Friday, February 22, 2008

China - rumours of restructuring

Under the Spotlight - China Close to Finalising Industry Restructuring Plans

As China gives its first official hint of a restructuring of its domestic telecoms market, Global Insight looks at what such a move could mean for the telecoms industry, both in China and across the world.

Global Insight Perspective

Significance - China has given the first official hint that it is close to finalising the restructuring of its telecoms market.

Implications - The creation of three giant integrated telcos would give the Chinese players the clout, experience, cash and will to expand abroad, raising the bar for established telcos in Europe and the United States.

Outlook - By this restructuring, China may be unwittingly outlining a coherent vision of what the telecoms industry of the future should look like—an industry made up of integrated telcos rather than single-play operators.

China's state-run radio has reported that the country may unveil long-awaited plans for a major industry shake-up as early as next month. If the plan proceeds as outlined in the brief radio report, the country's six telecoms operators will be consolidated into three, offering a full range of services from mobile, fixed-line to internet connections, as opposed to the current set-up where fixed and mobile operators are clearly divided.

According to the radio report, China Mobile Communications Corp, the country's largest mobile operator, would merge with the small fixed-line operator, China Tietong Telecommunications Corp. China Telecommunications Corp, the largest fixed-line operator, would acquire a mobile network based on the CDMA technology from China United Telecommunications Corp, the smaller of the country's two mobile operators. The remainder of China United Telecommunications, which also owns a network based on the GSM standard, would merge with China Network Communications Group, the second-ranked fixed-line operator. The sixth telecoms carrier, China Satellite Communications Corp, would merge into a state-owned aerospace industry group.

The report, broadcast by the Central People's Broadcasting Station, is the first official sign that the industry shake-up may come soon. The plan is likely to be scheduled for formal approval at the annual session of the National People's Congress (China's legislature), which kicks off on 5 March. A formal government announcement is likely to come shortly after the session concludes, two weeks later.

Outlook and Implications

Overhauling the Status Quo: The proposed restructuring will radically alter the status quo in the Chinese telecoms market and will create a level playing field for all operators in the market. Admittedly, the current split between fixed-line and mobile operators has not favoured all the players in the tightly controlled market, skewing competition in the market. In particular, the fixed-line operators have experienced slow growth in their traditional fixed-line service and are therefore eager to enter the mobile segment. The mobile sector, in contrast, still has a lot of growth left in it. China now has more than 547 million mobile subscribers, but a large majority of the population are not yet mobile users, with mobile penetration standing at just over 40%. As such, increased competition and the convergence of fixed and mobile services would help drive further growth in the market, creating a level playing field for all the operators. In addition, the industry restructuring would also remove the dilemma for the issuance of 3G licences, which has been delayed for years. There had been anxiety that the government was unsure as to whom it should issue the limited number of licenses, with all the existing mobile and fixed operators making a case for the 3G permits. It now appears that 3G licensing could finally take place later this year, with all three remaining telecoms giants set to receive clearance.

Restructuring for Growth: Apart from dramatically altering the domestic Chinese telecoms market, the proposed restructuring will create new industry stalwarts that are comparable to many of the big telcos in Europe and the United States. It is likely that the resultant giants will want to flex their muscles globally, and will thus wish to seize the juicy telecoms assets in the developing world. China Mobile, the country's largest mobile operator, has already revealed its desire to seek out takeover assets in Africa and the Middle East. However, without a foot in its domestic fixed market, China Mobile would have only really eyed mobile assets abroad. In contrast, the future China Mobile, with both fixed and mobile operations at home, will have the expertise, cash, clout and the will to acquire whatever telecoms assets become available around the world. That prospect raises the bar for the established Western telcos who, with their cash and historic ties, have hitherto had unhindered access to emerging market assets.

A Vision for the Future?: While the news headlines are full of analyses about how China is micro-managing its telecoms market, the Chinese government may be unwittingly outlining a coherent vision for the future of the telecoms industry globally. By fusing the fixed and mobile players together, China will eradicate single-play operators in its telecoms market, instead creating integrated operators able to compete across all segments of the telecoms market. Interestingly, anecdotal evidence suggests that this desire is not limited solely to China. Vodafone, for example, has abandoned its mobile-only strategy and has been wading into fixed services across many of its markets. In fact, in recent times, many of the acquisitions in the telecoms industry around the world have seen fixed players buy mobile assets and vice versa. That trend encapsulates the belief within the industry that the future of the telecoms market lies in offering integrated/converged mobile and fixed services. Contrastingly, however, while operators in the rest of the world hope to achieve that dream by innovation, luck or acquisition, China has taken the short-cut route, and will achieve that goal by legislation.

No comments: