Technology Won’t Hold Back China Mobile

05/05/2008 12:00 am EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says China’s leading wireless company will thrive even as it launches a new wireless standard that’s not state of the art.

On April 1st, China Mobile (NYSE: CHL) finally announced that it is launching third-generation (3G) wireless services and offering 3G handsets to its best customers before the upcoming Beijing Olympics. While the 3G launch has been widely anticipated, it has been delayed for nearly three years.

3G is a broadband wireless technology that allows users to transmit large data files—such as streaming videos—over wireless networks. China's existing pre-3G wireless network is based on European technology, which can be easily upgraded to the WCDMA standard.

[But] China decided to develop its own homegrown 3G technical standard—TDS-CDMA—[even though] TDS technology is less robust than the two existing standards—WCDMA and CDMA2000.

With the launch of 3G this year in China, most telecom industry analysts expected the Chinese government to issue three licenses for 3G technology—one for each of the three standards. Currently, China Mobile has a market share approaching 70% in the country's wireless market, while its only competitor China Unicom (NYSE: CHU) has less than 30%.

It became apparent that [China Mobile] would get stuck with the homegrown technology. But this is not all bad news: Beijing wants to give the homegrown technology an edge, so China Mobile would be the first and only wireless operator with a 3G network in China for at least the next six months, and possibly much longer.

And with Beijing concentrating on their homegrown technology first, the focus will be building out the new infrastructure and getting China Mobile's TDS out to customers. Even though landline giant China Telecom recently announced that it will likely receive a 3G license for WCDMA sometime in September, I believe Beijing will probably delay granting a WCDMA license to China Telecom until China Mobile's TDS reaches critical mass.

China Mobile has other tricks up its sleeve: The company is currently building new 2.75G networks in major cities throughout China to hedge its bets in case the TDS standard flops.

Regardless of what happens to 3G, I am confident that China Mobile will continue to dominate the country's wireless industry, because it has a superior distribution network and existing infrastructure. The company will continue to grow rapidly by bringing in older and cheaper technology to new customers living in small towns and villages.

Plus, while 3G may be a hot topic right now, technology is ever-changing, and the next likely standard is 4G. International wireless infrastructure leaders such as LM Ericsson and Nokia are already developing this even-higher bandwidth 4G technology. And with its superior financial prowess and marketing advantage, China Mobile will likely be the leader in introducing 4G to China.

Continue to buy China Mobile under $90. (It recently closed below $88—Editor.)

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