China Mobile Telecom Market Analysis report

1
China Mobile Telecom Market Analysis
report (Industry Overview Part)
Sensky Telecom Consulting for SK Telecom (China)
2005.10
2
Contents
Country Overview Communication Industry
Policy Current status of Communication Industry
Communication industry overview Operators
overview Fixed network industry
situation Internet industry situation Mobile
industry situation Analysis on marketing sales
of mobile communication CMCC marketing
sales analysis CUCC marketing sales
analysis Comparison of marketing sales
between CMCC CUCC
3
Country overview-Chinas position in the world
Population of China 1.304 billion GDP 1.6493
trillion US dollars
Population of Japan 128 million GDP 4.6234
trillion US dollars
Population of US 296 million GDP 11.6675
trillion US dollars
Population of India 1.104 billion GDP 0.6919
trillion US dollars
Source National Bureau of Statistics of China
2005
4
Country overview-PEST analysis
Politics
Society
Economy
Technology

• The largest developing country in the world
• A country with centralized system, currently
  enjoying a steady society. The policies on
  foreign investments are determined by the State
  Council
• The opening-up policies are of great advantage to
  foreign investments

• There are 1.3 billion people on the Chinese
  mainland
• In the multi-nationality country, there are 56
  nationalities, with Han population accounting for
  over 91
• 10 people have religious faith. There are five
  official religious bases

• RD spending accounts for 1.35 among GDP
• There are 900 thousand scientists and engineers
  committing to RD
• There are 820 thousand graduates and 13.335
  million undergraduates in colleges and
  universities

• GDP has maintained an annual growth rate of 8
  for successive 20 years.
• Huge investment space in China for FIEs
• The residents enjoy growing consumption capacity

Main characteristics

• Steady politics, rapidly growing economy and huge
  potential for foreign investments
• Increasingly larger market space and stronger
  consumption capacity of residents
• The information industry enjoys a rosy future due
  to the supports from national policies
• Low overall technical level. Various foreign
  patent technologies should be introduced

Conclusions
5
Country overview-politics overview

• As the largest developing country in the world,
  China carries out socialist system.
• The system of people's congresses is the
  fundamental political system for China.
• National Peoples Congress (NPC) is the supreme
  state power organ in China, owing legislative
  power, power of appointment and removal, power to
  make decisions and supervisory power.
• The State Council, i.e. central people's
  government, is the executive organ of
  highest-level state power organ. It is also the
  supreme state administrative organ.

6
Overview of Chinas economy

• Currently, China has gradually formed the
  economic circle focusing on Beijing, Tianjin and
  Tangshan, the Yangtze Delta economic circle led
  by Shanghai and the Pearl Delta economic delta
  centering on Shenzhen and Guangzhou. The three
  economic circles account for over 60 of Chinas
  GDP.
• China witnesses the imbalance among regional
  economic developments. The GDP in East China and
  West China respectively achieve 53 and 17 of
  the total.

• GDP enjoys a rapid growth. In 2004, Chinas GDP
  achieved RMB13.6515 billion yuan. Among that,
  agriculture sector, industrial sector and service
  sector respectively contributed RMB2.0744 billion
  yuan, 7.2387 billion yuan and 4.3384 billion
  yuan.
• The population has a large base. The GDP per
  capita only achieves 1257 US dollars.

Source National Bureau of Statistics of China
2005
7
Main economic indicators

• In 2004, the total value of Chinas imports and
  exports achieved a growth rate of 35.7. Among
  that, exports and imports respectively increased
  by 35.4 and 36.0.
• Chinas main financial indicators are much lower
  than international warning line. This can
  facilitate the foreign exchange transactors to
  have more confidence in RMB value, thus achieving
  steady RMB exchange rate.

Source National Bureau of Statistics of China
2005
8
Society overview

• With an area of about 9.6 million square
  kilometers, Peoples Republic of China has two
  special administrative regions, four
  municipalities, 23 provinces and five autonomous
  regions.
• In 2005, Chinas population achieved 1.304
  billion, with urban population and rural
  population respectively accounting for 41.7 and
  58.3.
• There are 56 nationalities in China. Among that
  Han population accounts for 91.6. The rest 55
  are called minorities.
• Five official religious bases consist of
  Buddhism, Islamism, Taoism, Catholicism and
  Protestantism. There are over 100 million
  religious believers.

Source National Bureau of Statistics of China
2005
9
Overview of each province in China
Population unit 10,000 persons
GDP unit RMB Yuan
Harbin
Xinjiang Uygur nationality population 8.9768 million

• Inner Mongolia Mongolia nationality population
  4.0292 million

Changchun
Urumchi
Shenyang

• Ningxia Hui nationality population 1.9 million

Beijing
Hohehot
Dalian
Tianjin
Datong
Yinchuan
Yantai
Tsingdao
Shijiazhuang
Lanzhou
Xining
Jinan
Nantong
Taiyuan
Wuxi
Xian
Lhasa
Zhengzhou
Nanjing
Suzhou
Shanghai
Chengdu
Hefei
Wuhan
Chongqing
Ningbo
Hangzhou
Nanchang
Guiyang
Changsha
Wenzhou
Fuzhou
Kuming
Tibet Tibetan nationality population 4.0292
million
Nanning
Xiamen
Guangzhou
Shantou
Zhuhai
Hongkong
Haikou

• Guangxi Zhuang nationality population 15 million

• The red points refer to the most developed cities
  in terms of society, economy and culture in China
• The red points refer to the most developed cities
  in terms of society, economy and culture in each
  province

Source National Bureau of Statistics of China
10
Current status and trends of consumers financial
structure

• Chinas consumers will maintain a sustained
  growth of consumption in the future
• With increasing consumption capacity, it is
  predictable that China will see an increasingly
  larger consumer market.

