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Reshuffle a prelude to mergers

http://english.people.com.cn/200411/10/eng20041110_163368.html

If China's telecommunications market is to establish two to three conglomerates, last week's executive reshuffling among the top four operators could be interpreted as a prelude.

Wang Jianzhou, former chairman and president of China Unicom Corp, was named as general manager of China Mobile Corp early this month.

While Wang Xiaochu, former deputy general manager of China Mobile Group and executive director, board chairman and chief executive officer (CEO) of China Mobile (HK) Ltd was transferred to be the general manager of China Telecom Corp.

Chang Xiaobing, former vice-president of China Telecom Corp and CEO of China Telecom (HK) Ltd was designated as board chairman of China Unicom Corp.

Leng Rongquan, former vice-president of China Netcom Corp was also named deputy general manager of China Telecom Corp.

These moves sparked rumours that after years of fierce competition, the Chinese Government is now working to roll out plans to further standardize the telecoms market as well as form internationally competitive telecoms giants.

Government figures showed that by the end of September this year, revenue from the telecoms industry reached 386.2 billion yuan (US$46.53 billion), up 12.8 per cent year-on-year.

Meanwhile, the sector has recruited 306.9 million fixed-line subscribers and 320 million mobile users. Broadband users topped 20.6 million.


Pros and cons

As a matter of fact, the telecoms industry is currently exposed to fierce competition dominated by rampant price wars.

To consolidate their market shares, each telecoms operator has resorted to all types of market manoeuvres such as slashing their monthly rental fees, lowering telecoms fees, and offering monthly service packages and handset subsidies.

"The underlying purpose of the government's executive reshuffling is to curb irrational industry competition, thus protecting industry profitability and improving investment returns," Goldman Sachs said in a report.

It is definitely a positive move for the industry in the long run, it said.

"However, we also expect execution risks and uncertainties will increase in the short term, which might arouse negative investment sentiment on Chinese telecoms."

But Credit Suisse First Boston did not believe a change in CEO will have a huge impact on China Unicom given that its business model has structural problems, for example, balancing between GSM (Global System for Mobile Communication) and CDMA (Code Division Multiple Access).

For China Telecom, a new CEO may decide to further slow down PAS (Personal Access System) expansion as it does not have a clear profitable business prospect and cannot be migrated to 3G business.

Wang Yuquan, president of Frost & Sullivan (China), also believed that to curb the ferocious telecoms competition in the domestic market is the main reason for the personnel adjustment.

He said he would rather believe that such an adjustment will not have much influence on the fierce market competition.

First of all, slashing telecoms fees is an inevitable trend, it is just a case of it happening "sooner or later," he said.

Second, all the price wars, in fact, are usually triggered by local branches or subsidiaries instead of the parent company. The parent firms normally work out the company's overall strategy.

Nevertheless, the executive is likely to lose some influence over the company's management as changing a company's leadership team usually sees the introduction of some new corporate and marketing strategies, according to Dai Chunrong, an analyst from China Securities.

"However, the new head will usually take some time to adjust themselves to the company. Therefore, the company's new strategies are unlikely to be rolled out soon," she said.

"What concerns us most is, for example, how Wang Jianzhou maintains China Mobile's leading position in the Chinese market as he insisted many times that China Unicom should take advantage of CDMA technology to catch up with China Mobile," she said.

"Also, for Chang Xiaobin, the question could be which one will have the market potential regarding mobile phones and PAS?"

"We have to wait and see now," she said. Dai believed the executive reshuffling will help operators monitor market competition from their rival's perspective and therefore devise more rational corporate and marketing policies.


Potential merger?

But some analysts seem to have sensed that the executive adjustment is more like increased collaboration leading to a merger between the major telecom operators.

This echoes rumours that a draft merger plan for telecom carriers has been worked out by State-owned Assets Supervision and Administration Commission and will be implemented next year or in 2006, depending on the market situation after the executive adjustment.

Earlier this year, there were a number of reports about the possible consolidation of the four big carriers into two firms.

It is reported that China Telecom will link up with China Unicom while China Netcom will team up with China Mobile.

However, the companies and the Ministry of Information Industry (MII) all remain silent on all these reports.

Goldman Sachs also predicted last week that the executive reshuffling lends more credibility to the theory of a potential industry restructuring, in which mergers among the key four players could be involved and could happen in the first half of 2005 at the earliest.

Industry experts argued that, as the result of the merger plan, the Chinese Government is likely to decide to issue less than four 3G licences when rolling out its 3G mobile telecommunications industry next year.

Some analysts believed the high cost of 3G mobile networks, if each of the four builds its own, is also a major concern given the current uncertainty of China's 3G policies.

They believed that although the executive adjustment did not involve China Railcom and China Satcom, the possibility cannot be ruled out that the two operators may jointly apply for a 3G licence.

In that case, the Chinese Government has to issue just three 3G licenses, each run by one telecom operator.

Sources close to China Railcom said that it is also teaming up with China Satcom and US-based Nextel Communications to apply to the regulatory commission for a licence for digital trunking business in China, an ambitious step to seek a firm foothold in the telecoms market.

The three parties are planning to establish a joint venture to conduct digital trunking business, said the source who declined to be named.

They are planning to adopt TD-SCDMA (Time Division Synchronous) as the technology to construct a nationwide network.

Meanwhile, both China Satcom and China Railcom are conducting experimental tests for TD-SCDMA technologies during the MII's test for the three 3G standards.

Analysts believe the joint venture between China Railcom, China Satcom and Nextel reflected that operators are doing what they can to prepare for the arrival of 3G in China.

Source: China Daily