Qualcomm's Long March

Irwin Jacobs is obsessed with China, but he won't talk about it. Jacobs, 67, is a mild-mannered engineer and MIT professor by background. But he's also the chairman of Qualcomm, one of America's high-tech standard-bearers--literally. The San Diego, California-based company owns key patents on a wireless transmission standard known as CDMA, which experts agree is one of the better ways to send data. In a world that's gaga about mobile phones, that's a very good thing. But during the early 1990s, while Qualcomm was knocking out the kinks in its product, a European wireless standard known as GSM grabbed most of the global market, even though its American competitor may be a step ahead technologically. Qualcomm has since notched a few important victories: CDMA networks are going strong in Korea, the United States and Japan. But worldwide there are roughly 500 million people with GSM phones, compared with 90 million CDMA subscribers.

To catch up, Jacobs set his sights on the world's most dazzling growth market: China. There, Qualcomm aimed to insure its future. No matter that China is already wedded to GSM. With 105 million cellular subscribers already, and future growth estimates that go through the roof, there would be plenty of room for a new competitor. China is the telecom industry's Valhalla, and a major battleground for telecom companies. Bureaucrats and cellular operators decide which standards to embrace--and out of such decisions come huge contracts and lots of jobs. With so much at stake, Jacobs did not trust himself to win favor with Beijing; he enlisted the U.S. government's lobbying help--including former president Bill Clinton, who brought up the merits of Qualcomm's technology in a discussion with President Jiang Zemin. That may have been a riskier strategy than Jacobs realized.

Qualcomm, which is more a telecom think tank than a manufacturer, was the best performing stock in America two years ago. But without a China foothold its growth will suffer. Qualcomm gets both patent royalties from CDMA licensees and profit from every handset or base station made with CDMA chips. In a booming market like China--where $2o billion worth of handsets and wireless equipment were sold last year--that can amount to a fortune.

But as Qualcomm has learned, China is a very tough market to crack. Finding a spot in the country's telecom industry has meant playing a chess match against multiple competitors. The company's ambitions have been stymied by Sino-U.S. tensions, commercial opposition, bureaucratic backtracking and China's tough negotiating tactics. One problem: China doesn't like paying royalties on intellectual property. As a result, nine years after Jacobs first began talks with the Ministry of Information, Qualcomm is still waiting for a CDMA network to be built.

But the long march may soon be over. Last month China's second largest wireless operator, China Unicom, announced that it would be buying CDMA equipment from a group of telecom manufacturers--many of them Chinese with little or no CDMA expertise. The decision comes after years of Qualcomm-China negotiations that Duncan Clark, managing director of the telecom consultancy BDA in Beijing, describes as a "soap opera." The equipment contracts are the crucial first step in Unicom's on-again, off-again plan to build a CDMA network. Getting it up will bolster Unicom in its battle against giant China Mobile, the No. 1 wireless carrier. In fact, Unicom asserts it will have the new system running within 12 months--and by then have 15 million subscribers.

The news should have set off a wild celebration among CDMA backers. It didn't, which speaks volumes about how maddening China can be for foreign investors. Terry Yen, a Beijing-based official with the CDMA Development Group, has seen China back away from more than a few "framework agreements," handshakes and other promises. He calls the Unicom decision "a milestone," but adds: "In China it doesn't mean anything until you dig dirt, put equipment in the ground and begin service. I don't want to be the most negative guy at the party, but one of the reasons we aren't popping champagne is that there must be more milestones ahead."

