China Telecom Industry Restructuring - Positive but 3G Uncertainties Remain
Published on: 26th May 2008
The debt ratings agency, Fitch has commented that the recently announced telecommunication (telecom) industry restructuring in China helps somewhat towards resolving the uncertainty that has surrounded the industry for years. The announced industry restructuring falls in line with the agency's expectation, i.e. China Mobile acquires China Tietong Communications Corporation, China Telecom acquires China Unicom's CDMA business and network, and China Unicom's GSM business merges with China Netcom.
Accordingly, Fitch believes that the announced restructuring measures pave the way for the future 3G licensing announcement to likewise fall in line with Fitch's expectations that each of the three restructured players will receive a 3G license.
At this stage, as the government has only confirmed that three 3G licenses will be awarded once the restructuring process is finalised, remaining outstanding issues with potential to impact Fitch's ratings on the Chinese telecom operators include: the timing of the 3G license awards; the technology associated with each 3G license; and the impact of potential asymmetrical regulations which could be placed on China Mobile.
"While the competitive landscape of the telecom industry will dramatically change, the current imbalance in the industry pertaining to China Mobile's dominant position is unlikely to change, at least within the next 1-2 years." said Jinqing Li, Associate Director with Fitch's Asia-Pacific Corporates group. "With an ability to internally fund large and increasing levels of capital expenditure on its network, China Mobile sits in a better position, relative to its competitors, to take advantage of the ongoing fixed to mobile substitution trend and the rapid growth of subscribers in rural areas." Mr Li noted.
Although the timing of the 3G licenses in China remains unclear, given that this in turn depends on when the industry restructuring will be finalised, from a technology point of view Fitch reaffirms its view that TD-SCDMA, CDMA2000 and WCDMA technology will be awarded to China Mobile, China Telecom and China Unicom, respectively, supported by further developments in recent months. The agency notes that China Mobile has been conducting TD-SCDMA commercial trials in 8 major cities and could possibly upgrade these networks to the more advanced TD-HSDPA technology before the end of June 2008.
From the announcement, Fitch also noted that the government could implement asymmetric regulations against China Mobile, including enforcing a mobile market share ceiling (compared to its current market share of 68%), and asymmetric mobile number portability, should the regulators believe that the current imbalance is not resolved.
The agency notes that similar asymmetric regulations were implemented in Korea, which reduced the leading player's (SK Telecom) market share from 57% in 2000 down to 50% in 2001, and whose market share has remained at approximately this level ever since (50.5% currently). Nevertheless, SKT still managed to record positive subscriber volumes through this period of asymmetric regulations, with its current subscriber base of 22.5m being 47% higher than that at the end of 2000.
While industry restructuring and potential asymmetrical regulations will allow China Telecom and China Unicom to form more meaningful competition to China Mobile over the medium to long term, at the same time Fitch expects that China Mobile's leading position in the Chinese mobile sector is unlikely to change, given a total subscriber base of approximately 400m at the end of April 2008, ongoing net subscriber acquisitions of over 7m per month, high brand recognition and its leading position in mobile content and applications. China Mobile's strong financial profile also provides further support in the face of evolving industry developments and uncertainties. However, its weakness in fixed line and its attachment to the less mature TD-CDMA technology are obstacles that China Mobile will need to focus on resolving.
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