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June 5, 2000

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Subject:  The last word on China (I hope...)
Author:  Y2Krash

Hi, I'd like to thank jeffcrawford for raising some interesting questions about China's market potential. Sometimes it's very easy for some of us to get carried away with the fact that China has 1/5th of the world's population. I thought it might be a good idea to take a moment to examine some of the statistics for the country, its people and its economy.

I'll start with some basic population statistics:

CHINA
The total area of China: 9,571,300 sq km (3,695,500 sq mi)
Population: 1,246,871,951 (July 1999 est.)
Population Density: 337 per square mile (130 per square km)

UNITED STATES
The total area of The United States: 9.6 million sq km (3.7 million sq mi).
Population: 270,311,758 people (1998 estimate)
Population Density: 73 persons per square mile (28 per sq km).

Rural Population?

As you can see, although China and the US have almost identical land masses, the population density is vastly different. This gives us a good idea of the size of the country but does little to alleviate one of the main concerns of jeffcrawford and others, that China is a rural society. The argument claims that: in the case that China was a rural society, it would be impractical to develop an expensive CDMA network since it would have to span over massive distances. The population would be spread so thin that there would be no need for the added capacity offered by CDMA. If this were the case, then yes, GSM would probably be the right choice as a migration path to 3G.

When we look at the facts, it's true, China has the largest rural population in the world and thus, would seem to substantiate these fears. But upon further inspection, we also notice a second interesting particular: China also has one the largest urban populations in the world (India might be number one, but I don't think so). As of 1991, China had 40 cities with populations greater than 1 million, with four of them hovering around 10 million (Shanghai, pop 14,200,000, Beijing, 13,000,000 Peking, 12,500,000, Tientsin, 9,400,000) and at least five others (That I know of) surpassing 5,000,000: (Tianjin 5,500,000, Shenyang 5,000,000 Wuhan 5,500,000 Guangzhou 4,500,000). These 8 market on their own contain around 75 million people, plus there are still 32 other cities with at least 1 million residents. In addition the statistic of 40 cities with 1 million+ residents was taken in 1991, as hard as it is to believe, that was almost ten years ago. I think we can safely assume that the number today is closer to 45 or 50. In all of these cities, CDMA's advantages of greater capacity and more efficient use of the spectrum would offer significant advantages over GSM.

Too poor for mobile?

Another concern has to do with economics. pp13pp13 made the rebuttal, as I have, that there was a great number of Chinese living in cities. He then went on to argue that the market wasn't as large as people were lead to believe because most of the citizen's were poor. According to the 1997 census, 50% of China's 750 million strong labour force worked in agriculture, 24% in industry and 26% in services. In all likelyhood, it will be many years before the 50% in agriculture would be using cell phones, since this 1/2 also represents the poorest segment of China's economy. Within the industrial sector, the chances achieving a high penetration rate upon initially deployment are also very small. This sector will probably not represent a significant amount of the early adopters of the technology. The segment of the population that we should be most interested in, is the 26%, or almost 200 million people who work in services. The service sector, which includes banking, government, transportation, tourism, retail trade and others, makes up the bulk of the urban work force and will represent the earliest adopters of mobile technology. These people have the money and the requirement for mobile communications that will drive them towards the wireless market.

Dopee pointed out that, despite the enormous potential, China presently has a very low per capita GDP, making it nearly impossible for most people to afford a wireless handset. China's Gross Domestic Product for 2000 is expected to be around $1.1 trillion. This number places it in seventh worldwide, behind the US (9.4 trillion), Japan (4.4 trillion), Germany (2.2 trillion), France (1.5 trillion), The UK (1.45 trillion) and Italy (1.2 trillion). Seventh place seems to put China in some pretty good company but this is before the per capita breakdown. With around 1.25 billion citizens, that comes out to around $880 per person, far less than the US's $30,000+ or even Italy's $21,000. These numbers, like many of the others, are deceiving at first glance. In order to get an accurate impression of the value of the goods produced in a nation, we must re-examine the numbers based on Purchasing Power Parity. Using PPP basically means you adjust the numbers so that each dollar has the same level of buying power in each countries economy. Since items are less expensive in China, the value of each dollar is higher, which will increase the countries PPP GDP. In fact, if we use the American dollar as our base standard (equal to 1), the Chinese PPP GDP quadruples to around $4.5 trillion. This increase vaults it all the way into second place behind the US (Japan's GDP drops to $2.9 trillion), which in turn boosts the per capita GDP to $3,600, a somewhat more respectable level. This number is also being kept much lower than developed nations due to the drag placed on it by the large number of poor people working in industry and especially agriculture. Since we are not particularly interested in the agricultural and industrial sectors, we must attempt to determine a rough estimate of the per capita GDP for the services sector (It would be better, of course, if we could determine the average income of the different sectors but I don't think that kind of information has ever been collected by the government). Due to the above factors, I would venture to guestimate that the per capita GDP of a person working in the services sector is probably more than twice that of the average, or at least $8000. While only representing � of the United States' per capita GDP, $8000 still represents a significant amount when compared to many other countries.

