When China Mobile, the world’s largest mobile operator by subscribers, announced this week that it intended to buy a 12 per cent stake in FarEasTone, Taiwan’s number three operator, it caught most in the industry by surprise.

The Chinese market leader had expressed the intention to look for acquisitions abroad, focusing on developing markets with big growth potential. Now, in its first deal following the sector’s restructuring last year, it has opted for one of the world’s most saturated telecoms markets.

China Mobile is under heavy pressure at home. After years of delays in introducing competition to China’s telecoms industry, it has arrived rapidly during the past three months.

Both China Mobile and China Unicom, its smaller rival, saw revenues per user drop in the first quarter, and China Telecom, the third-largest operator, reported a drop in profitability over falling fixed-line revenues and a jump in mobile network infrastructure investments.

When the Chinese government ordered an industry restructuring last May, many analysts said China Mobile was too strong to allow its rivals a serious chance of gaining ground.

However, the incumbent’s lead in signing up new subscribers is eroding fast.

After peaking at more than 95 per cent in December, its monthly share of new subscribers has fallen steadily and stood at just 61.3 per cent last month.

The two catalysts of competition are licences for third-generation (3G) mobile services, handed out in January, and the quest to sign up hundreds of millions of rural Chinese as mobile subscribers.

The government’s decision to force China Mobile to roll out 3G using TD-SCDMA, a homegrown standard plagued with technical problems, is proving a big weight around the market leader’s neck.

Beijing is planning to test mobile number portability, which would allow customers to keep the same number when switching provider, in two regions from April next year and is expected to roll it out nationwide one year later. Analysts say that once that happens, China Mobile could lose about 8 per cent of its now 477m subscribers.

“TD-SCDMA is the main asymmetric regulation used so far,” says Duncan Clark, chairman of BDA, a China-based telecoms consultancy.

As mobile phone makers have been slow and unenthusiastic in developing handsets for the standard, China Mobile has many fewer handsets to offer to consumers than its rivals. Industry observers say that the N96 handset that is now being tested by Nokia is bulky and heavy.

China Telecom, a new entrant to mobile services, has been quick off the mark expanding its 3G services based on CDMA 2000, the standard mainly used in the US, and quickly grabbing new subscribers in the process.

China Telecom has focused its marketing on fixed-mobile connectivity. This gives it an advantage over rivals since China Mobile does not have fixed-line services and China Unicom’s integration of China Netcom was more lengthy and complicated than the post-merger integration at China Telecom.

In 3G, China Telecom is confronting China Mobile head-on, focusing on private and leisure use and family products.

China Unicom, which is to start 3G services in mid-May, plans to focus on business customers.

Industry insiders say China Mobile, resigned to the fact that it will lose out on 3G due to its uncompetitive technology, is now fully focusing on making TD-SCDMA a core part of the emerging global 4G standard Long-Term Evolution, or LTE.

This is where the Taiwan investment comes in. Jimmy Cheong, an analyst at JPMorgan, says China Mobile’s investment decision had an industrial policy element to it as Far EasTone is to set up a trial TD-SCDMA network in Taiwan. “Getting this support to promote TD-SCDMA through the Taiwan manufacturing value chain was likely an important consideration for China Mobile,” he says.

He adds that there were increasing signs that LTE, rather than Wimax, a technology in which Taiwan’s government and companies have made major investments, will be the dominant 4G technology.

This would give China Mobile, which plans to deploy a pilot network by the end of next year, a new chance. “China Mobile is aggressive in research and development and patent application on TD-LTE and TD-LTE advance, which is very likely to be one of the International Telecom Union’s 4G standards,” says Zhuang Weiran, an analyst at BDA. Key hardware vendors such as Huawei, ZTE and Alcatel-Lucent which has a TDD-LTE research centre in Shanghai, believe that the 4G technology will be mature by 2012.

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