China’s Mobile Telecom Services Industry Overview

China’s Mobile Telecom Services Industry Overview
02 PD China Mobile Telecoms Service Industry ppt CONFIDENTIAL China’s Mobile Telecom Services Industry Overview GCO Practice Development May 2002 This report is solely for the use of Firm personnel. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from McKinsey & Company.

ACKNOWLEDGEMENTS AND REFERENCES
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt ACKNOWLEDGEMENTS AND REFERENCES MGMs and CSS involved in the relevant studies include the following: The series of PDs include the following: Tony Perkins (BEI) Stefan Albrecht (BEI) Chipper Boulas (HKO) Peter Kenevan (TOK) Perchow Joseph Chang (SHA) Andrew Wu (HKO) Hai Wu (BEI) Jane Xing (HK) Yi Feng (BEI) Sheng F Li (SHA) Yoshinobu Takanuki (TOK) Graeme Hunter (JOH) Julia Yang (BEI) Eric Xu (BEI) Jason Liu (BEI) Shirley Chen (BEI) # China Macroeconomic Environment # China’s Mobile Telecom Service Industry Overview # China’s Internet Industry Overview # China Telecom Equipment and Services Overview # China’s Mobile Handset Sector Overview # China Telecom Industry Regulatory Overview # Key Success Factors and Case Studies of MNCs Entry to China

02 PD China Mobile Telecoms Service Industry 020403.ppt
KEY MESSAGES 1. China’s mobile telecom service market is huge and fast growing, representing US$21 billion market size in 2001 and US$38 billion in This market is supported by the world’s largest subscriber base at 145 million, already comprising 15% of the world’s total in 2001 and growing to potentially 218 million in a low case or 300 million in a high case by 2005 2. The competitive landscape for mobile services has evolved from a single regulator and operator to today’s duopoly of China Unicom and China Mobile, both of whom are unassociated with the Ministry of Information Industries. A second breakup of China Telecom is expected to form two large telecom operators, China Telecom and China Netcom Group, who are likely to receive mobile licenses. A fifth telecom operator, China Railcom, also has the potential of receiving a third generation license and building a mobile business. For now, China Mobile dominates the market with 82% value share and 72% subscriber share and owns much of the high value user base. However churn is already high and is expected to increase with continuing pricing pressures and increased competition. 3. Wireless data services are expected to grow quickly in China to a market of potentially over US$4 billion by 2005, used by 43% of all mobile users. Interest from consumer surveys have been high and operators and other players are actively building services in the market. While early WAP services have failed to catch on, SMS has grown exponentially with up to 20 billion SMS messages in The early adopters will be mobile professionals and modern youth, who will require services and devices tailored to their needs. 4. Regulatory changes loom, particularly with the accession of China to the WTO. While foreigners will be unlikely to set up MVNOs, WTO will allow greater participation of foreigners in basic and value added services, although geographic limitations will exist through 2004 and Chinese players will be required to own at least 50% of telecom service ventures (51% for basic services). Regulatory risks remain, with no means to appeal regulator decisions, unclear interpretation of regulation including WTO commitments, and the government’s track record of intransparent and unpredictable decision making. (See separate regulatory PD for details) Appendix Players profiles 3G technology standards choices

KEY MESSAGES 1. China’s mobile telecom service market is huge and fast growing, representing US$21 billion market size in 2001 and US$38 billion in This market is supported by the world’s largest subscriber base at 145 million, already comprising 15% of the world’s total in 2001 and growing to potentially 218 million in a low case or 300 million in a high case by 2005

MOBILE SERVICE REVENUE GROWTH OF 30% CAGR HAS OUTPACED OTHER TELECOM SERVICE SECTORS AND IS PROJECTED AT 16% THROUGH 2005 Revenues US$ Billions CAGR vs. other industries ( ) Percent CAGR 16% Mobile CAGR 30% Fixed line Paging Source: Deutsche Bank; McKinsey analysis

EXTRAORDINARY SUBSCRIBER GROWTH IS THE PRIMARY DRIVER OF REVENUE EVOLUTION, MORE THAN MAKING UP FOR LARGE DECLINES IN ARPU DUE TO STIFF COMPETITION Announced Effective Number of subscribers – low case Millions Drivers CAGR 19% Penetration initially low Government backing for increasing subscriber numbers Relatively low fixed line penetration Low-end prepaid subscriber increase 291 263 Mobile revenues* $ Billions 235 208 CAGR 83% CAGR 16% CAGR 30% ARPU US$/month Decline due to increased prepaid and lower spending by late entrants Tariff reduction as competition increases Slightly off-set by increase in data traffic in later years CAGR -24% CAGR -7% 17 16 15 15 * Revenues do not equal the product of ARPU as subscriber figures are provided for year end, not average subscribers during a year. Detailed information on the timing of new subscriptions and churn required for the calculation of average subscribers during a given year is not available ** All CAGRs are calculated on the announced data Source: Deutsche Bank; JP Morgan; MII

Major European** countries
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt CHINA IS THE WORLD’S LARGEST MARKET IN TERMS OF SUBSCRIBERS, HAVING OVERTAKEN THE US IN 2001 2000 2005 Number of mobile subscribers Millions CAGR = 30% CAGR = 22% CAGR = 13% CAGR = 14% CAGR = 7% China – low case* China – high case* US Japan Major European** countries * 05 forecast use low case, net subs after inactive and multi-sim-card reduction ** Major European countries include: UK, France, Italy, Germany, Netherlands, Spain, Sweden Source: JP Morgan; WEFA-WMM; MII; McKinsey analysis

CHINA’S MOBILE SUBSCRIBER BASE IS GROWING MORE RAPIDLY THAN ANY OTHER MAJOR MARKET, COMPRISING 15% OF WORLD TOTAL IN 2001 Global mobile subscribers Million subscribers; percent CAGR percent 100% = 207 300 482 727 965 1,178 1,393 1,633 1,850 Western Europe 29 US 18 South and Latin 45 Japan and Asia Pacific 28 China** 47 Rest of world* 45 1997 1998 1999 2000 2001E 2002E 2003E 2004E 2005E * Afirca, Eastern Europe, Middle East, Canada ** Forecast of use the high case, net subs after inactive and multi-sim-card reduction Source: JP Morgan; Gartner 2001; Deutsche Bank; Merrill Lynch; Piper Jaffray

CHINA’S MOBILE MARKET IS PROJECTED TO GROW SIGNIFICANTLY
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt CHINA’S MOBILE MARKET IS PROJECTED TO GROW SIGNIFICANTLY Net subscriber* additions Millions Low case High case 47.1 46.3 45.7 43.9 39.4 35.9 16.9 11.5 5.5 1997 1998 1999 2000 2001 2002E 2003E 2004E 2005E Annual growth Percent Low – 108 47 133 -9 8 -47 1 1 High – 108 47 103 -9 22 5 -1 3 Penetration Percent Low 1 2 3 7 9 12 13 15 16 High 1 2 3 7 9 12 16 19 23 * forecast are net subs after inactive and multi-sim-card reduction Source: IDC report; JP Morgan report; McKinsey analysis

CHINA’S SUBSCRIBER BASE OF 218 MILLION IMPLIES A 47% PENETRATION OF AN ADDRESSABLE MARKET OF 460 MILLION BY 2005 2001 2005 China income distribution and addressable market Percent China’s addressable population for mobile services is projected to increase by 8% p.a. for the next five years to 460 million in 2005 The key assumptions in determining the income threshold are: Chinese consumers willing to spend 5-10%% of their income on communication services – higher than the average of 3.5-4% for more developed markets as a greater portion of income is available for non-essential goods as a result of China’s relatively low living cost Half of this assumed spent on mobile services (5.5%) Unicom’s prepaid ARPU will decrease from USD 8.3 for 2001 to USD 8.1 for 2005; therefore the threshold income will drop from USD 1,815 (8.3*12/5.5%) for 2001 to USD 1,772 for 2005 (8.1*12/5.5%) 2005 Addressable market: 35% Addressable population: 460 mn persons Percent of population 25% 2001 Addressable market: 27% Addressable population: 345 mn persons 20% 15% 10% 5% 0% 1,772 1,815 Income per capita (US$ p.a.) 2001 2005E Addressable market Number of mobile subscribers Implied penetration of the addressable market 345 mn 145 mn 42% 463 mn 218 mn* 47% * Low case, net subs after inactive and multi-sim-card reduction Source: JP Morgan; DRI; Asiandemographics.com; Literature search; Analyst reports; Team analysis

MOBILE SUBSCRIBER PENETRATION OF LESS THAN 7% IN 2000, LEAVES SIGNIFICANT ROOM FOR GROWTH As percentage of total population – low case* Millions (total population) Mobile subscriber penetration in 2000 Percent 1,218 1,230 1,242 1,254 1,265 1,276 1,287 1,298 1,309 1,319 100% Italy Sweden Netherlands UK Spain Germany All subscribers France US 16.4 12.0 13.4 15.0 8.9 China** 6.6 7.1 Data service subscribers 2.9 3.9 2.0 0.6 1.0 1.9 0.4 1.1 China Urban*** 1996 1997 1998 1999 2000 2001E 2002E 2003E 2004E 2005E * forecast are net subs after inactive and multi-sim-card reduction ** Penetration over total population *** Penetration over urban population. Source: JP Morgan; IDC report; Gartner; Literature search, EIU

CHINA’S RICHER PROVINCES GENERALLY HAVE MORE SUSCRIBERS AND ARE GREATER PENETRATED… Penetration Percent, 2000 Number of subscribers Millions Subscriber CAGR Percent, Population Millions Province Beijing Shanghai Guangdong Zhejiang Fujian Liaoning Heilongjiang Jiangsu Shandong Hebei Hubei Anhui Hunan Sichuan Henan Source: China Statistical yearbook, JP Morgan Report, McKinsey analysis

…WHILE THE POOR WESTERN AND INTERIOR PROVINCES HAVE LESS SUBSCRIBERS AND ARE LESS PENETRATED Penetration Percent, 2000 Number of subscribers Millions Subscriber CAGR Percent, Population Millions Province Tianjin Jilin Hainan Inner Mongolia Ningxia Chongqing Xinjiang Yunnan Shanxi Shaanxi Guangxi Gansu Qinghai Jiangxi Tibet Guizhou * Growth rate from Source: China Statistical yearbook, JP Morgan Report, McKinsey analysis

KEY MESSAGES 2.The competitive landscape for mobile services has evolved from a single regulator and operator to today’s duopoly of China Unicom and China Mobile, both of whom are unassociated with the Ministry of Information Industries. A second breakup of China Telecom is expected to form two large telecom operators, China Telecom and China Netcom Group, who are likely to receive mobile licenses. A fifth telecom operator, China Railcom, also has the potential of receiving a third generation license and building a mobile business. For now, China Mobile dominates the market with 82% value share and 72% subscriber share and owns much of the high value user base. However churn is already high and is expected to increase with continuing pricing pressures and increased competition.

