Siemens Starts its Long March in China - TheStreet

BERLIN -- Before

Mao Tse-Tung

was able to create communist China, he and his followers had to endure the

Long March to escape

Chiang Kai-Shek's

nationalist forces. Now, as China attempts to modernize its economy, it is perhaps fitting that the country may help provide

Siemens

(SMAWY:Nasdaq ADR) with a chance to end its own long, hard slog to become a mobile communications contender.

As part of the German engineering and electronics giant's plans to catch up with its Scandinavian and American wireless rivals, Siemens this week announced plans to invest $1.5 billion in Asia over the next three years, with around $1 billion earmarked for China alone. While the large sums are impressive, more intriguing was the announcement that the company was developing a new wireless technology standard

TD-SCDMA

with the

Chinese Academy of Telecommunications Technology

(CATT).

Siemens apparently is working with not only the Chinese but also with French telco equipment maker

Alcatel

(ALA)

and Swedish mobile giant

Ericsson

(ERICY)

on the standard -- news that could spell trouble for the likes of

Qualcomm

(QCOM) - Get Report

and

Nokia

(NOK) - Get Report

, as investors fear the firms may lose future market share in China. Showing the degree of investor sensitivity to the region, Qualcomm fell 7/16 to 63 1/4 on Wednesday, amid concern it would sell fewer chipsets to South Korea in the coming months.

However, looking at technical and time considerations more closely suggests that while the new standard may possibly provide Siemens, Alcatel and Ericsson with nice footholds in the world's largest potential wireless market, Qualcomm and others betting on the third-generation (3G)

CDMA2000

and

WCDMA

standards don't have to fear they will be completely shut out of China. (In another issue, Qualcomm does stand to reap fewer royalties should Chinese operators opt for WCDMA over CDMA2000, which is its own standard.)

Qualcomm shareholders can take some solace, however. Siemens may be in cahoots with CATT, which has the backing of the Chinese telecom regulator, the

Ministry of Information Industry

, but TD-SCDMA isn't quite up to the 3G quality offered by other technology. Indeed, its promoters are apparently pushing it as 2.9G, offering near-third generation quality, yet at perhaps a more affordable price or easier upgrade from existing mobile networks.

That could go over in a big way in the poorer and more remote areas of China, and with the operators that don't get a coveted 3G license. But in the coastal areas and big cities, many users will likely demand the better quality and international compatibility offered by the 3G.

Moreover, with Siemens admitting that commercial applications for TD-SCDMA systems won't be available until early 2002, the question arises whether it might be better to wait just a bit longer for the third-generation CDMA standard. "According to Siemens the reason why an operator would deploy this is that it would be a lot cheaper than CDMA," says Sherief Bakr, an analyst for

Merrill Lynch

in London. But "it's unlikely a Chinese operator is going to deploy TD-SCDMA in hotspot areas." Merrill Lynch doesn't have an investment banking relationship with Siemens, but rates the stock a buy.

However, China's size and low mobile penetration might make Siemens' effort to secure any segment of the country's wireless market worthwhile. Perhaps the most beneficial side effect of TD-SCDMA for Siemens will simply be cultivating relationships with the powerful Chinese authorities and developing ties with the state-influenced

China Telecom

(CHL) - Get Report

and

China Unicom

(CHU) - Get Report

.

And according to a recent report by

Dresdner Kleinwort Benson

, "with China intent on promoting its own 3G technology, foreign suppliers will encounter several new hurdles at once." Those are problems Siemens and any other operators supporting TD-SCDMA won't have, while they can still offer the true 3G goods if they desire. That could make the company's Long March to wireless success just a little shorter indeed.