Bell (Finally) Rings for Telecoms Reform

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It has been a long wait (we flagged it back in November 2006), with lots of talk, lobbying and political positioning, but the long-expected reforms of Chinese telecoms sector have now been announced. The Economist reported:

    “BY ANY measure—revenues, employees, customers—it is the largest industrial reorganisation ever. And, reflecting how business is done in China, it was announced in the most modest way, with a posting on a government website on May 24th. The country’s telecoms industry, with nearly 600m mobile subscribers, 360m fixed-line customers and $244 billion in revenue, will be reconfigured. Six companies will be collapsed into three, each spanning mobile, fixed and broadband services.

    China Mobile, the world’s largest mobile operator by subscribers, will merge with China TieTong, the smallest fixed-line operator. China Telecom, the country’s biggest fixed-line operator, will acquire one of the mobile networks run by China Unicom, which will merge its remaining mobile operations with China Netcom, another fixed-line operator. A sixth operator, China Satcom, will be taken over by China Telecom.”

In a clear reminder of how government policy can impact investors – let alone businesses – the market’s reaction was also noted by the Economist:

    “…rumours of an imminent decision swept the Hong Kong and Shanghai markets on May 23rd, provoking a panic that continued until May 27th.

    The shares of China Telecom, China Unicom and China Netcom were suspended, and those of China Mobile fell in value by 10%, or $31 billion. (The other two operators are unlisted.)”

    As the article notes, the reforms have been made to make the telecoms sector more competitive. The fixed line operators have been suffering, while mobile sales have gone through the roof. AFP notes the statistics:

    “In a sign of how lopsided the market is, official figures showed that by the end of last year China’s fixed line users fell by 2.3 million to 365.4 million while mobile phone subscribers surged by 86.2 million to 547.3 million.

    China Mobile, the world’s biggest mobile network operator by subscriber numbers, raked in 87.1 billion yuan in net profits in 2007, twice as much as China Unicom, China Telecom and China Netcom combined. “

China Mobile will have to give up some of its market, and may also be forced (ever so politely, but it is that policy thing again) to take on the locally-developed TD-SCDMA 3G standard. Not something that is likely to bring short-term benefit, or to assist with international expansion or integration.

The Economist makes the point that policy reform has worked well for the sector up till now, but leaves us with the question:

    “…will China’s pursuit of industrial-policy goals now hamper the industry’s progress?”

We will have to wait and see what happens in this instance, for this industry. But the wider lesson is that policy analysis (based on intelligence gathering, not just press reports) should be a key feature of business and investment planning in China, or when investing in or selling to Chinese companies – state controlled or not.

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