CHINA’S MOBILE OPERATOR LANDSCAPE HAS EVOLVED SIGNIFICANTLY, CULMINATING IN SECOND BREAKUP OF CHINA TELECOM No mobile licenses currently Pre 1994 Regulator and Operator 1994 to 1999 Virtual Monopoly 1999 To 2002 Deregulation/Breakup 2002 and beyond 2nd breakup and future landscape China Netcom Established in Sept.1999 with internet backbone Likely license winner China Netcom Group Jitong Jitong China Telecom broken up into North and South with CT North merging with China Netcom and Jitong to become China Netcom Group Setup in 1994 to develop data communication service Began to offer VoIP services Leading player in voice over IP China Telecom Ministry of Posts and Telecommunications China Telecom China Telecom China Telecom South continues operation as China Telecom Operating CDMA local loop services in several cities China Mobile (CMCC) Prior to 1994, the MPT acted as the regulator and sole operator of telecommunications In 1993, announcement was made to separate operating and regulatory functions along with the establishment of a 2nd operator Created in 1994 when former MPT separated into regulatory and operating functions China Telecom ownership transferred to Ministry of Finance, with regulatory functions placed in the new Ministry of Information Industries (MII) Under the government’s anti-monopoly plan, in the 1st half of 1999, China Telecom was split into 4 operating companies: CT fixed, China Mobile, CT Paging, CT Satellite The change became official on April 20, 2000 China Mobile (CMCC) China Mobile unaffected by second breakup, surviving proposal to merge it with Jitong, given concerns about consequences of forced mergers for publicly listed companies China Unicom China Unicom China Unicom Became the second mobile network operator in mid 1994 However, China Telecom as the sole provider of both basic and wireless telephony services made it difficult for Unicom to grow China Unicom unaffected by second breakup, surviving proposal to merge it with Railcom While Great Wall CDMA asset transfer has yet to be completed, Unicom will become first major operator in the world with both CDMA and GSM services, with launch of its own CDMA network in 2002 Great Wall Great Wall Established in 1995 to harness PLA’s radio spectrum The company undertakes “the CDMA project” at the direction of the government Due to government commitment to separate PLA from commercial activities, Great Wall dissolved with decision to transfer CDMA assets to China Unicom made in October 2000 (transfer yet to be completed) China Railcom China Railcom 2nd largest fixed line network Established December 2000 Offers limited GSM service over it’s railway network Operator bidding for 3G license, with openness towards adopting China’s 3G standard, TD-SCDMA Source: Literature search; EIU Pyramid; Industry reports

MOST RECENT BREAK-UP OF CHINA TELECOM TO LEAD TO A LANDSCAPE OF 5 OPERATORS COMPETING ACROSS BOTH MOBILE AND FIXED Have license Before Licenses After CT break-up Licenses Mobile Mobile Fixed Announcement on November 26 to merge Jitong with China Netcom and China Telecom Northern unit Competition will increase as merged telecom giants obtain licenses for comprehensive telecom operations, including Fixed-line phone Mobile phone Internet-related services Original plan to merge China Mobile with Jitong and China Unicom with China Railcom, met with strong dissent from the capital markets who saw this as an affront to China Mobile and China Unicom’s governance as publicly held companies Mobile Fixed Mobile Fixed Fixed GROUP Mobile Fixed Fixed China Telecom North Fixed Mobile Fixed China Telecom South Mobile (GSM-R) Fixed Mobile Fixed China Railcom China Railcom Source: Literature search; industry interviews

PROFILES OF CURRENT AND LIKELY FUTURE PLAYERS
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt PROFILES OF CURRENT AND LIKELY FUTURE PLAYERS License prospects* China assets Mobile strategy Current partnerships Current players China Mobile China Unicom Likely future players China Telecom China Netcom China Railcom ~96 million mobile subscribers ~30 million mobile subscribers Services covering over 180 cities Largest national telecom network covering 2,000 cities First operator to introduce internet access cards, and announced on-line shopping card to be launched in 2001 Internet backbone covering 17 major cities Started IP phone services in January 2000 2nd largest network in China; covering all major cities (>500 cities) Be technology leader, thus eager to enter 3G Focus on high-end customers Trialing GPRS with 7 vendors Strongly supporting WAP Shifting attitudes on technology, now first player to cover both GSM and CDMA Focusing attention on developing CDMA networks Trialing GPRS with 4 vendors Compete on service offering with existing operators, leveraging government and supplier expertise Active with WLL and local mobility Go straight to 3G if possible Obtain mobile license as quick as possible regardless of technology standard Roll out wireless data services even if it means taking GSM/GPRS first May focus initially on GZ, BJ, SH Likely intends following 2-tier structure Obtain 3G license to target high-end users Use 2G PHS to target voice subscribers Vodafone HP Hutchison KDDI SK Telecom Telstra AT&T Japan Telecom British Telecom News Corporation Goldman Sachs SingTel None Existing Existing Still to be decided * Government likely to grant 2 licenses; undecided when, and what type; none to be awarded in 2001 Source: Piper Jaffrey; Merrill Lynch; Literature search

OTHER PLAYERS UNLIKELY TO ATTAIN MOBILE LICENSES
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt OTHER PLAYERS UNLIKELY TO ATTAIN MOBILE LICENSES Who they are Basis for entry Obstacles Century Mobile Jitong Foreign JV Entrants New telcos Consortium of 10 enterprises who have joined together to try to set up mobile enterprise Set up in 1994 to develop data communication services Potential JVs involving foreign companies New players expanding into telecom Some government contacts Originally considered takeover of Great Wall’s assets Owns 70% of VoIP market Government has indicated desire to see multiple operations with multiple service offerings Government may be pressured to show market progress and WTO benefits Foreign operators and entities eager to invest Desire to enter wireless given opportunities and convergence of technologies Great Wall assets moved to China Unicom No current discussion regarding mobile services observed Low capability to utilize mobile spectrum if allocated WTO agreements do not require that new telecom licenses be issued to new entrants Nationwide presence of foreign investment not possible for initial 3 years under WTO MII will likely limit the influence of other ministries on their turf (e.g., blocking SARFT entry into Internet) Source: Goldman Sachs; EIU Pyramid; McKinsey analysis

EXISTING AND POTENTIAL MOBILE OPERATORS HOLD BROAD BUT DIFFERENT COMPETITIVE POSITIONINGS AND SERVICE OFFERINGS China Mobile China Unicom China Telecom China Netcom Basic services Mobile voice service Mobile data service IP Multimedia service Mobile voice service Mobile data service IP Multimedia service Local call DLD IDD Paging IP Multimedia service Local call DLD IDD Web hosting Network element lease and sale IP IDD Web hosting Lease and sale of bandwidth Value-added services Fax Voice mail Caller ID Call waiting SMS VPN/VPDN IDC Fax Voice mail Caller ID Call waiting SMS VPN Fax Voice VAS Caller ID VPN IDC ISDN/DDN EDI ISP Data communication Public multimedia services Source: MII; Asiacom; Analyst report

EACH EXISTING/POTENTIAL MOBILE OPERATOR HAS STRENGTHS AND WEAKNESSES
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt EACH EXISTING/POTENTIAL MOBILE OPERATOR HAS STRENGTHS AND WEAKNESSES Existing/ potential operator Strengths Weaknesses China Mobile China Unicom China Netcom China Telecom China Railcom Incumbent operator serving higher value customers Dominates market with 74% of subscribers and 84% of revenues Allied with Vodafone whose CEO sits on board Access to global capital via CMHK Offers complete package to corporate customers Able to underprice CM and attain market share Government and policy support to promote competition No frequency constraint due to CDMA network (13 m sub capacity) Access to global capital via Unicom Hong Kong Strong management team with executives hailing from successful startup (Asia-info), consulting firms and bulge bracket investment banks Strong governmental connections with Jiang Zemin's son onboard Remains dominant fixed-line operator Dominant in data communications and in Internet service 2nd largest fixed-line network Facing 2G spectrum shortage in major cities 2002/2003 Unicom has 10% price advantage by regulation Management and business structure not yet completely set up Weaker brand and public penetration than CMHK Facing complexity of dual network management Infrastructure spend high to build CDMA network Lacks fixed-network reach Has no mobile operating license Lacks mobile expertise Regulatory concerns as MII law prohibiting JVs with SOEs targets relationship with SARFT (one of the founders) Carries monopoly culture and lacks business-driven aggressiveness Bound to financially nonviable rural area expansion of fixed-line network Uncertainties in its break-up plan Lacks scale and support Source: Literature Research; McKinsey Analysis; IDC

