Today, a Chinese mobile phone manufacturer unveiled a new cell phone using Qualcomm's CDMA technology. The announcement follows an order from the Chinese government last month for its second-largest wireless service provider to expand its CDMA network. While good news for Qualcomm, questions remain about the potential size of China's CDMA network, and when it will actually be built.
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Either way, the market responded positively to the news, as Qualcomm's shares ticked up 7.6% in mid-day trading, to $75.28.
The deal
Early this morning, Qualcomm joined the second-largest Chinese manufacturer of mobile phones, ZTE Corp. -- also known as Shenzhen Zhongxing Telecom -- and the second-largest Chinese wireless service provider, China Unicom (NYSE: CHU), to unveil a CDMA phone that ZTE will manufacture and China Unicom will sell.
The phone includes a removable subscriber information module, or SIM, a small chip that enables customers to take their phone numbers and existing service plans with them when they buy new phones. This is considered particularly important for the Chinese market, where mobile phone users apparently treat handsets as fashion items and buy new ones frequently. In addition, the chip is interoperable between CDMA and the more-widespread GSM standard, enabling greater international compatibility for handsets that include the module.
Last month, China Unicom was ordered by the country's Ministry of Information Industry to expand its limited CDMA network, reversing an earlier decision by China Unicom to delay doing so until the rollout of so-called third-generation (3G) technologies. 3G promises greater bandwidth for wireless Internet access. (For more on wireless lingo such as "CDMA" and "3G," check out this recent Fool on the Hill column.)
Implementation is the question
While the development of the new phone is a positive sign, the key is the scope of the CDMA network that China Unicom will build, which most news reports provided little information about. Reuters quoted the head of China Unicom's mobile phone division, Zhang Fan, as stating, "We will definitely build a narrow-band [CDMA] network, definitely." Yet Zhang also said that, "The networks won't be very small, but subscriber capacity has yet to be determined."
That's the key question for Qualcomm investors. While China's potential market is huge, with mobile phone penetration only at 4.7 per 100 people, there are still two potential obstacles for Qualcomm to overcome: debt and political infighting.
China Unicom, which already has a nationwide GSM network with upward of 7 million subscribers, is inheriting a company called Great Wall Telecommunications from China's military. Great Wall consists of a CDMA network in seven cities, with either 200,000 or 1 million subscribers, depending on which news report you read.
However, Great Wall is also apparently saddled with large amounts of debt, with some observers pegging the number at $4.4 billion, according to a Wall Street Journal report last month. While the government may end up paying the debt itself, a China Unicom official told the Journal that "We must resolve this problem of debt before expanding the network."
In addition, while China Unicom's Zhang may intend to build new narrowband CDMA networks, he also stipulated that this would depend on formal government approval. Given the government's order last month, this would seem to be merely a formality, but in the past it has been anything but. There has long been infighting between China's Ministry of Information Industry -- which is not interested in competition for the country's leading mobile provider, China Telecom -- and the nation's political leaders, which have pushed CDMA primarily to aid China's relations with the U.S.
Whether this political infighting will continue, and perhaps hamper or slow the expansion of CDMA networks within China, is anyone's guess. While today's news is good for Qualcomm, investors in the company certainly know by now that there are no guarantees.
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