RMB Yuan
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
1995
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source National Bureau of Statistics of China
11
Chinas investment environment

• In 2004, China used a FDI of 60.6 billion US
  dollars, up 13.3 year on year Since China is
  still in high-speed growth stage, it is predicted
  that China will maintain the preferential
  policies on foreign investments and attract more
  foreign investors to inject investments in China.
• After the entry into WTO, China will accelerate
  the opening-up of the market for foreign
  investors in terms of depth and scope.

Network Service
Network Service
LOW
Big change
Big change
Bank
Bank
Chemical
Chemical
Retail
Retail
Insurance
Insurance
Automobile
Automobile
Agriculture
Agriculture
Mid
Mid
Protection after entered WTO
Energy
Small change
Energy
Small change
Stock
Stock
sources
sources
Medicine
Medicine
Consumable
Consumable
High
Telecommunication
Telecommunication
Electronic
Electronic
less change
less change
Mid
High
Low
Mid
High
Low
Protection before entered WTO
Source National Bureau of Statistics of China
2005
12
The direct investment of Japan and South Korea in
China
South Korea Japan
Investment region Centering on Northeast China and Bohai Rim A lot of Chinese Korean residents live in these areas near South Korea. They have the same language and customs as South Korea Shandong and Liaoning have the most South-Korea-invested enterprises in China In early 1990s, Japan mainly injected investments in South China Economic Special Zones near Hongkong and gradually transferred the investments to coastal cities in Northeast China and North China In late 1990s, China began to implement the policies encouraging foreign investors to invest in Central China and West China. Then Japan began to lay emphasis on the investments in Central China and West China
Investment industry Mainly focusing on manufacturing industry By comparison, the invested enterprises are labor-intensive ones Mainly focusing on manufacturing industry By comparison, the invested enterprises are capital-intensive ones
Investment structure Most investors adopt wholly-own or shareholding means to ensure the foreign investors absolute control over enterprise operation In the early days of reform and opening-up policy, Japan failed to get a better understanding of Chinas realities, focusing on joint ventures. Since late 1990s, the solely foreign-owned enterprises played a leading role among foreign-invested enterprises newly built in China. The joint ventures with early entry into China also began to become solely foreign-owned enterprises by expanding investments and shares.
Investment size Centering on small and medium-sized investments The large projects in China mainly focus on the several large transnational enterprises like Samsung, LG and Hyundai Large size of investment projects
Investment income The sales profit rate and asset net profit rate of the South-Korea-invested enterprises in China respectively achieve about ½ of the average level of foreign-invested enterprises The Japan-invested enterprises in China enjoy a higher productivity and asset net profit rate than the average level of foreign-invested enterprises
Investment trend Increasingly larger average investment in single projects More centralized investment regions More large enterprises The investment size sees an increasingly growth The investments focus on the manufacturing industry and become diversified. The investment in service sector will achieve an increasingly growing share In terms of investment means, the mergers acquisitions will be adopted on the basis of wholly-owned shareholding.
13
Contents
Country Overview Communication Industry
Policy Current status of Communication Industry
Communication industry overview Operators
overview Fixed network industry
situation Internet industry situation Mobile
industry situation Analysis on marketing sales
of mobile communication CMCC marketing
sales analysis CUCC marketing sales
analysis Comparison of marketing sales
between CMCC CUCC
14
History of policy management
November 1949 The Ministry of Post Telecommunication was established, consisting of post bureau and telecommunication bureau. The two bureaus respectively founded six regional bureaus for postal and telecommunication services.
July 1950 The joint operation of post telecommunication was carried out around China except for provincial capitals.
May 1955 Large-region post telecommunication management bureau system was cancelled. The three-level management of the Ministry of Post Telecommunication, provincial post telecommunication management bureaus and municipal and county-level post telecommunication bureaus was implemented.
July 1958 Provincial post telecommunication management bureaus and municipal and county-level post telecommunication bureaus became the departments of the governments at various levels
January 1962 Resumed the dual system led by the ministry and provincial authority with emphasis on central government
January 1970 Cancelled the Ministry of Post Telecommunication. The post services and telecommunication services were carried out respectively by the Ministry of Communications and army
May 1973 The Ministry of Post Telecommunication was resumed. The post and the communication were united
July 1979 Resumed the dual system led by the ministry and provincial authority with emphasis on central government
March 1998 The Ministry of Post Telecommunication took charge of institution management, along with State Radio Regulation Committee (SRRC) for radio management and the price management department under State Development Planning Commission (SDPC) for pricing management.
March 1998 According to the State Council institution reform solutions passed by NPC, the Ministry of Post Telecommunication and the Ministry of Electronics were cancelled to constitute the Ministry of Information Industry (MII), implementing the system of government functions separated from business operation. In addition, the functions of SRRC and State Council IT Application Leader Group and the governmental functions of broadcasting TV network and information management regarding State Administration of Radio, Film and TV (SARFT) were transferred to MII. In the meantime, State Post Administration was established directly under MII.
April 2000 After the separation of post services and telecommunication services and telecom restructuring, the post telecommunication bureaus in each province (autonomous region and municipality) achieved the system of government functions separated from business operation and established communication management bureaus, which executed supervision over regional telecom industries, directly under MII and provincial authority.
September 2005 New Telecom Law was submitted to NPC
15
Current telecom management systems in China

• Non-governmental management organizations
• China National Consumers' Association was
  established in December 1984
• National Telecom User Committee was established
  on September 16, 1999
• On May 23, 2001, China Post Telecommunication
  Enterprise Management Association was renamed as
  China Communication Enterprise Association.

