By Mike Caggeso
Associate Editor
There are three new kings in China's $100 billion-plus telecom kingdom: China Telecom Corp. Ltd. (ADR: CHA), China Network Communications Group Corp. Ltd. (ADR: CN) and China Mobile Ltd. (ADR: CHL).
Not surprisingly, all are state controlled.
But now that the first two have more assets, the up-to-now dominant China Mobile faces increased competition and a more-level playing field.
The government of China announced this major shakeup in the country's burgeoning telecommunication industry over the weekend. It's a massive restructuring that'll fold the country's top six telecom companies into three, and possibly open the way to windfall profits for wireless-equipment providers.
"Everyone has been waiting for it for over three years and now it is here," Kelvin Ho, a Hong Kong-based analyst at Nomura International PLC, told Bloomberg News of the reorganization plan. "Creating three full-service phone companies offering both fixed and mobile services will help the fixed-line phone companies."
Under the plan, fixed-line provider China Telecom will acquire one of China United Telecommunications Corp.'s two wireless networks and also China Satellite Communications Corp., The Wall Street Journal reported. China United is the parent company of China Unicom Ltd. (ADR: CHU).
Then, China United's remaining wireless network will merge with China Network Communications Group, parent company of China Netcom Group Corp. Ltd. (ADR: CN).
Financial terms weren't released.
A day before the plan's announcement, China's state-controlled Xinhua news agency reported that China Mobile Ltd. - the world's fourth-largest company and largest mobile phone company - will take over China Tietong Telecommunications Corp. for an undisclosed amount.
Many investors hung up on China Mobile, which saw its shares take an 8.2% shellacking on Monday, the biggest decline in two months, following the announcement of the government plan.
Three Companies Providing "3G"
Though the arrangements of this entanglement are complicated - and without a timeline for completion - the impetus is simple: China needs to catch up with the rest of the world in adopting third-generation, or 3G, wireless services that quicken increasingly popular Internet uses such as music and video downloading.
The restructuring will also combine many phone and Internet services into one bill for many households.
"This restructuring is key to a 3G rollout, and there will be lots of opportunities for domestic and foreign equipment providers," Ian McGuinn, managing director for JL McGregor & Co., a China-focused consulting company, told The Wall Street Journal.
And 3G providers such as Paris-based Alcatel-Lucent (ADR: ALU), China's Huawei Technologies Co. and Ericsson Telefon AB LM are lining up for contracts.
In fact, the annual salary of Alcatel-Lucent's Chief Executive Patricia Russo may be largely determined by how well the company capitalizes on this and other opportunities, Reuters reported. Alcatel-Lucent's New York shares gained 4.1% yesterday (Tuesday), the first day of trading in the U.S. market since the weekend announcement in China.
Industry analysts expect each of the giant telecom companies to employ different versions of 3G technologies, The Wall Street Journal reported. One of those will include China's own 3G standard, called TD-SCDMA.
Pressure of the Mobile Phone Industry
The bruising competition in the global telecom market only adds to the companies' eagerness to expand China's mobile-phone market, which at more than 465 million users is larger than the combined populations of the United States, Japan...and, for good measure, the 48-person population of the Pitcairn Islands.
In China, China Mobile controls about 68% of the domestic mobile-phone market, while China Unicom has most of the rest. China Mobile has nearly 400 million customers total, a figure that combines its Internet, mobile-phone and fixed-line services.
Before this deal, China Mobile was leading the worldwide shift away from fixed-line phone service and into mobile multimedia. It had been steadily stealing subscribers away from China's fixed-line titan China Telecom. And its penetration into new and rural markets - with its mobile newspapers service in tow - is tapping new customers that neither telecom company previously had been able to reach.
Now, customers have half the number of companies to choose from, but the three left standing are leaner. The mobile-phone market is China Mobile's bread and butter, and these measures could likely induce potential mobile-phone customers to feel satisfied with combined Internet and fixed-line services.
[Editor's Note: If you're a sophisticated global investor looking for superior market intelligence about Mainland China profit opportunities, check out Money Morning Investment Director Keith Fitz-Gerald's New China Trader. As our recently concluded "View From China" news series chronicled, Fitz-Gerald last month led an investor excursion into China, Hong Kong and Japan. Look for additional insights from that trip - and for a new special investment report on those markets - in upcoming issues of Money Morning, which remains free of charge.]
News and Related Story Links:
- The Wall Street Journal:
China Shuffles Telecoms, Opening Opportunities