California-based telecoms equipment vendor UTStarcom and Japan's Matsushita will soon form a research and development (R&D) centre in China focused on 3G (third-generation) wireless communications, an industry source said last week.

That would be the latest in a stream of tie-ups and investments ahead of the roll-out of 3G services in China, the world's largest wireless market.

The two industry giants are expected to make the announcement early this month, the source said, on condition of anonymity.

"The R&D centre is very likely to give top priority to base stations used in 3G networks," the source said.

Matsushita already has a US$8-million joint venture in Shanghai, which focuses on R&D of 3G handsets, with NEC and Huawei Technologies, China's top telecoms gear vendor.

The three firms announced the joint venture last June. Matsushita and NEC each hold 47-per-cent stakes and Huawei has a 6-per-cent stake.

UTStarcom and Matsushita's joint R&D centre is expected to focus on the Europe-initiated 3G standard, WCDMA (wide code division multiple access), and Chinese standard, TD-SCDMA (time division synchronous CDMA).

Those standards compete with CDMA2000, which was developed mainly by US-based wireless giant Qualcomm.

Details about the venture's shareholding structure and how money will be invested in the facility were not immediately available.

Officials with Matsushita and UTStarcom were not available for comment.

Establishment of a 3G R&D centre is expected to help UTStarcom gets its toe in China's 3G sector.

The company has been selling equipment to China's fixed-line giants - China Telecom and China Netcom - to build local wireless networks called Xiaolingtong (little smart), or known within the industry as PAS (personal access system).

UTStarcom is widely considered to be the largest profit-maker in China's Xiaolingtong services, which have seen rip-roaring growth since last year.

The company said on October 1 it had raised its revenues and earnings forecasts for the full-year, due to better-than-expected business in China.

The company forecast full-year revenues of between US$1.93 billion and US$1.94 billion, compared with prior guidance of US$1.8 billion and US$1.82 billion.

However, with 3G services in the offing, China Telecom and Netcom are expected to slow down their investments in Xiaolingtong, which will put a dent on UTStarcom's profitability in the future, analysts warned.

Technically, Xiaolingtong is unlikely to be upgraded to 3G, and, since it takes up spectrum allocated for the future deployment of 3G networks, it will eventually be cleared up.

That means UTStarcom must find a new growth area if it wants to maintain high profitability in the future, analysts said.

The Chinese Government has not yet indicated when licences will be issued to operators to roll out 3G networks.

Industry observers widely expect the issuance to occur some time in the second half of next year.

The imminence of the 3G roll-out in China has sparked a new investment boom and tie-ups on 3G telephony in the country.

Lucent Technologies in June announced an additional investment worth US$50 million to enhance its existing R&D capacities in China.

Alcatel said in August it will pour an additional US$45 million into R&D facilities in China.

Canadian telecoms giant Nortel in September announced it will invest more than US$200 million in China within three years to expand R&D capabilities.

Nortel also launched a new TD-SCDMA laboratory with Datang, the major developer of TD-SCDMA.

Huawei and German chipmaker Infineon in September teamed up to build low-cost WCDMA chipsets. Both firms invested US$20 million.

In late September, Huawei also formed a US$100-million joint venture with Siemens, the co-developer of TD-SCDMA, to help commercialize the Chinese standard.

"No major telecoms firm can afford to lose out in China's 3G market, the biggest money spinner in the telecoms world. In the coming months, I expect more fresh investments and tie-ups in this area," said a Beijing-based telecoms analyst.

"Foreign firms' increasing investments in China, tie-ups with local players and support for TD-SCDMA will help them win government favour and increase their chances to win orders for building 3G networks."

The competition for future 3G network orders should be fierce.

Industry insiders suggest the Chinese Government aims to help home-grown gear vendors grab a 30-per-cent share in the 3G network business.

There should be only four major network equipment providers in the future 3G business, they said.

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