U.S. government officials learned long ago to expect the unexpected in China. China has been enthusiastic about Qualcomm's technology since 1994, when the People's Liberation Army conducted tests with it in four major Chinese cities. The tests were successful, but since then it's been one step forward, one step back. Led by the strong-willed Wu Jichuan, the Ministry of Information wouldn't allow the PLA to fully expand the CDMA network. The ministry feared that the new network would steal customers from China Telecom, which is the operating arm of the ministry. Instead, a joint-venture company was created to operate a CDMA network. Called Great Wall Telecom, it died in infancy when Beijing decided to dismantle Army-owned businesses in the late 1990s. The government replaced Great Wall with China Unicom--and gave it the exclusive right to deploy CDMA. But its growth plan has been slowed by one imbroglio after another--including, it is said by some industry officials in China, quiet but steadfast opposition from certain factions within the Information Ministry, perhaps led by Wu himself. Asked whether China had committed itself to CDMA, a U.S. government official replies: "It depends on what you mean by commitment, and who you mean by the Chinese."

According to Ming Louie, president of Qualcomm China, there has never been a consensus among top party officials about the need for Qualcomm's technology. Top government officials have been consistently supportive, but complications always ensue. Two years ago Prime Minister Zhu Rongji declared publicly that a CDMA network would soon be built. Then last summer, the project was shelved--again--after government officials vaguely accused Unicom, which is a publicly traded company, of making decisions without central government consultation.

And so it has gone. China Unicom was supposed to sign the first equipment manufacturing contracts on April 28. On that day, Louie strolled confidently into a banquet room at the International Hotel in Beijing, accompanied by executives from several equipment makers. "I got there at 3 o'clock," recalls Louie. "We were supposed to sign the contract. Then the government postponed it." Louie chuckles at the memory. There was no explanation for the postponement. There never is. Says Christina Lund, an official with the U.S. Trade Representative's Office in Washington: "This issue is all wrapped up in China's deregulation efforts, competing commercial interests and the fiefdoms that operate out of the information ministry."

It was partly for those reasons that the Clinton administration rallied to the Qualcomm cause. The U.S. Commerce Department, the Office of the Trade Representative and even former president Clinton himself all tried to persuade Beijing to accept Qualcomm's standard as part of bilateral trade talks between the two countries. Former Commerce secretary Bill Daley raised the issue at least three times with Zhu Rongji. Former U.S. national-security adviser Brent Scowcroft, who now runs a lobbying firm in Washington, talked up Qualcomm with top Chinese leaders. "Among our commercial interests, this was a very important one," says Daley, the vice chairman of Evercore Partners, a private equity investment firm in New York. "We were making the case not just for Qualcomm's standard, but for more competition in China's telecom industry." That, the United States argues, will benefit China by soaking up demand for wireless services, promoting innovation and lowering consumer prices. "We pushed, prodded and encouraged the Chinese not to get locked into one standard," says Daley. Adds a U.S. government official: "From the U.S. point of view, CDMA represents hundreds of millions, if not billions, of dollars in exports. So it can be compared to other major contracts for planes and power-generating plants."

But there has been opposition, and CDMA backers say they're not always sure where it's coming from. "We don't know who our friends or enemies are," says Yen. "That's one of the hardest [things] about dealing with China. If we could identify the factions who are resisting CDMA, it would help. But the Chinese government is big, and there isn't enough transparency to understand why certain decisions are made."

Louie says European GSM manufacturers--including Siemens, Philips and Nokia--can certainly be placed in the enemy camp, since they stand to lose money if CDMA networks are built. He says those multinationals have "attacked" Qualcomm as part of an intercontinental battle for technological superiority. Nokia at one point referred derisively to Qualcomm's standard as "vaporware."

Aside from commercial conniving, CDMA has been a bargaining chip in relations between the United States and China. When the two countries are on good terms, plans for Unicom's new network seem to move ahead. But when a spat occurs, U.S. commercial interests tend to suffer. In early 1999, as Washington and Beijing inched closer to a bilateral trade agreement that would pave the way for China to join the World Trade Organization, Zhu Rongji asked Unicom officials to cooperate with American firms on a CDMA network. Soon after, he told Commerce Secretary Daley, during a meeting in Beijing, that he favored the project. Then came the inadvertent U.S. bombing of the Chinese Embassy in Belgrade, in May 1999. Unicom's CDMA network was abruptly put on hold.

