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Back On Track?

By Vaughan O'Grady

Despite the economic battering that the country has taken in recent months, Korea's biggest CDMA equipment manufacturer is not only looking forward but making plans for the next generation. Vaughan O'Grady.

It hasn't been an easy year for the Korean economy. The downturn that began in Thailand and spread throughout the Asian region forced the country into economic restructuring hand in hand with the IMF.

What this means for the country's wireless telecommunications industry is hard to say. Although the fearfully anticipated total economic meltdown has not actually occurred, the relaxation of rules on foreign ownership and the introduction of outside competition, in part consequences of IMF-advised reforms, could make it a tough year for local business. Handset giant Nokia is now moving into the Korean PCS market and Motorola has recently announced the signing of a contract with Korea's biggest CDMA network operator, SK Telecom, for the supply of handsets to the local market.

Meanwhile, Korea's position in the 3G debate has been unclear for a while. Korea's standards body, the Electronics and Telecommunications Research Institute (ETRI), has submitted a W-CDMA proposal to the ITU as well as cooperating with Qualcomm on CDMA2000 development.

It could be argued that this is a wise precaution in case both systems are commercialized or, as many people would prefer, harmonized.

Alternative

A speaker at the CDMA International Conference (CIC) which took place recently in Seoul, Dr William C Y Lee, vice president and chief scientist with AirTouch Communications, put forward an alternative to 3G wrangling.

Dr Lee suggested a novel way out: the development of a smartcard that could allow a number of 3G systems to exist at once.

The next step, he argued, would be the development of software radio to make the 3G air interface issue redundant.

The "global smart card" idea was suggested as an option if manufacturers do not harmonize standards, something that seemed possible at the time. Certainly ETRI was taking no chances and, at a lively press conference held at the CIC, representatives of ETRI tried to explain where the country intended to go with IMT-2000. Journalists heard that research was taking place into both CDMA2000 and W-CDMA. This, a speaker admitted, was going to be "very costly". There seems, however, to be a desire not to miss out on whatever comes next-as well as the wish to be less reliant on a single supplier.

The development seven years ago of Qualcomm's CDMA system for the Korean market proved more successful than either party could have forecasted. However, there has been an unfortunate side-effect recently in the form of debates between the two parties involved over royalty payments. This has led ETRI to be wary of relying too heavily on one company for future technology development.

However, the whole country is cdmaOne-reliant which, one would guess, makes a complete change of direction unlikely. The Korean government originally mandated IS-95. If this policy is continued into the third generation it seems highly likely it will mandate CDMA2000.

Even the recent hints of a possible compromise on chip rates between those involved in the 3G debate do not rule out the need for Korean companies to work with a cdmaOne-experienced company such as Qualcomm, given the starting point from which Korea's network has to evolve. It could, however, allow ETRI to argue that it was justified in researching more than one future technology.

Challenges

The president and CEO of the information and communications division of the country's major manufacturer of CDMA equipment, Samsung, rejected any idea of a split from Qualcomm. At a recent interview given to a group of telecommunications journalists, Hee Joon Park discussed this and other challenges awaiting his company over the coming months.

The main question for his company, as for so many others, is how the economic woes of the region had affected it, and telecommunications generally. Park was blunt about this: "Our systems business was very adversely impacted this year not only in Korea but also in South eastern Asian countries like Indonesia, Thailand, Malaysia and the Philippines." There was, however, an upside: "On the terminal side the local market was very strong, the US market was very strong, so were Hong Kong and China... so we have done pretty well on the terminal side."

Why then did he believe the terminal side had not been so badly affected? The continuing growth of local and international cdmaOne networks was cited: "Three Korean PCS operators came into service at the end of last year and they've been adding subscribers all year, as have the US operators like Sprint. So has Hutchison Telecom in Hong Kong."

Korea is no doubt a big cdmaOne market, but it's a competitive one too. Would all the operators survive? Park agreed on the size: "The smallest operator has over one million subscribers. Three have over two million. Two million is quite good volume." There was, however, a caveat: "The concern is that, in arriving at that level of subscriber base, they incurred significant losses."

As he pointed out, however: "Companies like Hansol and LG Telecom solved the loss problem by increasing capitalization," adding: "It seems to me it's a business issue and business will find its own way."

Whatever the fates of the various networks, right now their millions of subscribers want handsets. Did this mean that Samsung has to allocate more resources to its terminal division, bearing in mind the systems side is slow?

Park saw a silver lining to the apparent cloud of limited infrastructure business: "I think in a sense it was fortunate. We had a plan to recruit many engineers. We've been working on that plan all year last year in order to beef up the development engineers in both the handsets and systems sides. However, there was a slowdown in the systems side, so we could manage by shifting from the project engineers to the development engineers on the systems side for CDMA2000... and on the terminal side we still have to recruit more engineers."

Overseas emphasis

Samsung, like many Korean firms, has made a virtue of not relying solely on local markets. Had the emphasis on developing overseas markets been even stronger recently, given the limitations of the Korean market and the present economic downturn?

Park said that this conclusion was obvious: "Where a market has a population, like Korea, of 45 million, and we have already over seven million subscribers, how far can you go and how much of a replacement market can you expect? So, with CDMA systems installations spreading over the Americas and South-east Asia-and also we hope we'll have some market development in China-all those are potential markets for both CDMA systems and terminals."

