China Unicom, the country’s also-ran cellular player, has always had to operate with a major handicap. Back in the 1990s, Zhu Rongji, the economic czar who later became premier, wanted to score some points with the U.S. and so decreed that one of the state-owned cellular operators would adopt the CDMA standard developed by San Diego-based Qualcomm.

Never mind that China already had embraced the rival GSM standard. And never mind that building a parallel CDMA network would be wasteful and put whatever company operated it at a big disadvantage. This was about politics, not business. China Unicom, the company that got stuck with the chore of building and operating that CDMA network, never really recovered from the blow. The company struggled on, trying to run both the CDMA network that the government wanted and the GSM network that users wanted.

But Unicom couldn’t compete with China Mobile, which not only was the only other company allowed to operate cellular service, but also ran a GSM-only network and didn’t have to worry about CDMA at all. Not surprisingly, China Mobile became the world’s largest cellular operator, with over 300 million subscribers and a dominant share of the Chinese market. China Unicom was a very distant second.

Well, Unicom’s misery is finally over. After trading ended in Hong Kong this afternoon, the company announced it will merge with China Netcom, one of two fixed-line operators, in a deal worth $56 billion. The merger has been the subject of much speculation for months, if not years, and the government on May 24 more or less said it would be happening. A joint statement from the Ministry of Finance, the Ministry of Information Industry, and the National Development Reform Commission on May 24 urged the companies to join forces.

The idea is a combined Unicom and Netcom would have some heft so the merged entity can compete better against its bigger rivals as Beijing finally opens up the country to 3G. At the same time, Unicom also will be shedding its CDMA network, selling it to state-owned rival China Telecom for $15.8 billion.

But still unclear is what type of 3G network the new-and-improved Unicom will be operating. For most of the past decade, Chinese engineers have been hard at work on a local alternative, TD-SCDMA, to the 3G standards popular in the rest of the world. The Chinese government has invested a lot of money, time and prestige in this project, but it’s no secret that the telecom operators themselves would much rather stick with the already-developed standards that have proven track records outside the country. So Beijing is probably going to have only one company operate the Chinese-made standard. Will China Unicom, having operated a network for political reasons once before, have to do it again?

Source:businessweek