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The Chinese telecommunications industry is at a crossroads today. Although it has achieved spectacular growth and currently has a mobile subscriber base of 368.01 million (as of July 2005), it still has a relatively low teledensity of 25 per cent. Thus, it holds significant potential for further growth.

In such a scenario, the industry faces the issue of how to tackle the licensing and implementation of third-generation (3G) services to ensure financial viability and adequate demand. It also has a self-enforced deadline to work against –­ the Beijing 2008 Olympics –­ by which time it proposes to have these services up and running.

China currently has two mobile operators, China Mobile and China Unicom, and four fixed line operators –­ China Telecom, China Netcom, China Railcom and China Satellite Communications. All the service networks are under the control of the state with foreign investment allowed only in value-added services.

In recent times, mobile operators have seen higher rates of growth than fixed line operators. Companies like China Netcom and China Telecom have started focusing on the development of value-added services to supplement their fixed line operations. They are looking at new avenues of growth.

One such avenue is expected to open up with the introduction of 3G services. Operators with 3G licences will be able to participate in a new converged environment, an environment which will throw open demand for new services and solutions.

3G services will also allow mobile operators to provide high speed data services in an environment where demand for such services is increasing. The 3G licences will also give operators access to additional spectrum at a time when 2G spectrum is likely to be insufficient to provide good quality services to the growing subscriber base.

While there is no doubt that such services will open up new opportunities for growth, huge investments will have to be made to implement network upgradations. According to reports, the cost of setting up nationwide 3G networks will be as high as Yuan 600 billion. Given the mixed response to such services in Europe and Hong Kong, the returns on such investments may take many years.

The huge costs involved raise the stakes in this project. They also encourage strong lobbying from equipment manufacturers and vendors who are keen to enter into the lucrative deals that are likely to emerge once China announces its 3G guidelines.

Central to the lobbying is the ongoing debate in China on the standard to be adopted for providing 3G services. There are three options: the European standard WCDMA, the American standard CDMA2000 and the home-grown Chinese 3G standard TD-SCDMA.

Many in China have attributed the delays in announcing 3G licences to the determination of the Chinese government to give the TD-SCDMA standard time to mature. This is because, unlike TDSCDMA, WCDMA and CDMA2000 have already been deployed and have had time to mature and iron out some flaws. Though the formation of the TD-SCDMA Alliance represents the Chinese government's backing of the project, the technology still faces developmental delays.

Also, given that many of the seconDgeneration networks of mobile operators were built by foreign vendors, these operators might opt for the same foreign vendors to provide network upgradations for their networks. This has prompted aggressive lobbying from different interest groups.

Many options are being considered by the Chinese government, which is working with multiple objectives. As part of its WTO obligations, by 2007, China will reportedly allow 49 per cent of foreign ownership in service networks nationwide. By 2008, the government is committed to have 3G services up and running. It also needs to ensure that the operation of such services is financially viable and serves the needs of the people. All this in an environment where technological changes are constantly taking place.

Keeping these considerations in mind, industry analysts predict a restructuring of the Chinese telecom sector. According to news reports, it is expected that three licences will be given out for 3G services. These will be likely distributed among four national operators –­ China Mobile, China Telecom, China Unicom and China Netcom. It is believed that the two smaller operators will be merged with the larger ones.

One of the challenges will be to restructure the four national operators if there are only three licences. Some reports indicate that the government may split up China Unicom, which provides GSM, CDMA and fixed line services. Reports also indicate that the three 3G licences may be different: one for WCDMA, one for CDMA2000 and one for TD-SCDMA.

As of now, these are all possible scenarios. The market is waiting to see how things will play out. Whatever the case may be, it will be important to take a longterm view on such services.

Other changes will also have to be made to ensure that the best possible use can be made of the converged environment once 3G services are permitted. For example, adequate and interesting content that meets with government monitoring, will need to be created to ensure demand for such services.