• Trend of new Telecom Law
• Establishing independent telecom monitoring
  institution

• As the telecom regulatory department of China,
  MII monitors and manages Chinas telecom
  industry other governmental departments will
  divide their work on the basis of duties,
  implementing corresponding management over
  telecom industry within their duties.
• Directly led by MII, the telecom management
  bureaus in each province, autonomous region and
  municipality, in accordance with Telecom
  Regulations, carry out management over the
  telecom industry in local administrative regions.

16
Foreign operators investments in Chinas telecom
market
Time Foreign operator Investment in Chinas telecom market
October 2000 Vodafone Acquired 3.3 stock of China Mobile with 2 billion US dollars
March 2002 ATT Established a joint venture in China, Shanghai Xintian Communication Co., Ltd
July 2002 SK Signed a memorandum of understanding with China Unicom, with both parities set to establish a joint venture
November 2003 NTT DoCoMo Established Beijing Research Center
February 2004 SK Established a joint venture with China Unicom China UNISK Beijing Information Technology Co., Ltd
September 2004 British Telecom Cooperated with China Netcom to enter the mainland market
November 2004 France Telecom Established Beijing RD Center
June 2005 TELEFONICA Acquired 3 stock of China Netcom with 240 million US dollars
17
Vodafone in the Chinese market
Establish strategy alliance with CMCC, cooperate
in the fields of new technique, equipment and
terminal
2001/2002Use 35 millions US Purchase 9.9 share
of Aspire
2001/2002Use 800millions US Purchase 3.27
share of CMCC
2001/11Establish Subsidiary company in HK.
Establish agent in China
2001/02Sign strategy agreement with CMCC
Initial stage Establish strategy cooperation
Establish agent in China
Deepened stage Penetrate in the value chain
Capital operation stage Purchase stock

• Vodafone will inject more investments in China
  during 3G era.

18
The Frequency Layout in China

• China 3G frequency allocation solution is
  stipulated in Notice about 3G Public Mobile
  Communication System Frequency Planning (XBW
  2002 No. 479) of Radio Management
  Administration under MII
• Among that, reserve TD-SCDMA-specific frequency
  for the development of national independent IPRs

19
Inter-network connection
June 1995 The former Ministry of Post and Telecommunication issued Specification of China Unicom GSM Network and Sharing Communication Backbone Network Interconnection Relay Method and Gateway Switch Equipment, marking the first step of the regulations on the connection of Chinas telecom industry.
July 1996 The former Ministry of Post and Telecommunication issued Temporary Regulations on Connection of Private Network and Public Network. It is the first time for the former Ministry of Post and Telecommunication to pose all-round and detailed requirements on networking connection principles (exchange point, technical specification, relay line and networking connection charge), networking examination procedures, networking protocols and networking management.
July 1999 MII issued Technical Specification of Interconnection of New DDD Network and Other Telephone Network, mainly including interconnection principles, POI and switch position on both sides, dialing way, routing, signal requirements, billing requirements, synchronization requirements and transfer requirements.
October 1999 MII issued Telecom Inter-Network Call Billing Measures, posing detailed regulations on the billing of local telephone network, DDD telephone network, international communication network and mobile communication network.
October 1999 MII issued Technical Specification of Interconnection of Land Cell Mobile Communication Network and Other Communication Network, posing the technical requirements on the interconnection between mobile communication network and fixed local telephone network, domestic long-distance network or international gateway network, including POI and switch position on both sides, dialing way, routing, signal requirements, billing requirements, synchronization requirements and transfer quality requirement.
July 2000 China Mobile Communication Corporation and China Unicom Co., Ltd signed inter-network connection and settlement agreement in Beijing.
September 2000 The State Council issued the People's Republic of China Telecommunication Regulations, including relevant rules for telecom network interconnection
September 2005 New Telecom Law was submitted to NPC, which will pose more detailed requirements on inter-network connection.

• Trend of new Telecom Law
• The monopoly of user access will disappear
• A fine of RMB5 million Yuan for interconnection
  breakdown

20
Structure of main tariffs regarding China Telecom

• Fixed telephone call tariffs
• Local telephone call tariff
• Three fees installation fee, basic monthly rent
  fee and call fee.
• Monthly payment system installation fee and
  monthly fixed-value fee.
• Domestic long-distance call tariff
• Calculate the fees according to the distance and
  traffic (call duration)
• International long-distance call tariff
• Collection charge of international call service
• Total accounting rate 2 US dollars
• Division rate 50, 50
• Settlement rate 1 US dollar

• IP telephone call tariffs
• Being value-added service. The tariff carries out
  market adjustment price
• IP call tariff
• Calculate the charge according to traffic
• Calculate the charge on the basis of minutes
• Since IP call serves as prepayment service,
  currently, the large operators face intense
  competition, which can be seen from the sharp
  discounts of IP cards.

