Original articles in Chinese: [Restructuring] [Oppose] [Support]

Unveiled on May 24 , the long-awaited restructuring plan for the Chinese telecommunications industry has met with both congratulations and criticism.

On the one side, some argue that the mergers will create synergies and strengthen the international competitiveness of the new firms. Others, such as Han Kaili, a telecommuncations expert, have decried it as "a redistribution of rotten potatoes" that will leave China Mobile at a massive advantage. Last week, the EO explored the landscape of this new post-restructuring era.

Telecom in the Post-Restructuring Era
By Communication Research Team of China Merchants Securities

The plan would streamline five companies into three giants with new chiefs. The original China Mobile Group, China Unicom Group, China Telecom Group, China Netcom Group and China Tietong Group have become new China Mobile, headed by Wang Jianyu; new China Unicom, headed by Zhang Xiaobin; and new China Telecom, led by Wang Xiaochu.

Telecom restructuring has long since been considered a key factor in the growth of Chinese telecom operators. Indeed, the real motivation of such an industry-wide reorganization stems from the Chinese government's hope to break up European and American monopolies on wireless communications and have its own share in the international market.

In announcing the plan, officials stressed that the telecom industry should "persist in independent innovation" and "make special efforts to foster the world's top-ranking telecom companies with core competitiveness".

The first part of that statement indicates government support of TD-SCDMA, the locally-developed 3G (third generation) technology, while the latter is an expectation that these powerful state-owned telecom companies gain ground in the global market--specifically, China Mobile.

China Mobile: Prop of Local-Produced 3G
With the rules changed, the new China Mobile should not only retain profits, but support 3G. In line with the government directive of "independent innovation", it would likely continue to invest in the TD network even if that meant sacrificing other interests.

Despite "necessary asymmetric regulations" to be adopted after the restructuring according to the announcement, chances of the government's weakening of China Mobile with harsh measures are slim, as it's always been its hope to let the latter "go out" and prosper in the international market.

In other words, the company will be free from strict supervision and still control its own future. By taking advantage of the world's biggest GSM network and tightening control over the industry chain, it can remain a dominating force in the industry over the next two or three years.

China Unicom: A Turning Point
The entry of China Unicom to CDMA services in 2001 was both a sacrifice for China's joining the WTO and an attempt to surpass China Mobile. Later, pressured by double-network operation and a broken industry chain in CDMA, China Unicom was finally driven to the 2G market.

When China Unicom only provided GSM services in 2001, it shared 1/3 of the market of new users. In 2007, after the company had spent five years and a total of a hundred billion yuan on CDMA, this share dropped to 1/5.

According to the announcement, the fundamental goal of the reorganization was to form three main bodies in the industry which have nationwide network resources, close strength and scale, the capability of full service operation and strong competitiveness. The weakest among the three, China Unicom will apparently benefit after the restructuring.

Chances are the new China Unicom will grow from a disadvantaged operator to a dominating one in north China and the data service market.

Important factors in the development of Chinese telecom operators include capital, the 3G license, the restructuring plan; and China Unicom gains support in all the three.

China Telecom: Mobile Services Regained
In the firsts round of telecom restructuring in 1999, China Mobile split from China Telecom and took over its GSM services, leaving PHS as its only mobile service. More splits occurred in the following ten years, during which China Telecom was gradually edged down to a regional operator.

By acquiring CDMA from China Unicom, the company will regain mobile services, but also have to carry a heavy financial burden.

Given the government principle of supporting disadvantaged operators, it's possible that the company will receive support from the State-owned Assets Supervision and Administration Commission (SASAC), and solve its financial problems by introducing strategic investors, issuing additional shares and bonds, and other possible ways.

In view of the limitation of the technology itself, benefits to be brought by CDMA may not be as great as has been anticipated.

Thanks to the features of CDMA, China Telecom will most probably be the first to provide large-scale 3G services and an important player in the future data service market.

However, long-term problems still exist, including the operation of CDMA, which is ebbing away from the American market, how to deal with PHS users, and how to prevent potential drop of fixed network customers.

Side by Side: Dissenters vs. Watchdogs
By Yang Yang, Li Jing

Watchdogs: Balancing Telecom Powers
The current restructuring plan was the result of balancing both state-owned assets and future competition in the trade, said a source close to the SASAC. The three newly formed operators would all gain the license for full-service operation after being restructured, he added.

The restructuring was an attempt to guarantee maximized profits in all telecom companies, according to Zhang Zhiqiang, researcher at the Economic System and Management Research Center under the National Development and Reform Commission (NDRC).

Therefore, he said, the government chose a "one for one" solution to help out these weaker companies. "The integration of China Tietong with China Mobile, China Satcom with China Telecom, and China Netcom with China Unicom, are all out of hope for a good result for all the companies," he explained.

To the understanding of an insider, the restructuring this time aimed to solve two problems--to issue 3G license, and to form a stable team with members each having their own strong points. "China Mobile is like the big brother, China Telecom the second child, and China Unicom the youngest. They all have goals to fulfill, that is, TD for the former, GSM for the middle, and a new network for the latter," he added.

Dissenters: Restructuring Plan a Double Failure
The moment the restructuring plan was released, fierce criticism came from the industry, centering on its failure to bring back fair competition. Even if China Telecom and China Unicom gained the license for full-service operation, they still hardly had the strength to battle against China Mobile, experts said.

Presently, China Mobile has 390 million GSM customers and is making over 200 million yuan daily, said Li Jinliang, a senior engineer at China Electronics Technology Group Corporation's No. 7 Research Institute.

After being restructured, China Telecom, which currently has 220 million customers in its fixed-network services and 60 million in PHS, will gain another 40 million customers through the newly-acquired CDMA service. Despite this, given that CDMA had just started making profits since 2006 and reorganization work may not be finalized until at least half a year later, the company could probably only maintain its original profits.

As for China Unicom, which has a customer base of 280 million including 120 million of GSM users,  20 million PHS users and 140 million fixed-network users, also needs some time to return to its normal operation. Therefore, its profits were unlikely to improve, said Li.

There were other issues that transcended the new giants. For example, personnel adjustments below middle management level might harm the stable development of the industry, experts argued. And feasibility was another concern, according to Han Kaili, the expert on telecommunication. The restructuring was virtually "a redistribution of rotten potatoes", which would be difficult to implement and could hardly break up the existing monopoly.