This includes about five different countries in the nascent Latin American market, where Samsung has received large handset orders from Mexico and Peru. More recently, Telesp Cellular, the largest designated cellular service provider in Brazil, concluded an agreement to buy $25 million worth of the Samsung SCH-210 cellular phone, while the nation's second largest service provider, Telerj has agreed to buy $15 million worth of the Samsung's SCH-411 model.

In fact, said Park, in total, "we've been providing terminals to 11 countries-and I'm sure more will be added next year".

However, there remains the question of Korea's economic situation. The Korean monetary unit, the won, has fallen significantly in value since the economic crisis in Asia took hold, although that is something that many would argue could help exports.

Park sounded a note of caution however: "Korean won devaluation appears to have helped Korean exports on the surface but it's not necessarily so. We import a great deal of parts from Japan and also the US so there's an immediate offset of whatever gains we make.

Also, this financial crisis has caused interest rates to shoot up, a financial burden for us.
"From Samsung Electronics Systems' point of view, local currency-wise, we are registering some growth... yet in terms of dollars, as you can expect, we are somewhat down because of the translation impact."

Given this situation, how did Samsung's position compare with the country as a whole? Park said: "The overall economic indicators forecast that we'll register between 6.5 to seven per cent downturn in GDP this year. However, Samsung Electronics will register a few per cent growth local currency-wise. It's pretty strong, solid growth [although] there have been some changes in semiconductor prices in the global market that'll impact our final numbers."

Park also saw some benefit in the uncertainty of recent months: "This financial crisis initially put a great strain on our operating environment but, as it now appears, it's helping us in trimming and slimming our operations.

"As soon as the financial crisis occurred we focused on slimming down. We tried to establish a cash flow-based operation, a liquidity-focused operation. We tried to establish controls: spending reductions and so forth. That was the immediate concern. Plus we emphasized profitability more than revenue growth so that made us more healthy.

"From the long-term standpoint we wanted to regroup our product lines [so] we selected those areas we were going to emphasize and put our resources into, while spinning off and selling off the derivative or non-essential parts of our operations; it's made our structure lighter and in the long run it'll make us more competitive."

Direction

Among the emphasised areas will be data networks and, not surprisingly, wireless communications, which is continuing to be an issue as the ITU's IMT-2000 decision comes closer. Was Samsung, like ETRI, playing a cautious game? To a certain extent, Park admitted, it was: "In terms of our company's direction we believe that cdmaOne and WCDMA will both remain as contenders."

"At the moment," Park said, "we are heavily engaged in CDMA2000 and our objectives, our goals, our schedules are all set up and clear on CDMA2000. However, on the WCDMA front we started development work initially on the handset side and also we are contemplating ways to the systems side."

Certainly, at a demonstration in the Kumi factory in the south of the country, it seemed that CDMA2000 handset development (a virtual handset was demonstrated on a computer) was ahead of its WCDMA equivalent, albeit a recent move into GSM handsets could prove a useful way into the latter market. Nevertheless, GSM is a relatively new market for the company; its output of CDMA handsets goes into the millions.

A single, harmonized 3G solution would by no means undermine this research. The fact that Samsung has been working on both the leading technologies involved in the 3G battle could still be rewarding, given the demands of backward compatibility with the various present generation networks.

But with which companies would future handsets be developed? Qualcomm is the obvious choice. Park agreed: "We are working very closely with them on the system side and on the terminal side and also in terms of the future direction of CDMA2000."

So is there any question of differences, notably over the IPR dispute referred to by ETRI? Park's answer was a diplomatic one: "Well, when you look at a group of people, then everyone can have his own opinions." Fundamentally, however, "I think both Qualcomm and Korean companies engaged in CDMA are in complementary situations". There could therefore be "some differences of opinion depending upon the issues" but hardly all-out war, he feels.

As to Samsung's relations with other companies, notably on future technology and IPR development, he was again careful but ruled nothing out: "There are always possibilities and discussions on those possibilities. This telecommunications arena is global and the linkage is getting shorter and shorter and smaller and smaller..."

Import substitution was still an aim, of course: "Chips and parts and components that go into terminals... it's one area we'll be constantly looking into," he points out.

Australia is moving into CDMA soon and Samsung's position as a business partner at the Olympics should give its handsets a major showcase for the period when the Nortel-built network (overlaying the old AMPS network) is built out.

By then, perhaps, could enough roaming and numbering agreements be in place for CDMA phone users to take their handsets with them? Park was optimistic: "Within the CDMA world I'm sure that's the trend... Dual band, tri-mode-I think they'll come to life soon in CDMA."

And Korea's fortunes in 1999? Park sounded a note of cautious optimism: "Many people are saying nowadays this downward pressure on the Korean economy will bottom out during the first half of next year and reverse during the second half and reach a gradual recovery and growth."

Since the beginning of the CDMA boom in Korea, Samsung has been the leading local supplier of handsets and infrastructure. With the entry of foreign companies, not to mention the local names such as LG and Hyundai chasing markets at home and abroad, there will be no lack of competition, even in the welcome event of a quick economic recovery. The Korean CDMA market should be an interesting place in 1999.