Does Executive Shuffle at Telcos Signal Consolidation?
5G or not 5G? That’s the question at the center of this week’s column, which takes us away from the racy world of smartphones and internet firms and into the stodgier realm of telecom network operation. Wireless carriers throughout the world have become relatively passe among investors over the last decade, as they evolved into mostly commoditized pipes that allow people to access more dynamic services like WeChat and Facebook over the fixed-line and wireless networks.
That story is even truer in China, where the nation’s three carriers are all essentially one and the same due to their state-owned nature and Beijing’s iron grip that forbids private investment in the market. For that reason I rarely write about China Mobile, China Unicom and China Telecom these days, since the trio has about as much creativity as a stone.
The only occasional excitement among this group comes from the telecom regulator in Beijing, which, for example, earlier this year ordered the three to stop charging data roaming fees. Now another even more revolutionary bit of speculation is rippling through the airwaves, following a series of changes last week in the top echelons of Unicom and China Telecom, the smallest carriers that collectively control about 40% of the market.
I won’t go into the changes too much here, since we wrote about them last week. But the bottom line was that both Unicom and China Telecom announced changes to their president positions, and China Telecom also announced a new CFO. Such concurrent movement is relatively common in big sectors dominated by a handful of state-owned giants, which is why it’s helpful to think of the big-three carriers and their regulator as more like a single unit rather than individual entities.
We saw something similar happen just three years ago, when a sudden reshuffle saw Unicom and China Telecom suddenly swap chairmen, while a former top official from the telecom regulator became China Mobile’s new chairman.
Change in the Air?
Returning to the present, the latest shuffle has raised the intriguing question of whether the moves could foretell something bigger, namely some kind of pooling of resources or even a merger between China Unicom and China Telecom. The 2015 shuffle didn’t presage any such retrenchment. But longtime industry watchers might recall that another management shuffle a decade ago was followed by a major industry restructuring that saw the four major carriers at that time reduced to the current three.
At least one media outlet, a WeChat public account focused on 5G, carried an article headlined “China Telecom, Unicom to Build, Share 5G Wireless Network?” (link in Chinese) I’ll be quite frank and say this article’s main source of any credibility comes from the fact it was posted in this account at all, which appears to be run by serious 5G fans. The source is vague, citing people with various web handles like Shchhbj and zc035. In addition, a long-time analyst who knows the sector well and I highly respect has also cited the article in one of his reports, which was how I noticed it in the first place.
Here we need to pause quickly and explain the 5G situation in China, which is critical to understanding the talk of a potential tie-up between Unicom and China Telecom. The 5G standard will become the next wave in wireless communications, with the first global systems set to start rolling out as early as next year. China has typically waited several years for these new technologies to mature before building its own networks. But it has signaled it wants to be among the first to build 5G networks this time, in large part to have a greater say in how such global standards are created and reap profits from their commercialization.
All that said, telecom networks aren’t cheap, especially when you have to build three of them. One estimate by a research arm of the telecom regulator estimated China would spend around $400 billion on 5G between 2020 and 2030 alone, a huge sum by any standards. So the thinking would go that perhaps Beijing might be looking to save a big chunk of change by building just two networks instead of the three that everyone is expecting.
It could do that either through an outright merger of China Telecom and Unicom, or by issuing them a single 5G license and then forcing them to build a jointly operate one network rather than two standalones. Such an approach certainly makes sense from a cost perspective, and the analyst I mentioned earlier even pointed out in a note that the uncertainties raised by Sino-U.S. trade tensions could make such a merger even more likely now than perhaps it would have been a few months ago.
One victim of collateral damage if all this comes to pass could be China’s two big telecom equipment sellers, Huawei and ZTE. That pair have come to rely heavily on their home market, with each reporting half or more of their sales came from China last year. Thus a one-third reduction in spending on 5G could take a sizable bite out of their business, hardly encouraging news, especially for a ZTE still reeling from a recent tussle with Washington that forced it to halt operations for two months.
If I were a betting man, I would say there’s a greater than 50% chance that we’ll see Unicom and China Telecom forced to pool their assets in some way for 5G. Whether that’s an outright merger is less certain. But at the very least I would venture the pair will be forced to share heavily in the cost of building a 5G network, and could very possible be forced to jointly build, own and operate a single system.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
Jul 16 17:58
Jul 16 17:19
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