MOST OPERATORS HAVE EXISTING PARTNERSHIPS WITH FOREIGN PLAYERS
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt MOST OPERATORS HAVE EXISTING PARTNERSHIPS WITH FOREIGN PLAYERS Operator* Partner Type of partnership China Mobile China Unicom China Telecom China Netcom Vodafone HP Hutchison Telecom KDDI SK Telecom Telstra AT&T Japan Telecom British Telecom News Corporation, Goldman Sachs, etc. SingTel Equant Vodafone owns 2% equity share in China Mobile (HK) Strategic alliance agreement with Vodafone to be CMHK’s long term preferred partner in areas including R&D technical expertise, standard and protocol development etc. Wireless data R&D JV between majority owned subsidiary Aspire and HP Hutchison owns 1.5% of China Unicom (listed) Joint development of technology for high speed mobile phone KDDI to supply CDMAOne mobile phones Strategic Alliance to aid China Unicom’s CDMAOne network development and 3G transition Strategic alliance to aid Unicom develop CDMA network AT&T owns 25% of Shanghai Symphony Telecommunications MOU in fixed line, mobile phone and fast-data transmission areas for client companies MOU signed in 1998 to cooperate in technology and business opportunities Joint venture providing end-to-end data communication service for MNCs set up in 1999 Partners bought 12% of China Netcom for $324 million in private placement Strategic alliance to provide safe, efficient data transmission for Singapore companies with subsidiaries, partners in China Service agreement to co-develop VPN offerings * China Railcom is involved in no relevant partnerships Source: Literature Research; Analyst reports

IN MOBILE TELECOM SERVICE MARKET, CHINA MOBILE WILL LIKELY REMAIN THE DOMINANT OPERATOR IN BOTH REVENUE… US$ Billions, percent CAGR E Percent 100%= 8.4 11.8 16.2 21.1 27.9 32.0 34.5 38.4 3 6 3 7 Other operators N/A 10 67 China Unicom China Mobile 18 1998 1999 2000 2001E 2002E 2003E 2004E 2005E Source: McKinsey Analysis

…AND SUBSCRIBER* SHARE
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt …AND SUBSCRIBER* SHARE Millions, percent 100%= 11 25 43 85 145 155 176 197 218 3 5 Other operator(s) China Unicom China Mobile 1997 1998 1999 2000 2001E 2002E 2003E 2004E 2005E * forecast are net subs after inactive and multi-sim-card reduction Source: Deutsche Bank; JP Morgan; McKinsey analysis

PROPORTION OF EACH OPERATORS’ SUBSCRIBERS* INCLUDED IN LISTED ENTITY
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt PROPORTION OF EACH OPERATORS’ SUBSCRIBERS* INCLUDED IN LISTED ENTITY Listed company Millions, percent China Mobile Unicom 100%= 23.5 37.8 66.3 111.0 108.4 112.9 118.7 126.6 100%= 1.5 5.2 18.7 44.0 47.0 55.2 63.5 67.8 86 82 68 65 66 66 66 65 61 63 61 61 62 62 Unicom Listed 41 28 CMHK 1998 1999 2000 2001E 2002E 2003E 2004E 2005E 1998 1999 2000 2001E 2002E 2003E 2004E 2005E CMHK Provinces Beijing** Fujian Guangdong Guangxi** Hainan Hebei** Henan Jiangsu Liaoning** Shandong** Shanghai** Tianjin** Zhejiang Unicom (HK) Provinces Anhui Beijing Fujian Guangdong Hebei Hubei Jiangsu Liaoning Shandong Shanghai Tianjin Zhejiang * forecast are net subs after inactive and multi-sim-card reduction ** Acquired by CMHK from parent in Oct 2000 Source: JP Morgan; Industry interviews; McKinsey analysis

CHURN IS ALREADY SIGNIFICANT WITH BOTH OPERATORS AND WILL CONTINUE TO INCREASE DRIVEN BY INCREASING COMPETITION WITH IMPACT GREATEST ON CHINA MOBILE Percent Comments China Mobile's broader network coverage leads initially to far lower churn rate than for China Unicom China Unicom's rapidly expanding network and higher-quality CDMA connection will increase CMHK's churn going forward Intensifying competition causes both sets of churn rates to rise As networks become similar, customers appreciate lower China Unicom price China Mobile HK China Unicom Source: Analyst report; Company annual report

CHINA MOBILE ENJOYS GREATER ARPU, ALTHOUGH LISTED COMPANIES FOR BOTH OPERATORS GENERATE GREATER ARPU THAN UNLISTED US$/month Comments Decreasing trend due to Increased competition and lower tariffs Increased mix of low-value prepaid users Deepening penetration which increases low-value usership China Mobile's ARPU higher due to Higher prices than China Unicom Greater concentration of high-end users because of breadth of coverage and market presence CMHK Unicom (listed) CM (unlisted) Unicom (unlisted) Source: Deutsche Bank; McKinsey analysis

CHINA MOBILE'S ARPU EXCEEDS CHINA UNICOM'S DESPITE A LARGER PROPORTION OF PREPAID CUSTOMERS Prepaid Postpaid Blended Prepaid vs. postpaid ARPU comparison USD/month CAGR Percent 2001 2005 -5 CMHK -1 Blended ARPU US$/month CAGR Percent China Unicom (listed) -4 2001 2005 -6 Prepaid subscribers as percentage of total subscribers Percent CMHK CAGR Percent WA China Unicom (listed) -5 2001 2005 19* CMHK China Unicom (listed) 43** China Mobile’s ARPU exceeds China Unicom's despite a larger proportion of prepaid customers due to a far higher postpaid ARPU China Mobile's higher postpaid ARPU is due to its high-end customer base and superior marketing as well as China Unicom's lower tariffs charged * 100% = 75.9 million subscribers in 2001 and million in 2005 ** 100% = 28.6 million subscribers in 2001 and 54.9 million in 2005 Source: Goldman Sachs; Morgan Stanley; Team analysis

SHARE PRICES FOR BOTH OPERATORS HAVE DETERIORATED IN 2001 PRIMARILY DUE TO PRICING PRESSURES Share price HK$ MII announces cancellation of registration fee CMHK China Unicom Market capitalization US$ billions 120.4 69.5 20.9 17.5 Share price took a hit on fears that tariff cuts and spending on a new CDMA network will eat into earnings China Mobile announces new lower tariff packages Source: Hong Kong stock exchange; DataStream

NONETHELESS, BOTH OPERATORS STILL ENJOY HEALTHY EBITDA AND RETURN ON ASSETS, DRIVEN BY LOWER COST BASES, ESPECIALLY COMPARED TO CHINA TELECOM US$ Billions, 2000 Percent of revenue Percent of revenue ROA Percent Player*** Revenue EBITDA Net profit CMHK 54.7 18.8 China Unicom (listed) 44.8 13.8 China Telecom N/A N/A 0.5 0.1 * Total China Mobile revenue 14.3 billion ** Total China Unicom(Listed + unlisted) mobile revenue is US$1.9 billion; listed portion contributes 1.5 billion (balance paging and fixed line) *** Netcom and Railcom financials N/A Source: JP Morgan

KEY MESSAGES 3. Wireless data services are expected to grow quickly in China to a market of potentially over US$4 billion by 2005, used by 43% of all mobile users. Interest from consumer surveys have been high and operators and other players are actively building services in the market. While early WAP services have failed to catch on, SMS has grown exponentially with up to 20 billion SMS messages estimated for The early adopters will be mobile professionals and modern youth, who will require services and devices tailored to their needs.

RESULTS OF A CHINESE WIRELESS SURVEY (2000) INDICATED STRONG INTEREST IN MOBILE DATA SERVICES Key sample characteristics Interview of 100 randomly chosen respondents in Shanghai, Beijing and Guangzhou, representing a good cross-section of different types of mobile users 68% of respondents express interest in receiving data services 20% of respondents are fixed line internet users* Median Internet usage of 30 hours/month Median mobile bill of RMB 300/month Very disinterested Not interested Very interested Neutral Interested * Internet user number is significantly higher than Internet subscription number, because of the sharing Internet access among users Source: Mobile user survey, 2000

CONSUMERS HAVE GREATEST INTEREST IN EMAIL AND MOBILE VAS
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt CONSUMERS HAVE GREATEST INTEREST IN AND MOBILE VAS Interest in transactions delivered over mobile Interest in content delivered over mobile Percentage of respondents Percentage of respondents Not interested Neutral Interested Flight/ train sche-dule and reser-vation News/ sports/ Enter-tain-ment Stock quotes Inter-net brows-ing City map Yellow pages Mobile VAS (billing, location, etc.) Mobile banking Inter- active games For content, Chinese consumers show greatest interest in , flight/train scheduling and reservation, and news For transaction, mobile VAS and m-banking are the most popular m-commerce applications for Chinese consumers Source: Mobile user survey, 2000

CHINA’S WIRELESS DATA SERVICES EXPECTED TO GROW QUICKLY
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt CHINA’S WIRELESS DATA SERVICES EXPECTED TO GROW QUICKLY ESTIMATE Number of mobile subscribers Millions, Percent Revenue from wireless data US$ billions Voice only Data and voice Low case High case CAGR 5.4 171 145 43% 87 2.5 155 26% 43 1.1 15% 9% 0.4 4% 0.1 '99 '00 01E 02E 03E 04E 05E 01E 02E 03E 04E 05E Wireless data service ARPU/month/actual user US$ 2.6 2.7 3.0 3.3 Source: IDC report; Literature research; McKinsey analysis

