China spends more on importing chips than oil

China spends a lot more on importing chips than oil.  According to iSuppli, China last year imported $192 billion in integrated chips and a mere $120 billion in oil.

This matters in China - and in the telecom sector in particular - because despite tipping all of that cash into semiconductor industry's pockets, domestic handset firms are well back in the queue for the Qualcomm and ARM chips that power top-range devices.

More than half of China Mobile’s recent TD-LTE handset tender went to devices using Qualcomm chips. Among Chinese firms, only Huawei's Hisilicon chip unit won a share.

A paper by State Council Research Office a month ago said 80% of China’s chips come from abroad, China Business News reports.  A touch sourly, the report notes that:

China in one year produces 1.18b handsets, 350m computers and 130m colour TVs - all no. 1 worldwide. But the high-end patent fees embedded in these reduces all of us to manual workers for the international vendors.

In truth China industry lacks the scale as well as the expertise of the big US, Korean and Taiwan chip players.

iSuppli senior semiconductor analyst Vincent Gu points out to China Business News that Taiwan fab TSMC has annual sales of $10 billion, greater than China's top four companies combined. TSMC and Intel are investing $10b each year, and China just $400-$500m.

In this thoughtful blog on the topic, Dieter Ernst, a senior fellow at the East-West Center, says the gap between China’s chip consumption and production grew from $5.7b in 1999 to $100.5b in 2011, aided in particular in the last few years by steepling imports of advanced wireless chips. He writes:

China remains way behind the technology frontier in both fabrication and design, reflected in a weak portfolio of essential semiconductor patents. China still has a long way to go before it can shape, or even co-shape, the industry’s technology trajectory.

One reason is that while China is deeply integrated into the global semiconductor production chain, “China’s leadership views such deep global integration primarily as a threat to its domestic innovation capacity, rather than an opportunity.”

Additionally, the sector is caught between by two disconnected drivers - the government’s indigenous innovation policy and the industry’s own real-world practice of global technology sourcing.

The result is “a fragmented innovation system that is ill-equipped” to respond to the challenges of the global value chain.

Shanghai free trade zone will also open up to telcos

So, the daring plan to let Facebook into the Shanghai free trade zone (reported here, here and here) may also mean the embrace of foreign telcos.

Hong Kong’s scmp.com reported Tuesday that the FTZ would allow access to previously-blocked websites such as Facebook, Twitter and YouTube.

The story adds that the FTZ, the first in mainland China, “would also welcome bids from foreign telecommunications companies for licences to provide internet services within the new special economic zone.”

Given the role of FTZ as a business zone, this surely means some attractive enterprise contracts with MNCs and local firms. The three domestic operators, China Telecom, China Mobile and China Unicom, have all accepted the arrival of foreign competition, the SCMP says.

The 29 sq km zone, located next to the Pudong business district and covering the airport and the Yangshan port, is intended to attract foreign investment and to trial some liberalised financial services. It is being hailed within China as akin to the establishment of special economic zones 30 years ago.

In that optimistic vein, we might see the FTZ, along with the opening of the MVNO market and the continuing talk of economic reform as signs of cracks in the wall around China telecoms.

This Reuters story on the campaign against monopoly abuses by economic reform outfit NDRC points out that:

The agency is also investigating the pricing practices of 60 local and foreign pharmaceutical firms. Autos, telecoms and banks might come next, regulators have suggested.

However, those with longish memories of Chinese telecoms may recall similar excitement accompanied AT&T’s joint venture with China Telecom and the Shanghai city government back in 2000. To quote People’s Daily back in the day:

Analysts said the deal will serve as a role model for foreign investors in the State-gripped market and other foreign firms are expected to follow the AT&T example when China enters the World Trade Organization.

That hasn’t happened. Shanghai Symphony is still the only foreign-invested telco JV in China, and a frustrating exercise for AT&T. 

China’s WTO promise to open up the telecom services sector has been a hollow one, but no surprise. Direct control over telecoms is a sine qua non of party rule, guaranteeing direct control over the net and influence over the entire digital economy. China ranks 173^rd out of 179 countries in the Reporters Without Borders Press Freedom Index and is on the NGO’s list of Enemies of the Internet.

None of this has changed. Rather, the current heavy internet crackdown tells us that, even if foreign operators are admitted to the FTZ, they will go no further.

Telecom innovation: China is not even in the race

This is what telecom innovation looks like.

A US startup, 2600hz Mobile, is ready to launch an MVNO with open access and APIs that will allow others to build apps to run on top of it. As the company blog says:

 ...we’re the first company to basically try to open-source cellular integration. We’re trying to encourage the hackers, the tinkerers, the enthusiasts out there in VoIP to get engaged in the next generation of networks - cellular. We’re trying to give you a way where you don’t have to spend $250,000 to just be able to play around with a test cell phone on your own little mobile network.

With this platform its customers can, for example, combine VoIP and cellular to offer a mobile/WiFi hybrid; create low-cost wireless and fixed VoIP bundles; or offer smart services that help users avoid roaming fees.

Today that's innovation. In five years it will be routine.

Here in China, all of that is impossible and will remain impossible. The idea of opening a  network to people without government sanction is a complete non-starter.

As it happens, China is right now trying to introduce an MVNO sector.

A genuinely competitive market would embrace the idea of a network as a giant apps platform. But that's not China. Instead, the new MVNO entrants will have the freedom to offer exactly the same services as the existing infrastructure owners.

