China Telcos Propose Base Station JV

Telcos eye base station JV

A controversial new plan could see China’s 3 major wireless carriers pool their resources to form a base station joint venture, marking a rare collaboration just as Beijing is trying to foster more competition in the highly protected industry. While the move appears to have anti-competitive overtones, it would actually represent a smart and much-needed step towards reducing costs that would benefit both the companies and consumers.

Beijing has embarked on a painfully slow path to reform of China’s telecoms services market over the last 20 years, in a bid to modernize infrastructure and create companies that can compete with global players like Britain’s BT (London: BT) and Singapore’s SingTel (Singapore: STEL). Over that time the Chinese industry has evolved from a single state-owned monopoly to its current status that has the market controlled by 3 large state-run players, China Mobile (HKEx: 941; NYSE: CHL), China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU).

That trio was in the headlines last week when media reported they were in talks to set up a joint venture to operate the hundreds of thousands of base stations they collectively own throughout China. (company announcement; Chinese article) Under the proposed scheme, the 3 would pool their existing stations into the single new company. The trio would then presumably lease back base stations from the joint venture.

The telecoms regulator has indicated its broad support for the plan, which carries big potential for lower costs and improved service. China Mobile has previously said it plans to construct 500,000 base stations by the end of this year alone for its new 4G service, reflecting the huge scale needed to offer service for a massive market of China’s size.

Similar build-outs by China Telecom and Unicom could require construction of more than 1 million base stations collectively by the 3 carriers throughout China. Construction of so many stations carries huge costs, and is time consuming because land and permits must be secured for each location. Such sites are also an eyesore, especially in already crowded urban landscapes where large cellular towers and their protruding antennae are clearly visible.

By pooling their resources, China’s 3 telcos could instantly consolidate their hundreds of thousands of stations, reducing the collective number by half or more. Such a move would allow all 3 companies to improve their coverage, since the new joint venture company could rationalize its huge pool of station locations to provide the most efficient national layout.

Equally important, such a move would allow the carriers to sharply reduce their costs by shifting the burden of operating such stations onto the new joint venture company. China Mobile has been hit particularly hard by high costs and slowing subscriber additions over the last year, reporting an unprecedented 9.4 percent slide in its latest quarterly profit after years of slowing growth.

Some might argue this kind of collaboration has monopolistic overtones in a market where limited competition already stifles innovation. While such joining of resources does look like a step backward, returning to the days of a single national operator, it is actually in line with practice in many of the world’s most developed markets. Carriers in countries like the US realized long ago that formation of base station operators was in their best interest, as it allowed them to lower costs and focus on their core business of providing innovative products and services.

China’s telecoms regulator is also in the process of trying to liberalize the market in other ways that could bring more competition and innovation. Chief among those is its recent creation of virtual network operators (VNOs), which will be able to provide rival services from companies that lease network capacity from the existing 3 carriers. Companies that open in Shanghai’s new free trade zone may also be able to offer such services in the future.

Those broader moves show the telecoms sector is clearly moving towards more competition from the private sector. Against that backdrop, this formation of a station operator joint venture looks like a prudent move that will bring China in line with global practices. Savings from such a venture would benefit the carriers’ shareholders through higher profits, and also consumers who could see their phone bills lowered. The new national base station operator could also become a future IPO candidate, providing an interesting and potentially lucrative new choice for Chinese investors from a sector that is now largely absent from China’s stock markets.

Bottom line: A proposed new base station joint venture between China’s 3 telcos would help them reduce costs and improve coverage, benefiting both their shareholders and consumers.

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