• Mobile phone call tariffs
• Mobile phone call charge collection ways
• Calling party one-way charge and calling called
  parties two-way charge
• Monthly payment system (after-service payment)
  and prepayment
• Structure of tariffs regarding mobile phone calls
  in China
• Structure
• Network access charge (cancelled on July 1, 2001)
• Basic monthly rent charge
• Call charge
• Roaming charge

• Internet service tariffs
• Service types
• Dialing access
• Private-line access
• Enterprise email
• VPN service
• Internet service is value-added service. In
  accordance with the regulations of Telecom
  Regulations, the tariffs should be formulated
  mainly on the basis of market adjustment. The
  government should strengthen supervisions to
  prevent illegal competition.
• Charge calculation of normal dialing service
  traffic calculation system and monthly payment
  system
• Private-line access service charge collection
  based on bandwidth

• Inter-network connection tariffs and network
  element rent tariffs
• Inter-network connection tariffs
• Network element rent tariffs
• Determine tariffs based on costs

• Trend of new Telecom Law the tariff moves
  towards market adjustment

21
Contents
Country Overview Communication Industry
Policy Current status of Communication Industry
Communication industry overview Operators
overview Fixed network industry
situation Internet industry situation Mobile
industry situation Analysis on marketing sales
of mobile communication CMCC marketing
sales analysis CUCC marketing sales
analysis Comparison of marketing sales
between CMCC CUCC
22
Overview of Chinas telecom industry

• The telecom industry always maintains a rapid
  growth. Its business revenue maintained a
  two-digit growth rate, higher than the growth
  rate of GDP.
• Since 2000, each industry in China has gained an
  average profit rate of less than 10. The
  operation benefit of the telecom industry is
  higher than the average level of various
  industries of national economy. Nevertheless, due
  to the intensified competition, the profit rate
  sees a decline year by year.
• Mobile phones have accelerated the replacement of
  fixed telephones and the dispersion of fixed
  telephone call traffic.

Source MII and data about operators in 2005
23
Structure of communication service revenue

• The revenue from fixed local and mobile
  communication services still remain the majority.
  The revenue is mainly from voice services.
  However, from the perspective of change trend,
  fixed telephone call revenue suffered a sustained
  decline of share due to the heterogeneous
  competition and etc. Mobile communication becomes
  the main revenue source.
• Data service enjoys a rapid growth. But it is
  currently in market cultivation stage, having no
  grate influences on telecom service structure.
• Since telecom tariff decrease in 2001,
  long-distance telephone call tariff also
  witnessed a decline, acquiring a smaller share.
  Nevertheless, as long-distance telephone call
  becomes IP-oriented, the service can see a
  recovery of revenue with its low price
  advantages.
• Other telecom services such wireless paging and
  telegraph services suffer a decrease of revenue.

24
Regional differences of communication levels

• The communication developments among East China,
  Central China and West China, especially between
  urban areas and rural areas, show obvious
  imbalance.
• The fixed telephone penetration rate and mobile
  phone penetration rate in West China are less
  than 50 of those in East China. The fixed
  telephone penetration rate and mobile phone
  penetration rate in Central China also suffer a
  wide gap with those in East China.
• In West China and Central China as well as rural
  areas, due to the backward economic level and
  small migration of population, the people pose
  few demands on communication products, resulting
  in low per capita telecom consumption level.

Source MII and data about operators in 2005
25
Market share

• Since urban areas and East China enjoy a high
  economic level and fast population migration, the
  people pose high demands on communication and
  information consumption, directly resulting in
  increasingly greater differences of telecom
  consumptions in each area.

• Analysis of current status and market share
  market change rules and market shares of major
  operators
• China Mobile achieves a highest market share. The
  Chinese residents show an increasingly higher
  recognition level of mobile communication.

