China Shakes Up Telecoms Market: Mobile is the Driver

China Mobile Reframes Telecoms in China

China's supervisor of state-owned assets (SASAC) is planning to launch a restructuring of the telecommunications sector in the fourth quarter of this year and finish the reform in March 2008, the latest issue of Caijing Magazine reported.  [For those of you unfamiliar with business in the middle kingdom, Caijing 财经 is an independent, Beijing published magazine focusing on China's companies.]

China's State-owned Assets Supervision and Administration Commission (SASAC), which has been mulling over the reform since 2004, has formulated a restructuring plan, but it is not finalized yet and needs approval from higher governmental levels.

Today, the telecoms market in China has four major players, namely China Mobile, China Unicom, China Telecommunications and China Netcom. The sharp differences among their operational results seems to have catalyzed the restructuring. According to their half-year reports, China Mobile recorded a net profit of 37.9 billion yuan ( US $5.04 billion ), while the rest were: China Unicom, 5.65 billion yuan (US $751 million ); China Telecommunications,13.48 billion yuan (US $ 1.79 billion); and China Netcom, 6.713 billion yuan ( US$ 892 million).

CMCC customers = US population = $5 Billion

China Mobile's incredible success is the driving force behind the restructuring.

China Mobile  reported revenue rose 21.6 % from the same period in 2006. Net profit increased 25.7 %, or 1.9 yuan per share, roughly 25 cents per share. The mobile phone giant also reported 31 million new users as of June 30, raising its customer base to 330 million, or roughly the size of the US population estimated as of July 1, 2007. The average user spent 440 minutes a month on the phone, while the average monthly spending per user (ARPU) held steady at 88 yuan, or US$11.45.

Technology as Geopolitics: US mobile ARPU is roughly $54 as of '06 vs China's US$12

By comparison, although the mid-year achievements of China Unicom Co. Ltd. met industry forecasts, the company expects profits to fall. The company reported in the first half 2007, pre-tax profits rose 38%, or 0.297 a share, to 5.65 billion yuan, over the year-earlier period. Total user numbers rose 9.26 million to 151.63 million mobile users versus China Mobile's 330 million.

But China Unicom’s ARPU value, indicates storm clouds gathering over the horizon. China Unicom has both GSM and CDMA networks. The ARPU of the company’s GSM network fell to 47.3 yuan, or US$ 6.30, from 50 yuan the previous year, while the CDMA network equivalent declined 59.6 yuan, or US$ 7.92 from 68.1 yuan. Thus, although the number of Unicom users rose 12.2 percent, revenue increased only 3.8 percent.

Reports from the two fixed network operators -- China Telecom Co. Ltd. and China Netcom Group Co. Ltd. – were similarly mixed. China Telecom’s revenue for the first half of this year rose 1.5 percent from the same period 2006, but revenue from voice services dropped 7 percent, and net profit fell 5 percent. Net profit at China Netcom Group (CNC) also declined 5.4% during the first half of this year.  at their mid year meeting: “China Telecom has long since shown interest in purchasing one of China Unicom’s network assets. It’s just that we have yet to reach the stage to negotiate price.”  China Telecom is slated to get a 3G license in China, and is eager to get into the mobile market.

#1 Red Chip Glory for China Mobile

China Mobile’s price topped HK＄ 100 per share on August 27. It was the first time that a red chip (a company incorporated and listed in Hong Kong with controlling Chinese shareholders) share price surpassed HK＄ 100.  With a market value exceeding HK＄ 2 billion ( US$ 256 million ), it has become the No. 1 stock on the Hang Seng, with a market value three times higher than those of China Unicom, China Telecom and CNC combined.

Clearly, an imbalance among telecom players is expanding, seven years after the break-up of China Telecom’s monopoly over the domestic market. SASAC had hoped that the major operators can solve the restructuring problems through talks among themselves. Reports indicate it hasn't gone well. Surprise surprise. What capitalist would think he would give up market advantage absent the heavy hand of the government forcing him to?

