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Telecom Equipmentmarkets in China:The Big Picture

Jean-Charles Doineau, Head of TDS division, IDATEJulien Grivolas, consultant

IDATE © 2003August 8th 2003

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Fu Jun at Huawei technologies has said:

“ in the past few years China has seen telecoms growth of seven times gross domestic product - not bad when your GDP is growing at around 7%. But he also predicted that the market will now be looking at increases of around the same as GDP or 7% for the next few years”.

Telecom network Equipment market in China: The big picture

IDATE © 2003August 8th 2003

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Population 1.281 billion

GDP per capita (PPP) US$4,300

GDP growth 7.9%

Fixed-line penetration 16.7%

Mobile penetration 15.6%

Broadband penetration 0.44%

Claim to Fame: The biggest potential development perspectives in the market.

3G licences (WCDMA, CDMA2000, TD-SCDMA) likely to be granted to operators in beginning 2004..

China Telecom IPO in Nov. 2002 only raises half the expected amount.

MII carefully regulates the market; open to foreign vendors but essentially still closed to operators.

China Mobile surpasses Vodafone as world’s largest mobile operator

Market fundamentals Telecom network Equipment market in China: The big picture

IDATE © 2003August 8th 2003

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Telecom equipment markets in ChinaTelecom network Equipment market in China: The big picture

• Market structure is based on 4 network operators (2 in the fix market, 2 in the mobile)

2002 figures China Telecom

China Netcom

China Mobile China Unicom

Turnover (CNY millions)

75 496 67 600 128 561 50 800

CAPEX (CNY millions)

28 919 na 41 000 na

Employees na 210 000 59 633 na

Agreed restructured coverage

21 provinces

10 provinces

Nationwide Nationwide

Fixed lines(in millions)

57 77.4 - -

Mobile subscribers (in millions)

- - 131(end July 2003)

71.4(end July 2003)

Source:IDATE

• Growth of the market in value is one of the highest in the world, though ARPU is still very low

  2000 2003 (e) 2007 (f)

North America 323.7 328.5 368.1

Western Europe 205.3 261.2 310.4

Asia-Pacific 256.6 348.2 445.5

China 37.1 61.5 89.3

Rest of the world 137.2 200.3 275.4

Total 922.9 1 138.2 1 399.5

Telecom services markets, BUSD

Source:IDATE

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Telecom equipment markets in ChinaThe big picture

In millions of USD 2003* 2007*

North America 24% 27%

USA 21% 24%

Asia-Pacific 41% 40%

China 26% 29%

Western Europe 22% 22%

• In 2003, for the first year ever, Chinese Network equipment market has become the first international market in volumes (all combined).

• IDATE anticipates this situation to persist for the next 4 years.

Source:IDATE

Hong KongHong Kong

AustraliaAustralia

SingaporeSingaporeNew ZealandNew Zealand

S. KoreaS. KoreaJapanJapan

TaiwanTaiwan

MalaysiaMalaysiaChinaChina

ThailandThailand

PhilippinesPhilippinesIndonesiaIndonesiaVietnamVietnamLaos CambodiaLaos CambodiaMyanmarMyanmar

Monopoly Controlled Competition Free Market

Fixe

d-lin

eTe

lede

nsity

70%

10%

Competitive Market Dynamics

50%

0%

Hong KongHong Kong

AustraliaAustralia

SingaporeSingaporeNew ZealandNew Zealand

S. KoreaS. KoreaJapanJapan

TaiwanTaiwan

MalaysiaMalaysiaChinaChina

ThailandThailand

PhilippinesPhilippinesIndonesiaIndonesiaVietnamVietnamLaos CambodiaLaos CambodiaMyanmarMyanmar

Monopoly Controlled Competition Free Market

Fixe

d-lin

eTe

lede

nsity

70%

10%

Competitive Market Dynamics

50%

0%

• Chinese market is one of the more strategic worldwide market, as well as in APAC.

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Telecom equipment markets in ChinaThe big picture: Who does what?

The access equipment market for fixed networks is dominated by Alcatel and Siemens in China. Siemens has a manufacturing plant (BISC) for its EWSD circuit switches in Peking. Ericsson is also present in this market with its ENGINE fixed/mobile solution.

• Narrowband switching: 212 million lines, second market worldwide

China's DSL infrastructure market leader is the joint venture Alcatel Shanghai Bell which holds 50% of China's DSL access market. In 2002, Alcatel Shanghai Bell announced that they had delivered 1 million DSL lines in China. Nokia, ZTE Corporation and UT starcom are also present;

• Broadband switching: 58 million internet users, 3rd market worldwide

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Telecom equipment markets in ChinaThe big picture: Who does what?

A lot of regional manufacturers have invested the place.Market is dominated by Motorola and Nokia, followed by Ninbo Bird, TCL Group, Siemens, and SonyEricsson. Margins of western manufacturers are going to decline, and development of a consolidation mechanism will appear in the Chinese market.

• Mobile handset market: 49 million unit market 2003, first market worldwide

Market is dominated by Ericsson, followed by Nokia and Motorola. Other major providers are Siemens, Nortel Networks, Alcatel, and to a lesser extent, Huawei Technologies and ZTE Corporation. 3G roll out is a very important challenge for these technology providers.

• Mobile infrastructure market: 58 million internet users, 1st market worldwide

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Strong investment in Local R&D Telecom network Equipment market in China: The big picture

• This huge R&D public investment has let emerge a 10000 staf in R&D ( ~ 40 %, over 22000 people), through common public and private R&D labs. This Would mean 36 K$/year cost module.

• China’s public R&D investment as been continuously growing from the 80’s

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Development of local players Telecom network Equipment market in China: The big picture

HUAWEI

Optical AccessNetwork

Switching

SDH/DWDMTransmission

Intelligent Network

STP, BITS

Fixed NetworkSolution

Mobile NetworkSolution

DataCommunications

Solution

GSM 900/1800

Access Server

ATM

Router (2600, 3600,4500, 7500, GSR)

LAN Switch

ASIC Design Center

Mobile IntelligentNetwork

Short MessageCenter

Base StationMonitor

Call Center

ETS 450/1900 WLL

Mobile Call Center

GPRS

CDMA

• Huawei Technologies: a comprehensive product portfolio combined with technical leadership

• Huawei’s yearly revenues equals a quarter of the occidental NEPs

• Internationalization of the strategy: 2 European country (BerliKomm), Russia, Mexico, Brazil, Colombia, Ecuador, Chile and Peru, Australia, India, Malaysia, the Philippines and Indonesia

• Main competitive advantage: price (20 to 40% markup compared to occidental NEPs)