Amid years of skepticism, the plan for the third round of restructuring of China’s telecom industry has been finalized. On May 24, the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Finance jointly issued a notice on restructuring China’s telecom industry, which states that based on the current conditions of the industry, the acquisition of China Unicom’s CDMA network (including the assets and subscriber base) by China Telecom, the merger between China Unicom and China Netcom, the merger of basic telecom service of China Satcom into China Telecom, and the merger of China Railcom (Tietong) into China Mobile should be encouraged in order to achieve reform. The notice also states that the restructuring and the issue of 3G licenses should be combined. In other words, the 3G licenses should be issued after the industry is restructured. Although expectations and enthusiasm for the restructuring have long since faded, this latest announcement still got a lot of attention.
The restructuring is meant to mark a new era for China’s telecom industry, in which it’s hoped that a new tide of development will wash over the entire industry. It’s a rare opportunity for the industry, but still a long way from being achieved.
Uncertainty No. 1: How will the price for Unicom’s CDMA network be determined?
At the core of the restructuring scheme is the split of China Unicom’s two networks. The most difficult point is the assessment of Unicom’s CDMA network. Unicom, of course, hopes for a higher price because the compensation fund can be used to further develop its GSM network and eventually migrate to 3G. However, after acquiring the CDMA network, China Telecom also prepares itself for migration to the 3G network in addition to increasing its coverage and improving its quality. This would require investment of more than RMB100 billion (US$13 billion) in the near future. So, for China Telecom, the lower the price for Unicom’s CDMA network the better. “The top management of China Telecom had hoped that Unicom’s CDMA network would be directly handed over to China Telecom in the form of administrative transfer,” said a source with China Telecom. The significant divergence between the expectations of China Unicom and China Telecom will make it hard to reach a price that is satisfactory for both parties.
Last year, some investment banks even estimated the value of China Unicom’s CDMA network at RMB130 billion (US$19 billion). But given current development, the final acquisition price may be somewhat less-possibly RMB70 billion (US$10 billion).
The center of the debate hinges on what method should used to calculate the price of Unicom’s CDMA network. In fact, there are many options. For instance, the price can be calculated based on the subscriber base or the net assets. However, since both parties must answer to the State-owned Assets Supervision and Administration Commission of the State Council, there are many alternatives. The final price will need to be a trade-off after all factors are taken into consideration.
Uncertainty No. 2: Good news or bad news?
The party that is most likely to be happy with the new restructuring scheme is China Telecom. Some time ago, Wang Xiaochu, the chairman of China Telecom, became the first telecom head to publicly float the idea of splitting up China Unicom. He showed particular interest in China Unicom’s CDMA network. The latest development implies that China Telecom is very likely to benefit the most from the restructuring. By acquiring Unicom’s CDMA network, China Telecom can easily get a foothold in the mobile market. Technically, moving from CDMA to 3G is quicker and less costly than going from GSM to 3G. Moreover, China Telecom boasts abundant fixed line resources and the broadband cable that connects tens of millions of families. After acquiring the mobile network, it could quickly develop the fixed-mobile convergence (FMC) technology. This is the trend in global network technology, and would be China Telecom’s best weapon against China Mobile.
If the restructuring is good news for China Telecom, it is not all that welcome for the new Unicom. Firstly, China Unicom and China Netcom are small players in their own markets. They lag far behind their rivals in terms of network resources and subscriber bases. Even combined, they don’t have any particular competitive edge after their merger. Furthermore, both Unicom and Netcom face enormous integration pressure. Several years ago, it took five years for Netcom to integrate Netcom Holdings, which was much smaller. This time, the ratio of Netcom employees to Unicom employees is just 5 to 1. Moreover, the fixed-line operator has a lot of expectations for mobile service. However, Netcom employees, enjoys the majority of number, are not familiar with the mobile services. The integration between the two operators will be very difficult and costly.
In addition, the restructuring announcement has been long awaited by domestic and foreign telecom equipment manufacturers. The restructuring and the following 3G will unveil the prelude for investment in fixed assets, thus creating opportunities for equipment manufacturers, and in particular, driving up the required performance of domestic vendors like Huawei and ZTE.
Uncertainty No. 3: Who will be strong enough to compete against China Mobile?
