Related Stories:

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.

(Wang Jianzhou)

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.

More recently, China Mobile's influence has spread to future technology and upstream telecom hardware manufacturing, making it the envy of the weaker rivals that it's left in the dust.

A general manager at competitor China Unicom told Caijing that “the demands and choices made by China Mobile in terms of its technological roadmap will directly influence the coming development of mobile communications technology in China.” Moreover, he said the behemoth's “twice-a-year, centralized purchasing has directly influenced the performance of telecom equipment suppliers. The company's commercial policies sometimes act with powerful oversight of service providers.”

“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? These days, as the next restructuring approaches, this issue weighs on the mind of China Mobile Chairman and CEO Wang Jianzhou, who is also chairman of the Hong Kong-listed company.

“The question I think about most is how can China Mobile continue growing while facing issues of restructuring, TD-SCDMA and 3G licenses,” Wang said during an exclusive interview with Caijing.

Growth and Profits

When Wang moved to China Mobile from his former job as CEO for China Unicom in 2004, his first assignment was to confront the challenge of the so-called Xiaolingtong networks, which are low-cost “personal access phone systems” set up by wireless providers in townships and controlled by fixed-line operators China Netcom and China Telecom.

Although Xiaolingtong networks initially eclipsed China Mobile, they soon lost their competitiveness due to weak signals and other technical glitches. These shortcomings, combined with China Mobile’s downward price adjustments in rural markets, quickly stalled the Xiaolingtong effort. Now, as 3G approaches, China Netcom and China Telecom are continuing efforts they started in 2006 to gradually end the service.

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.

While winning over the countryside, and despite government price controls, China Mobile has enjoyed a competitive advantage in pricing. The company has been busy creating monthly fee packages and preferential price policies to win customers. “By using various sales strategies and flexible pricing, effective impetus was given to our voice services, which brought further growth in earnings,” the company's annual report declared.

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

Policy biases adopted during the 1997 and 2001 restructurings helped make China Mobile a success. The company emerged from the 1998 breakup of China Telecom, which had been a monopoly. Nothing less than wholehearted government support is expected in the upcoming restructuring, particularly since China Mobile has now taken over the operation of China's homegrown standard for 3G, known as TD-SCDMA.

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 such as the National Reform and Development Commission, State-owned Assets Supervision and Administration Commission, and the Ministry of Information Industry 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 State-owned Assets Supervision and Administration Commission has repeatedly emphasized that restructuring of the telecom sector is aimed at strengthening enterprises,” he said. “From this perspective, they would also want China Mobile to keep developing strongly.”

Cashing In

For China Mobile, a change in the market environment could bring some uncertainty over the company's future development. But the road has been widened with the removal of several negative factors.

For example, call pricing is not a barrier. Ever-lower prices has been a feature of China's telecom market for some years now. “The price of other goods is going up, so the adjustments in call charges attract particular attention,” Wang said with a smile.

Recently released records of company plans for this year's charge packages and special prices show that China Mobile's latest bonuses for long distance and roaming charges actually exceed what planners originally intended.

And China Mobile is flush with cash. After repaying in October 2007 some 3 billion yuan in five-year bonds issued through Guangdong Mobile, the company's debt-to-assets ratio fell to 8.7 percent from 10.9 percent, while its cash on hand totaled 188.5 billion yuan. China Mobile also hopes to return to the A-share market -- a wish Wang has expressed on several occasions.

The industry's general view is that, just as it's been hard to compete with China Mobile domestically during the 2G era, no real competition can be expected until after 3G begins.

Wang can't envision an end to the China Mobile growth story any time soon. He optimistically thinks the domestic market is far from saturated. “800 million isn't the peak,” he said.

Merrill Lynch's Meng reported that overall market penetration in China's mobile sector has reached a mere 41 percent. In the cities, penetration is 66 percent, and in the countryside it's only 22 percent. “We believe there is still much potential for growth,” Meng said. “Market penetration in many Western European countries exceeds 100 percent.”