HANDSET AND PDA MANUFACTURERS WILL FURTHER DRIVE MOBILE DATA
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt HANDSET AND PDA MANUFACTURERS WILL FURTHER DRIVE MOBILE DATA Number of handset units sold Millions Number of mobile device units sold Millions CAGR CAGR 86.1 14% Non-data enabled 65.6 8% -28% 54.9 57.5 -28% 67.2 46.6 44.6 45.0 55.8 50.3 Non-internet enabled 90% 42% 44.7 45.2 Internet enabled handset 86% 69% 42% 45% 63% Internet enabled 23% 30% 74% 2000 2001E 2002E 2003E 2004E 2005E 58% 44% 30% 24% 183% Wireless PDA 23% 7% 14% 0.3% 0.3% 2% Number of PDA units sold Millions 2000 2001E 2002E 2003E 2004E 2005E Comparison of unit shipment in China vs. US Millions China US CAGR 25.0 35% 17.3 11.9 -4% Other 5.6 6.8 8.3 31% 82% 193% Wireless 2% 2% 11% 56% 2000 2001E 2002E 2003E 2004E 2005E 2001 2005 Source: IDC; CCID; SINO-MR; Gartner; Interviews; Cahners In-Stat Group; literature search; Team analysis

NUMEROUS PLAYERS INVOLVED IN THE PRC WIRELESS DATA MARKET
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt NUMEROUS PLAYERS INVOLVED IN THE PRC WIRELESS DATA MARKET Estimated number Key Player (examples) Players Summary Launched WAP service/portals with support of partners GPRS trials in progress and scheduled for launch in October, 2001 China Unicom launched CDMA (64kbps) and 1XRITT (140kbps) in Jan 2002 China Mobile initiated 3G trials in November, 2001 2 China Mobile China Unicom PRC mobile operators Equipment Vendors WAP sites launched M-commerce enabler emerging and forming partnership with content suppliers or/and PRC operators 2-5 Monternet (China Mobile) Uni-info (China Unicom) PRC wireless portal platforms Leading PRC portals launched WAP site Supported by equipment vendors and local operators 10-20 Sohu.com China.com Sina.com PRC wire-line portals International m-portals/HK operators Actively launching WAP / GPRS trials in Hong Kong Announced interest in PRC Acquiring startups to strengthen capability Developing relationships with PRC Operators 5-10 SmarTone /BT Sonera SK Telecom Hutchison New World Source: Literature search

OPERATORS ARE ESPECIALLY ACTIVE IN PURSUING WIRELESS DATA
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt OPERATORS ARE ESPECIALLY ACTIVE IN PURSUING WIRELESS DATA Operators are actively pursuing wireless data services Competitive pressure China Mobile’s domination of the market is threatened by Unicom’s aggressive low price and value added services offerings 2 new operators may be granted licenses to enter wireless market after 2002 The lever of competition in mobile communication market will be VAS High value mobile users express their willingness to switch operators in order to access wireless data services China Mobile offers WAP service in all cities, and has gateways in 4 cities Unicom also launched WAP service in 6 major cities Both China Mobile and China Unicom are actively forming partnerships with mobile Internet application providers and ICPs to boost up their WAP offerings Potential new operators, China Telecom and China Netcom also express strong desires to focus on wireless data services as a tool to gain customer base Operators have introduced own wireless portals Monternet by China Mobile Uni-info by China Unicom Source: Literature search; Analyst reports; Team analysis

WAP SERVICES HAVE FAILED TO TAKE OFF IN CHINA…
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt WAP SERVICES HAVE FAILED TO TAKE OFF IN CHINA… WAP has failed to take off Content Mainly informational services such as news, weather Text content Slow take off 450,000 subscribers in 2000 Less than 300,000 users in 2000 Major roadblocks to success Slow speed (download, processing) Limited compelling WAP content Initial premium pricing and limited availability of WAP enabled handsets Difficult input Unstable connection Limited coverage Relative high mobile Internet charge Small screen with unclear Chinese character displays Hard to navigate Lack of security Source: Literature search; Gartner Group

...BUT SMS IS TAKING CHINA BY STORM
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt ...BUT SMS IS TAKING CHINA BY STORM SMS is enjoying a fast take off Key success factors Content Get and send text messages Play simple games Real time contest Download ring tones Download screen savers Exchange jokes 20 million active users currently 19.9 billion messages sent in 2001 2% of CMCC revenue in 2000 was from SMS Average daily SMS volume in Shanghai is 3 million in July 2001 China Mobile and China Unicom linking their SMS services SMS enabled PDAs launched Low usage cost 0.10 RMB per message Reliable service Proven technology Improved and easier input Nationwide coverage by CMCC and now by Unicom too No new handset needed Fun Lesson learned Mobile data services need to be simple, cheap, reliable, and fun Source: Literature search; Team analysis

EARLY TAKE UP OF MOBILE DATA IS ENCOURAGING AS CONSUMERS ARE DEMONSTRATING WILLINGNESS TO PAY
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt Data service offerings Data service performance By operators China Mobile Product/service SMS, including personalized information, flight/train schedule inquiry, stock quote and online chatting WAP, including , gaming and PIM Pricing RMB0.1 per ordinary message for sending with free for reception; RMB0.2-2 charged by service provider and CM for each specialized SMS WAP pricing: RMB0.15 per minute for first 200 minutes, free for another 300 minutes and RMB0.15 per minute for any extra China Unicom SMS, including personalized information, PIM, entertainment and stock quote Online pager RMB0.1 per ordinary message for sending with free for reception; same charge for specialized SMS as CM China Mobile 2001 15.9 billion 29% 1.2% Number of short message SMS Penetration in user base*** Percent of total revenue* China Unicom 2001 4 billion N/A N/A Number of short message SMS Penetration in user base Percent of total revenue* QQ 1st half 2001 By ICPS Mobile QQ ( Product/service Unified instant messenger (mobile QQ) enabling mobile to PC communication Pricing 5 RMB monthly fee RMB per out going message with free incoming messages via CM mobile No monthly fee, but 0.1 RMB per out going message and 0.05 RMB per incoming message via CU mobile 20 million 0.9 million** Total subs Mobile QQ subs * Include both wireless data and VAS ** only CM QQ subs included *** CMHK Source: Semi-annual reports; Press release; Website; Interviews; Team analysis

“VIRTUAL PETS” IS ONE EXAMPLE OF SMS APPLICATION IN CHINA
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt “VIRTUAL PETS” IS ONE EXAMPLE OF SMS APPLICATION IN CHINA Lunar狼吞虎咽的把饭吃光了。"谢谢主人，再来点吧。"米增加5；金币减少10；经验增加1。 Lunar has eaten the food like a tiger. “Thank you, master. Some more, please.” Use 10 gold coins to buy 5 rice units, add one experience point. Linktone’s “Virtual Pets” SMS game allows subscribers to educate their animal of choice - ranging from tigers to pigs to the popular koala - send it on dates and put it to bed, rather like the Japanese electronic pet, Tamagotchi The cost is very affordable at RMB0.10 per SMS More Back More Back 申请侍应生职位成功，由于工作努力，获得30个金币！经验增加3 Your pet was successfully hired as a waiter. Because of his hard work, he has earned 30 gold coins, and three experience points. More Back 你的宠物魅力十足，cici想跟你做朋友（跟对方说话请输入P空格cici空格再写内容），30字以内。 Someone has a crush on your pet! (To talk to the pig named cici, enter P_cici_ and a note) Do not exceed 30 characters. More Back China, like Japan, combines a love of gadgets with a “cult of the cute” Source: Linktone website; literature search

QQ HAS BEEN VERY SUCCESSFUL IN GAINING SUBSCRIBER BASE WITH UNIFIED MESSENGING Basic functions: Sending SMS between mobile phone and QQ Using mobile phone to check information stored on QQ Using mobile phone to check if friends are on-line Service fee: Services are free for users who only use OICQ on the Internet Subscribers are charged for using mobile QQ via mobile phone Fee structure for China mobile subscribers is : 5 RMB monthly fee RMB per out going message, incoming message is free of change* Fee structure for Unicom subscribers is : no monthly fee, but 0.1 RMB per out going message and 0.05 RMB per incoming message Mobile QQ in a semi-instant messaging type of mobile data application, which originated from the popular internet based instant chatting and messaging application, I.e., OICQ, where subscribers can chat with each other and be notified if their friends are on line at real time TenCent claims to have 20 million subscribers in total In fact, only 0.9 million of which are actual mobile QQ users from whom China Mobile collects monthly subscription fee for Ten Cent * While subscribers don’t need to pay for incoming messages, TenCent is required to pay 0.05 RMB for each incoming message to China Mobile Source: Ten Cent, team analysis

FOUR KEY MOBILE DATA USER SEGMENTS CAN BE IDENTIFIED
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt FOUR KEY MOBILE DATA USER SEGMENTS CAN BE IDENTIFIED Segment Description Share of sub base % Mostly managers or entrepreneurs Use mobile phone mainly for business Travel a lot and have significant roaming needs Care about voice quality and network coverage High personal income High mobile data potential: already 25% of them use SMS frequently Mobile professionals Mostly under 30 years old Use mobile phone mainly for personal communication convenience Interested in new technologies and willing to try out new things Many unmarried people, with high educational level High mobile data potential: already 47% use SMS regularly Modern youth Care the most of mobile communication cost Relatively lower income Older than average and less educated Lots of pre-paid users Lowest ARPU Very low SMS usage currently: <13% Little potential for mobile data Conservative mainstream Mostly married, over 30 years old and under college education Don't care much about technology and trend Mainly use voice services for local calls Very low SMS usage currently: <15% Little potential for mobile data Indifferent laggard Source: Survey research on 18 cities and >2500 mobile users; Team analysis

