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  China's Telecom Restructuring: A Preliminary Assessment  
August 20, 2008

China's Ministry of Industry and Information Technology (MIIT) data shows that for 1H 2008, China's national telecom services completed a total of 1.1 trillion Yuan of revenues, up 25.9% YOY, while telecom operating revenues were 398.79 billion Yuan, up 9.2% YOY. The gap between revenues continue to widen, as telecom service prices continue to fall and competition intensifies.

There was a significant difference in market share of telecom service types.

China's mobile communications services is still a major driver of overall telecom growth in 1H 2008, garnering a market share of 53.6% and 15.9% YOY growth. Data communications (broadband access) had the fastest growth at 40.4% YOY and a share of 9.4%. The shares of local and long distance fixed-line services continue to decrease.

 
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Telecom Services Market Share, IH08

Source: miit AND CCID Consulting ANALYSIS, July 2008

Restructured "new" China Mobile has become more dominant.

China Mobile is stronger in 1H08. After China's telecom reorganization, the three new restructured telecom operators (which include China Telecom and China Unicom) have similar asset scale, but their business development results continued to differ widely. For example, the graph below shows 1H08 month-by-month GSM mobile communications subscriber numbers for China Mobile and China Unicom.

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1H08 GSM Mobile Communications Subscribers, in thousands

Source: Annual Reports of China Mobile and China Unicom; and CCID Consulting Analysis, July 2008

Note that subscriber and revenue gap widened between China Mobile and China Unicom. By the end of June 2008, China Mobile subscribers numbered 414.6 million, an increase of 45.25 million new subscribers; while China Unicom numbered 127.6 million with an increase of 7.0 million new subscribers. China Mobile's 1Q08 operating revenues exceeded 93 billion Yuan, up 19.7% YOY; while China Unicom's revenues were just below 26 billion Yuan, up 6% YOY.

THE FUTURE: MORE CHANGES TO COME

The ultimate goal of China' recent telecom restructuring is to have the three reorganized entities of China Mobile, China Telecom, and China Unicom, each having nationwide resources, full service capabilities, strong competitiveness, and relatively equal scale and strength. The desired result is to have a strong, vibrant, and competitive telecom industry in China.


Source: CCID Consulting, May 2008

All three telecom operators, and only these three, will have mobile communications licenses; however, in the short term, China's rapid mobile communications market favors China Mobile. Moreover, China Telecom and China Unicom are facing integration issues that affect their ability to compete effectively in mobile communications with China Mobile.

Given these issues, and ensuing reorganizations, China's telecom market will experience more changes in next one to two years.

Regulatory Environment

The government may institute asymmetric regulatory measures to level the playing field of the three telecom entities. In particular, policies may be aimed at China Mobile, such as heavier taxes. However, CCID Consulting has seen that such policies in the past have been ineffective and disruptive in China. The emphasis would be more on penalties, rather than incentives.

An approach worth examining is that of South Korea and its telecom industry. This approach involves executing unidirectional wireless number portability, to level the subscriber base of all three telecom entities. Subscribers are free to keep their wireless phone numbers when they switch their service, say, from China Mobile to another entity, but not vice-versa.

There would then be incentive for all three entities to have competitive service levels and products; China Mobile would need to improve services to keep customers; while China Telecom and China Unicom would need to do the same to attract customers.

There are factors to consider in implementing such a portability policy in China:

  1. Wireless number portability coverage in China is about 60%, and this rate may go down slightly relative to the high overall growth of China's mobile communications.
  2. There are technology limitations to consider, and China's telecom infrastructure is still regionally unbalanced.
  3. China Mobile's TD-SCMA is a consideration for asymmetric wireless number portability.

3G Standard

By the end of 2008, Mobile, China Telecom and China Unicom will be obtaining their 3G licenses. 3G and B3G are becoming more developed, and relative to 2G networks, it offers future mobile communications with the Internet as the core.

Each of the three entities have a different 3G emphasis. China Unicom with WCDMA is the most mature. China Mobile with TD-SCDMA is supported as a national China standard. China Telecom has gone ahead with its CDMA2000, which could be targeted towards more high-end users. Each operator has its own advantages, and execution of their standards and technology will be important variables in the near future.

Commercial Customer Development

Each of the three operators has had to confront average revenue per user fluctuations. As a mitigating factor for such fluctuations, China's commercial sector is considered a new growth area for the three telecom operators. However, addressing the commercial markets is still early, where requirements differ from the consumer. In short, operators are not able to effectively integrate into the commercial users' business processes.

All three operators are at parity when it comes to addressing the commercial markets, although China Telecom does have a slight advantage. It has steadily increased its commercial user base. China Unicom's (China Netcom's) commercial user base has declined in 1Q08. China Mobile can leverage its strength in mobile communications into the commercial sector.

For more information

Please contact us for these and other China-related data, information and products.

Unless otherwise specified, all information provided is sourced from CCID Consulting.

 
         
         
     

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