Why Wireless? Wy CDMA?

As of 1998, China's wireline infrastructure supported 105 million traditional telephones, which translates into 8.4% penetration. Wireless has barely even begun to proliferate and already has 45 million subscribers (4% penetration), wireless is also predicted to grow many times faster. Usage is expected to rise 63% in 2000, bringing the total users from 45 million to 70 million and should break 170 million by 2005. Contrary to Chapman208's argument that the small number of wireline telephones does not bode well for the wireless potential because wireless phones are more expensive than wireline, I think that this situation represents the ideal opportunity for mobile communications. In most countries around the world, cell phones are not more expensive than wired ones. North America is the only continent that has developed a significant traditional telecommunications infrastructure, resulting in mass adoption and thus much lower rates. Here in Canada and the US, we have fixed rate local and long distance calls while in many countries, they don't even have a telephone in their house and if they do, even local calls are charged on a per minute basis. This is the reason why the breakout of wireless technology has been the slowest in North America, everything was so cheap, it simply wasn't worth it

Having such a small user base for traditional telephones means that most people in the country don't have easy access to any communications technology. Since wireless infrastructure can be deployed at many times the speed of its wireline counterpart and at 1/10th the cost, urban centres in China will gobble them up as fast as they can be produced. This in turn will drastically reduce the cost per minute, leading to prices that rival and then beat the traditional system making them almost completely obsolete. If this does come to pass, GSM will not be able to handle to massive capacity required to accomodate the number of users. As I stated in one of my previous posts, in order to give our present wireless system the capacity to handle just the voice traffic of our wireline system, capacity would have to be increased by a factor of 22. Now quintuple that number and you have China's potential capacity requirements, only CDMA economically handle this amount of traffic.

Conclusion

There are probably 200 million Chinese service workers that could be considered wireless targets and probably at least another 50 million from the other sectors of the economy. These workers' families could also be considered targets (at least another 100 million), bringing the present total to 350 million. This is far lower than 1.25 billion but as far as I know, still the largest single market in the world. If for some reason, CDMA isn't able to make inroads into China over the next few years, the country will be forced to accelerate it's adoption of 3G in order to handle the capacity constraints of GSM. As we know, 3G means CDMA and CDMA means Qualcomm. By that time, the Chinese market should have grown to 400 million.

China's inevitable acceptance into the WTO will accelerate industrialization of the nation. History has shown that this event is soon followed by a continuing migration towards the urban centres, as people try to find work in factories and other large sectors. As this occurs it will concentrate China's population into large urban centers, resulting in a greater need for spectrum efficient, high capacity wireless services (ie. CDMA).

Bottome Line

The basic conclusion that I've reached is that when it comes to China, Qualcomm can't lose. If CDMA is able to become a 2G alternative to GSM then that will bring in earlier revenues to Qualcomm. If CDMA penetration does not occur for 2G, Qualcomm still wins. Since I will admit that a single standard would result in the highest level of subscriber growth, GSM would garner an enormous user base in a shorter amount of time. The larger amount of users will result in the need for earlier 3G adoption of the entire network to handle the capacity constraints, thus resulting in enormous revenue potential for Qualcomm.

NOTE:
Does anyone know why we've heard little about CDMA in India? Their population has also topped 1 billion and with the enormous urban centers, it seems like an ideal place for Qualcomm to push CDMA deployment. I searched through the company's press releases (back to Jan 1999) and didn't get a single hit mentioning India and CDMA. I haven't really looked into it but it just seemed strange the there was so much hoopla over China when India is almost as large, growing at a faster pace (expected to eventually pass China as the world's most populace nation) and who's government is not communist.

Cheers,
Krash


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