networks and new mobile operators emergingGrowth and maturation of 3G applicationsOctober commercial trialsOctober trials (64 Kbps)I x RTT (140 kbps)3 - 4 additional provincial operatorsLaunchLaunchChina MobileChina UnicomExisting networksGSMGSM/CDMA59
- 61. BOTH CHINA MOBILE AND UNICOM* FOCUSED THEIR GPRS PILOTS IN COASTAL AREASBeijing Mobile/ Motorola, 1.4m subsTianjin Mobile/ Motorola, 500,000 subsLiaoning Mobile/ Huawei, 1.3m subsShanghai Mobile/ Siemens, 2m subsZhejiang Mobile/ Alcatel, 2.5m subsFujian Mobile/ Nokia, 2m subsGuangdong Mobile/ Ericsson, 5.7m subsRationale Voice will remain key revenue source for mobile operators in the short run Demands for data service will primarily originate from developed coastal area & major inland cities Mobile data service is far from developed, which limits it to coastal areas It is estimated by China Mobile that GPRS market size will reach 1 million by end of 2001China Mobile**Unicom**WuXi Unicom / Ericsson, Subscribers N/AShanghai Unicom / Nokia, 360,000 subsShenzhen Unicom / Motorola, 270,000 subsGuangdong Unicom / Nokia, 1m subs * Unicom GPRS trials on hold as attention has shifted to CDMA ** Subscriber numbers from early 2000 Source: Literature search, industry interviews 60
- 62. CHINA UNICOM HAS LAUNCHED NATIONWIDE CDMA NETWORK AS BASIS OF CDMA2000 NETWORKCapacity of subs, Million20012002E2005E152050CDMA2000 1XRTTIS-95Source: Literature search, industry interviews Technology CAGR 35%61
- 63. EVOLUTION OF MOBILE RADIO STANDARDS IN CHINA LEADS TO THREE 3G ALTERNATIVES * Available by end of 2002 ** Assuming dual mode GSM/W-CDMA solution Source: Various vendors; McKinsey analysis2G2.5GIS-95AGSMCDMA2000 1x RTTCDMA (China Unicom)GSM (China Mobile, Unicom)IS-95BGPRS China timingPresent2002W-CDMA** (UTRA FDD)CDMA2000 3x RTT TD-SCDMA3G2003TSM*2003-200462
- 64. OUTLOOK FOR 3G STANDARDS IN CHINAAll 3 standards likely to exist in some capacity in ChinaW-CDMATD-SCDMACDMA2000China outlookAggressively marketed by MNC vendors Remains the most widely known standard and will probably exist in ChinaFavored by government as the first 3G standard to be deployed in China Seen as Chinese technology, which is very important to development of Chinese IT industryUnicom planning to upgrade CDMA network to 1XRTT in early 2002Support in ChinaEricsson Nokia Operators HuaweiGovernment Operators (reluctant) Datang Siemens Nortel Huawei (moderate support)Qualcomm Lucent Samsung ZTE China UnicomGovernment and operator support for TD-SCDMA Delayed availability of FDD spectrum Availability of W-CDMA outside of Japan (including dual mode handsets)Technology development Terminal development (chipset) Lower market awareness and confidence by operatorsNot clear 3G license for CDMA 2000 would be granted, or if existing CDMA license allows upgrades to 1XRTT and 3XRTTMain obstacles in China Source: McKinsey analysis; Industry interviews63
- 65. 3G SPECTRUM HAS ALREADY BEEN ALLOCATED FOR W-CDMA AND TD-SCDMA, ALTHOUGH FDD SPECTRUM (W-CDMA) IS CURRENTLY USED FOR WLL IN SOME CITIES20 mhz30 mhz60 mhz15 mhz60 mhzVoidTDDFDD (uplink)SatelliteTDDVoidFDD (downlink)Void188519001920198020102025211021702200Air interfaceModeSpectrum rangeTotal spectrumBandwidthAvailabilityTD-SCDMATDD1900 - 1920 2010 - 202535 mhz1.6 mhzAvailable nowW-CDMAFDD1920 - 1980 (UL) 2110 - 2170 (DL)60 mhz5.0 mhzCurrently being used in certain cities for WLL, and expected to be cleaned up by 2003-2004 Source: The International Engineering Consortium (IEC); Interviews; MII64
- 66. W-CDMA IS SCHEDULED FOR LAUNCH PER CHINA MOBILE BY 2003, ALTHOUGH SOME QUESTIONS REMAIN ABOUT VIABILITY OF TECHNOLOGY AND AVAILABILITY OF DUAL MODE HANDSETSLaunch in 2003-2004 * Not available until 2H 2002 at the earliest when the W-CDMA/GPRS dual-mode phone become available, and may be delayed until TD-SCDMA launched Source: Industry interviews; Government interviews; McKinsey analysis20022003200420052001TechnologyPossible launch scheduleAllocated to FDD but not ready to award to operatorsFDD SpectrumFDD spectrum and license will be awarded to operatorsCommercially available*65
