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Looking East—The Chinese ICT Industry in 2014

  • March 2014
  • 22 pages
  • Frost & Sullivan
Report ID: 2056639

Summary

Table of Contents

This study will look at the current state of China’s mobile market and outline the strategic investments plans of China Mobile, China Unicom, and China Telecom. It will also investigate the opportunities and challenges for global expansion of 3 key Chinese mobile manufacturers: Lenovo, Yulong Coolpad, and Xiaomi. Finally, it will examine the 2 biggest Internet companies in China—Tencent and Alibaba, by exploring their core products and the business models that they employ. The insight will focus on how each company is adapting its business model to accommodate the consumer shift to mobile.

Executive Summary
With million Internet users, China’s online community is larger than the population of almost every country on earth. This number, however, only constitutes a penetration rate of %, meaning, there is still plenty of opportunity for growth in the market. With million, the United States has the second largest population of Internet users, which is less than half of China’s, but with a penetration rate of % for adults and % for teenagers. China has more than a billion mobile subscribers and is the world’s largest smartphone and eCommerce market, and therefore, offers Internet companies unparalleled growth potential. However, China’s unique dual economy, with central planning methods and market liberalisation principles, makes the wireless, mobile, and internet market particularly difficult to navigate.
The first part of the market insight will look at the current state of China’s mobile market and outline the strategic investments plans of China Mobile, China Unicom, and China Telecom. It will prove that the regulatory changes will create a much-needed competition in the mobile market.
Further, changes in foreign ownership rules suggest a broader policy shift toward allowing global competitors to compete in the market. The second section will investigate the opportunities and challenges of global expansion for three key Chinese mobile manufacturers—Lenovo, Yulong Coolpad, and Xiaomi. It will draw lessons from Samsung’s success and HTC’s relative difficulty in penetrating mature markets and will recommend that these companies must focus on innovation, achieving scale, and developing brand equity if they are to be successful. This last section examines the biggest Internet companies in China—Tencent and Alibaba—by exploring their core products and the business models they employ. It focuses on how each company is adapting its business model to accommodate the consumer’s shift to mobile. Despite very different roots, these companies’ strategies clearly converge when it comes to making money on mobile. Advertising on mobiles is not yet sophisticated enough to replace revenues lost from desktops, and so each company is looking to mobile commerce (mCommerce) as its growth engine.

The Wireless Market
China’s wireless and telecommunications market is dominated by 3 state-owned companies: China Mobile, China Unicom, and China Telecom. These companies have their origins in the old China Telecom, which was, until 1999, the only telecommunication provider in China, when the government broke up the company and its monopoly. Initially, China Telecom and China Netcom—which later merged to become China Unicom—provided fixed-line networks while China Mobile and China Unicom focused on wireless networks. With mobility becoming more important for customers, all companies have been investing heavily in their mobile networks to increase speed and coverage. The Chinese Government has once again intervened to stimulate competition in the market. The Ministry of Industry and Information Technology (MIIT), which is responsible for telecommunications, has forced all mobile providers to lease their networks to at least private mobile virtual network operators (MVNOs). Moreover, the MIIT has eased restrictions on foreign ownership in the telecom market, enabling foreign companies to provide telecom services such as app stores, call centres, domestic multi-party communication, and store-and-forward services.
China Mobile’s Poor 3G Networks have Accelerated its Move to 4G With 735 million subscribers, China Mobile is the largest mobile network operator in the world. In its home market, it has a % market share in mobile connections; however, more than million of these connections are on its 2G network. When it comes to 3G subscribers, China Mobile has % market share, down from 50% in 2010.1 China Unicom has % market share whilst China Telecom has slightly less with %. China Mobile’s weakness in the 3G market is the result of its use of the Chinese-developed standard, Time Division Synchronous Code Division Multiple Access (TD-SCDMA). This standard was developed in an attempt to reduce the dependence on Western technology and avoid paying royalties to patent holders. In 2009, the MIIT assigned the TD-SCDMA license to China Mobile and assigned licenses for existing 3G standards, CDMA2000 EV DO Rev A (Code Division Multiple Access Enhanced Voice-Data Optimized) and W-CDMA (Wideband Code Division Multiple Access), to China Telecom and China Unicom, respectively. At Mbps, the TD-SCDMA network is considerably slower than China Unicom’s W-CDMA network, which can reach speeds of Mbps. China Telecom’s CDMA2000 EV DO Rev A based network averages speeds of Mbps nationwide and Mbps in large cities. The slow speed of China Mobile’s network, combined with the lack of handset support for TD-SCDMA, resulted in a decrease in subscribers for China Mobile. In fact, the Samsung Galaxy range of handsets did not support the network until 2012, and Apple’s iPhones never supported TD-SCDMA.
The inferior quality of the 3G network and loss of customers prompted China Mobile to invest heavily in 4G infrastructure. The company has pledged to spend $8.18 billion by the end of 2014, thereby, building its Time-Division Long-Term Evolution (TD-LTE) network2. As with TD-SCDMA, TD-LTE is a Chinese-developed standard, but unlike its predecessor, it has broader support from outside China. There have already been deployments in Sri Lanka and India. China Mobile also has agreements with 32 international carriers to run trials. In January 2014, Apple announced that its iPhone 5 models would run on China Mobile’s TD-LTE network, and it is likely that new smartphones from Apple and Samsung will also run on the network. The support from handset makers will help China Mobile attract new customers and keep existing customers, who are looking for the latest smartphones, to its 4G network. Competitors are less keen on a quick move to new 4G networks and associated new infrastructure. China Telecom wants to extend its 3G network lifespan as long as possible, as it has invested more than $ billion since 2007 into its CDMA2000 EV DO Rev A based network.
China Unicom is favouring the use of an alternative 4G standard, Frequency-Division Duplexing Long-Term Evolution (FDD-LTE), which is more widely adopted globally, especially in Europe and the United States. These companies investments in 3G networks are now are limiting their 4G deployments, with China Unicom ordering base stations, and China Telecom ordering , compared to orders by China Mobile.

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