Telecoms Industry Restructuring Plan Announced in China, 3G Licences to be Issued after Reshuffle

China’s Ministry of Finance, the Ministry of Industry and Information, and the National Development and Reform Commission jointly announced over the weekend (24/25 May) the guidelines of a long-awaited restructuring of the country’s telecoms industry. In a statement, the government urged China Telecommunications Corp (China Telecom), the country's largest fixed-line operator, to acquire the CDMA mobile network business of China United Telecommunications Corp (China Unicom), the smaller of the country's two mobile operators. The plan also calls for China Unicom to merge with China Network Communications Group (China Netcom), the second-largest fixed-line operator. China Mobile Communications Corp (China Mobile), the country's largest mobile operator, will merge with China Tietong Telecommunications Corp (China Tietong), the telecoms arm of the Railway Ministry, while China Satellite Communications Corp (China Satcom) is to merge its telecoms business into China Telecom's operations. The statement gave no timetable or financial details of the restructuring, but called for the telecoms companies to soon report detailed arrangements for carrying out the plan to the relevant government departments. The statement also said 3G licensing will take place following the restructuring. The remaining three telecoms carriers will each receive a licence.

In response, China Mobile has stated it will comply with the government announcement and implement specific reform plans in a timely manner. China Unicom has said it is in talks with China Telecom and China Netcom about merging operations and disposing of businesses. The telecoms companies also said they will reshuffle key management positions as part of the restructuring. China Unicom confirmed that Shang Bing has resigned as president and executive director of the company, and Yang Xiaowei has resigned as executive director and vice-president. Both executives will take up senior management positions at China Telecom. China Netcom confirmed separately that Zhang Chunjiang has resigned as chairman and executive director, and plans to join China Mobile as vice-president.

The Final Picture

The core of the industry reshuffle is the creation of three integrated telecoms operators, offering a full range of services from mobile and fixed-line to internet connections, as opposed to the current set-up where fixed and mobile operators are clearly divided. The following provides a picture of what the asset and business scale of the new operators will look like:

• China Mobile + China Tietong: The merged group will have extensive nationwide GSM mobile network coverage owned by China Mobile, but limited fixed-line infrastructure currently run by China Tietong. The group will control approximately 70% of the country's mobile subscribers, but only about 5% of fixed-line and broadband internet subscribers.
• China Netcom + China Unicom's GSM Assets: The merged group will own fixed-line assets in the northern part of the country and China Unicom's GSM network. The group will control approximately 30% of the country's fixed and broadband internet subscribers and about 22% of total mobile users (China Unicom's GSM subscribers).
• China Telecom + China Unicom's CDMA Assets: The merged group will own fixed-line assets in the southern part of the country and China Unicom's CDMA network. The group will control approximately 60% of total fixed-line and broadband subscribers, but only about 8% of the country's mobile users (China Unicom's CDMA subscribers).

Global Insight expects that the reform will have a positive impact on overall industry growth as it will help to create a more level playing field among the telecoms operators and enhance the overall competitiveness of the Chinese telecoms industry. The restructure will stimulate greater competition across all segments in the long term, but in the short term competition will remain asymmetric in that China Mobile will continue to be the strongest player in the mobile market, while its fixed-line operations will be dwarfed by those of China Netcom and China Telecom.

Outlook and Implications

• Greater Competition in Mobile Segment: China will effectively gain a third mobile operator through the fragmenting of China Unicom's mobile network assets and customer base between China Telecom and China Netcom. This will result in greater competition in the mobile market and help stimulate mobile subscriber growth and the penetration rate in the long term. However, the reform is unlikely to break the dominance of China Mobile or dampen its business growth in the short term. There is still considerable organic growth potential in the Chinese mobile market, particularly in rural areas. China Mobile, which currently controls about 70% of the country’s mobile subscribers, also enjoys a much stronger brand name, and more robust and extensive mobile networks than its rivals.
• Opportunities and Challenges for China Telecom and Netcom: China Telecom and China Netcom, whose revenues have suffered as a result of fixed-to-mobile substitution, will have the opportunity to tap growth potential in the mobile market. By acquiring mobile assets from China Unicom, the two will not enter the mobile market as greenfield operators, but can build on the existing operations of China Unicom, therefore reducing their market entry risks. However, both China Telecom (CDMA) and China Unicom/Netcom (GSM) will need to invest heavily to expand their mobile networks in order to compete on a national scale with China Mobile. The two will also need to develop effective pricing and service offering strategies to attract mobile customers—for example, they could bundle mobile services with their existing fixed-line/broadband offerings to attract new customers and increase the loyalties of existing customers.
• Competition in Fixed and Broadband Segments Less Affected: Through gaining China Tietong's assets, China Mobile will be able to provide a range of new services, including fixed-line voice, broadband internet, and datacomms/IP-based services to residential and business customers. However, China Tietong's current network assets and subscriber base are far less extensive than those of China Netcom and China Telecom, so in the short term China's fixed-line and broadband markets will remain dominated by the regional incumbents, China Netcom and China Telecom.
• Doubts over 3G Remain: The industry restructuring will better prepare the Chinese operators, particularly China Telecom and China Unicom/Netcom, for future 3G deployment. China has not rushed into 3G and, as such, should avoid some of the early pitfalls experienced by European and Japanese operators, including problems with 2G/3G handover and a lack of handsets. Under MII guidance, there has been considerable testing of China's own version of 3G—TD-SCDMA—which is likely to be deployed alongside W-CDMA/HSPA and CDMA 2000 1X EV-DO. Nevertheless, the wide-scale deployment of TD-SCDMA will still be a risk given the difficulties operators may experience in integrating and operating different network technologies.
• International Ambitions of Chinese Operators: The completion of the industry restructuring will give Chinese operators more leeway to pursue their international ambitions. China Mobile has already acquired a Pakistani mobile operator and is looking towards Africa for more investment opportunities, but competition for mobile and fixed-line assets in emerging markets will be intense, with a rising number of global telecoms operators seeking such opportunities. While we expect Chinese telecoms operators to seek out opportunities and bid for assets and licences, they will inevitably lose out to international rivals in some instances. The slow internationalisation of China's telecoms operators does pose a longer-term risk and, while we expect that economic growth will be strong in China in the medium term, China's operators should seek to diversify their international exposure.

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