Standards and Innovation Policy in the Global Knowledge Economy NBR & East-West Center Workshop October 14, 2009 Duncan Clark Chairman, BDA China Limited ©BDA 2009

2 BDA provides strategic consulting and research to leading TMT firms and financial institutions with a focus on emerging markets and new technologies in Asia. The first independent TMT consultancy in China, established Team of 50 in Beijing. – BDA’s team of professionals has prior experience in strategy consulting, investment banking, telecom operations, international policy and corporate planning. Active in India since 2004, office opened in Team of 16 in New Delhi. BDA also tracks emerging markets in South East Asia, especially Vietnam. BDA has dedicated analysts organized around three sector groups: BDA provides three types of services: – Strategy & market entry consulting projects – Investment advisory services – Ongoing research through retainer Handsets/Devices Telecom Equipment & Services Internet/New Media www BDA: Telecom, Media & Technology (TMT) Consulting & Research for Asia ©BDA 2009

China’s 3G market so far provides a cautionary tale for the challenges of ‘innovation on demand’ 3G Subscribers Thousands Source: company information, BDA Note: TD-SCDMA user numbers are sourced from China Mobile; other subscriber figures are estimated by BDA China Mobile: First to launch, but already lagging TD-SCDMA still faces hurdles of handset supply and a need for increased subsidies These will ease in the coming months, but EV-DO looks set to dominate data card market – and W- CDMA competition looms in handset market (iPhone etc.) China Telecom: Strong start in 3G 3G user numbers increasing by 0.5 – 0.7 mm each month Handset user growth began to take off when supply increased to a sufficient degree China Unicom: Late start, but prospects improving User numbers are growing but at a slow pace Handsets are soon to become more widely available, which should boost user growth in the coming months TD-SCDMA commercially launched in 10 cities on 8 Jan; Netbooks on sale from 15 April CDMA EV-DO commercially launched in 120 cities on 16 April; EV-DO data cards available from March W-CDMA commercially launched in 55 cities on 17 May

Update on 3G network rollouts: EV-DO upgrade completed in August; WCDMA will now cover 335 cities by YE 2009, and not 284 as originally planned Jan Dec Apr May 2009 Jun cities 20,000 BTS cities 46,000 BTS Capacity: 30mn voice subs or 5mn HSDPA data cards 238 cities 80,000 BTS cities <50, cities 355 cities 50% of the population cities 130,000 BTS 342 cities 500+ cities 160,000 BTS 500+ cities 200,000 BTS Time Line CarriersStatements “Network construction is progressing smoothly with 46,000 base stations in place by June These provide capacity for 30mn voice subs or 5mn HSDPA data cards – more than sufficient but still expanding.” “In 2008 we planned to cover 284 cities with a 3G service this year. But because of lower than expected equipment costs, we have been able to increase this target to 355 cities at no extra cost. Since we have found the majority of GSM handsets now also support 3G we think that this gives us a great opportunity to increase our coverage. Our capex plan will enable us to cover all prefecture level cities and many large county level cities this year which mean just about 50% of the population will be covered. We will spend our entire capex budget this year but it will give us more than we originally planned for.” Chairman Wang stated that the network was fully completed by July in terms of EVDO coverage (currently CDMA has 160,000 BTS compared with 82,000 at the time of the handover from Unicom) and that coverage even extends to prefecture level townships. Additionally, CT completed its platform upgrades in August. 3G Network Coverage in Terms of Cities Covered and Number of BTS Carriers’ Statements on 3G Network Coverage Source: company information, BDA, press reports Jul. 2009

In July, China Mobile lowered its TD sub target for 2009 from 10 million to 3 million, partly due to poor network performance Connection rateCall-drop rate GSM>99.8%<0.8% TD-SCDMA in June %2% TD-SCDMA in Dec 2009 Close to that of GSM Network Quality KPI of China Mobile: GSM vs. TD-SCDMA In Shanghai in July 2009 the dropped call rate was 0.99%, but in Beijing the rate was 3.6% in April The data connection drop rate was higher than voice, registering 19.75% in Shanghai in July. China Mobile is targeting the improvement of the TD- SCDMA network and bring the KPI figures close to those of GSM by year-end carriers and vendors had no experience in TD-SCDMA network optimization, to solve the problems on the handover from TD-SCDMA to GSM and interference between them. These problems cause calls to be dropped or fail. Frequent switching between GSM and TD results in terminals dead locking and even going offline The various kinds of equipment from different vendors are not compatible; Handsets are not completely compatible with TD-SCDMA equipment Poor compatibility leads to dropped calls, muting and low signal strength The various kinds of equipment from different vendors are not compatible; Handsets are not completely compatible with TD-SCDMA equipment Poor compatibility leads to dropped calls, muting and low signal strength Weak Experience in Network Optimization Source: C114, BDA analysis Compatibility Problem Insufficient Support from Vendors China Mobile has complained about the lack of support from vendors; the support engineers deployed are inexperienced or incompetent in maintaining the network Key Problems Performance Indicators 5

In term of standardization, TDD-LTE follows the same procedure as FDD-LTE, but its equipment development lags more than half a year behind FDD-LTE. China Mobile has started LTE tests and will play an important role in speeding up the development of the TDD-LTE value chain to catch up with FDD-LTE. In an interview with BDA, China Mobile stated it planned to deploy a pilot network in BDA expects commercial deployment of TDD-LTE in China not to begin before 2012, given the nearly 2 years that elapsed between the setting up of the TD-SCDMA pilot and commercial networks. LTE is to be ratified as the 3GPP standard in December 2008; NTT DoCoMo plans to rollout the first commercial LTE network in 2010; China may see LTE pilot networks later on Timetable of LTE Development Globally and in China Standardization of 3GPP Global (FDD-LTE) China (TDD-LTE) StudyTasking Indoor/Field Experiments & Demo Commercial System Development Test specification Core specification Source: 3GPP, NTT DoCoMo, BDA interviews and analysis Experimental System Development Request for proposal Commercial System Development Commercial Network Available Pilot Network in Key Cities Indoor/Field Experiments & Demo Experimental System Development

How to nurture ingenious innovation? Focus on the conditions that produce innovation, not innovation itself Human capital: Science & technology capacity Access to capital: VC & industrial investment, equity capital markets IP protection & entrepreneurial culture: legal and regulatory framework Anticipating & meeting market demand 7 ©BDA 2009

Innovation: the road ahead is global, Chinese innovation will also ‘zou chu qu’ 8

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