MOBILE PROFESSIONALS, YOUTH MOST ATTRACTIVE BECAUSE OF HEAVY DATA USAGE AND HIGHER ARPU ESTIMATE Share of total revenues Percent of total revenue Share of total subscribers Percent ARPU USD SMS use Percent PC internet use Percent Segment Mobile professionals Modern youth 47 Conservative mainstream <13 Indifferent laggard Source: Judgment and analysis based on survey research on 18 cities and >2,500 users for China Mobile and rough estimates for China Unicom

BOTH TARGET SEGMENTS WILL REQUIRE DEVICES WITH FEATURES CUSTOMIZED TO THEIR NEEDS Customer segment Description Key user needs Key features Mobile professional Mostly managers or entrepreneurs Use mobile phone mainly for business Travel a lot and have significant roaming needs Care about voice quality and network coverage High personal income High mobile data potential: already 25% of them use SMS frequently Messaging/ on the go Information (e.g., stock quotes, weather, news, local guide) Personal information management Mobile commerce Mobile stock trading Mobile office Always up-to-date unified messaging (hotmail, voice mail, 2-way SMS, IM) Customized information Always up-to-date PIM, notifications, alerts, outlook sync. Commerce and stock trading capabilities Secure browser of corporate intranet and internet Modern youth Mostly under 30 years old Use mobile phone mainly for personal communication convenience Interested in new technologies and willing to try out new things Many unmarried people, with high educational level High mobile data potential: already 47% use UMS regularly Messaging/ Information (local news, weather, event) Games/entertainment Always up-to-date unified messaging (hotmail, voice mail, IM, 2-ways SMS) Customized information Network gaming Downloads (rig tone, basic image, music and video clips) through PC PIM, PIP, notification, alerts, outlook sync Source: Team analysis

MESSAGING, INFORMATION AND ENTERTAINMENT WILL BE KEY OFFERINGS FOR MOBILE PROFESSIONALS AND MODERN YOUTH IN THE NEAR TERM 02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt % of people interested Mobile professionals, N  370 Modern youth, N  500 Messaging/ 90.0 86.3 Information (stock quotes, news, weather, restaurants) 61.2 68.7 M-shopping 22.1 25.7 M-stock trading 21.0 23.7 Entertainment (ring tone & screen download) 19.8 35.1 M-advertising 17.1 19.5 Source: Survey research; Team analysis

KEY MESSAGES 4. Regulatory changes loom, particularly with the accession of China to the WTO. While foreigners will be unlikely to set up MVNOs, WTO will allow greater participation of foreigners in basic and value added services, although geographic limitations will exist through 2004 and Chinese players will be required to own at least 50% of telecom service ventures (51% for basic services). Regulatory risks remain, with no means to appeal regulator decisions, unclear interpretation of regulation including WTO commitments, and the government’s track record of intransparent and unpredictable decision making. (See separate regulatory PD for details) * Mobile virtual network operator

REGULATORY AND POLITICAL CHANGES AND IMPLICATIONS FOR FOREIGNERS PLAYING IN telecom LOOM Decision point 2001 2002 2003 2004 2005 Key events WTO December, 2001 Accession Value-Added Services Up to 30% within operating Up to 49% within operating Up to 50% within operation Foreign and geographical restrictions 3 cities (BJ, SH, GZ) 17 cities nationwide Up to 49% Mobile voice and data services Up to 25% within operating Up to 35% within operating 3 cities (BJ, SH, GZ) 17 cities Nation- wide Relevant legislation Wu Jichuan promised a draft by January 1st. However, comprehensive law not likely to be drafted in that time according to industry insiders. Law not likely to expand beyond WTO concessions Promulgation of Telecommunications Law Drafting of foreign investment law in telecommunications Must be completed before/at time of WTO accession Not likely to expand beyond WTO concessions Mobilization of telecommunications commission Drafting of a development blueprint for the telecommunication industry to manage operation of fixed-line, mobile and Internet business Zhu Rongji to mobilize commission and lead sector reform Change in political leadership Announcement of succession Transition of power in senior leadership Limitations on partnership structures lifted gradually Operators will be more deal ready once laws are official Foreign investments will still be initially restricted geographically Risk for shift in regulatory direction and policy making Change may make relationship investments obsolete Maximum foreseeable opening of VAS in China telecom market Maximum foreseeable opening of basic services in China telecom market Implications for foreigners Source: Legal and industry interviews; team analysis

MVNOs ARE NOT LIKELY TO BE VIABLE IN THE FORSEEABLE FUTURE
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt MVNOs ARE NOT LIKELY TO BE VIABLE IN THE FORSEEABLE FUTURE Legal status Current activity Future prospects MVNO operation would require a license Licenses would be subject to government approval Regulations governing basic services and value-added services would apply to MVNOs including restrictions on foreign participation Currently a hot topic discussed by industry followers as a means to help transform service orientation of China’s telecom landscape MVNOs or services running on equipment infrastructure of licensed operators do exist, including in fixed line; however, these are illegal and the government is currently cracking down on these infractions in an effort reminiscent of crackdown of Chinese-Chinese-Foreign companies (CCFs) MVNO activity is reportedly present in Liaoning and Southern provinces; these are also not recognized legally by the government and have been retained by disgruntled investors of the PLA's Great Wall CDMA network and will likely disappear after asset transfer to Unicom is completed Chinese government is discussing MVNO concept as a means to avoid capacity overbuild, particularly with new licensees Existing operators unlikely to consider MVNOs, particularly in key and attractive regions given spectrum shortages and no desire to increase competition MVNOs would still require a license from the government, will be limited geographically through 2004, and even by then, require 50% or more Chinese ownership MVNOs are not likely to be introduced in the foreseeable future Source: Legal interviews; Industry interviews Source: Legal and industry interviews

Basic Telecommunication services
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt VALUE ADDED SERVICES WILL BE LIBERATED UNDER WTO QUICKER THAN BASIC TELECOM SERVICES BUT LIMITATIONS WILL REMAIN Basic Telecommunication services Mobile voice and data services Domestic services (wireline) Telecom VAS (mobile and wireline) Period Upon entry (2002)* Foreign investors can obtain up to 25% ownership Beijing, Shanghai, Guangzhou Unchanged (foreign participation not allowed) Foreign operators can obtain up to 30% ownership in Beijing, Shanghai, Guangzhou Foreigners will still be prohibited from investing or operating in fiber-optic network License availability will be strictly limited even after WTO accession and subject to Chinese government approval Foreign investment is limited to no more than 50% even post WTO After 1 year (2003) Foreign investors can obtain up to 35% ownership in 17 cities Foreign operators can obtain up to 49% ownership in 17 cities After 2 years (2004) Foreign operators can obtain up to 50% ownership nationwide After 3 years (2005) Foreign investors can obtain up to 49% ownership in 17 cities Foreign investors can obtain up to 25% ownership in Beijing, Shanghai, Guangzhou After 5 years (2007) Foreign investors can obtain up to 49% ownership nationwide Foreign investors can obtain up to 35% ownership in 17 cities After 6 years (2008) Foreign investors can obtain up to 49% ownership nationwide * WTO entry potentially effective January 2002 with likely November 2001 ratification Source: Literature search; WTO Working Team Report November 13, 2001

VALUE ADDED SERVICES (VAS) ARE DEFINED AS PROVISION OF SERVICES OVER SOMEONE ELSE’S NETWORK BACK UP Basic Telecommunication services Telecommunications VAS Definition Ownership of networks Fixed, domestic, long distance and local telephone Provision of services over other's network Services included Paging services Mobile voice and data services: Analog/digital/cellular services Personal communication services Domestic Services Voice services Packet-switched data transmission services Circuit-switched data transmission services Facsimile services Domestic private leased circuit services International Services International closed user group voice and data services (use of private leased circuit service is permitted) Electronic mail Voice mail On-line information and database retrieval Electronic data interchange Enhanced/Value-added facsimile services (including store and forward, store and retrieve) Code and protocol conversion On-line information and/or data processing (including transaction processing) Source: WTO Working Team Report November 13, 2001

APPENDIX- PLAYERS PROFILE
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt APPENDIX- PLAYERS PROFILE China Mobile and China Unicom are duopoly in China’s mobile telecom service market. China telecom, China Netcom, China Railcom, and Jitong(newly merged by China Netcom) are potential players of this market.

