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By staff reporter Ming Shuliang

China's telecom sector stands on the threshold of a major restructuring that's generated a degree of anxiety for fixed-lined operator China Netcom (HKSE: 0906) and minor mobile operator China Unicom (HKSE: 0762), which are expected to merge, as well as fixed-line provider China Telecom (HKSE: 0728), which is slated to take over China Unicom’s CDMA wireless network.

The company sweating least is China Mobile Telecom Group, the largest mobile operator in China and the world.

None of the mega-mobile operator's assets are expected to be involved in the restructuring. The company is flush with cash and has started expanding overseas, notably in Pakistan. And although the Beijing government wants to inject some competition into the nation's wireless market, official planners have firmly tied the industry's next phase to the future licensing of third-generation mobile phone technology, or 3G, which is likely to benefit China Mobile.

State-controlled China Mobile is considered to have been the major beneficiary of previous restructurings over the past decade, even though each step was aimed at encouraging competition. As a pride of Beijing leaders, the giant company emerged from past restructurings with larger shares of the domestic market. Now the company has a chance to become the world's most valuable telecom operator with the largest number of users.

“What other Chinese enterprise has this kind of influence?” the manager asked rhetorically. But the telecom industry in China faces a more difficult question as well: Can China Mobile continue growing at breakneck speed?

Rural markets have been a China Mobile target for the past three years. Indeed, this is a growth area the company can't do without; the company's latest annual report said close to half of all new subscribers last year were in rural markets.

China Unicom, China Netcom and China Telecom have been unable to compete with high-flying China Mobile, which now accounts for almost all expansions in the telecom market. China Mobile's annual revenues are nearly equal to those of its three competitors combined, and its earnings are twice those of all its rivals combined.

Restructuring With Pride

In the overhaul, China Mobile is expected to merge with a small operator named China Tietong, while China Unicom is slated to sell its CDMA network to China Telecom and then merge with China Netcom. Breaking up China Mobile is not on the table.

Chen Yunhong, an analyst with Sinolink Securities, thinks no one in the government has a problem with allowing China Mobile to dominate the sector. Quite the opposite, agencies take pride in China Mobile -- an attitude directly affecting the restructuring.

Supervisory agencies apparently have set several goals for the restructuring, according to Merrill Lynch analyst Meng Jinhong. These include balancing the sector, guaranteeing the success of TD-SCDMA, and helping China Mobile win internationally. Since China Mobile got the task of operating the TD-SCDMA network, the company's progress was clearly tied its future 3G license.

But while being interviewed, Wang expressed no concerns about the restructuring and said he thinks the shakeup has only one goal: strengthening China Mobile.

The TD-SCDMA Challenge

The biggest challenge facing China Mobile, then, is TD-SCDMA. China Mobile accepted responsibility for setting up trial networks of the TD-SCDMA system in eight Chinese cities in August 2006, shortly after it was one of three mobile operators assigned to create trial networks in three cities.

Wang apparently made the decision to make China Mobile the trial leader after expressing clear support for a TD-SCDMA standard. “We absolutely have the responsibility to advance the maturation of a new international standard that will have a guiding role in the industry in China,” he said.
 
Going Overseas

On April 1, Wang visited Pakistan to introduce China Mobile's first international brand, called Zong. “We'll also use this brand in other overseas markets in the future,” Wang told Caijing. Zong's debut followed China Mobile's February 2007 purchase of Pakistan's fifth largest telecom operator, Paktel, from Millicom.

The newly emerging mobile Internet sector is also an important part of its plan for the future. Instant messaging is the key entry point for China Mobile's mobile Internet strategy.
 
Wang also revealed that, while moving into the mobile Internet sector, China Mobile will use a platform developed by ASPire Technologies -- a company started in 2000 in which China Mobile holds a majority stake.

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Background: China Mobile and Competitors

The company started in 1987 with an experimental network in a single city in Guangdong Province. It now operates a super network with 307,000 base stations and 369 million subscribers nationwide. Based on current share value, Hong Kong-traded China Mobile Mobile Ltd. (HKSE: 0941) is worth more than US＄ 320 billion, far ahead of the world’s second-ranked telecom AT&T (NYSE: T) whose market capitalization is about US＄ 230 billion. China Mobile is also far ahead of the China's No. 2 mobile operator, China Unicom PLC.

China Mobile last year posted a profit of 87 billion yuan, up 31 percent from the previous year, which was the highest rate of increase in five years. Company revenues were 356 billion yuan, up nearly 21 percent year-on-year.

The financials at fixed-line operators China Telecom and the China Netcom paled in comparison. China Telecom last year earned 23.7 billion yuan, while China Netcom posted 10.5 billion yuan in profits. The other wireless company, China Unicom, made 9.3 billion yuan on revenues of more than 99 billion yuan last year.

China Mobile added 68 million new subscribers in 2007, or about 5.67 million a month, giving it 69 percent of the market. The company set a record for one month when its subscriber list swelled by 7 million in January. Meanwhile, for the first time, China Telecom and China Netcom reported declines in fixed-line subscribers -- and neither company has a mobile operations license.

China Unicom, which added just 1 million new subscribers in January, certainly poses no threat to the mobile leader. As an industry latecomer founded in 1999, it was given the task of developing a CDMA mobile network in 2001, which required a shift in limited resources between GSM and CDMA networks that eventually led to money and manpower shortages and threw the company's development strategy off track.