The European way to think the Digital World Telecom Equipment markets in China: The Big Picture Jean-Charles Doineau, Head of TDS division, IDATE Julien Grivolas, consultant

IDATE © August 8th 2003 Fu Jun at Huawei technologies has said: “ in the past few years China has seen telecoms growth of seven times gross domestic product - not bad when your GDP is growing at around 7%. But he also predicted that the market will now be looking at increases of around the same as GDP or 7% for the next few years”. Telecom network Equipment market in China: The big picture

IDATE © August 8th 2003 Population1.281 billion GDP per capita (PPP) US$4,300 GDP growth7.9% Fixed-line penetration 16.7% Mobile penetration 15.6% Broadband penetration 0.44%  Claim to Fame: The biggest potential development perspectives in the market.  3G licences (WCDMA, CDMA2000, TD-SCDMA) likely to be granted to operators in beginning  China Telecom IPO in Nov only raises half the expected amount.  MII carefully regulates the market; open to foreign vendors but essentially still closed to operators.  China Mobile surpasses Vodafone as world’s largest mobile operator Market fundamentals Telecom network Equipment market in China: The big picture

IDATE © August 8th 2003 Telecom equipment markets in China Telecom network Equipment market in China: The big picture Market structure is based on 4 network operators (2 in the fix market, 2 in the mobile) 2002 figuresChina Telecom China Netcom China MobileChina Unicom Turnover (CNY millions) CAPEX (CNY millions) na41 000na Employeesna na Agreed restructured coverage 21 provinces 10 provinces Nationwide Fixed lines (in millions) Mobile subscribers (in millions) (end July 2003) 71.4 (end July 2003) Source:IDATE Growth of the market in value is one of the highest in the world, though ARPU is still very low (e)2007 (f) North America Western Europe Asia-Pacific China Rest of the world Total Telecom services markets, BUSD Source:IDATE

IDATE © August 8th 2003 Telecom equipment markets in China The big picture In millions of USD2003*2007* North America24%27% USA21%24% Asia-Pacific41%40% China26%29% Western Europe22% In 2003, for the first year ever, Chinese Network equipment market has become the first international market in volumes (all combined). IDATE anticipates this situation to persist for the next 4 years. Source:IDATE Chinese market is one of the more strategic worldwide market, as well as in APAC.

IDATE © August 8th 2003 Telecom equipment markets in China The big picture: Who does what? The access equipment market for fixed networks is dominated by Alcatel and Siemens in China. Siemens has a manufacturing plant (BISC) for its EWSD circuit switches in Peking. Ericsson is also present in this market with its ENGINE fixed/mobile solution. Narrowband switching: 212 million lines, second market worldwide China's DSL infrastructure market leader is the joint venture Alcatel Shanghai Bell which holds 50% of China's DSL access market. In 2002, Alcatel Shanghai Bell announced that they had delivered 1 million DSL lines in China. Nokia, ZTE Corporation and UT starcom are also present; Broadband switching: 58 million internet users, 3 rd market worldwide

IDATE © August 8th 2003 Telecom equipment markets in China The big picture: Who does what? A lot of regional manufacturers have invested the place.Market is dominated by Motorola and Nokia, followed by Ninbo Bird, TCL Group, Siemens, and SonyEricsson. Margins of western manufacturers are going to decline, and development of a consolidation mechanism will appear in the Chinese market. Mobile handset market: 49 million unit market 2003, first market worldwide Market is dominated by Ericsson, followed by Nokia and Motorola. Other major providers are Siemens, Nortel Networks, Alcatel, and to a lesser extent, Huawei Technologies and ZTE Corporation. 3G roll out is a very important challenge for these technology providers. Mobile infrastructure market: 58 million internet users, 1st market worldwide

IDATE © August 8th 2003 Strong investment in Local R&D Telecom network Equipment market in China: The big picture This huge R&D public investment has let emerge a staf in R&D ( ~ 40 %, over people), through common public and private R&D labs. This Would mean 36 K$/year cost module. China’s public R&D investment as been continuously growing from the 80’s

IDATE © August 8th 2003 Development of local players Telecom network Equipment market in China: The big picture Huawei Technologies: a comprehensive product portfolio combined with technical leadership Huawei’s yearly revenues equals a quarter of the occidental NEPs Internationalization of the strategy: 2 European country (BerliKomm), Russia, Mexico, Brazil, Colombia, Ecuador, Chile and Peru, Australia, India, Malaysia, the Philippines and Indonesia Main competitive advantage: price (20 to 40% markup compared to occidental NEPs)