PLAYER PROFILE – CHINA MOBILE
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt PLAYER PROFILE – CHINA MOBILE Basic Information Strategic Direction Subscriber Base Financial Highlights Market Cap Largest mobile operator in China Own and operate mobile networks across China since early 1990s Established: 1999 Head office: Beijing CEO: Zhang Ligui # of employee: 38,343 (CMHK) Strategy Maintain market share & keep high-end customers in mobile business Enter Internet business – mobile and fixed Be on leading edge of technology 30% of 2005 revenue from non-voice services New initiatives Launched “Monternet” to actively prepare for 3G CMHK will acquire mobile network in the rest 18 provinces from CMCC early next year Subscriber Million ARPU US$/m (CMHK) US$ Billion Revenue EBITDA Profit ROE 2000 1999 67 38 11.7* 8.5 6.4 1999 2000 4.7 Stock price: HK$24.10 Market Cap: ~HK$440bn (Oct. 30, 2001) 2.2 30 22 0.6 30% 14% 1999 2000 * Total China Mobile revenue is US$ 14.3 billion Service Offering Main Partnership Strengths & Weaknesses Ownership Structure Impact of China Telecom Breakup* Mobile voice service Mobile data service Vodafone has 2% stake in CMHK Strength Leader in China’s mobile market Extensive coverage & comprehensive network Strong strategic partner like Vodafone Strong brand Quicker to market new value-added service Owns its own R&D arm Weakness Under constant threat due to Unicom’s low price policy ARPU is threatened by the increase in prepaid subscriber Ministry of Finance No impact Original proposal to merge with Jitong rejected based on conflict with corporate governance of publicly held firm 100% Public shareholder** China Mobile Revenue Breakdown 75% 25% Monthly fees Connection fees 100% Unlisted Provincial network CMHK (listed) Other 100% Usage fees ** Includes Vodafone (2.0%) Source: Literature search; industry interviews; IDC; Team analysis

PLAYER PROFILE – CHINA UNICOM
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt PLAYER PROFILE – CHINA UNICOM Basic Information Strategic Direction Subscriber Base Financial Highlights* Market Cap Strategy Betting on CDMA to win high value subscribers from China Mobile 30% of 2005 revenue from non-voice services Increase network coverage and quality in fixed-line Focus fixed-line business on corporate users New initiatives Invest USD 18mm to build up ethernet fiber across 9 provinces and invest USD ~30 bn in next 5 years in its voice and data business The 1st operator in the world outside US to operate large scale CDMA & GSM networks Own and operate 2nd largest mobile network across China since 1996 Established: 1994 Head office: Beijing CEO: Yang Xian Zhu # of employee: ~35,400 (listed company) Subscriber Million ARPU US$/m US$ Billion Revenue EBITDA Profit ROE 2000 1999 19 2.9 5 2.1 1999 2000 1.3 0.7 0.4 Stock price: HK$7.35 Market Cap: ~HK$ 91bn (Oct. 31, 2001) 0.1 19 14 6% 7.6% 1999 2000 * All the data are of CU(listed) Service Offering Main Partnership Strengths & Weaknesses Ownership Structure Impact of China Telecom Breakup Fixed-line telecom service Mobile voice and data service (GSM & CDMA) Internet-related service Pager Hutchison has 1.5% stake in China Unicom Ltd. (listed) Strength Data speed advantage over China mobile with CDMA network No spectrum shortage on CDMA First mover in building high-capacity backbone with national reach Weakness Network uses hybrid ATM/IP-based technology, which is more expensive to operate compared to a pure IP network Ministry of Finance No impact Original proposal to merge with China Railcom rejected based on conflict with corporate governance of publicly held firm 79% Public Sharehol -ders*** 13 minority shareholders** 21% CU (Parent) Revenue Breakdown 23% 77% Fixed line & data Cellular service 100% Unlisted network & CDMA nationwide China Unicom (listed) Paging service **including MII, MOR & MOEP ***1.5% held by Hutchison Source: Literature search; industry interviews; Team analysis

POTENTIAL PLAYER PROFILE – CHINA TELECOM
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt POTENTIAL PLAYER PROFILE – CHINA TELECOM Basic Information Strategic Direction Subscriber Base Financial Highlights Market Cap Incumbent fixed-line provider in China Own and operate fixed-line networks covering across China, and its fiber lines is 1.2 million km, covering 75%+ of China cities & counties Established: 1994 Head office: Beijing CEO: Zhou Deqing # of staff: 533,000 Strategy Strengthen fixed-line status, doubling its fiber network over the next 5 years Supplement fixed-line business with fast-growing mobile business New initiatives IPO in 2002 or 2003 Facing breakup to 2 companies Fixed-line US$ Billion Revenue Profit ROA 2000 144 1999 109 19.8 18.6 NOT LISTED 1999 2000 0.11 Internet N/A 4.1 7.4 0.17% 2000 2001E N/A Service Offering Main Partnership Strengths & Weaknesses Ownership Structure Impact of China Telecom Breakup Local and long distance voice service Data/Internet ISP Strength Comprehensive nationwide network which dominates last-mile access to customers Extensive customer relationships given its status as the incumbent Weakness Likely to be saddle with national service obligation, a big issue given the wide income disparities in China AT&T invested 25% in Shanghai Symphony Telecom Other cooperation's with J-phone and British Telecom Ministry of Finance Spilt into two companies Two regional monopolies be created out of one national incumbent Northern Unit will merge with CNC and Jitong Both units will be released from public obligation Both units likely to receive mobile licenses 100% China Telecom Revenue Breakdown Long distance service Data/ internet 100% 100% Fixed Datacom 100% Local Across ISP Local voice Source: Literature search; industry interviews; Team analysis

POTENTIAL PLAYER PROFILE – CHINA NETCOM
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt POTENTIAL PLAYER PROFILE – CHINA NETCOM Basic Information Strategic Direction Strategic Direction Financial Highlights Market Cap Owns 9,376km 40GB trunk network connecting 17 major cities Established: 1999 Head office: Beijing CEO: Edward Tian # of Employees: 2,674 Strategy Focus on providing high quality, low-cost infrastructure & value added services & solutions Target communication-intensive corporate and high-end residential customers Compete through differentiation & distinctive value proposition Build a strong brand Establish strategic partnership with world-class tech/biz leaders New initiatives Private equity replacement in Feb 2001 Corporate data service launched Strong take-up in Netcom’s IDC Signed agreement with Sing Tel thus become less reliant on CT in international bandwidth 2000 US$million 65 Revenue Turned profit in Sept., 2001 NOT LISTED Service Offering Main Partnership Strengths & Weaknesses Ownership Structure Impact of China Telecom Breakup* VoIP card & Corporate Data Services Backbone & bandwidth wholesale VPN, high speed bandwidth, international integrated data services Raised $325 million for 12% stake through private placement in 2001 Identity of JV partners remains unclear Strength High quality management High capacity backbone based on IP technology Strongly positioned on international bandwidth through alliance with C2C and potential international link through its Hong Kong gateway Weakness Inadequate last-mile access to customers currently SARFT Merge with China Telecom Northern Unit and Jitong Obtain valuable fixed-line infrastructure and business Get access to last mile to boost existing backbone networks and business 15% Chinese Academy of Science SH Gov’t 15% Revenue Breakdown 15% Private investors Lease Bandwidth Ministry of Railway Voice 40% CNC 100% 15% Data Source: Literature search; industry interviews; Team analysis; JP Morgan

POTENTIAL PLAYER PROFILE – CHINA RAILCOM
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt POTENTIAL PLAYER PROFILE – CHINA RAILCOM Basic Information Strategic Direction Subscriber Base Financial Highlights Market Cap Own 2nd largest fixed-line network(120,000+ km) in China covering 500+ cities Internet covers 36 cities; paging network cities; IP 16 cities Fiber network is 42,000km in length and 10,000km of its backbone has been updated with DWDM Established: Dec., 2000 Head office: Beijing CEO: Cui Qing # of employee: 65,000 Strategy Strengthen the service to railway transportation Explore public market Enhance service quality Focus on HR and Technology New initiatives Invest $ 240mn in broadband network construction Invest $384mn in fixed-line network construction Enter satellite communication business 2000 million 1.0 1.4 2000 US$billion 0.12 1.6 1.3 Fixed-line Pager Revenue Asset Registered Capital NOT LISTED Service Offering Main Partnership Strengths & Weaknesses Ownership Structure Impact of China Telecom Breakup Fixed line voice service Paging IP, DLD Backbone leasing Strength Existing nationwide network 10-20% price advantage Weakness Network are all constructed along railway, restricting development of service to public Network need to be upgrade to meet the massive communication demand of public Financing channel need to be explored Lack of talent Acquired 20% share of Shin Staellite PCL (Thailand) with cash and stock exchange No impact Original proposal to merge with Jitong rejected based on conflict with corporate governance of publicly held firm Candidate for mobile license (likely TD-SCDMA) Ministry of Railway 15 china railway branches 51% Revenue Breakdown 49% CRC 100% N.A. Source: Literature search; industry interviews; Team analysis

POTENTIAL PLAYER PROFILE –JITONG
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt POTENTIAL PLAYER PROFILE –JITONG Basic Information Strategic Direction Subscriber Base Financial Highlights Market Cap IP infrastructure and value-added service provider Leading ISP & VoIP player in China with telecom service market share of 10% Established in 1994 ISP licensed in 1995 IP phone licensed in 2000 Licensed in 1998 to operate ChinaGBN, China’s national public computer network Coverage: 200 cities # of employee: ~2000 Merging into China Netcom in April 2002 Strategy Leading comprehensive telecommunication company Meet customers’ demands with tailored services New initiatives IPO 2nd time postponed Signed agreement with Nortel and Digital China to build self-owned backbone Subscriber mn 2000 US$million 60 1.1 Revenue NOT LISTED 0.3 1999 2000 Service Offering Main Partnership Strengths & Weaknesses Ownership Structure Impact of China Telecom Breakup Internet connectivity-dial up permanent ( via fiber, microwave, & satellite) VoIP VAS & VPN IDC Strength A market leader in VoIP Nationwide network and various technologies, e.g. satellite & SDH Own customer loyalty Strong in sales given its smaller scale of operation Weakness Financially weak for further expansion and infrastructure investment Management style is strongly entrenched with SOE mentality Quality personnel leaving to join other telecom co. Heavily dependant on VoIP revenues iPass Nortel, Digital China IRICO To be merged with China Netcom and the Northern Unit of China Telecom 45% Shanghai Hua Hong SDIC Electronics Revenue Breakdown 40% 10% Other SOEs MII VoIP & others <5% 0.14% 57% JiTong 43% ISP Source: Literature search; industry interviews; Team analysis

APPENDIX- 3G TECHNOLOGY STANDARDS CHOICES
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt APPENDIX- 3G TECHNOLOGY STANDARDS CHOICES Mobile technology in China is advanced and cutting edge. Operators are launching packet switch networks in GPRS and CDMA 1XRTT, and plan to launch 3G by The country will likely three technologies—W-CDMA, TD-SCDMA and CDMA2000—in some form or another. China has actively been developing TD-SCDMA, which has significant benefits over other alternatives, as an ITU approved 3G standard.

