China's new telecoms operators at a glance
New China Mobile
New China Telecom
New China Unicom
China Unicom's GSM network
Annual revenue (2007) yuan
Market cap HK$
Fixed line subscribers
Total voice subscribers
Ericsson, Huawei, Datang
Huawei, ZTE, Ericsson
NSN, Huawei, ZTE
The latest overhaul of China's telecoms sector is the biggest ever, and lays the map for the long-awaited introduction of 3G platforms into the world's largest mobile market.
In what was a long anticipated move, Beijing merged the country's five main operators into three companies that will compete for mobile, fixed line and internet customers.
The reorganisation will be regarded with relief by vendors around the world as well as by operators in other countries. Now that China is to invest in 3G — or even move quickly towards LTE-based 4G — the scale will affect the cost of other 3G and 4G operations.
Fixed-line operator China Telecom now has a mobile platform in the form of China Unicom's CDMA network; China Unicom's GSM business has been merged with China Netcom, the second largest fixed-line operator; while China Mobile was given China Tietong, a small fixed line operator that grew out of the country's railway network.
China Mobile is already the world's largest mobile network and though its new competitors are also giants on an international scale it is far from certain they will be much of a match for it.
The company has been headed for the past three years by Wang Jianzhou, who was previously president of China Unicom — during which time he was interviewed by Global Telecoms Business. China Telecom head Wang Xiaochu has also worked for more than one company in the industry: he is a former board chairman of China Mobile.
China Unicom CEO Chang Xiaobing is a former deputy general manager at China Telecom. Before that — as with most C-level executives in China's operators, he was an official in Beijing's Ministry of Information Industry — though earlier in his career he received a doctorate of business administration from Hong Kong Polytechnic University, in the days before Hong Kong was a special administrative region of China.
China Mobile now has two-thirds of mobile users in China, and 80% of new subscriptions. Its turnover reached 93 billion yuan ($13.3 billion) in the first quarter of this year — more than the turnover of all its competitors put together.
The addition of China Tietong (formerly China Railcom) gives it 41 million fixed-line subscribers, 3 million broadband users and a national transmission trunk route.
Aside from strengthening its competitors, the Beijing government has levelled the playing field more by choosing China Mobile to operate China's home-grown 3G technology, TD-CDMA, whether it likes it or not.
"TD-SCDMA certainly would have a negative impact on China Mobile due to the large amount of capital expenditure and little return," said Gu Chu, an analyst at CITIC-Kington Securities in Hangzhou.
China Mobile has already invested 14.2 billion yuan ($2 billion) into building trial networks in 10 Olympic hosting cities.
Not only is TD-SCDMA an unproven technology, the results from trial runs are already rumoured to be far from encouraging.
China Mobile must either make TD-SCDMA work or at the very least pay lip-service to its duty while really holding out for the launch of 4G technology a couple of years down the line.
"It already seems plausible that China Mobile may engage in delaying tactics to wait out 3G for 4G," said Dave Carini of Maverick China, a telecom-focused research firm in Beijing. "These are multi-billion dollar investments; you don't want to have to upgrade them two years later," he said.
Wendy Liu, head of China research at ABN-Amro, also predicts that China Mobile will have only a thin layer of TD-SCDMA deployment and instead rely on 2.5G (Edge) for data services.
But while China Mobile will be keen to avoid a mass roll-out of a untested technology expected to go out of date in a couple of years, Beijing will be doing all it can to help TD-SCDMA grow.
In order to help China Mobile launch the technology, it is likely that the government will delay issuing WCDMA and CDMA2000 3G licenses by three to six months until TD-SCDMA has been given time to grow.
"I don't think the government is going to restructure the market and then walk away," said Mark Natkin, managing director of Marbridge Consulting, a Beijing-based firm. "I think TD-SCDMA would die on the vine if the other two technologies were introduced at the same time."
China Telecom, which had been losing more than 10 million fixed-line subscribers a year, paid 66.2 billion yuan ($9.54 billion) for Unicom's CDMA network and another 43.8 billion ($6.31 billion) for the business, its employees and 42 million subscribers.
It has also absorbed the basic telecoms business of China Satellite Communications.
Fixed line upgrade
Despite admitting the price was too high, China Telecom will be in a strong position to push its new CDMA network in the wealthy southern provinces where it has dominance in the fixed line network and a strong high street presence. The company aims to grow by 100 million subscribers in three years.
The majority of China Telecom's fixed line customers already have mobile phones so migration from fixed lines is likely to be limited only to the two operator's Xiao Lingtong personal handy phone (PHS) service — of which it expects to upgrade 18 million, one third of the total, to CDMA.
The company has also said that it believes the low profitability of China Unicom's CDMA network was in part due to high handset subsidies and that it will take the same route. Rather than handsets, it may use CDMA's excess capacity to give users free minutes as an incentive.
China Telecom will become one of the largest CDMA mobile operators in the world — at 42 million behind only Verizon Wireless's 57 million in the US and Sprint's 53 million.
Having a CDMA network means that China Telecom will be able to introduce CDMA2000 EVDO relatively quickly, providing medium-speed 3G applications to major cities by the end of 2008.
However the company has already announced that it will probably then move away from CDMA technology when following onto 4G in two to three years time, likely adopting the GSM industry's Long Term Evolution (LTE) platform instead. In this it will be following the move already announced in the US by Verizon Wireless, which is also planning LTE for its 4G technology.
The marriage of China Unicom and China Netcom is the "tough piece of the puzzle," said Liu at ABN-Amro. The company has a valuable set of assets, but as a merger of equals faces a challenging integration, she said.
China Netcom was formed by the government in 1999 to build high speed internet communications. In 2002, it was given a third of China Telecom's assets, mainly in China's north-eastern provinces.
China Netcom is still dominant in these areas but has a presence in most provinces. Apart from certain cities such as Beijing and Tianjin, the north is not as prosperous the southern coastal areas in which China Telecom is dominant.
China Unicom has been running two mobile networks, CDMA and GSM, side by side since 2001. Its value-added CDMA service was targeted towards high-end customers, while its GSM network was marketed as cheaper than China Mobile's — but both failed to compete successfully with China Mobile.
With New China Unicom being merger of the two worst performing operators, analysts are sceptical that having to deal with such an enormous integration may only make matters worse. The poor performance of the company's shares since the announcement is a reflection of that.
It is difficult to predict how management in these two companies of equal stature will divide responsibility and whether leaders will be able to build loyalty bases across the divide. Most analysts are sceptical.
It has been suggested former Netcom management may take on a larger role in the north, with former Unicom management leading in the south — but no decision has yet been announced.
"It is also unclear the degree to which a high level government power broker will come in and lay things out if they do not do so themselves," said Natkin at Marbridge Consulting.
The new combined company is expected to make some synergies by streamlining its combined 20,000 outlets, sharing network resources such as Netcom's nationwide transmission asset and using its capital expenditure more efficiently.
Unicom will also migrate a proportion of Netcom's PHS customers to the GSM network and begin offering bundled services.
Given the challenges of integration, it may take longer to get to this stage than to get its 3G WCDMA licence. On top of this, China Netcom is the fixed line provider in Beijing, meaning that the new integrated company's first priority will be to ensure that communications run smoothly during the August Olympics.
Restructuring is not likely to be fully complete until September 2008 at the earliest, at which time a full TD-SCDMA licence will likely be issued and from which other 3G and 4G licences will follow — finally signalling the end to a six-year wait, which had put the world's largest mobile market on hold to 3G, convergence and new applications. GTB