"Both sides have used CDMA as a political football," says Yen. "Clinton was pointing to it as an example of how increased trade and economic ties could boost China's ability to play on an international stage," says Yen. "I can't say that the Clinton administration cared specifically about the technology--it was part of a bigger message of engagement. I think that worked against us because China knew that America cared about this issue. They've viewed CDMA as a way to signal their displeasure with U.S. policy or events."

China's high-tech ambitions, and reluctance to play by normal trading rules, have also delayed negotiations. China aims to establish its own telecom industry, and the country is deft at squeezing favorable terms from foreign suitors. China typically wants foreign investors to build manufacturing facilities, to share their technology with Chinese firms, and to include Chinese components in finished products, among other demands. Such requirements are generally against free-trade rules--and will become illegal after China joins the World Trade Organization. But until that happens, companies tend to acquiesce because the China market is too valuable.

In Qualcomm's case, Beijing and the Information Ministry not only insisted that Qualcomm license Chinese firms to make CDMA equipment, but also that Qualcomm dramatically lower its royalty rates--from about 8 percent to as low as 2.5 percent. Jacobs resisted the royalty demand, say sources in Beijing, but eventually gave in. (The company has acknowleged lowering its rates for Chinese manufacturers, but won't confirm any numbers.) Says Craig Watts, an analyst at BDA: "Qualcomm would rather get in the market at 2.5 percent than get nothing at all."

Watts argues that Qualcomm's China strategy has been flawed. He says that Qualcomm was too quick to run to Washington for help. European equipment makers got into China early on and "worked the back end of the market," signing joint ventures with Chinese companies in the provinces. Qualcomm's high-level political campaign was "not the smart way to go," says Watts. "It has worked against them."

Still, Jacobs' dogged persistence may yet pay off. Last October Zhu Rongji met with him in Beijing. Also in attendance: Wu Jichaun, the Information minister, and Unicom chairman Yang Xianzu. Zhu is a no-nonsense bargainer with a fiery temper, and according to a source at the meeting, he'd become exasperated by the protracted CDMA conflict, and perhaps by Wu's foot-dragging. Zhu asked Wu and Yang to spell out which CDMA issues still needed resolution. Wu wondered how soon a dual chip, which would enable phones to work on both CDMA and GSM networks, would be available. Yang wondered when a cellular "roaming" issue would be settled. "There were six or seven issues, mostly technical," says the source. That done, Zhu pointed to Wu, Yang and Jacobs and said firmly: "You three, try to resolve this matter. After you do, come back to me and I will get this deal done." The men talked and apparently settled most remaining disputes. The prime minister's intervention saved the Unicom project, and may signal the end of the ministry's tacit resistance. "Over the last three months, Wu has lost a lot of power, and it's connected to this deal," says a telecom consultant in Beijing. "He thought he was important enough to take on Zhu, and that he knew more about telecoms than Zhu. But Zhu has insisted that the CDMA deal needed to be done. I think the timing was tied into WTO negotiations."

That breakthrough, and the vendor-licensing contracts, doesn't mean that Qualcomm can now relax. After a decade-long roller-coaster ride, CDMA advocates know there are likely to be more dips ahead. In fact, they're almost counting on them. Perry LaForge, the executive director of the CDMA Development Group, says: "We're all very aggressive people, and we want to move forward. But it's a gigantic opportunity, so patience is the best thing." It's the only thing in a country that functions on its own terms. Unicom officials are expected to visit North American equipment makers soon to cement their new commercial relationships. When? China Unicom hasn't said. Neither it nor the Information Ministry is eager to answer questions. Nor is Jacobs, who doesn't want to upset a fragile applecart. Colleagues say that on those rare occasions when the Qualcomm chief mentions his obsession--the China market--he's fond of using two words: "Cautiously optimistic."