CURRENT PUBLIC MOBILE SERVICE SPECTRUM RESOURCE ALLOCATION IN CHINA COVERS BOTH GSM AND CDMA ETSI GSM spectrum 825 835 870 880 885 890 909 915 930 935 954 960 Up Down Up Down Unicom CDMA 10 mhz CMCC Analog reallocation 5 mhz CMCC GSM 19 mhz Unicom GSM 6 mhz ETSI GSM spectrum 1710 1720 1745 1755 1785 1805 1815 1840 1850 1880 Up Up Down Down CMCC GSM 19 mhz Unicom GSM 10mhz Source: Operator interviews

CHINESE OPERATORS MOVING AGGRESSIVELY TO ROLL OUT PACKET NETWORKS
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt CHINESE OPERATORS MOVING AGGRESSIVELY TO ROLL OUT PACKET NETWORKS Projected date Projected timing range Now 2002 2003 2004 2005 Existing networks Key events 3 - 4 additional provincial operators China Mobile GSM Transfer of non CMHK operators to CMHK October commercial trials Launch Launch of GPRS 3G trials Launch of 3G China Unicom GSM/CDMA Launch of GPRS CDMA launch October trials (64 Kbps) Launch I x RTT (140 kbps) Implication by period Existing operators preparing for wireless data Crucial time period for 3G decision and positioning with new operators 3G networks and new mobile operators emerging Growth and maturation of 3G applications Source: Interviews; literature search

BOTH CHINA MOBILE AND UNICOM* FOCUSED THEIR GPRS PILOTS IN COASTAL AREAS China Mobile** Unicom** Beijing Mobile/ Motorola, 1.4m subs Tianjin Mobile/ Motorola, 500,000 subs Rationale Voice will remain key revenue source for mobile operators in the short run Demands for data service will primarily originate from developed coastal area & major inland cities Mobile data service is far from developed, which limits it to coastal areas It is estimated by China Mobile that GPRS market size will reach 1 million by end of 2001 Liaoning Mobile/ Huawei, 1.3m subs WuXi Unicom / Ericsson, Subscribers N/A Shanghai Unicom / Nokia, 360,000 subs Shanghai Mobile/ Siemens, 2m subs Zhejiang Mobile/ Alcatel, 2.5m subs Fujian Mobile/ Nokia, 2m subs Shenzhen Unicom / Motorola, 270,000 subs Guangdong Mobile/ Ericsson, 5.7m subs Guangdong Unicom / Nokia, 1m subs * Unicom GPRS trials on hold as attention has shifted to CDMA ** Subscriber numbers from early 2000 Source: Literature search, industry interviews

CHINA UNICOM HAS LAUNCHED NATIONWIDE CDMA NETWORK AS BASIS OF CDMA2000 NETWORK Capacity of subs, Million CAGR 35% Technology 50 CDMA2000 1XRTT 20 15 IS-95 2001 2002E 2005E Source: Literature search, industry interviews

EVOLUTION OF MOBILE RADIO STANDARDS IN CHINA LEADS TO THREE 3G ALTERNATIVES CDMA (China Unicom) GSM (China Mobile, Unicom) China timing IS-95A GSM 2G Present IS-95B GPRS 2.5G 2002 CDMA2000 1x RTT TSM* 2003 3G CDMA2000 3x RTT TD-SCDMA W-CDMA** (UTRA FDD) * Available by end of 2002 ** Assuming dual mode GSM/W-CDMA solution Source: Various vendors; McKinsey analysis

OUTLOOK FOR 3G STANDARDS IN CHINA
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt OUTLOOK FOR 3G STANDARDS IN CHINA TD-SCDMA W-CDMA CDMA2000 Support in China Ericsson Nokia Operators Huawei Government Operators (reluctant) Datang Siemens Nortel Huawei (moderate support) Qualcomm Lucent Samsung ZTE China Unicom China outlook Aggressively marketed by MNC vendors Remains the most widely known standard and will probably exist in China Favored by government as the first 3G standard to be deployed in China Seen as Chinese technology, which is very important to development of Chinese IT industry Unicom planning to upgrade CDMA network to 1XRTT in early 2002 Government and operator support for TD-SCDMA Delayed availability of FDD spectrum Availability of W-CDMA outside of Japan (including dual mode handsets) Technology development Terminal development (chipset) Lower market awareness and confidence by operators Not clear 3G license for CDMA 2000 would be granted, or if existing CDMA license allows upgrades to 1XRTT and 3XRTT Main obstacles in China All 3 standards likely to exist in some capacity in China Source: McKinsey analysis; Industry interviews

3G SPECTRUM HAS ALREADY BEEN ALLOCATED FOR W-CDMA AND TD-SCDMA, ALTHOUGH FDD SPECTRUM (W-CDMA) IS CURRENTLY USED FOR WLL IN SOME CITIES Void TDD FDD (uplink) Satellite TDD Void FDD (downlink) Void 20 mhz 15 mhz 60 mhz 30 mhz 60 mhz 1885 1900 1920 1980 2010 2025 2110 2170 2200 Air interface Mode Spectrum range Total spectrum Bandwidth Availability TD-SCDMA TDD 35 mhz 1.6 mhz Available now W-CDMA FDD (UL) (DL) 60 mhz 5.0 mhz Currently being used in certain cities for WLL, and expected to be cleaned up by Source: The International Engineering Consortium (IEC); Interviews; MII

W-CDMA IS SCHEDULED FOR LAUNCH PER CHINA MOBILE BY 2003, ALTHOUGH SOME QUESTIONS REMAIN ABOUT VIABILITY OF TECHNOLOGY AND AVAILABILITY OF DUAL MODE HANDSETS 2001 2002 2003 2004 2005 FDD Spectrum Allocated to FDD but not ready to award to operators FDD spectrum and license will be awarded to operators Technology Commercially available* Possible launch schedule Launch in * Not available until 2H 2002 at the earliest when the W-CDMA/GPRS dual-mode phone become available, and may be delayed until TD-SCDMA launched Source: Industry interviews; Government interviews; McKinsey analysis

TD-SCDMA IS LAGGING BEHIND IN TERMS OF COMMERCIALIZATION AMONG 3G CANDIDATES CDMA 2000 W-CDMA TD-SCDMA Mobile network equipment CDMA X RTT technology commercial with 400,000 users in Korea China Unicom will construct CDMA X test networks in major Chinese cities CDMA XRTT is in preliminary R&D phase Equipment commercialization nearly finished in Japan 44 contracts for W-CDMA sourcing finalized Test networks are not performing well Network equipment prototype will be available by end of 2001 Call between terminal prototype completed on April 27 Video transmitted between base stations and terminals on July 4 Mobile terminal Lucent has CDMA 2000 (1XRTT handset prototype, later this year mass production starts Qualcomm developing dual mode chipset for CDMA 2000 and W-CDMA Chipset design completed No prototype available Unclear when W-CDMA terminals will be available outside of Japan Some question whether dual mode GSM W-CDMA handsets will be available before 2004 Signs of mobilization for chipset development have appeared (Qualcomm,TI, Phillips) Chipset design is expected by proponents to be completed in 2002 Prototype and commercial handsets will potentially be available by late 2002 Time to market CDMA X RTT to be launched in early 2002 No time schedule for CDMA XRTT introduction Unclear whether CDMA license includes 1XRTT or 3XRTT Overall postponing of W-CDMA time to market. Possibly not launched on large scale nationwide for years, due to complexities of dual mode solution Proponents expect to launch in China by end of 2002 Proponents expect TD-SCDMA to potentially enter international markets after China launch Market awareness Growing support especially by US operators 400,000 1XRTT users in Korea today Japanese operators will also adopt Primarily supported by US and Korean vendors Previously, the most widely accepted technology For a time, has been preferred option for 3G technology by most operators Large vendor base support led by Ericsson, Nokia Viewed as inferior Chinese technology despite technical advantages and significant Siemens contribution Lower awareness and acceptance by industry though accepted by ITU and 3GPP Currently Siemens and Datang are the key supporting vendors Source: Industry interviews; Analyst reports

TD-SCDMA’S PROSPECTS LARGELY DEPENDS ON THE TIMING AND VIABILITY OF TECHNOLOGY The timing of the commercial availability of TD-SCDMA technology can be summarized in 3 scenarios. In scenario 1, TD-SCDMA is available by the end of In scenario 2, development is delayed due to terminal inavailability, and launch occurs in In scenario 3, TD-SCDMA fails to launch 2001 2002 2003 2004 2005 TDD Spectrum TDD spectrum is ready to be distributed to operators as soon as technology is ready TD-SCDMA Technology Trial* Commercially available Scenario 1 Trial Commercially available Scenario 2 Trial Fails Scenario 3 Possible launch schedule Scenario 1 Launch in 2003 Scenario 1 Scenario 2 Launch in 2004 Scenario 2 Scenario 3 TD-SCDMA never launches Scenario 3 * Trials will include infrastructure buildout in 2002 Source: Industry interviews; McKinsey analysis

