Global Insight Perspective | |
Significance | The Chinese telecoms companies released more details of a major industry overhaul. China Unicom, the country's second-largest mobile operator will sell its CDMA assets to China Telecom, the country's largest fixed-line operator. The remainder of China Unicom, including its GSM assets, will merge with second-ranked fixed-line operators China Netcom. |
Implications | The industry reshuffle will create a more level playing field among all telecoms operators, helping China Telecom and the merged entity of China Netcom and China Unicom to compete more effectively with the dominant mobile operator, China Mobile. However, China Mobile will not lose its market dominance in the next three to five years. |
Outlook | Both China Telecom and China Unicom/Netcom will need to invest heavily to expand their mobile networks in order to compete on a national scale with China Mobile. However, the two may face less risk in their future 3G deployment than China Mobile, which Global Insight expects to be the driving force in rolling out TD-SCMDA, China's home-developed 3G standard. |
China Unicom Limited (Unicom) today announced that Unicom and China Netcom Group Corporation (Hong Kong) Limited (Netcom) are planning a merger, pursuant to which each share of Netcom will be exchanged for 1.508 shares of Unicom, and each American Depository Shares of Netcom will be exchanged for 3.016 American Depository Shares of Unicom. After the completion of the merger, the enlarged share capital of Unicom will be 237.645 shares. The total consideration of the merger will be approximately HK$439.167 billion, based on the previous closing price of Unicom shares at HK$18.48.
Separately, Unicom announces that in order to further adjust its business model and to redeploy its resources, Unicom and Hong-Kong-listed China Telecom Corporation Limited (Telecom) entered into the CDMA Business Framework Agreement, pursuant to which Telecom will acquire Unicom's CDMA business for a total consideration of 43.8 billion renminbi. In addition, China United Telecommunications Corporation (Unicom Group), the state-owned parent of Unicom, and China Telecommunications Corporation (Telecom Group) also entered into the CDMA Network Framework Agreement, pursuant to which Unicom Group intend to sell to Telecom Group the CDMA network for a total consideration of 66.2 billion renminbi.
The companies said they will continue to refine the details of the transactions, including asset transfer, liability, personnel changes and significant contracts. Both transitions are still subject to government and shareholder approval and are expected to be completed by the end of this year. Upon completion, Netcom will be de-listed. Unicom's strategic shareholder SK Telecom and Netcom's investor Telefónica will remain the shareholders of the merged group, although no details of their exact shareholdings were released.
The merger between Unicom and Netcom, and Telecom's purchase of Unicom's CDMA assets, are the key components of a major industry shake-up of China's telecoms industry, under which the country's six telecoms companies will merge into three integrated telecoms operators (see China: 26 May 2008: Telecoms Industry Restructuring Plan Announced in China, 3G Licences to be Issued after Reshuffle). The following provides a picture of what the asset and business scale of the new operators will look like:
- China Netcom + China Unicom's GSM Assets: The merged group will own fixed-line assets in the northern part of the country and China Unicom's GSM network. The group will control approximately 30% of the country’s fixed and broadband internet subscribers and about 22% of total mobile users (China Unicom's GSM subscribers).
- China Telecom + China Unicom's CDMA Assets + China Satcom: The merged group will own fixed-line assets in the southern part of the country and China Unicom's CDMA network. The group will control approximately 60% of total fixed-line and broadband subscribers, but only about 8% of the country's mobile users (China Unicom's CDMA subscribers).
- China Mobile + China Tietong: The merged group will have extensive nationwide GSM mobile network coverage owned by China Mobile, but limited fixed-line infrastructure currently run by China Tietong. The group will control approximately 70% of the country's mobile subscribers, but only about 5% of fixed-line and broadband internet subscribers.
Outlook and Implications
- Telecom, Unicom/Netcom to Benefit: The main aim of the restructuring is to stimulate competition and enhance the overall competitiveness of the country's telecoms industry. Most significantly, the industry reshuffle will create a more level playing field among all telecoms operators, helping Telecom and the merged entity of Netcom and Unicom to compete more effectively with China Mobile, which dominates 70% of the country’s mobile subscribers. Telecom and Netcom, whose revenues have suffered as a result of voice traffic migration from fixed to mobile networks, will have the opportunity to tap growth potential in the mobile market. By acquiring/merging with mobile assets of Unicom, the two will not enter the mobile market as greenfield operators, but can build on the existing operations of Unicom, thus reducing their market entry risks. For Unicom, its current business model of operating on both GSM and CDMA lacks strategic focus and operating efficiency. The sale of CDMA operations will allow Unicom/Netcom to focus on growing their GSM operations.
- ChinaMobile to Remain Dominant: Although China Mobile will face two more robust competitors, the industry reshuffle is unlikely to break its market dominance or dampen its business growth in the short term. The mobile giant is still best positioned to catch the future growth potential of the country's mobile market, with stronger brand recognition and more robust and extensive mobile networks than those of its rivals. The operator is also the leading force in penetrating into the massive rural markets, as well as being the leader in the mobile-data-service segment, enjoying a large base of high-end customers. Both Telecom and Unicom/Netcom will need to invest heavily to expand their mobile networks in order to compete on a national scale with China Mobile. Nevertheless, both operators will be able to leverage their national backbone assets and utilise their distribution network and marketing efforts to reduce the operating costs and future capital expenditure (capex) requirements for voice and data transmission. On the service offering front, the two could bundle mobile services with fixed-line/broadband offerings to attract new customers and increase the loyalties of existing customers.
- Uncertainty over 3G: China will issue 3G licences following the competition of the industry restructuring. China has not rushed into 3G and, as such, should avoid some of the early pitfalls experienced by European and Japanese operators, such as problems with 2G/3G handover and a lack of handsets. The industry restructuring will particularly give Telecom and Unicom/Netcom a leg up to 3G, providing an opportunity for them to build robust and profitable mobile operations. In addition, Global Insight expects that Telecom (CDMA) and Netcom/Unicom (GSM) will focus on the more mature 3G technologies, CDMA 2000 1X EV-DO and W-CDMA respectively, thus facing less risk in the 3G deployment than China Mobile, which is set to be the driving force in rolling out TD-SCMDA, China's home-developed 3G standard. Although there has been considerable testing of TD-SCDMA, the technology is still relatively immature and will need some technical improvements to compete with W-CDMA and CDMA 2000 1X EV-DO. In addition, the wide-scale deployment of a new technology (TD-SCDMA) will cause more difficulties for operators in integrating and operating different network technologies.
- Business Opportunities for Strategic Investors: Both Telecom and Netcom/Unicom will be keen to increase strategic alliances with foreign strategic investors. Both will desire to raise additional capital from strategic investors to help fulfill the heavy capital investment requirements they face in expanding 2G networks and rolling out 3G in the future. They will also want to leverage the expertise and experience of leading foreign operators, particularly in 3G deployment. For major global telecoms players, this major industry shake-up undoubtedly represents business opportunities to tie up with the Chinese operators. Three leading multinational telecoms companies have already established strategic partnerships with the Chinese telecoms companies: Britain's Vodafone holds a 3.3% stake in China Mobile, SK Telecom owns 6.6% of Unicom, and Spain's Telefónica holds 7.22% of Netcom. Global Insight expects all three will be exploring opportunities to increase their exposure to the Chinese market.