Market Watch

China’s Telecom Market to Decelerate in 2005

March 21, 2005

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Capital spending to decline this year, but market’s long-term prospects still appear bright
China’s red-hot telecommunications equipment market is expected to cool significantly in 2005 due to decreasing revenue from local-phone services and a delay in the deployment of next-generation wireless technology.

The two major Chinese fixed-line carriers, China Telecom and China Netcom, are expected to suffer declines in local-phone revenues over the next five years. Meanwhile, China has delayed the awarding of licenses for 3G service providers. This will impede capital spending and deployment of those services.

Because of these factors, the period of phenomenal growth for China’s fixed-line telecommunications carriers is rapidly coming to an end. These companies are expected to cut capital spending in 2005.

Spending is expected to amount to $10.2 billion in 2005, down 10 percent from 11.3 billion in 2004. Despite the decline, there continue to be some bright spots that could generate market growth. These bright spots, including booming demand for broadband access, Next-Generation Networks (NGNs) and Internet Protocol Television (IPTV)—plus the eventual advent of the 3G market, eventually will lead the country’s telecom market back to growth.

At the end of 2004, China was home to 16 percent of the world’s broadband subscribers. By 2008, 23 percent of the world’s broadband subscribers will be in China, iSuppli projects. XDSL now is the major broadband access technology in China.

In 2005, Chinese telecommunications carriers will spend $133.2 million to accelerate the construction of commercial NGNs that can provide packet services like Voice over Internet Protocol (VoIP) and IP video to subscribers.

iSuppli forecasts that China’s NGN market will take off in 2005. Furthermore, China Telecom and China Netcom have launched IP TV services in more than 20 cities. The two carriers are aiming for 200,000 to 300,000 subscribers in 2005, which could increase their capital expenditures in this area dramatically.

The largest expenditures in China’s telecommunications market over the next few years will be on 3G mobile networks. Carriers, including wireline service providers like China Telecom and China Unicom, are eager to obtain 3G licenses from the government.

iSuppli predicts that the Chinese government probably will begin issuing 3G licenses at the end of 2005, when the nation’s homegrown Time Division Synchronous Code Division Multiple Access (TD-SCDMA) system matures. The awarding of 3G licenses could result in a major inflection point in carriers’ capital expenditure plans.

Original equipment manufacturers should closely watch the 3G license awarding process.

The telecom industry plays an important role in China’s electronics industry. Although carriers will reduce their capital spending in 2005, iSuppli still predicts China’s telecom market will grow during the next five years, driven by the nation’s huge potential market.

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