Source MII and data about operators in 2005
26
Contents
Country Overview Communication Industry
Policy Current status of Communication Industry
Communication industry overview Operators
overview Fixed network industry
situation Internet industry situation Mobile
industry situation Analysis on marketing sales
of mobile communication CMCC marketing
sales analysis CUCC marketing sales
analysis Comparison of marketing sales
between CMCC CUCC
27
Network deployment of each operator
Main services Network distribution
China Telecom Maintain a sustained and steady growth in terms of broadband and Little Smart services. Second backbone network (CN2) a new IP carrying network covering China will be deployed in 2005. IPTV (network TV) the technology tests have been carried out for more than one year in Shanghai and Guangdong.
China Mobile Three major brand servicesGoTone, M-zone and Shenzhouxing. -
China Netcom Fixed-line phone service, broadband service and other Internet-related services. The service regions North China include Beijing, Tianjin, Henan, Hebei, Shandong and Liaoning. The service regions in South China include Shanghai and Guangdong.
China Unicom Step up efforts on the development of value-added services to bring into full play the advantages of full-service operation of China Unicom. After the network quality is improved, CDMA1X value-added service will be promoted with greater efforts. Has covered all the cities and counties (except for individual counties in Tibet), highways and other major main lines, provincial tourism sites, coastal regions, developed towns and rural areas in China.
China Satcom Satellite broadband services like long-distance learning with integration of sky and ground, broadband access and video conference develop satellite mobile communication service, try hard to score achievements among mobile communication system deployment. In 2004, the NGN of China Satcom has been connected with nearly 150 cities in China. The digital cluster project also formally kicked off.
China Railcom Fixed-line phone service and broadband service Deployed the second largest transfer network in China, only inferior to China Telecom.
28
Analysis of strength and weakness regarding each
operator
  Strength Weakness
China Telecom Own the largest fixed-line phone network and favorable cash flows. Lack of mobile license. The traditional fixed network services fail to see a robust growth.
China Mobile Own the largest mobile phone network, with strong profiting capability and good cash flows The intense market competition and the adjustment of new entrants will result in slower growth.
China Unicom Own a large mobile phone network. The strong competitiveness results from imbalanced regulatory advantages and differential services. The unique CDMA 1X network can be upgraded to 3G immediately. The concurrent networks face operation risks greater pressure on capital expense and cash flows face the challenges from new entrants of mobile services.
China Netcom Own a large fixed-line network, good cash flows and strong capability of data services. Lack of mobile license the traditional fixed network services fail to see a robust growth the integration of service architecture still needs a long time.
China Railcom Enjoy some preferential policies and supports from the Ministry of Railway (MOR). Public network operation is still in infancy, small network size, weak operation capability dual management system should be rationalized.
China Satcom Dominate the satellite communication field, with strong profiting capability. Single service, small market capacity and limited development space.
29
Contents
Country Overview Communication Industry
Policy Current status of Communication Industry
Communication industry overview Operators
overview Fixed network industry
situation Internet industry situation Mobile
industry situation Analysis on marketing sales
of mobile communication CMCC marketing
sales analysis CUCC marketing sales
analysis Comparison of marketing sales
between CMCC CUCC
30
Current status of fixed network industry

• Since its release, PHS service has enjoyed a
  rapid growth. The service acquired an
  increasingly larger proportion among new users,
  becoming the key driving force factor for the
  revenue growth of traditional fixed network
  operators.
• PHS can meet the requirements from low- and
  medium-end user bases. In late 2004, PHS had a
  higher proportion than normal fixed-line phone
  among new users.
• Since 2002, Chinas broadband market has been
  rapid developed, with an increasingly larger user
  base. ADSL played a key role for the growth of
  broadband user base. In the first half of 2005,
  Chinas broadband user base achieved 31.651
  million.
• Long-distance phone call is IP-oriented. Low
  tariffs can directly result in long-distance
  phone call IP-orientation.

Source MII and data about operators in 2005
31
WLAN

• Currently, Chinas users cannot get a better
  understanding of WLAN, which resulted in the slow
  development of the total market
• SME and household WLAN market enjoys an increase
  of share. China adopts the self-developed WLAN
  security standard WAPI.

• The mature product technologies under 802.11b
  standards and multi-vendor supply environment are
  perfect, constituting the mainstream of China
  WLAN. 802.11g provides higher bandwidth for the
  users. The application will gradually achieve a
  higher proportion. The incompatibility of
  802.11a will result in less application of this
  standard.

Market share of WLAN protocol
Forecast for WLAN market
Source MII and data about operators in 2005
32
Contents
Country Overview Communication Industry
Policy Current status of Communication Industry
Communication industry overview Operators
overview Fixed network industry
situation Internet industry situation Mobile
industry situation Analysis on marketing sales
of mobile communication CMCC marketing
sales analysis CUCC marketing sales
analysis Comparison of marketing sales
between CMCC CUCC
33
Overview of Internet industry development

• As of June 2005, the Internet-surfing users
  amount to 103 million
• In 2004, China formed an Internet information
  service market with an annual size of RMB20
  billion yuan
• Internet information service has transferred
  itself from the reliance on past single online
  advertisement revenue to diversified operation
  and revenue generation.

• The users with various Internet-surfing means are
  repeatedly calculated. Therefore, the sum of
  users with various Internet-surfing means is
  greater than the total Internet-surfers
• Private-line Internet-surfers refer to the users
  having access to LAN through Ethernet and then
  having access to Internet through private line
• Broadband Internet-surfers refer to the users
  surfing the Internet with xDSL, Cable Modem and
  etc.

Private-line Internet-surfer base Dialing Internet-surfer base ISDN Internet-surfer base Broadband Internet-surfer base
29.7 million 49.5 million 5.5 million 53 million
Internet-surfer base with various surfing ways (
June 2005 )
34
Contents
Country Overview Communication Industry
Policy Current status of Communication Industry
Communication industry overview Operators
overview Fixed network industry
situation Internet industry situation Mobile
industry situation Analysis on marketing sales
of mobile communication CMCC marketing
sales analysis CUCC marketing sales
analysis Comparison of marketing sales
between CMCC CUCC
35
Total size of Chinas mobile communication market

• Over the recent years, Chinas mobile
  communication service saw a robust growth, owning
  the largest user base in the world. As of June
  2005, the mobile phone user base in China
  amounted to 363 million.
• Over the recent years, the mobile users always
  enjoy a higher growth rate than that of
  fixed-line phone users. In October 2003, the
  mobile user base exceeded the fixed-line phone
  user base for the first time.
• The revenue from mobile services saw a ceaseless
  increase of proportion. In late 2003, this
  proportion was greater than 50. The revenue from
  mobile communication services acquired a greater
  proportion.

