China - restructuring of the market

China's Changes In Telecom Sector Start Taking Hold

China forged ahead with the restructuring of its telecom market Monday, as China Unicom, the country's No. 2 mobile phone company, agreed to buy China Netcom Group for $23.8 billion in stock and to sell off part of its wireless business to China Telecom for $15.9 billion.

China Unicom will keep its biggest wireless unit, which operates a GSM-type network and has about 123 million subscribers, and merge it with China Netcom's fixed-line phone business. China Telecom, the country's biggest landline phone company, will take over China Unicom's smaller wireless business, which operates a CDMA network and has 43 million customers.

China's restructuring is expected to give China Mobile, which has about 68% of the country's 584 million wireless phone users, more competition.

China Mobile's U.S. shares have slid near 12% since China's government announced the long-awaited restructuring on May 24. On that date, trading in China Telecom, China Unicom and China Netcom was suspended in the U.S. and in Hong Kong. It's unclear when trading will resume in those stocks.

As part of the restructuring, China Mobile is expected to acquire a small fixed-line operator, China Tietong Telecom.

China Telecom and China Unicom/Netcom plan to invest in 3G wireless broadband services. China regulators say they'll dish out their first 3G licenses after the restructuring is completed, likely late this year.

Third-generation, or 3G, wireless networks carry voice calls and also whisk music, video, games, maps and other data content to cell phones and laptop computers. It represents the current top-of-the-line in wireless communications.

"3G will be the catalyst for greater competition," said Sara Harris, an analyst at Strategy Analytics. "But China will still be a heavily regulated market. We are not going to see a free-for-all or an all-out price war."

Non-Chinese can own only small stakes in China's telecom carriers. The U.K.'s Vodafone Group, Italy's Telefonica and Korea's SK Telecom own stakes in Chinese carriers, but all those stakes are less than 10%.

Regulators might attempt to curb China Mobile's dominance with other new measures, such as requiring it to offer low-cost roaming on its network to rivals.

Regulators also might issue rules that would force China Mobile to let subscribers keep their same phone numbers when switching to rival carriers. The U.S. already has such a requirement, but few developing countries have instituted such a rule.

Pushing Into Rural Markets

Even so, China Mobile has many strengths that rivals will struggle to match, some analysts say.

China Mobile has been expanding its wireless network in fast-growing rural areas. It has also set up sales offices in small villages. Expanding its network and sales force into rural areas will give it a long-term edge over rivals, says Todd Rosenbluth, an analyst at Standard & Poor's.

"We see China Mobile expanding its market share, especially in rural markets, as competitors are slowed in rolling out 3G services," he said.

While China's government aims to increase competition through the restructuring, its leaders might not want to undermine China Mobile's ability to compete globally, some observers say. China Mobile is the world's largest wireless carrier in terms of subscribers, while Vodafone is the largest in revenue.

"Remember that Beijing remains the architect of these moves," said Donald Straszheim, vice chairman of Roth Capital Partners, which runs some China-focused investment funds. "Telecom is one of the sectors regarded as strategically vital by the government. Beijing wants the state-owned enterprises to become dominant worldwide players."

China Mobile is still state-owned, like most of China's big companies. China Mobile bought Pakistan's No. 4 wireless firm two years ago. While it hasn't made any acquisitions since, observers say it's on the prowl in Asia and perhaps Africa.

China's government has delayed awarding 3G licenses until a homegrown technology, called TD-SCDMA, could be commercialized. China Mobile's parent holding company has been honing a TD-SCDMA service.

Almost all of the world, however, uses either GSM or CDMA technology, which requires use of their own types of phones and telecom gear.

Most analysts expect that China's regulators will require that China Mobile use TD-SCDMA as a condition for getting a 3G operating license.

What's unclear, says Lehman Bros. analyst Paul Wuh in a note to clients, is whether regulators will issue 3G licenses to China Mobile, China Telecom and China Unicom/Netcom at the same time. They might hold off, giving China Mobile and homegrown TD-SCDMA a head start, he says.

Harris says if TD-SCDMA is deployed successfully at home, China Mobile could use the technology in Pakistan and other markets it enters. That would fit in with Beijing's goal of establishing TD-SCDMA as a worldwide standard.

Olympics Boost Likely

China Telecom is expected to stick with CDMA, giving a boost to Qualcomm, which licenses the technology to equipment and phone makers. China Unicom/Netcom might also use a version of CDMA for its 3G network.

Qualcomm has agreed to lower royalty rates in China as part of negotiations with the government, says a Goldman Sach's research note.

Wireless phone usage is expected to pick up this summer because Beijing is hosting the Olympics, starting Aug. 8, which could boost China Mobile's results for the quarter ending Sept. 30, analysts say.

Walter Piecyk, analyst at Pali Research, says China Mobile's subscriber growth over the next year could beat consensus estimates.

"Investors are concerned about the potential for increased regulation on China Mobile, yet many of those concerns appear to be hysterical given the slow pace of change in China," Piecyk said in a research note.