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Telecoms Split Plan Under Fire
The long-awaited breakup plan of China Telecom, reportedly finalized last week, seems to have disappointed many telecoms analysts and experts who warned that the plan may lead to new monopolies while denting the company's competitiveness.
State media reported last week that China Telecom's assets in 10 northern and coastal provinces and cities would merge with China Netcom (CNC).
China Telecom's assets in the 21 remaining provinces and cities in south and northwest China would continue to operate under the name China Telecom.
"It's a bad plan since the split of China Telecom into two companies is not enough," Jay Chen, senior telecoms analyst with Frost & Sullvin's Beijing office, told Business Weekly. "CNC has always posed as the competitor of China Telecom in data business. With the merger, the competition is simply gone."
Like Chen, many industry watchers are dubious about the effectiveness of the plan, saying it may give rise to new forms of monopolies while harming China Telecom's competitiveness after China joins World Trade Organization (WTO).
Kan Kaili, a professor with Beijing University of Posts and Telecommunications, warned that it was likely that CNC and China Telecom might become two regional monopoly companies without new rivals in the market.
"This is definitely a questionable plan. Although we're not clear about how the two companies will run their business, it is very likely that the monopoly in the telecoms industry may change from one national monopoly into two regional monopoly companies," he said.
He also said the plan, which scaled down China Telecom's assets, virtually weakens the company's competitive edge after China joins the WTO and allows foreign telecoms giants to compete in China's telecoms industry.
China Telecom has been proposing a series of restructuring programmes for the State Council's approval since early this year in a bid to raise between US$4 billion and US$6 billion through an overseas initial public offering (IPO).
An alternative the State Council was believed to have considered was to split the company into its three business units: local fixed-line service, long-distance service and data transmission.
Although it is set to achieve a higher price for the IPO slated for Hong Kong and New York this year, the government had a tough time knowing how to restructure the firm, to break up its monopoly while sharpening its competitiveness.
"I think the split plan will benefit the IPO a little bit. I predict the stock price will pick up a little bit, then it will drop to a reasonable level," said Jay Chen.
"Foreign investors will learn the problems with the time passing by. They will be impressed at the beginning, but stop dreaming after a while," he said.
He also believes that the global slumps in the telecoms industry would seriously affect China Telecom's pending IPO.
"I believe foreign investors have come to know that the prime time of the growth of China Telecom's business is gone. I mean the number of telephone lines has been pretty large," he said.
"The premium customers of telecom services have been covered, and the telecom services provider shall be really good in service provisioning and quality to get more out of these premium customers. It takes time. China Telelcom doesn't have the ability to develop into an ideal company," he added.
Some analysts, however, said the plan may not be so bad.
"Although the government's approval comes at a challenging time in the global economy, we believe that the break-up of China Telecom will help stimulate market competition as well as usher in new opportunities for both domestic and foreign companies," said Agatha Poon, senior analyst with the Yankee Group's Convergent Communications Asia-Pacific.
"We believe that it is good news for the country's telecom industry," she said.
The immediate opportunity will be for China Netcom, which finds itself -- at a relatively early stage in its corporate development -- catapulted into national prominence. Its goal from the outset was to achieve such status, but now it will find itself forced to substantially increase its pace, she said.
"Increased competition will also help other smaller domestic players to gain a foothold in the marketplace, although perhaps not as quickly as Netcom. Additionally, China Telecom's successful privatization will go a long way toward increasing confidence among foreign investors, and serve as concrete evidence that China is preparing itself for WTO membership."
However, the economic slowdown will be a tough challenge facing China Telecom's officers in the near to medium term after its IPO, she said.
"It's not a good time for IPOs because such activities elsewhere around the world have been seriously affected," she said, quoting difficulties that Telecom operators in South Korea, including Korea Telecom, Hanaro Telecom and Dacom, have already experienced in negotiations with potential foreign investors.
"In order to reap the full benefits of the strategic merger, China Telecom will need to relinquish its monopoly control wholeheartedly, and like other incumbents elsewhere in the world, will need to realign its operational priorities to reflect its newly privatized status.
"Meanwhile, China Netcom will have its work cut out for it in integrating the China Telecom assets into its organization. It must develop an effective programme to take what are currently bureaucratic State-run local operations and transform them into efficient branches of a modern corporate entity," she said.
Officials from China Telecom, China Unicom, Jitong, Railcom, Netcom and China Mobile were either unavailable or refused to make any comment.
"There won't be any comment before the government officially releases the news because the topic is too sensitive at this moment," said an official from China Telecom, who refused to be identified.
Good part of the plan
Despite the criticism against the break-up plan of China Telecom, analysts showed positive response to the merger between China Unicom and Railcom, China Mobile and Jitong to form another two new telecoms operators. State media also reported the news last week.
"The merger between Railcom and Unicom will be beneficial to both sides because China Unicom has tried to make its fixed-line network more complete, cover more provinces and reach more grassroot level counties," said Chen.
"The fusion of Railcom's network with China Unicom will accelerate China Unicom's emerging into a more independent service provider," he said.
China Mobile's merger with Jitong will give Jitong a thrust in funding as Jitong has been troubled by the lack of investment while China Mobile has a lot of cash in hand, analysts said.
"China Mobile is also developing aggressively in the data business. However, data business is different from voice business," he said. "Based on my interaction with China Mobile's people, they do not have a lot of experienced personnel in the data business, but Jitong's engineers will help China Mobile do better in 2.5G and beyond."
Experts' doubts
Jay Chen, senior telecoms analyst from Frost&Sullvin Beijing Office, said:"The creation of China Mobile -- Jitong, China Unicom -- Railcom, Northern, and Southern companies sounds to me like four companies who can do almost the same business. They can do a little bit of everything. I think the ideal development of telecom business should be as followings:
1. Medium-sized companies develop themselves to be strong player after competition, say, ultimately Company A is good at Mobile, Company B is good data, Company C is good at voice.
2. The stronger company merges some players or enters into alliance strategically with players in other business to form a competitive and strong conglomerate.
It seems that the split plan skipped the first step, none of the parties above mentioned. China Mobile, Jitong, etc. is good at their respective trade.They are big. They make money because they are State-owned. They are monopoly. The merger will give them the edge to monopolize instead of helping them to better their business. They'll behave as bureaucratically as before."
Zhou Qiren, a telecoms professor at Peking University, said:"Despite the breakup plan, there are still some issues that remain unaddressed.
First, will the four telecoms operators be allowed to enter each other's business field? If not, there might be four monopoly companies, China Telecom, CNC, new China Mobile and new China Unicom.
Second, will the price for telecoms business be open for competition? If not, monopoly in the telecoms sector will not be effectively broken.
Third, will private enterprises be allowed to enter the telecoms business?
Source: China Daily
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