The mobile user base was greater than fixed-line
phone user base
The revenue from mobile services acquired a share
of over 50
Source MII and data about operators in 2005
36
China Mobile Market competitive status

• at present, there only are two operators CMCC and
  CUCC in China Mobile market.
• some important factors influence the competitive
  status in China mobile market ,include contesting
  the users by PHS, recombining the operators, the
  granting of 3G license and the entrance of
  foreign operators.

current influence
Operatorss split and restructure
Distribution by PHS
CMCC and CUCC are the only two operator in the
market
The entrance of foreign operators
CTC and CNC will obtain 3G Licence
Latency influence
37
CMCC and CUCC-development background and overview

• China Mobile and China Unicom were established
  under different backgrounds and policy
  environments. China Mobile was split up from
  China Telecom in 1999. China Unicom was a product
  arising from competition attempts in Chinas
  communication industry.

Characteristics of operators China Mobile China Unicom
Service Mobile service Full service
Mobile technology standard Focus on GSM, with due consideration to GPRS Focus on both GSM and CDMA
Operation characteristics Renowned operator New market entrant
Network size Owning the largest GSM user base in the world Owning the Second largest CDMA user base in the world
Market share Over 60 Less than 40
Government regulation Relatively strict Adopt imbalanced regulation policy on it, with a series of preferential conditions, including unique full-service operator the tariffs can be adjusted within the range of 10-20 of the national standard scope GSM and CDMA service can be implemented at the same time.
Tariff policy No preferential policies Having preferential policies
Operation experience Experienced Insufficient experience
Service brand High recognition level Relatively low recognition level
38
CMCC and CUCC-network operation status

• Both China Mobile and China Unicom own GSM
  network. But China Mobiles GSM network enjoys
  better performance than China Unicoms GSM
  network.
• Since 2002, China Unicom has begun to operate
  CDMA network and laid emphasis on it. In
  addition, it upgraded CDMA network around China
  to CDMA 1X in late 2004.
• In an effort to promote the development of mobile
  data services, China Mobile deployed GPRS and
  even EDGE networks in some developed areas.

China Mobiles GSM network enjoys better
profiting capability than China Unicoms GSM
network.
China Unicoms CDMA network always suffers
losses. The less deployed GSM network is the main
profit source for China Unicom.
Source MII and data about operators in 2005
39
CMCC and CUCC-market performance (user base and
business revenue)

• On the basis of comparisons about the data of
  user base and main business revenue, we can see
  that China Unicom suffers weaker overall strength
  than China Mobile. China Unicom cannot compete
  against China Mobile in short time.

The ratio of China Mobiles user base to China
Unicoms user base is less than the ratio of
China Mobiles business revenue to China Unicoms
business revenue. This means than low-end users
take the majority among China Unicoms users.
40
CMCC and CUCC- market performance (ARPU value)

• Due to more low-end users, intensified tariff
  price wars and lower proportion of new services,
  the users of China Mobile and China Unicom saw a
  decline of ARPU. Both after-service payment users
  and prepayment users show this trend.
• Compared with China Unicom, China Mobile carried
  out a series of differential marketing activities
  for different brands, slowing the decline of ARPU
  value to some degree.
• Compared with China Unicom, China Mobile enjoys a
  higher ARPU, with the gap set to become wider. In
  some degree, compared with China Mobile, China
  Unicom suffers weaker profiting capability.

For China Unicom, its CDMA ARPU is grater that
that of GM, which results from the small CDMA
user base. With more general users among CDMA
user base, the gap will be narrower.
China Unicom invests a lot of cell phone
subsidies to promote CDMA service. With the
decline of cell phone subsidies, CDAM saw a
decrease of ARPU value.
China Mobiles contract signing users are the
high-end users.
Source MII and data about operators in 2005
41
CMCC and CUCC- market performance (MOU value)

• China Mobiles traffic maintains a steady growth.
  Although the MOU value of prepayment users saw a
  decline in 2002, China Mobile introduced a series
  of activities for low- and medium-end users like
  monthly call minute offer, family love number
  setup, Shenzhou night call and etc, resulting in
  the rise of MOU value. The contract signing user
  base of China Mobile always maintains a growth.
• The CDMA users of China Unicom saw a decline of
  traffic. This is because that in the beginning,
  China Unicom positioned CDMA towards high-end
  market and attracted many low- and medium-end
  users under the unfavorable operation. In
  addition, the decrease of CDMA cell phone
  subsidies is the other reason.
• Through the comparisons, China Mobiles users
  have more traffic than the users of China
  Unicom. The gap will be wider.

Source MII and data about operators in 2005
42
CMCC and CUCC-VAS (service categorization)

• Under the total brand of MonterNet, China Mobile
  introduced the mobile value-added services like
  MMS, WAP, STK-OTA, JAVA downloading and etc.
• Under the total brand of U-Max, China Unicom
  introduced the mobile value-added services like
  color e (MMS), Unicom Message (SMS), STK-OTA,
  BREW/JAVA-0TA, Interactive Vision (WAP) and etc.