For sure, those MVNOs will provide a touch of badly-needed extra competition. But even the most optimistic forecast doesn't expect them to grab more than 1% market share over the next three years.

That's assuming they're allowed to compete. From the limited information available, it looks like they will have to cope with a wholesale price as high as the lowest retail price.

The China Securities Journal reports that the licence shortlist will likely be finalised in October. Which means perhaps the first trials by year-end. We won't hold our breath.

As if to emphasise the air of unreality around China telecoms, a China Mobile honcho last week claimed that WeChat was more of a monopoly than the giant cellco. 

Li Zhengmao, a China Mobile vice-president, said that his company wasn’t a monopoly because it had a mere two-thirds of the market. Speaking at a conference, he said WeChat had much a bigger share of the audience in the room than China Mobile.

Peking University economist Zhang Weiying explained to Li that a monopoly is something which the government “allows some people to do, but doesn’t allow others to do."

At least there's no confusion about open access networks. They're off-limits to everyone.

4G contracts: China Mobile throws EU firms a bigger bone

Huawei and ZTE have once again won the biggest share of a major Chinese telecom tender, despite being undercut by Nokia Siemens.

In what is certain to be the largest telecom tender this year, China Mobile handed out 20 billion yuan ($3.27b) in contracts to build its TD-LTE network in 100 cities.

Nokia Siemens surprised the industry when it was revealed during the tender that it had bid the lowest price - the first time a foreign vendor had done so. Despite that, it won no more business than other foreign players, and much less than the two large local firms.

With what appears to be immaculate stage management, Huawei and ZTE emerged with 26% each of the total tender, while the three foreign vendors, Ericsson, Nokia Siemens and Alcatel Shanghai Bell, were allocated 11% apiece. Small Chinese players Datang, Potevio, New Postcom and Fiberhome picked up the remainder.

Chinese telecom news site C114 noted that the 67% share won by local firms was down slightly from their 70% share of China Mobile's trial network last year.

The market share number is more than academic. EU Trade Commissioner Karel De Gucht has warned he would push ahead with his subsidies case against Huawei and ZTE if European firms did not win a fair share of Chinese domestic contracts.

Chinese firms have a 25% share of the EU market, according to CICC telecom analyst Chen Haofei. The 33% of these contracts that have gone to European firms are probably enough to stave off De Gucht's attentions.

As well as the size - 207,000 base stations - this contract is strategically important as the first large-scale tender for the China Mobile's 4G network. The major winners are best-placed to pick up follow-up contracts as the network expands over the next decade or so.

From the shards of the shanzhai, the rise of China handsets

Good times for China’s handset sector: the latest is that four of the top five brands in Asia-Pacific markets are Chinese.

But the counterpoint to the emergence of players such as Huawei, Lenovo and Coolpad is the demise of the pirate, or shanzhai market.

The shanzhai era now looks like a classic transition period in an emerging economy. A tiny number of shanzhai players are growing into genuine brands. The vast majority are gone or fast disappearing.

A report by Sohu IT recently found that of an estimated 6,000 or so vendors at the market peak seven years ago, only a few hundred are left.

What’s most interesting is the reasons cited - such as declining price of mid-range phones, greater enforcement of copyright laws and changing consumer tastes. In various ways these all connect back to the growing success of the genuine brands.

What appears to have sparked the almost total collapse of the market was a credit squeeze in the supply chain early this year.

Shanzhai handsets emerged in the mid-2000s. By making use of the extensive electronics supply chain in Guangdong, shanzhai firms could make fake versions of brand name phones for as little 100 yuan.

When Sohu IT reporters paid a visit to Huaqiang North Rd, or 'Electronics St', in Shenzhen, they found just the shards of the shanzhai trade.

Of the five once-thriving retail malls, only one remains, Mingtong Digital City, now barely covering a single floor. Where it once charged 100,000 yuan a month in rent, stallholders today pay just 3000 yuan.

According to Sohu, the crisis began at the start of the year, when sales fell off a cliff and returns began piling up, creating a cash crunch in the supply chain. 

These firms weren't flush to start with. Typically, a shanzhai business could start up with just 600,000 yuan ($9,800). It had to pay cash for the Mediatek chipset, the camera lens and the display, but everything else came on credit. Now the battery, mould and packaging firms all require upfront payment.

The result, according to a manager of one store, is that as many as 800 bosses of knockoff firms are doing a runner each month.

The biggest factor is probably price. Shanzhai phones are caught in a pincer. On the one side, mid-range Samsung phones have come down in price and are now available for 2000 yuan or so. From the other side, local brands like Huawei and ZTE are cutting their own prices.

Another is the limitations of the shanzhai firms themselves – the shoddy quality and limited warranties, the inability build a brand or establish an online presence.

Then there's the increased vigilance of brand owners and authorities, both in China and abroad.

Consumer tastes are changing, too. Shanzhai sales in third tier Chinese cities, which were the biggest source of domestic demand, have plunged and these markets are now dominated by emerging Chinese brands like Gionee.

Of course, the arrival of the smartphone, and in particular Android, has been disruptive simply because of the degree of difficulty in developing them compared to feature phones.

Finally, there’s the safety issue. Apart from being unable to supply SAR measurement, there’s the sheer physical danger of shanzhai equipment.