This is part III in a continuing series. Part II can be found here.
We believe China Telecom (CHA), as well as other Chinese actors, will choose GE-PON. They are motivated by factors that transcend technical specifications, factors that matter most to the selection process.
The Chinese Tao
Contrary to popular belief, both government and business in China do not function through rigid top-down execution of initiatives. China is a confederation of provinces and townships with varying amount of influence, and each is slowly coerced into following a high level dictum through social engineering mechanisms foreign to most western businesses.
There is an excellent chapter in the book One Billion Customers (Wall St. Journal Press) that provides the story behind the PHS ‘Handyphone’ system and how it gained popularity contrary to the desires and dictations of Beijing. With PHS, there were striking technical and economic advantages that overwhelmed the states desire for central planning.
Aside from the reams of marketing material available, the G-PON protocol has no dramatic technical or economic advantages over GE-PON. There are indeed some rogue states within China that have deployed G-PON in limited amounts, these are well highlighted in Flexlight press releases.
This is why GE-PON will win in China.
This is incredibly important as Chinese vendors are well known for not entering a particular market until a robust supply chain exists. Multiple sources for components allow them to use their large volumes to play vendors against each other and drive radical cost reduction. Huawei is particularly good at this, and since no secrets exist in China, the Huawei price becomes the China price.
Optical component vendors have already endured this pricing bloodbath, and the relatively few optical specification differences between the two technologies should not affect China’s standard selection. ADVANTAGE: GE-PON
The relative low cost of labor in China, and the resulting high percentage of costs assigned to equipment makes hardware pricing a greater issue than in the west. The lower startup costs of GE-PON make it a clear winner in China as a result.
Also, in the components business, volume is as important a cost lever as technology. Fixed costs (R&D, Qualification, Fab Capex) tend to dominate therefore the incremental cost of another component decreases as volumes increase. GE-PON will have much higher volumes for the forseeable future, and therefore lower structural costs. ADVANTAGE: GE-PON
This is compounded by the lack of proven G-PON interoperability among vendors. Telcordia is holding its very first G-PON interoperability event in 2006, while GE-PON has underwent informal interoperability testing in NTT labs for several years. The presence of a single large customer, NTT, introduced an informal interoperability requirement that forced the marketplace to quickly converge GE-PON requirements. ADVANTAGE: GE-PON
These four factors could apply to the decision of any telecom actor, not just a Chinese one. At this time it is unlikely that the large American and European telcos will use anything but the ITU B-PON and G-PON standard. It also appears virtually certain that China will chose GE-PON based on the structural economic advantages it brings to the table.
However, the most compelling evidence that China will select GE-PON is based on the actions of it’s largest carrier. There is a quiet and coordinated effort by China Telecom to enhance the IEEE GE-PON specification to meet the needs of their network, something informally referred to as C-PON. This effort and the companies involved will be examined in Part IV of the series.
Continue reading part IV (Link inactive until June 20th)