Operator China Mobile China Unicom
Brand MonterNet U-Max
Sign
SMS SMS Unicom Message
MMS MMS Color e
WAP WAP Portal Uni Interactive Vision
JAVA/BREW JAVA BREW/UniJa
IVR Voice Magazine and Mobile Salon Multimedia Street
CRBT CRBT CRBT
Stream media - U-Web
Mobile positioning - Positioning Star
43
CMCC and CUCC-VAS (development status)

• Despite GSM and CDMA networks, China Unicom steps
  up efforts on new services for CDMA. Since 2003,
  China Unicom introduced CDMA1X value-added
  service brand (U-Max) and developed a series of
  sub-brand services. As of June 2005, CDMA1X data
  users accounted for a share of nearly 40 among
  the total CDMA user base.
• Currently, China Unicom is introducing U-Web and
  stream media services with greater efforts.

• The value-added service of China Mobile maintains
  a steady growth, becoming the major driving force
  for the development of company and operation
  revenue growth.
• Currently, China Mobile is introducing new
  services to achieve the steady and rapid growth
  of value-added service revenue. Among that, WAP
  and CRBT services will play a key role.

• CRBT service is free of terminal restrictions. In
  addition, it can meet the requirements of users
  with affordable prices, therefore, it enjoyed a
  rapid growth since its release.
• WAP service suffers terminal restrictions. Since
  2004, China Mobile adopted a series of cell phone
  customization activities to promote the
  development of data services, resulting in the
  rapid growth of WAP service.

Source MII and data about operators in 2005
44
CMCC and CUCC-development strategies and
investment emphases in 2005
China Mobile China Unicom
Development strategies in 2005 Maintain and secure the leading position in the mobile market Sharpen the core competitiveness lay emphasis on market control and improve the management level Establish rapid-response network OM system for customers Strengthen excellent networks and implement e-village project The management becomes more intensive Strengthen sustained development and introduce go-abroad strategies in the long run Score effective developments with market-orientation Control large-size investments and raise investment benefits Strengthen overall management over investment, deployment and OM and improve the implementation capability Transform the development mode from amount-orientation to scale-merit-orientation
Investment emphases in 2005 New service developmentnew services with small data capacity and high added value, such as WAP, MMS, CRBT, IVR and etc Strengthen service RD and market cultivation technology progress, 3G-related infrastructure and OM preparation Three customer brands GoTone, M-Zone and Shenzhouxing Lay emphasis on rural market and low-end consumer market Control investment size and raise investment benefits to carry out investment implementation under secured investment benefits and achieve the transformation from amount-orientation to scale-merit-orientation Lay emphasis on network optimization and network improvement since the completion of C network deployment. Arrange G network investment implementation within limits, improve operation quality and raise investment benefits New technology follow-up and RD invest in establishing closer industry value chain
45
CMCC and CUCC-overall analysis

• China Mobile

• China Unicom

China Mobile China Unicom
Network GSM network GPRS network GSM network CDMA network
Strength Own the largest mobile phone network, with strong profiting capability and good cash flows Own a large mobile phone network. The strong competitiveness results from imbalanced regulatory advantages. The CDMA 1X network can be upgraded to 3G immediately.
Weakness The intense market competition and the adjustment of new entrants will result in slower growth. The concurrent networks face operation risks greater pressure on capital expense and cash flows face the challenges from new entrants of mobile services.
User base

• China Mobile achieves a market share of over 60,
  while China Unicom gains a share of less than 40

Main business revenue

• The main business revenue of China Mobile is
  2.5-3.5 times as that of China Unicom

ARPU value and MOU value

• Compared with China Mobile, China Unicom suffers
  weaker profiting capability and the gap is wider.

Network status

• China Mobile enjoys better GSM network
  performance than China Unicom. The CDMA service
  of China Unicom always suffers losses, with
  troubles arising from two concurrent networks