- 67. TD-SCDMA IS LAGGING BEHIND IN TERMS OF COMMERCIALIZATION AMONG 3G CANDIDATESMobile network equipmentMarket awarenessCDMA 2000 1 X RTT technology commercial with 400,000 users in Korea China Unicom will construct CDMA 2000 1X test networks in 10-15 major Chinese cities CDMA 2000 3XRTT is in preliminary R&D phaseCDMA 2000Growing support especially by US operators 400,000 1XRTT users in Korea today Japanese operators will also adopt Primarily supported by US and Korean vendorsEquipment commercialization nearly finished in Japan 44 contracts for W-CDMA sourcing finalized Test networks are not performing wellW-CDMAPreviously, the most widely accepted technology For a time, has been preferred option for 3G technology by most operators Large vendor base support led by Ericsson, NokiaMobile terminalLucent has CDMA 2000 (1XRTT handset prototype, later this year mass production starts Qualcomm developing dual mode chipset for CDMA 2000 and W-CDMAChipset design completed No prototype available Unclear when W-CDMA terminals will be available outside of Japan Some question 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 introduction Unclear whether CDMA license includes 1XRTT or 3XRTTOverall postponing of W-CDMA time to market. Possibly not launched on large scale nationwide for 2 - 3 years, due to complexities of dual mode solutionNetwork equipment prototype will be available by end of 2001 Call between terminal prototype completed on April 27 Video transmitted between base stations and terminals on July 4 TD-SCDMASigns of mobilization for chipset development have appeared (Qualcomm,TI, Phillips) Chipset design is expected by proponents to be completed in 2002 Prototype and commercial handsets will potentially be available by late 2002Proponents expect to launch in China by end of 2002 Proponents expect TD-SCDMA to potentially enter international markets after China launchViewed as inferior Chinese technology despite technical advantages and significant Siemens contribution Lower awareness and acceptance by industry though accepted by ITU and 3GPP Currently Siemens and Datang are the key supporting vendors Source: Industry interviews; Analyst reports 66
- 68. TD-SCDMA’S PROSPECTS LARGELY DEPENDS ON THE TIMING AND VIABILITY OF TECHNOLOGYTD-SCDMA TechnologyPossible launch schedule2002200320042005TDD spectrum is ready to be distributed to operators as soon as technology is ready2001Scenario 1Trial*Commercially availableScenario 2TrialCommercially availableScenario 3TrialFailsScenario 1Launch in 2003Scenario 1Scenario 2Launch in 2004Scenario 2Scenario 3TD-SCDMA never launchesScenario 3TDD SpectrumThe timing of the commercial availability of TD-SCDMA technology can be summarized in 3 scenarios. In scenario 1, TD-SCDMA is available by the end of 2002. In scenario 2, development is delayed due to terminal inavailability, and launch occurs in 2003. In scenario 3, TD-SCDMA fails to launch * Trials will include infrastructure buildout in 2002 Source: Industry interviews; McKinsey analysis67
- 69. TD-SCDMA ALSO HAS ADVANTAGES IN MIGRATING FROM GSMNew hardware investments9.6 KbpsBoth paths begin from GSM network2 G115 KbpsPath convergence continues through 2.5 G2.5 GMigrationData trans- mission rate Comment 384 Kbps (mobile) 2 Mbps (stationary)Continued leverage of GSM network for TD-SCDMA Mixed application capability Involves widespread new investment384 KbpsTSM: 3G like performance with minimal added investment to GSM network2001Late 2001/ 200220032003- 2004GSM BTSMSCTD-SCDMA pathW-CDMA pathBSCGSMUMSCTD-SCDMA Node BTD-SCDMA Node BFDD Node BFDD Node BUMSCW-CDMA3G TD-SCDMARNC BSC enhancedMSCGSM BTSBSC enhancedTD-SCDMAGSM BTSGPRSBSCPCUMSCSGSNGGSNTD-SCDMA Node BSGSNGGSN3 GGSM BTSMSCBSCGSMGSM BTSGPRSBSCPCUMSCSGSNGGSNRNC Source: Industry interviews68
