China Telecom Industry Review

Executive Summary
Continuing my early review about 3G Global Development, for past 2 months - I have begun to review significant growth after restructuring in China’s telecom industry. Current five service-providers have now been reduced to three full-service telecom service-providers. Birth of these providers suggests that there will be a new market-share pattern in China’s telecom industry. Which company gets the bigger piece of the pie and which gets the smaller will depend on the customers’ choice of service provider in China’s ‘3G’ era. In view of the over 1.4 Billion populations and low penetration, I believe there is ample room in the market for every operator to make a differentiating position and restore growth momentum in the long run.

From news, I have seen that Chinese Government would impose asymmetric regulations on dominant market players for 2 to 3 years to help new entrants catch up. This would prompt the three providers to reposition themselves through differentiation in market, services and/or customers. As the Government has been intending to stimulate competition instead of creating a price war, this would help in cultivating a healthy and sustainable industry development going forward.


China Mobile
I have seen China Mobile, current market share leader, faces development constraints. The mobile phone service provider will inevitably face fierce price wars and high capital expenditure in the next 2 years. The best way to determine which operator acquires the most market share will be by looking at customer flows. Therefore, new additional subscriber numbers will be a good indicator as to which of the three is building the most successful operation going forward. Again, I believed China Mobile should be able to make differentiation in the rural mobile market and high-end individual mobile users market in urban areas.

China Unicom
Another big player, new China Unicom is better than new China Telecom. After restructuring, China Mobile’s business development will be constrained in coming years due to the maturity of TD-SCDMA technology and the possible influence of some un-favorable regulatory policies. My review on the product front, its upgraded CDMA 3G version will be no better than WCDMA. New Unicom will focus on developing G-net after shedding the burden of C-net. I believe that the upgraded WCDMA has the strongest array of products and will be the top choice of China 3G customers in the future.

Additionally, I have heard from news (Financial Times) that Telefonica plans to buy 10% stake to become new strategic shareholder for China Unicom. Currently, Telefonica owns around 5% stake in Netcom; post-merger it would be about 3% of the enlarged China Unicom. In my view, the latest development is positive for China Unicom, at least from a technical standpoint, as any purchase in the open market would support China Unicom’s share price. Arguably, from a fundamental standpoint, Telefonica’s more serious involvement could help the new China Unicom in a number of areas including: 1) lower costs in equipment purchases,
2) more technical know-how and
3) commercial know-how in 3G planning and marketing.

China Netcom
I have my limitation to review China Netcom, just my key concerns on China Netcom are long-term competitiveness in a three player market. For comparison, China Mobile - it faces the largest and strongest mobile operator as above note, while China Telecom has a fixed line footprint twice the size of China Netcom. Facing the fact that fundamentally on the core business than China Telecom — given China Netcom operates in provinces with relatively lower affordability, I expect the impact from mobile substitution, lower mobile tariffs, etc, to be more material than for China Telecom.


Overall Review for Telecom Industry in China
I believe it will be a strong mobile usage growth continues in following year although it will not as fast as past years. From many reviews it says that China added 87 million mobile subscribers in 2007; mobile penetration just hit around 40% with 530 Million mobile subscribers by the year end.

From this point, I estimate China will add an additional around 180 Million subscribers in the next two years with the total of mobile subscribers approaching 700 Million by the end of 2009 and mobile penetration of around 52%. With industry restructuring allowing fixed line operators to participate in mobile operation would accelerate this process.

What next: South Asia Round-up?