46
Current status of 3G in China
                     Has invested RMB1 billion yuan to deploy a core network around China for 3G license. For Little Smart network and 3G network of the two major operators, there are great differences in terms of machine room equipment, power supply equipment, station address selection and transfer system. Little Smart network cannot have a high reusable rate. After 3G license issuance, China Telecom and China Netcom will slow the capacity expansion of Little Smart to finance the huge funds needed for 3G deployment. For Little Smart network and 3G network of the two major operators, there are great differences in terms of machine room equipment, power supply equipment, station address selection and transfer system. Little Smart network cannot have a high reusable rate. After 3G license issuance, China Telecom and China Netcom will slow the capacity expansion of Little Smart to finance the huge funds needed for 3G deployment.
                     Tian Suning and Zhang Chunjiang said that China Netcom will definitely get 3G license. China Netcom has purchased the stocks of Pacific Century CyberWorks, which shows that Li Jiacheng intends to support China Netcom in terms of 3G. For Little Smart network and 3G network of the two major operators, there are great differences in terms of machine room equipment, power supply equipment, station address selection and transfer system. Little Smart network cannot have a high reusable rate. After 3G license issuance, China Telecom and China Netcom will slow the capacity expansion of Little Smart to finance the huge funds needed for 3G deployment. For Little Smart network and 3G network of the two major operators, there are great differences in terms of machine room equipment, power supply equipment, station address selection and transfer system. Little Smart network cannot have a high reusable rate. After 3G license issuance, China Telecom and China Netcom will slow the capacity expansion of Little Smart to finance the huge funds needed for 3G deployment.
                     Huge capital and wide customer resources lay a good foundation for China Mobiles 3G kick-off. China Mobile has deployed the largest soft switching network in the world. Moreover, since 2004, many provincial companies of China Mobile have actively carried out base station selections so as to ensure the rapid deployment of a 3G network. Wang Jianzhou currently, 3G mainstream technologies and industries have been mature. The issuance of 3G license on the Chinese mainland will be likely to result in industry changes. The group will face great opportunities and challenges. The group will bring into full play the current technology, network and resource advantages to make preparations for the deployment of 3G network. Huge capital and wide customer resources lay a good foundation for China Mobiles 3G kick-off. China Mobile has deployed the largest soft switching network in the world. Moreover, since 2004, many provincial companies of China Mobile have actively carried out base station selections so as to ensure the rapid deployment of a 3G network. Wang Jianzhou currently, 3G mainstream technologies and industries have been mature. The issuance of 3G license on the Chinese mainland will be likely to result in industry changes. The group will face great opportunities and challenges. The group will bring into full play the current technology, network and resource advantages to make preparations for the deployment of 3G network. Huge capital and wide customer resources lay a good foundation for China Mobiles 3G kick-off. China Mobile has deployed the largest soft switching network in the world. Moreover, since 2004, many provincial companies of China Mobile have actively carried out base station selections so as to ensure the rapid deployment of a 3G network. Wang Jianzhou currently, 3G mainstream technologies and industries have been mature. The issuance of 3G license on the Chinese mainland will be likely to result in industry changes. The group will face great opportunities and challenges. The group will bring into full play the current technology, network and resource advantages to make preparations for the deployment of 3G network.
                     In late 2004, China Unicom had upgraded CDMA network. Despite the title of 2.75G, the network has been actually able to operate 3G services. According to sources, through the current excellent network, China Unicom can achieve a seamless transfer to 3G in short time. In late 2004, China Unicom had upgraded CDMA network. Despite the title of 2.75G, the network has been actually able to operate 3G services. According to sources, through the current excellent network, China Unicom can achieve a seamless transfer to 3G in short time. In late 2004, China Unicom had upgraded CDMA network. Despite the title of 2.75G, the network has been actually able to operate 3G services. According to sources, through the current excellent network, China Unicom can achieve a seamless transfer to 3G in short time.
China Satcom is now carrying out 3G outfield tests. It intends to enter the mobile market, which can be seen from the huge investment in digital cluster. China Satcom is now carrying out 3G outfield tests. It intends to enter the mobile market, which can be seen from the huge investment in digital cluster. The officials with MII said that there are still chances for China Railcom and China Satcom.
                     Zhao Jibin, chairman of China Railcom, expressed his eager for 3G license on many occasions. Zhao Jibin, chairman of China Railcom, expressed his eager for 3G license on many occasions. The officials with MII said that there are still chances for China Railcom and China Satcom.
47
A series of uncertainties for operators 3G
license acquirement

• China Mobile, China Telecom and China Netcom
  respectively get one license to deploy and
  operate the network
• China Telecom and China Netcom respectively
  deploy nationwide 3G network, which possibly
  results in huge investment waste
• China Telecom and China Netcom are likely to rent
  the current 2G network of China Mobile and China
  Unicom to carry out roaming services.

• China Mobile and China Unicom respectively get
  independent 3G license. China Telecom and China
  Netcom get a combined license to jointly deploy
  3G network
• China Telecom and China Netcom need to resolve a
  series of troubles arising from joint network
  deployment, such as cost allotment,
  interconnection and etc.
• China Telecom and China Netcom still need to rent
  2G network of China Mobile or China Unicom to
  carry out roaming services.

1
2

• China Unicoms CDMA network and GSM network are
  respectively integrated into China Netcom and
  China Telecom
• China Unicom enjoys huge capital and owns GSM
  network. 3G upgrade can be achieved with large
  investments. China Netcom is relatively weak in
  terms of capital. The CDMA network license
  acquirement can help achieve 3G with a small
  amount of funds.

3
48
After 3G license issuance, Chinas telecom market
will enter full-service competition era
The services of fixed network operators suffered
a slowdown. China Unicom witnessed a negative
growth. China Mobile sharpened its overall
competitiveness, with each greater indicator
securing the leading position
China Telecom and China Netcom entered mobile
market with Little Smart, with the user base up
to 30 million in late 2003
With the advantages of transfer network, China
Telecom and China Netcom will rapidly deploy 3G
mobile network and seize group customers through
overall telecom service advantages and group
customer relationship advantages.
With network deployment and optimization and
advent of Olympics, each major operator will race
to carry out more applications of telecom
value-added services and 3G video so as to secure
the market.
2003
2004
2007
2002
2005
2006
2008
China Mobile and China Unicom dominated the
mobile market
The government will issue 3G license in 2006.
Three mainstream operators will compete against
one another in the mobile market (if China Unicom
can implement restructuring solutions before late
2005)
With the operators competition in mobile market
and foreign investment entry, the customer share
and revenue share will be changed , with the
competition evolved towards total services.
With successfully held Olympics, the telecom
operation mode characterized by multimedia and
broadband will be rapidly penetrated. Chinas
telecom market will be prosperous with thorough
competition.
Industry integration. The mainstream operators
mainly secure the market, considering and
implementing strategic transformation