China Telecom Under Pressure
Monday, May 14, 2001
Railway tries new line to challenge monopoly
MARK O'NEILL
China's newest telecommunications firm will start operations on June 1, aiming to break the monopoly of China Telecom and lure a quarter of its fixed-line customers within two years.
That was the ambitious target announced last week by China Railway Telecom (CRT), the company created late last year by hiving off the telecommunications part of the Ministry of Railways.
"The aim is to build up our capacity to 17 million lines by the end of next year, take over 25 per cent of China Telecom's fixed-line customers and become the backbone that ends its monopoly," the company said. "Then we will decide to list on the stock market on our own or merge with China Unicom."
These are brave words, especially as China Telecom is having to postpone or scale down its overseas listing because of a loss of enthusiasm for telecom companies.
Few believe CRT can capture 25 per cent of the market in so short a time. But it has strong cards in its battle with China Telecom. One is the government's desire to promote competition in the market, already significant in data services and mobile phones but negligible in the fixed-line sector.
Another card is China's second-biggest telecom network after China Telecom, with 120,000 kilometres of cables, one-third of them optic fibre, along the rail network, which reaches into all parts of the country except Tibet.
It plans to invest 7.2 billion yuan (about HK$6.74 billion) this year to expand its network to all provincial and regional capitals, except Lhasa, as well as Liuzhou, Guilin, Baotou, Qiqihar and Luoyang, with between 10,000 and 100,000 lines in each city. By October, it aims to reach 150 cities and by the end of next year to cover nearly all of China, except Tibet.
It has chosen three companies as its strategic partners and entrusted each with building about 700,000 lines - Zhongxing Telecom, Hua Wei and Beijing Bell, a joint venture between the Railway Ministry and the Bell company of the United States.
Of these, the most important partner is Zhongxing, one of China's biggest manufacturer of telecom equipment, which is providing technical, accounting and management expertise to a firm with 65,000 employees and 52 years of operating in the "iron rice bowl" security of the state sector.
This large workforce, lack of experience in the market and shortage of capital are CRT's weak points.
Its history as a separate company began only in March 1999, when the State Council ordered a restructuring of the Railway Ministry and the spin-off of its telecoms arm into a separate company. The ministry agreed, but on the condition that it maintain 100 per cent ownership of the telecoms unit.
In July that year, the State Council proposed a merger between CRT and China Unicom, the country's second mobile company, of which the Railway Ministry was founding shareholder and holds a 7.5 per cent stake, arguing that the union of fixed-line and mobile would be a good marriage and help make a strong competitor to China Telecom.
The merger never happened because of opposition from foreign investors preparing to buy Unicom stock who believed CRT contained many bad assets and that its large workforce would overwhelm the 3,000 who work for Unicom. CRT executives also opposed the merger, not wanting to cede control.
After the Unicom listing, the Ministry of Information Industry last July proposed that CRT operate alone for three years and then consider whether to merge with Unicom, an idea Premier Zhu Rongji accepted the next month.
The firm was established formally last December 26, with registered capital of 13.6 billion yuan and Peng Ming as chief executive. The company left the Railway Ministry on February 25 and moved to a new office building in the west of Beijing.
The arrival of CRT is bad news for China Telecom and for foreign investors considering buying China Telecom's stock when it is listed. To gain market share, CRT will have to offer lower prices. It is allowed to cut 10 per cent from China Telecom's charge for city calls and 20 per cent on long-distance calls.
According to a report in the 21st Century Economic News, the State Council is considering more radical solutions to end China Telecom's monopoly.
One is to break it up into three companies one data services, one long-distance telephone and a third urban telephone operator. Another is to split it into four regional firms.
It said Mr Zhu was a strong supporter of CRT as a way to break China Telecom's monopoly and prepare the telecoms market for foreign competition with accession into the World Trade Organisation.
" Success seems to be largely a matter of hanging on after others have let go." ~ William Feather