If You're Leading, Increase the Pace

China Mobile is doing what leaders do - separate themselves from the competition even more. The president of China Mobile, Wang Jianzhou, while discussing the mid-year report, relayed that he intends to adjust the 2007 capital budget upwards from the original, 98.9 billion yuan (US$ 13.15 billion) spending plan.

Analysts with UBS think China Mobile’s potential for increase remains underestimated. CMCC's market share, based on phone time volume, is continually increasing. Citigroup’s analysts note that China Mobile’s rural mobile phone market penetration is currently only 18 percent, leaving plenty of room for growth. It forecasts profits for this year and next year as high as 81.13 billion yuan (US$ 10.79 billion) and 107.67 billion yuan (US$ 14.32 billion), respectively. Wow. Pause here and consider: 100% year on year growth to US$ 15 billion.

Converging Favorable Factors for CMCC

Meanwhile mobile expenses are falling and mobile systems are increasingly replacing fixed networks. China Telecom data show that per minute costs in the past three years have progressively decreased at an annual rate of 16.7%, even while the volume of mobile phone use has rapidly climbed 33.7 %, leading to a retreat for fixed network operators’ voice services.

Changes in mobile users’ one-way charges, decreasing fees, and other fee-related policy changes have also crippled China Unicom’s competitiveness. According to "asymmetrical control policies", China's government-ese for the fee ceilings that Unicom could charge as a late market entry in the mobile business, were originally 10 percent below those of China Mobile. Shang Bing, China Unicom’s executive board member and managing director, said "implementation of one-way charges nationwide and the fact that Unicom users are primarily mid- to low-end users prevents Unicom’s growth in voice services from offsetting a drop in company revenue." In contrast, China Mobile benefits from an enormous group of up-market users.

The Red Hand

This dynamic does not please China’s government telecom "ir-regulators." And so the impetus for the telecoms restructuring, percolating since 2004 and encouraged by increasing gaps between the four telecom companies, has finally boiled over. China Netcom's Chairman Zhang Chunjiang used an apt Chinese metaphor to describe the current situation in China’s telecoms industry: “In a family with four sons, the parents certainly hope that all four sons will be healthy,” he said. “They don’t simply hope that only one will grow to be big and strong. All four sons are considered healthy now,” Zhang went on, “It’s just that some are more robust while others are thinner. But if there’s a problem, they will of course go to their parents to discuss it.” Zhang was clearly implying a restructuring.

China Telecom Hungry for Mobile

High level managers at China Telecom have been quoted as viewing mobile as the only way out: "Only by developing mobile services might fixed network operators find impetus for the next stage of development. After all, developing all-around services is the worldwide trend for today’s telecom operators.” Note that mobile is emerging as the emphasis in the China market.

China Telecom estimates that construction of a new, nationwide 3G network would require more than 200 billion yuan (US$ 26.6 billion) during the first three years, including 100 billion yuan (US$ 13.3 billion) in the first year alone. China Telecom sees little possibility for the state government to approve a proposal for building a new 3G network, since the International Telecommunication Union will determine new 4G standards in 2009, and China Mobile has been in charge of the implementing TD-SCDMA technical standards. [Note: Another rule of commerce: Shape the standards so others react to your agenda instead of you reacting to the standard's agenda]. Instead, the natural option appears to be building all-around service operators through restructuring in the industry and upgrading the 2G network to 3G. Hence their desire to acquire one of China Unicom's mobile networks.

Chinese Way: Government led, market executed will be the main method for this telecommunication restructuring
Chen Jinqiao, deputy chief engineer of the Telecommunications Research Institute under the Ministry of Information Industry, said the major target of the upcoming restructuring is to realize a harmonized development of the telecommunications market, "after which the competitors will narrow their differences in asset scales." Translation of Forbidden City Speak: The Chinese government is taking steps to lower the ceiling and raise the floor. 

Industry consultants I know in China think China Mobile and China Telecom will become the main agents of the industry’s restructuring. One crucial question is whether China Unicom will continue to operate independently. In the end, will China Unicom transfer one of its networks to China Telecom and then merge with the fixed operator? Or will China Unicom divide and sell its network to China Telecom and China Netcom?

Stay tuned and start practicing your Mandarin.

Comments

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