MaSSSoftech

HONG KONG (MarketWatch) -- Telecoms will be in focus this week as wireless behemoth China Mobile reports half-year results on Wednesday.

Usually these reports have been like victory parades of eye-boggling numbers -- being the undisputed giant in the world's largest wireless market has been a good place to be.

But the arrival of 3G in China threatens to finally shake-up the wireless market there. All three mainland operators -- China Mobile /quotes/comstock/22h!e:941 (HK:941 80.00, -2.85, -3.44%) /quotes/comstock/13*!chl/quotes/nls/chl (CHL 51.87, -1.39, -2.61%) , China Telecom Corp. /quotes/comstock/22h!e:728 (HK:728 3.84, +0.02, +0.52%) /quotes/comstock/13*!cha/quotes/nls/cha (CHA 50.59, +0.70, +1.40%) and China Unicom /quotes/comstock/22h!e:762 (HK:762 10.74, -0.16, -1.47%) /quotes/comstock/13*!chu/quotes/nls/chu (CHU 14.18, -0.14, -0.98%) are gearing up to unleash 3G services after finally launching their new high-speed networks.
/quotes/comstock/22h!e:941 941 80.00, -2.85, -3.44%

Plans for China Mobile are particularly ambitious and controversial. It has to commercialize China's home-grown 3G standard "Time Division Synchronous Code Division Multiple Access" (TD-SCDMA), given national aspirations to sell it around the world. Its smaller rivals have the advantage of deploying Wideband Code Division Multiple Access (WCDMA) and CDMA2000 -- both proven and mature technologies used globally.

According to the government, operators will invest a massive 450 billion yuan (US$66 billion) in 3G projects in the next two-and-a-half to three years. Last week, the Ministry of Industry and Information Technology felt confident enough to up its 3G user target to 240 million in three years from the 150 million projected in February.

In Hong Kong any mention of bold 3G targets inevitably brings up the name of Hutchison Whampoa /quotes/comstock/22h!e:13 (HK:13 57.40, 0.00, 0.00%) /quotes/comstock/11i!huwhy (HUWH.Y 37.30, -0.10, -0.27%) , which painfully pioneered the technology in Europe. If any mainland officials had joined the conglomerate's results presentation last week, it would have tempered any enthusiasm.

Once again chairman Li ka-shing had to explain away a seemingly never-ending sea of 3G red ink. Since 2003, Hutchison has sunk more than US$20 billion in its 3G business "3" across Europe. Even with 25 million subscribers six years later it is still to break even at the EBIT level, and its cumulative losses are over HK$110 billion. In addition to making results briefings uncomfortable, the project is blamed for Hutchison shares consistently underperform the Hang Seng Index for the past five years.

The Hutchison lesson suggests mainland operators face an uphill battle to profitability.
TD-SCDMA wild card

China Mobile starts as the undisputed leader with 73% market share and 460 million subscribers, rather coming in as a new entrant. And to reduce the risk of investment in TD-SCDMA, China Mobile's parent -- effectively the government -- is building the network and charging the listed company a rental charge based on usage.

TD-SCDMA is still a wild card, however. China Mobile is a first mover with this technology. Much like Hutchison and early versions of 3G, China Mobile will have to learn by trial and error.

We can expect the gremlins in the network to be fixed, and perhaps the capital outlay costs can be kept from damaging the bottom line -- but finding subscribers will be harder.

Getting a range of handsets that match the competition will be key, and here TD-SCDMA is still a long way behind. So far China Mobile is believed to have around a million 3G customers.

Regulation could also turn against China Mobile. Despite restructuring the industry last year to even up competition, the government has still backed away from a fundamental enabler: number portability. You still can't switch carriers and keep the same phone number in China, and some analysts say this must come soon.

3G news flow could turn bad. As the networks from China Unicom and China Telecom go into wider commercial launch, comparisons with China Mobile's service will become more widespread. In September Unicom is expected to launch Apple Inc.'s /quotes/comstock/15*!aapl/quotes/nls/aapl (AAPL 169.22, +2.89, +1.74%) iPhone in China on its 3G network. To compete China Mobile is expected to launch the Ophone made by Lenovo /quotes/comstock/22h!e:992 (HK:992 3.52, -0.05, -1.40%) /quotes/comstock/11i!lenxq (LENXQ 0.01, 0.00, -7.69%) .

Attention is also turning to China Mobile's fundamental value drivers -- subscriber growth and fat margins. When you get to China Mobile's size, it gets a lot harder to keep growing at the same pace.
Bonanza for vendors

With 3G comes pricier handsets and so handset subsidies need to be increased. This could take a toll on China Mobile's EBTDA margins which have consistently been above 50%. These numbers also suggest there is some reward in there for its market power.

Perhaps the biggest question on China's belated 3G push is whether the country can really afford to build out three separate networks. The government, after all, is still majority owner of all carriers despite their stock market listings.

MainFirst Securities in a recent report highlighted that NTT DoCoMo /quotes/comstock/!9437 (JP:9437 139,800, -1,200, -0.85%) /quotes/comstock/13*!dcm/quotes/nls/dcm (DCM 15.01, -0.02, -0.13%) had to spend 4.5 trillion yen (US$50 billion) to convert 95% of their subscribers to 3G. Based on the 3G expenditure announced by June of 270 billon yuan in China, that only adds up to just 7% of what is needed for China's subscriber base, going by DoCoMo's experience.

The flip side is while that sounds like a daunting burden for the operators, it is a bonanza for vendors.

Both unlisted Huawei and ZTE Corp. /quotes/comstock/22h!e:763 (HK:763 34.45, +0.30, +0.88%) look set for many fat years ahead.