Chinese Telecom Networks Expand
Over 2003 and 2004 expansion of telecom networks in China has continued, though the pace of this expansion slowed slightly last year. The number of main line telephones in mainland China grew by 48 million from 215 million at the end of 2002 to 263 million at the end of 2003, then increased by a further 50 million in 2004, taking the total to 312 million at end-2004.
China in 2004 accounted for 26% of the global total for main telephone lines and a staggering 81% of the global net increase in main telephone lines! From the point of view of analysts like ourselves trying to understand the impact on China’s telecom cable markets, these amazing growth rates in telephone lines over the last two years are rather misleading, as the main telephone line statistics reported for China include not only conventional fixed lines (using copper pairs), but also wireless local loop (WLL) subscribers.
Impact of WLL in China
There has been rapid expansion of WLL systems, known locally as “Xiao Ling Tong”, in many parts of China over 2003 and 2004. At the end of 2003 there were 37 million WLL subscribers (compared to 225 million with conventional fixed lines), but by the end of 2004 the WLL total had grown to 65 million (compared to 247 million conventional). But conventional fixed lines continue to be added at a substantial rate, though this rate of addition is slower than it was three or four years ago. In China 22 million conventional fixed lines were added in both 2003 and 2004, a much higher figure than in any other country of the world. To put this figure in perspective, a comparison with Brazil is instructive. There was an extraordinary surge in fixed line installation activity in Brazil in 2000 and 2001. But, even at the peak of the Brazilian boom, the annual rate of fixed line additions was 6 to 7 million. At the same time as fixed lines have increased, there has been even faster continuing sustained growth in Chinese mobile phone subscribers.
Chinese Internet Users Surge Ahead
In parallel with this continuing growth in telephone users, there has been strong growth in the number of Internet users in China, the total of which increased from 79 million at the end of 2003 to 94 million by the end of 2004. This total is larger than any other country in the world, except the US. China already accounts for 11% of the world total for Internet users, and, assuming that the current growth trends continue, it is likely that China will overtake the US in the next few years.
Chinese Broadband Users Double
In 2004 the number of broadband users in China more than doubled, increasing from 11 million the end of 2003 to 24 million at the end of 2004, an average compound monthly growth rate of 6.5%. Despite the huge increase in the number of broadband users, according to China Telecom Weekly, a slowdown was reported in the growth rate of the Chinese market for broadband access equipment, as much of the up-front investment by telcos in ADSL central office equipment required to offer broadband services has already taken place. Sales of ADSL customer premises equipment continued to grow more strongly, however, as subscriber take-up of ADSL broadband expanded.
Various Technologies Deployed
The two largest providers of broadband services in China are the incumbent telcos China Netcom, also known as CNC (north and north-east China), and China Telecom (rest of China). At the end of 2004 China Telecom had over 10 million users and China Netcom 6 million users. As these incumbent telcos already have access networks in place, their main broadband technology focus is on DSL over copper pairs. While DSL is currently the most popular medium for broadband services in China, with 16 million users at the end of 2004, alternative broadband technologies are in use by other operators, including cable modems, wired LANs, wireless LANs and satellite (e.g. China Satcom). CATV operators (e.g. China Information Broadcast Networks) offer broadband services via cable modems. This technology was initially slower to make an impact than DSL, but by the end of 2003 there were 2.5 million users. Encouraged by property developers as a strong selling point in upmarket residential developments, newly built housing estates may include Ethernet networks that use a mix of copper and fibre optic data cables. Some companies also have trials underway of Powerline broadband technology, deployed over existing mains voltage energy cables.
FTTH: Huge Potential But When?
Though many commentators suggest that that fibre to the home (FTTH) has huge potential in China, we think that it is more realistic to say that the market is currently well-served by the existing broadband technologies. As in many other countries, the incumbent telcos in China are likely to be repelled by the prospect of large-scale investment in FTTH or FTTC (fibre to the cabinet) while they can continue to generate additional revenues and maintain a strong competitive position through alternative technologies that use existing network infrastructure and require more modest investment, principally DSL. Though the incumbent telcos may be reluctant to invest heavily in FTTx, there may be a stronger argument for investment by telecom companies whose existing infrastructure, especially in access networks, is not as extensive as the incumbent telcos.
Building the Great Wall
One interesting example of a competitor to the incumbent telcos that has a clear intention to develop a much more extensive network infrastructure is Great Wall Broadband Network Service, China’s third largest Internet Service Provider. Great Wall has started to build a broadband network that, when completed, will pass 250 million people in 30 of China’s largest cities (“akin to trying to wire half or more of the United States”). Given the scale of the potential investment, the company’s name seems very appropriate! Like the construction of the original Great Wall of China, we think that the timescale of this major infrastructure project is unlikely to be short-term. The Great Wall business will initially focus on providing broadband Internet connections, but the company is also seeking a licence to offer VoIP services and may also enter the market for video services. The latter application would be likely to require enhanced bandwidth through major build-out of FTTH, but fibre optic cable deployment by Great Wall will initially concentrate on fibre for business customers.