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. “It's something we're duty-bound to do.”

However, when speaking about the next step for TD-SCDMA development, Wang is more cautious. “We're currently concentrating our energies on making the trial networks in eight cities work well,” he said. “Our next move will be based on progress with them.” 

Unlike TD-SCDMA, which has just started commercial trials, the competing 3G standards CDMA2000 and WCDMA are mature in terms of industry development. A report from the telecom research firm BDA said that, at year-end 2007, the number of 3G customers worldwide had already reached 270 million, up 273 percent year-on-year.

TD-SCDMA took a first step toward commercial use when it came online April 1. Handsets for the standard are not expected to go on sale before mid-2008.

If only China Mobile wins a license for TD-SCDMA, while China Telecom gets a license for CDMA2000 and China Unicom receives a WCDMA license, the evolution of the China Mobile's network will be profoundly affected. “Giving the most mature 3G standard to the weakest player and having the strongest promote the native standard fits perfectly with the logic of the supervisory authorities,” said Chen Jinqiao, deputy chief engineer at the Telecom Research Institute, who doubts China Mobile will get two licenses.

A key factor for China Mobile's future development, then, will be its ability to transition its massive list of 2G customers to the new, 3G standard.

While awaiting the 3G era, China Mobile has already significantly upgraded its existing GSM network to meet rapidly growing demand. The company 's capital expenditures in 2007 were around 10.5 billion yuan, with GSM network infrastructure investment accounting for 60 percent of outlays.

GSM network expansion is expected to account for 55 percent of the capital expenditures this year, according to one report. Indeed, spending in each the next three years is forecast at 12.7 billion, 11.9 billion and 10.9 billion yuan, respectively.

China Mobile has been pleased by the slow regulatory process, which has dragged out licensing for mobile standards while the industry creeps toward TD-SCDMA. The snail-like pace has given China Mobile room to grow its business exponentially.

Many industry watchers expect TD-SCDMA to burden China Mobile by limiting the company's opportunities for development and choices in the eras of 3G and, someday perhaps, 4G. But ultimately, the market will decide the future of TD-SCDMA. According to Chen, “If TD-SCDMA matures, they (China Mobile) can use the speed advantage of the network. If it doesn't, they can move directly to the post-3G era and new technologies like TD-LTE.”

In either case, then, China Mobile appears safe. The company recently unveiled a plan for the next generation of broadband mobile networks, which should give China Mobile an added opportunity to press forward if the plan for 3G standards succeeds, or at least hold its ground if it fails.

Going Overseas

In Wang's view, China Mobile's future growth prospects lie beyond basic telecom services and China. For example, the company has already started to move into the mobile Internet business and international markets.

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.

Wang acknowledges that a gap between market developments in China and Pakistan as well as cultural differences have presented major challenges to China Mobile.

The Chinese company also had to restrain its ambitions after its bid for all of Millicom's shares failed, apparently due to a price dispute.

Wang thinks 2008 will be a crucial year for Paktel. Following the release of the Zong brand, the company is slated to expand operations. China Mobile plans to invest US＄ 800 million in Pakistan in 2008 in a drive to improve Paktel's coverage and after-sales services. It has already spent US＄ 860 million to improve and expand the Pakistani network.

But China Mobile is eyeing more than overseas expansion. The newly emerging mobile Internet sector is also an important part of its plan for the future. “Mobile communications are focused on the individual, which is the reason why they are so vibrant,” Wang said. “And the Internet and Web 2.0 emphasize individual participation. Bringing the two together would be profound.”

Instant messaging is the key entry point for China Mobile's mobile Internet strategy. The company's 2-year-old instant messaging service, Fetion, has more than 10 million users. The infrastructure can't keep up with demand for the service, Wang said, so China Mobile is urgently looking to expand capacity.

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. Other shareholders include HP, Vodafone and Merrill Lynch.

1 yuan = 14 U.S. cents

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.