Flat Capex for China Telecom Industry in 2004 as the Industry Waits for 3G

23rd March , 2004

ASIA : With the issuance of 3G licenses in China most likely delayed until 2005, BDA forecasts that total capital expenditures for China's four major operators will remain flat in 2004 at approximately $25.6 billion.

According to a recent BDA report, "2004 Capex Outlook: Life without 3G", available exclusively to subscribers of BDA's Strategic Advisory Service (SAS), China Unicom is the only operator expected to increase capex as it continues to invest aggressively in its CDMA network to increase coverage and capacity. GSM vendors will suffer in the run up to 3G as Unicom continues to cut GSM capex, to just $519 million in 2004, and China Mobile GSM capex slows to $3.3 billion.

China Netcom plans a sharp 12% reduction in capex as it aims profitability ahead of its planned Initial Public Offering. China Telecom, Netcom's competitor in the fixed-line market, plans to maintain capex at 2003 levels, focusing primarily on PHS and ADSL.

Flat capex is the result of a structural shift in China's telecom industry from new network build and capacity expansion to network optimization, increased efficiency, and a focus on the launch of new services. This shift began in 2001, which at $32 billion, according to data from China's Ministry of Information Industry (MII), was the high point of industry investment. BDA believes this level will not be reached until 3G networks are deployed.

According to a recent BDA report, "A Tale of Two Vendors: Huawei and ZTE", part of BDA's Strategic Advisory Service (SAS), despite the slowdown in carrier spending at home, domestic vendors, Huawei and ZTE, are benefiting from an aggressive push into overseas markets and market share gains in China. "The companies continue to win share from foreign vendors in key product lines at home," said Dongming Zhang, Research Director for BDA, "and exports are growing strongly with Huawei's sales overseas in 2003 topping $1 billion, or 27% of total revenues. International vendors underestimate the impact Huawei and ZTE may have on the global 3G market."

In the Chinese handset market, competition is shifting to the R&D lab. In a new report, "Handset Value Chain in China", part of BDA's Strategic Advisory Service (SAS), BDA describes how certain Chinese handset vendors are increasing investment in R&D in an effort to reduce reliance on design houses and module suppliers in order to cut costs.

At the same time, chip suppliers including Texas Instruments and Analog Devices Inc. are moving downstream to assist Chinese vendors in their efforts to integrate key components into their own production processes.

"While Chinese vendors engage in more in-house development," says Ted Dean, Managing Director of BDA, "they continue to rely on foreign companies for core technology. They also will continue to outsource designs of some models in order to maintain a large enough product portfolio and speed new handsets to market. The real shift in the handset value chain will come in 3G when Huawei and ZTE put their considerable R&D muscle to work and try to repeat their success in the equipment market in handsets."

As R&D increases in importance and competitive pressure intensifies, BDA expects long overdue consolidation to begin in China's crowded handset market. Handset vendors with stronger R&D will rise to the top. Leading players including TCL and Bird will have to rely on success in exports to build the scale to compete in the R&D lab.

About BDA China Strategic Advisory Service (SAS)

BDA China Strategic Advisory Service (SAS) is a comprehensive subscription service that provides ongoing analysis and data on China's telecommunications and technology markets. A subscription to BDA's SAS service ensures strategic decisions are founded on accurate insights and up-to-date information.

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