China govt does telco reform right

update The recent telecoms shakeup in China will achieve the government's aim to promote full competition and at the same time offer the path of least resistance to telcos, according to research analyst Ovum.

Cynthia Leung, senior analyst at Ovum, said the restructuring--in which six players will consolidate into three main groups--has succeeded in balancing the two considerations of the Chinese government.

This is despite the fact that "no one single operator will gain all the benefits" and "internal competition between the merged entities may exist", she noted in an e-mail commentary Wednesday.

Announced Saturday, the new structure will see the marriage of fixed line and mobile operators. Reports from the Associated Press and Computer Business Online said China Mobile's parent, China Mobile Communications, will acquire China Railway Communication, also known as Tietong. China Telecom's parent, China Telecommunications Corp., will buy China Unicom's CDMA mobile network as well as China Satellite Communications, while the GSM network of China Unicom will be merged with China Netcom.

Hong Kong-based Leung said: "The restructuring plan avoids the complication and interoperability issues of network rental and network separation, which inevitably can add to cost increase in the end."

The market reorganization, she pointed out, is a necessary one as the last two reforms, in 2001 and 1998, had not factored in mobile as a substitute for fixed line, nor the rapid growth of China Mobile resulting in market dominance.

China Mobile, however, will "in the short term" remain the market leader, with its closest challenge coming from China Telecom, said Leung. China Telecom will also have to contend with the "new Unicom", but its "strong foothold in the residential market" is expected to provide better value to customers when it comes to service bundling.

Bryan Wang, research director for connectivity and country manager for China at Springboard Research, noted in an e-mail interview that bundling "will be the only opportunity" for the new China Unicom and China Telecom to compete with China Mobile.

China Telecom, said Wang, will need to spend a "significant" budget to upgrade the CDMA network, and may "struggle a bit" assembling the necessary resources for CDMA operations, engineering, sales and marketing. Under such circumstances, the telco will face some challenges in its cash flow and capital structure for at least two years.

On the other hand, the cash that China Unicom gets from the sale of the CDMA network can be used to upgrade its GSM network to 3G-WCDMA, Wang said, adding that he expects 3G licenses to be issued by this year, rather than after the restructuring is completed. China Telecom would spend about nine months to absorb the CDMA unit of China Unicom, while the merger of China Unicom and China Netcom would take about a year, the analyst predicted.

Following the market consolidation, converged fixed and mobile broadband networks will take off and develop rapidly, Ovum's Leung added.