- 70. OPERATORS WILL NOT NECESSARILY DECIDE 3G STANDARD, AS MANY STAKEHOLDERS WILL HAVE INFLUENCE, AND THE GOVERNMENT HEADS THE LIST StakeholderRelevant entitiesGeneral positionDegree of influenceGovernmentState Council State Planning and Development Commission Ministry of Science and Technology Ministry of Information IndustriesLow awareness. Will consider geopolitical pressure and negotiations. Expected to support TD-SCDMA based on national interest industry development Low awareness. Expected to support TD-SCDMA based on national interest Strong supporter of TD-SCDMA based on Chinese origin Generally a strong supporter of TD-SCDMA but, some dissent within the ministryOverriding decision making power over all other entities Next to State Council, greatest power Strong advocate but not central Primary decision makerOperators Existing NewChina Mobile China UnicomPrefers W-CDMA, due to lack of confidence will support TD-SCDMA if in national interest Will try to develop CDMA 2000. Unclear how to develop GSM network Stronger confidence in W-CDMA, but less strong view on importance of standard Unclear about technologies. Will support national interests Eager to adopt and roll out TD-SCDMA as play for government support State owned flagship operator; will accept government decisions in interest of country May have general "bargaining chip" with CDMA decision Will take whatever spectrum is granted by MII Will do whatever MII plans Little direct influence given ownership by Ministry of RailwaysChina Netcom China Telecom China RailcomLocal equipment vendorsDatang Huawei ZTECo-developer of TD-SCDMA Supports TD-SCDMA but investing heavily in W-CDMA Strong support for CDMA given Qualcomm supportFavored son of MII given historic affiliation but questions about capability of CATT Privatized but most competent local vendor Viewed as successful SOEForeign equipment vendorsEricsson Motorola Nokia Siemens NortelAggressively pushing W-CDMA Hedging and waiting to see due to failed bet on 2G Position probability in between Ericsson and Motorola Supporter of TD-SCDMA, but hedging with W-CDMA Provider all technologies, but cooperating on TD-SCDMA RNC to gain favorInfluence through government lobbying and diplomatic mission Indirect influence through operatorsLocal handset playersEricsson Bird Kejian Many othersEager to gain technologies Many recognize TD-SCDMA as easier path for gaining domestic market shareLow individual influence Government will consider impact of 3G on themOther stakeholdersQualcomm Texas InstrumentsVarious positions Competing for chipset valueStrong lobbying force (Qualcomm) Source: Industry interviews69
- 71. 3G REGULATORY RESPONSIBILITIES3G regulatory tasksResponsible organizationProgressFrequency allocationRadio Frequency Administration Dept., MII3G spectrum specification completed FDD spectrums need to be cleaned-up3G standard decisionState Council Science & Technology Dept., MII Science & Technology Dept., SPDC Various research institutes(CATT, RITT)Currently 3G radio standards setting are still under discussion Waiting and hoping that TD-SCDMA is viable3G timingScience & Technology Dept., MIITD-SCDMA can begin anytime Other standards in 2002 or 2003Telecom Admin Dept., MII State Council SPDCMost likely would award to existing operators and 1 - 2 new operators 3G supplier qualification (licensing)Planning Department., MII Telecom Administration Department., MIIAll existing MNC suppliers are likely to receive licenses, if products meet specification Local suppliers will be preferred New entrants reviewed on technology and subject to import restriction if not manufactured locally; approval for entry of new vendors likely to be limited3G operator licensing and allocation of spectrumDecision maker Source: Ministry of Information Industries; CITIC CIEC70