Changing the drastically lopsided competition situation is the most significant impetus for the restructuring. The monopoly of China Mobile has severely hindered the development of China’s information industry. So, after the restructuring is complete, which operator will rise up against China Mobile? Due to the colossal competitive advantages that China Mobile currently has, the competition situation is unlikely to change anytime soon. But under current circumstances, China Telecom has the most potential to constitute a threat to China Mobile.
China Telecom is the closest to China Mobile in terms of financial strength, operation experience and management expertise. Prior to the restructuring, China Telecom has done a lot of preparation to embrace the CDMA network. Over the last year, it has maintained close contact with CDMA equipment suppliers and handset manufacturers, and often invited them to give various training programs to its employees. As well, China Telecom started to recruit employees who are familiar with the CDMA network as it continues to build on its resources. It was also reported that China Telecom has started outlining a procurement plan for the hardware equipment necessary to operate a CDMA network and soliciting proposals from infrastructure vendors on related plans. This is evidence that China Telecom is fully prepared to deploy its plan as soon as the restructuring scheme is finalized.
But the biggest ace up the sleeve for China Telecom is the FMC service it provides. This advantage results from the integration of wireline and wireless networks, something that China Mobile lacks.
“Currently, Telecom is developing a new application. If subscribers choose Telecom for both fixed and mobile services, once they enter a building, the communication network will automatically switch to indoor wireless broadband, providing subscribers with the bandwidth and rate of a fixed network,” says a source familiar with China Telecom. According to related data, 60% of all mobile calls are made indoors. Consequently, this service would be very appealing to subscribers. If this service is launched, it will surely attract some China Mobile subscribers. China Mobile’s top management has reportedly downplayed the China Unicom threat while privately admitting that China Telecom could be the major antagonist in the future.
Uncertainty No. 4: Will there be any real change in leadership after restructuring?
Along with the restructuring scheme, there have been announcements of some minor personnel shuffles. Wang Jianzhou will serve as the president and vice secretary of the CPC branch of China Mobile. Zhang Chunjiang, former president of China Netcom, will be transferred to act as the secretary of the CPC branch and vice president of China Mobile. Wang Xiaochu will remain president of China Telecom, and Shang Bing, former president of China Unicom, will assume the post of the CPC branch secretary and vice president of China Telecom. Chang Xiaobing will act as the director of the preparatory group of the new China Unicom. So far, there have been no major leadership changes. However, that could change.
Wang Jianzhou will be 60 years old this December. China Mobile is the telecom service provider for the Beijing Olympic Games. Therefore, Wang Jianzhou is likely to retire after the Games, but exactly who will fill his spot is unknown. One reasonable candidate is Chang Xiaobing, the director of the preparatory group of the new China Unicom.
Currently, the announced top management reshuffles only involves the groups, while the top management at the listed companies remain intact. But, the possibility of further change at the top cannot be ruled out.
Uncertainty No. 5: What impacts will the restructuring have on TD-SCDMA?
The restructuring makes the future of TD-SCDMA, China’s homegrown 3G standard, more unclear. The uncertainties result partly from the attitude of China Mobile. Before the Olympic Games, China Mobile clearly indicated that it will support the TD network. But will it change its TD strategy to adapt to the changing competitive environment after the Olympics? China Mobile will face new challenges resulting from the operation of both TD and GSM networks. How will China Mobile balance its strategy in the immature TD network, which requires a large investment, against the GSM network, which has a large coverage and brings in a huge margin?
In fact, China Mobile continues to upgrade its GSM network. It has even reached the 2.75G EDGE network standard in many parts of the country. This year, China Mobile also began to push the 4G LTE technology. It announced a partnership with Vodafone and Verizon Wireless, the second largest mobile operator in the US, to advance LTE technology. This has led to speculation that China Mobile will leverage its GSM deployment to compete with the 3G networks of other operators in the near future. However, considering China Mobile’s affinity for 4G, the possibility cannot be ruled out that China Mobile will directly bypass 3G and go straight to 4G network once its development on the TD network is hampered.
Another uncertainty for the TD network is that it will directly compete with two mature 3G standards after they are released. Judging from the current commercial trial of TD-SCDMA, there seems to be little industry optimism.
In any case, the restructuring will have profound implications for the development of China’s telecom industry. An industry that has been dormant for years finally appears ready to embrace an era of great changes.
