Unicom’s Half-Baked 4G Strategy Moves Ahead

Unicom advances half-baked 4G plan

The 4G strategies of China’s 2 smaller telcos are starting to emerge under an unusual hybrid scheme being rolled out by the nation’s telecoms regulator, and the path being pursued by China Unicom (HKEx: 762; NYSE: CHU) certainly doesn’t look encouraging. Both Unicom and China Telecom (HKEx: 728; NYSE: CHA) have been given the nod to launch commercial 4G service using a homegrown standard known as TD-LTE, even though both plan to build their main networks using a more globally tested technology technology called FDD-LTE. But whereas China Telecom is making minimal investment in TD-LTE, Unicom seems intent on wasting billions of dollars, with word that it has awarded contracts to 8 companies to start construction of a network based on the technology. (Chinese article)

The only positive thing I can say about this latest report is that it doesn’t include any investment figure, meaning Unicom’s first round of contract awards to build a TD-LTE network could be relatively small. But even if it’s small, such a network will undoubtedly account for a third or more of Unicom’s planned capital spending this year if it wants to really provide competitive TD-LTE coverage in China’s largest cities. Presumably it would lease capacity for smaller cities from China Mobile (HKEx: 941; NYSE: CHL), the nation’s dominant wireless carrier, which is spending billions of dollars of its own to build an extensive national TD-LTE network.

According to the latest reports, Unicom recently made its first round of TD-LTE contract awards to 8 companies after the usual round of tenders. Most of the top global and domestic equipment makers won contracts, including local leaders Huawei, ZTE (HKEx: 763; Shenzhen: 000063) and Datang Telecom (Shanghai: 600198), and global giants Ericsson (Stockholm: ERICb) and Nokia Solutions and Networks (NSN). No figures were supplied for the total size of the contract awards, or which companies received what share. Based on Unicom’s previous statement that its capital spending budget this year won’t top 80 billion yuan ($13 billion), we could see the company waste several billion dollars on this ill-advised TD-LTE initiative.

Both Unicom and China Telecom currently operate 2G and 3G networks that are compatible with FDD-LTE, the globally tested 4G standard. But the Chinese telecoms regulator has so far only awarded 4G licenses for TD-LTE, which is the standard being used by China Mobile in its network. Both Unicom and China Telecom expect to get FDD-LTE licenses eventually, and have been lobbying hard for the telecoms regulator to award such licenses later this year.

But in the meantime, both of the smaller carriers don’t want to lose a competitive edge to China Mobile, which is aggressively promoting its 4G service launched in December. China Telecom has stated that it will offer TD-LTE service by leasing network capacity from China Mobile, and has indicated it won’t build its own TD-LTE network. Unicom has taken a different approach, saying it will build its own TD-LTE network, and then later also build an FDD-LTE network as it prepares to launch its 4G service later this month.

Such a strategy looks very expensive and inefficient, since Unicom will end up with a small TD-LTE network probably costing $5-$10 billion and a much larger FDD-LTE network costing 4 to 5 times that amount. That’s hardly a good use of company money, and there’s also a strong possibility that the TD-LTE network will end up as a white elephant that will go largely unused after Unicom gets its FDD license. This kind of half-baked strategy once again underscores why Unicom is my least favorite of China’s 3 major telcos, and why the company is almost certain to lose market share in the 4G era.

Bottom line: Unicom’s award of TD-LTE contracts shows it is determined to build a network based on the homegrown 4G standard, even though that network is almost certain to become a worthless white elephant.

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