- 72. SPDC & MII's CURRENT POSITION ON 3G STANDARDSProblem areasCurrent positionView this as a success of Chinese technology View this as opportunities for local industry to succeedLocal manufacturer's support outside of Datang MNC terminal manufacturer's supportTD-SCDMAThe government clearly supports TD-SCDMAAnticipated announcement of support for TD-SCDMA contingent on success of trials TDD spectrum allocated for TD-SCDMA TD-SCDMA trials to be permitted whenever product is available FDD licensing may be delayed for one year MNCs being pressured to support TD-SCDMAW-CDMAMonitor and study Considering holding off licenses for one year after TD-SCDMAPressure from EU for fair trade Lobbying by MNCsCDMA 2000Not as actively monitored and studied as W-CDMAWhether 2G CDMA will be widely deployed Pressure from US for fair tradeNot confident yet about the technology pending trials Need commitment of other local equipment suppliers besides Datang Need commitment of terminal suppliersHowever, the government is not ready to make a final decision Source: Ministry of Information Industries; Industry interviews71
- 73. GOVERNMENT 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 consideration Support of local industries IPRs for China Protecting existing network infra-structure investment Political considerations, i.e., trade relations Desire to lead the technology development Desire to conform with global standardSupporting TD-SCDMA because Avoiding foreign IPRs Promoting Chinese technology and standard Time to market advantage for local suppliers Potential for export Not promoting TD-SCDMA exclusively because Threat of unfair trade practice accusations Pressure from EU and US Uncertainty in standard, product development and terminal availabilityGovernment wants to avoid a market dominated by foreign players as experienced in 2G72
- 74. CHINA MOBILE MAY ADOPT BOTH TD-SCDMA AND W-CDMA WHILE CHINA UNICOM WILL LIKELY EMPHASIZE DEVELOPMENT OF ITS CDMA NETWORKCurrent operatorsApproach Probability Rationale Quotes China MobileChina UnicomMedium HighChina Mobile will be experiencing GSM capacity shortfalls in many major cities, which may influence 3G decision Given its advantages in assymetric transfer, TD-SCDMA being considered for data servicing role China Mobile is likely to adopt TD-SCDMA under government instructions to support national interests China 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 UnicomMedium Medium HighChina Unicom will focus on expanding CDMA network to build national coverage in the coming 1-2 years China Unicom will attempt to win high-value clients from China Mobile by leveraging CDMA strengths in quality and capacity China Unicom will not build GPRS, focusing instead on rollout of CDMA in October, and CDMA 2000 1xRTT in early 2002 China 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 necessity Internal 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-end3G TD-SCDMAW-CDMATSMGSMGPRSGSMGPRSTDD@GSM3G TD-SCDMAW-CDMACDMACDMA2000 1XRTTCDMA2000 3XRTTLikely approach Source: Interviews73
- 75. TECHNOLOGY PATHS OF NEW OPERATORS WILL LIKELY AVOID SIGNIFICANT INVESTMENTS IN 2G INFRASTRUCTUREPotential new operatorsApproach Probability Rationale Quotes China TelecomChina NetcomLow High Medium Low Regulatory bodies are not inclined to award a 2G license to China Telecom Plans to wait until 3G enters market and adopt 3G directly Lack of experience in mobile will make China Telecom more attentive to government mandates and open to TD-SCDMA CDMA 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 NetcomLow Medium MediumVendors 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 training Motorola are introducing W-CDMA to CNC instead of CDMA2000 Siemens is invited to present on TD-SCDMA Prefer to choose standard that will get them fastest to marketLikely approach * Railroad spectrum Source: Industry interviewsChina RailcomTD- SCDMAGSM-R*GSM/ GPRS3G TD- SCDMAW- CDMATSMCDMA2000 1XRTTCDMA2000 3XRTT3G TD- SCDMAW-CDMATSMGSM/ GPRSLease 2G from China Mobile or China Unicom“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 74
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