TELECOMS: China Mobile Heeds Beijing’s Call With Salary Cuts

Bottom line: China Mobile’s latest salary reduction plan underscores that it and its 2 peers are just big state-run companies that act on orders from Beijing, with little to differentiate them from one another.

China Mobile slashes salaries

I’ve become increasingly disenchanted with China’s big 3 state-run telcos, partly because they lack any kind of originality or inspiration. About the only thing they know how to do is heed the call of Beijing, or sometimes protest orders they don’t like. Another thing they’re good at is launching promotions to try to steal business from each other in their highly protected market. But no one will ever accuse any of the trio or originality or innovation.

With that introduction, I’ll be quite direct and say that the latest news that leading telco China Mobile (HKEx: 941; NYSE: CHL) plans to slash salaries company-wide is just the same old behavior in response to a central government directive. That kind of directive comes regularly from Beijing, which recently has grown frustrated at China Mobile and its 2 peers, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU), for failing to innovate despite their control of the world’s largest telecoms market.

One other area where Beijing is frustrated with the 3 telcos is their heavy promotional spending, which has undercut their profits in China’s rapidly saturating telecoms market. As the telcos’ largest stakeholder, the central government would like to get better returns from these 3 large companies that generate billions of dollars in revenue each year and should have better profit potential.

This new salary cutting exercise looks at least partly driven by the government’s desire to lower costs at China Mobile, and I would expect similar moves coming soon from Unicom and China Telecom. According to the latest reports, China Mobile has formally announced the company-wide salary-cutting plan at its midyear meeting. (Chinese article) The plan is aimed mostly at mid- to higher-level managers, who will see their salaries slashed anywhere from 20 percent to as much as 50 percent.

The reports say the salary cutting exercise comes after Beijing issued a broader directive in January, calling on companies to reform their salaries structures. That call was part of a larger drive by President Xi Jinping to rein in government spending on lavish activities like banquets and gift-giving, and to clamp down on corruption.

Turnover Likely, But Not Much

I’m sure the managers at China Mobile won’t be too happy with these cuts, and it’s even possible we could see some leave the company since no one likes to see their pay fall by so much. Some might go to the several dozen recently launched virtual network operator (VNO) companies that are part of a separate Beijing plan to bring more private investment to the telecoms services space.

But I suspect that many of these officials will probably stay in their current jobs, since they receive many other benefits from remaining at such massive state-run behemoths like China Mobile. Many still probably receive various bribes and other expensive presents from customers and suppliers for simply doing their jobs, and most are guaranteed lifetime employment. That’s a big part of what’s made these companies so uninteresting and undynamic.

This latest salary-cutting exercise follows another directive by Beijing last year for the 3 telcos to rein in their promotional spending, in a move that was clearly aimed at boosting profitability and reducing cut-throat competition. Beijing is also currently pushing hard for improvements in fixed-line broadband service from Unicom and China Telecom, which have thrived for years on their monopoly of the space without doing much to innovate or lower costs.

At the end of the day, China’s telcos look increasingly to me like the nation’s banks and other big state-run companies. It’s becoming harder to differentiate any of the telcos from one another since they all behave roughly the same. Things will only get tougher for them as China’s telecoms market becomes more saturated and limited competition emerges from VNOs. This latest salary-cutting exercise will also emphasize the theme that these companies take all their orders from Beijing.

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