With ongoing delays over the issuing of third generation mobile network licenses, China’s telecoms sector is a hotbed of restructuring rumors and uncertainty. The Market Journal casts an eye over some of the rumors, and rules out two of the three major myths

China’s telecom market has been dominated this year by uncertainty and rumors of impending restructuring. The year began with speculation that China Unicom could be dissolved and its network spun off, progressed to rumors that China Mobile could be broken up, and ended with some analysts predicting China Telecom, China Netcom and China Unicom could merge to form a worthy competitor to China Mobile. The impending issuance of 3G licenses has added to the uncertainty, as has doubt as to what the new year will bring.

Mobile networks eating into fixed-line subscribers

Ongoing market rumors had led many in the media to lose sight of the inequities in the relative positions of the four main operators, but third-quarter earnings announcements in October from the fixed-line operators refocused attention.

According to data released by the company on November 20, China Telecom lost 880,000 subscribers in the October, reducing its number of users to 222.56 million. The fall continued a trend that began in August when 380,000 users disconnected. Service cancellations increased to 730,000 in September.

China Telecom said the significant fall in fixed-line subscribers was mainly the result of increased market competition, especially from China Mobile’s new voice services and packages. Official data confirms this; China Telecom’s losses were mirrored by China Mobile’s continuous gain in subscribers.

The situation has led to calls for the government to make changes to the competitive landscape. Then, on November 24, Ministry of Information Industry (MII) vice-minister Xi Guaohua said he hoped there would soon be a restructuring in telecom sector. The market took his statement as meaning there would likely be a telecom restructuring next year.

Market rises on 3G

Despite the unsatisfactory subscriber numbers, China Telecom’s stocks are rising, bolstered by speculation that fixed-line operators may soon be granted 3G licenses, allowing them to venture into the lucrative mobile phone market.

Gong Shuangjin, Chief Expert at the China Academy of Telecommunications, said China Telecom was aware of the grave challenges its fixed network faced and needed to focus on transforming its business model to raise its competitiveness – by finding new growth points and repositioning itself as a provider of information services – even as it actively lobbied for a mobile license and established a solid platform from which to launch 3G services.

China Telecom is also the only domestic telecom operator that has not yet sold stakes to foreign investors, giving it room to increase competitiveness through strategic investments. Its management has repeatedly stated that the company is in talks with foreign investors but that agreements could only be made once industry restructuring was completed and a mobile license obtained.

Li Min, a China telecom researcher at In-Stat, said multinational organizations including Vodafone had been seeking to be more involved with China’s telecom sector.

China Telecom’s management considers its loss of fixed-line subscribers to be an international trend determined by consumer demand. The trend is particularly obvious in China, a country with a large, highly-mobile population, cheap mobile phones and falling mobile voice service rates. In these circumstances, China Telecom is moving ahead quickly with plans to transform itself from solely a fixed-line operator into a communications provider offering a range of services, including mobile business. In China Telecom’s case, this means 3G business.

Analysts with CCID Consulting said the most significant characteristics of 3G networks are their high-speed transmission capacity and new business development potential. China Telecom’s focus on value-added business, its overall development strategy and the ongoing association of part of its value-added business with mobile businesses are all signs that the company is moving toward 3G.

Market rumors lack foundation

Even if China Telecom is likely to be granted a 3G license, it is unknown how the company will do in competition with China Mobile and China Unicom, just as it is unknown how the competitive landscape between fixed-line and mobile phone operators will change. How the post restructuring landscape will look is anyone’s guess.

Three main myths have begun circulating regarding these issues. The first is that China Unicom will be dissolved and its mobile networks spun off to China Unicom and China Netcom. The second is that China Mobile will be broken up to reduce its monopoly on the sector, while the third holds that China Telecom, Netcom and Unicom will be merged to create a strong competitor to China Mobile.

With respect to these three rumors, Li said that although industry restructuring depended much on government consideration, the second and third rumors were highly unlikely.

“China Mobile is a listed company with strong performance,” Li said. “The industry landscape is not disorganized to the point that a good company needs to be dismantled. In the global telecom business, the competitive landscape is rarely balanced , so China’s situation is a normal phenomenon.

“The telecom sector is a high-cost industry so it would be undesirable for the state if no one major player was superior to others. In other words, it is very unlikely that China Mobile will be broken up. China Mobile’s chairman, Wang Jianzhou, has already said the rumors lack any foundation, which serves as further proof that this myth is unlikely to become reality,” Li continued.

“At the beginning, when the MII and the China Development and Reform Commission suggested the spin-off of China Unicom’s network’s, the main purpose was to reduce the number of 3G licenses. Breaking up China Mobile obviously goes against this goal since it will only increase the number of operators.

“To merge three operators to compete with one can easily lead to pricing alliances, which is not beneficial in restoring balance and rational competition to China’s telecom sector.”

This article was first published in Chinese in the Market Journal on December 3, 2007. The China Perspective takes no responsibility for the accuracy of the original article.