TD-SCDMA ALSO HAS ADVANTAGES IN MIGRATING FROM GSM
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt TD-SCDMA ALSO HAS ADVANTAGES IN MIGRATING FROM GSM New hardware investments Data transmission rate TD-SCDMA path W-CDMA path Comment 2001 2 G GSM BTS BSC MSC GSM BTS BSC MSC 9.6 Kbps Both paths begin from GSM network GSM GSM Late 2001/ 2002 2.5 G GSM BTS GPRS BSC PCU MSC SGSN GGSN GSM BTS GPRS BSC PCU MSC SGSN GGSN 115 Kbps Path convergence continues through 2.5 G Migration 2003 GSM BTS MSC 384 Kbps TSM: 3G like performance with minimal added investment to GSM network BSC enhanced TD-SCDMA Node B SGSN GGSN TD-SCDMA 2003- 2004 3 G TD-SCDMA Node B BSC enhanced 384 Kbps (mobile) 2 Mbps (stationary) Continued leverage of GSM network for TD-SCDMA Mixed application capability Involves widespread new investment UMSC FDD Node B RNC UMSC TD-SCDMA Node B RNC W-CDMA FDD Node B Source: Industry interviews 3G TD-SCDMA

OPERATORS WILL NOT NECESSARILY DECIDE 3G STANDARD, AS MANY STAKEHOLDERS WILL HAVE INFLUENCE, AND THE GOVERNMENT HEADS THE LIST Stakeholder Relevant entities General position Degree of influence Government State Council State Planning and Development Commission Ministry of Science and Technology Ministry of Information Industries Low awareness. Will consider geopolitical pressure and negotiations. Expected to support TD-SCDMA based on national interest industry development Low awareness. Expected to support TD-SCDMA based on national interest Strong supporter of TD-SCDMA based on Chinese origin Generally a strong supporter of TD-SCDMA but, some dissent within the ministry Overriding decision making power over all other entities Next to State Council, greatest power Strong advocate but not central Primary decision maker Operators Existing New China Mobile China Unicom Prefers W-CDMA, due to lack of confidence will support TD-SCDMA if in national interest Will try to develop CDMA Unclear how to develop GSM network Stronger confidence in W-CDMA, but less strong view on importance of standard Unclear about technologies. Will support national interests Eager to adopt and roll out TD-SCDMA as play for government support State owned flagship operator; will accept government decisions in interest of country May have general "bargaining chip" with CDMA decision Will take whatever spectrum is granted by MII Will do whatever MII plans Little direct influence given ownership by Ministry of Railways China Netcom China Telecom China Railcom Local equipment vendors Datang Huawei ZTE Co-developer of TD-SCDMA Supports TD-SCDMA but investing heavily in W-CDMA Strong support for CDMA given Qualcomm support Favored son of MII given historic affiliation but questions about capability of CATT Privatized but most competent local vendor Viewed as successful SOE Foreign equipment vendors Ericsson Motorola Nokia Siemens Nortel Aggressively pushing W-CDMA Hedging and waiting to see due to failed bet on 2G Position probability in between Ericsson and Motorola Supporter of TD-SCDMA, but hedging with W-CDMA Provider all technologies, but cooperating on TD-SCDMA RNC to gain favor Influence through government lobbying and diplomatic mission Indirect influence through operators Local handset players Ericsson Bird Kejian Many others Eager to gain technologies Many recognize TD-SCDMA as easier path for gaining domestic market share Low individual influence Government will consider impact of 3G on them Source: Industry interviews Other stakeholders Qualcomm Texas Instruments Various positions Competing for chipset value Strong lobbying force (Qualcomm)

3G REGULATORY RESPONSIBILITIES
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt 3G REGULATORY RESPONSIBILITIES Decision maker 3G regulatory tasks Responsible organization Progress Frequency allocation Radio Frequency Administration Dept., MII 3G spectrum specification completed FDD spectrums need to be cleaned-up 3G standard decision State Council Science & Technology Dept., MII Science & Technology Dept., SPDC Various research institutes(CATT, RITT) Currently 3G radio standards setting are still under discussion Waiting and hoping that TD-SCDMA is viable 3G operator licensing and allocation of spectrum Telecom Admin Dept., MII State Council SPDC Most likely would award to existing operators and new operators 3G timing Science & Technology Dept., MII TD-SCDMA can begin anytime Other standards in 2002 or 2003 3G supplier qualification (licensing) Planning Department., MII Telecom Administration Department., MII All existing MNC suppliers are likely to receive licenses, if products meet specification Local suppliers will be preferred New entrants reviewed on technology and subject to import restriction if not manufactured locally; approval for entry of new vendors likely to be limited Source: Ministry of Information Industries; CITIC CIEC

SPDC & MII's CURRENT POSITION ON 3G STANDARDS
02 PD China Mobile Telecoms Service Industry ppt 02 PD China Mobile Telecoms Service Industry ppt SPDC & MII's CURRENT POSITION ON 3G STANDARDS Current position Problem areas The government clearly supports TD-SCDMA View this as a success of Chinese technology View this as opportunities for local industry to succeed Local manufacturer's support outside of Datang MNC terminal manufacturer's support TD-SCDMA Anticipated announcement of support for TD-SCDMA contingent on success of trials TDD spectrum allocated for TD-SCDMA TD-SCDMA trials to be permitted whenever product is available FDD licensing may be delayed for one year MNCs being pressured to support TD-SCDMA Monitor and study Considering holding off licenses for one year after TD-SCDMA Pressure from EU for fair trade Lobbying by MNCs W-CDMA However, the government is not ready to make a final decision Not confident yet about the technology pending trials Need commitment of other local equipment suppliers besides Datang Need commitment of terminal suppliers Not as actively monitored and studied as W-CDMA Whether 2G CDMA will be widely deployed Pressure from US for fair trade CDMA 2000 Source: Ministry of Information Industries; Industry interviews

GOVERNMENT RATIONALE FOR TD-SCDMA POSITION BASED ON DESIRE TO INCREASE COMPETITIVENESS OF CHINESE TECHNOLOGY AND CAPABILITY OF LOCAL VENDORS Factors for consideration Support of local industries IPRs for China Protecting existing network infrastructure investment Political considerations, i.e., trade relations Desire to lead the technology development Desire to conform with global standard Supporting TD-SCDMA because Avoiding foreign IPRs Promoting Chinese technology and standard Time to market advantage for local suppliers Potential for export Not promoting TD-SCDMA exclusively because Threat of unfair trade practice accusations Pressure from EU and US Uncertainty in standard, product development and terminal availability Government wants to avoid a market dominated by foreign players as experienced in 2G Source: MII Interviews; RITT interviews; CITIC CIEC

CHINA MOBILE MAY ADOPT BOTH TD-SCDMA AND W-CDMA WHILE CHINA UNICOM WILL LIKELY EMPHASIZE DEVELOPMENT OF ITS CDMA NETWORK Likely approach Approach Probability Rationale Quotes Current operators China Mobile China Mobile will be experiencing GSM capacity shortfalls in many major cities, which may influence 3G decision Given its advantages in assymetric transfer, TD-SCDMA being considered for data servicing role China Mobile is likely to adopt TD-SCDMA under government instructions to support national interests China Mobile prefers and will likely to adopt W-CDMA jointly with TD-SCDMA to complement each other 3G TD-SCDMA W-CDMA TSM GSM GPRS Medium High “China Mobile will adopt W-CDMA and use TD-SCDMA as complementary technology" – Li Mofang, China Mobile China Unicom GSM GPRS 3G TD-SCDMA W-CDMA CDMA CDMA2000 1XRTT 3XRTT China Unicom will focus on expanding CDMA network to build national coverage in the coming 1-2 years China Unicom will attempt to win high-value clients from China Mobile by leveraging CDMA strengths in quality and capacity China Unicom will not build GPRS, focusing instead on rollout of CDMA in October, and CDMA xRTT in early 2002 China Unicom has little pressure to upgrade the GSM network given new spectrum availability on the CDMA network. Migrating to TD-SCDMA or W-CDMA remains an option but not a priority nor a necessity Internal competition will happen between CDMA and GSM; China Unicom may position the CDMA network as a high-end network, and the GSM one as low-end “CDMA 1XRTT will be released commercially by early 2002" – China Unicom Medium High Source: Interviews

TECHNOLOGY PATHS OF NEW OPERATORS WILL LIKELY AVOID SIGNIFICANT INVESTMENTS IN 2G INFRASTRUCTURE Likely approach Approach Probability Rationale Quotes Potential new operators China Telecom GSM/ GPRS 3G TD- SCDMA W- CDMA TSM CDMA2000 1XRTT 3XRTT Regulatory bodies are not inclined to award a 2G license to China Telecom Plans to wait until 3G enters market and adopt 3G directly Lack of experience in mobile will make China Telecom more attentive to government mandates and open to TD-SCDMA CDMA remains a remote possibility depending on inavailability of TD-SCDMA or W-CDMA and migration of CDMA based WLL network “As almost all of our mobile experts are allocated to China Mobile, we have to rely on government mandates. We will adopt whatever technology based on whichever bandwidth the government allocates" – China Telecom Low High Medium China Netcom 3G TD- SCDMA W-CDMA TSM GSM/ GPRS Lease 2G from China Mobile or China Unicom Vendors for 2 standards are being assessed: Motorola and Nokia (W-CDMA) and Siemens (TD-SCDMA) Agreement on partnership with Nokia to allow Nokia provide basic skill training Motorola are introducing W-CDMA to CNC instead of CDMA2000 Siemens is invited to present on TD-SCDMA Prefer to choose standard that will get them fastest to market “We wiill do what we can to prevent CM and CU from taking a first mover advantage in mobile data. We must enter into mobile data service quickly” – China Netcom Low Medium China Railcom TD- SCDMA GSM-R* China Railcom believes adopting TD-SCDMA would increase likelihood of gaining broad mobile service license “We would like to enter mobile services with TD-SCDMA " – China Railcom High * Railroad spectrum Source: Industry interviews

China’s Mobile Telecom Services Industry Overview

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