TELECOMS: Huawei, New Cell Tower Firm on the Rise

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Bottom line: Huawei’s ongoing surge should help to consolidate its position as China’s leading domestic smartphone brand, while a newly formed cell tower operator will relieve China’s 3 telcos of the burden of owning and operating such assets.

New cell tower operator takes shape

The telecoms space is buzzing on both the operator and consumer products sides, with surging smartphone maker Huawei and a new cell tower operator called China Tower both rising in the latest headlines. The higher profile of these 2 telecoms headlines has Huawei continuing its rise to become the world’s third largest smartphone brand, stealing the title from the fading Xiaomi. Meantime, all 3 of China’s big state-run telcos have come out with one of their simultaneous announcements saying they have formally transferred their cell tower assets to China Tower.

This pair of stories is quite different, but the bigger picture is one of trying to improve by becoming more efficient and diverse. In the case of Huawei the company is trying to leverage its long experience in making telecoms equipment to diversify into the consumer-oriented smartphone space. In the second case, China’s telecoms regulator is trying to improve efficiency among the nation’s 3 stodgy telcos by doing something that carriers in the west did on their own long ago.

Let’s begin with Huawei, which is emerging as one of China’s latest success stories in the hotly contested smartphone space. Huawei’s latest progress is on display in a new third-quarter smartphone sales report from Trendforce, which shows the company became the first Chinese brand to pass the symbolic 100 million unit mark in annual sales during the just-ended third quarter. (announcement) Huawei had previously set a target of 100 million unit sales for the entire year.

Huawei boosted its share of the global smartphone market to 8.4 percent in the third quarter, up a full percentage point from the previous quarter. That put it in a solid third place worldwide, still well behind leaders Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL). But Huawei widened its lead over the fading Xiaomi, which saw its share drop slightly to 5.7 percent.

Within China, Huawei also widened its lead over Xiaomi among domestic brands, with the pair owning 18.7 percent and 12.7 percent of the market, respectively, during the quarter. Those figures mark a big shift from last year, when a surging Xiaomi briefly became the world’s third biggest and China’s top selling domestic smartphone brand. Trendforce said Xiaomi is likely to miss its annual target for 100 million unit sales, though Xiaomi had previously lowered that figure to a range of 80-100 million units.

Rising China Tower

Next let’s look at the 3 telcos, which have all put out announcements saying they’ve completed the transfer of their cell towers to China Tower, whose formation has been in the works for much of the last year. (China Mobile announcement) Despite the fact that this move has been widely expected, shares of all 3 telcos rose in New York after the announcements, led by a 7.8 percent rise for China Unicom (HKEx: 762; NYSE: CHU), 5.5 percent rise for China Telecom (HKEx: 728; NYSE: CHA) and 1.6 percent rise for China Mobile (HKEx: 941; NYSE: CHL). (English article)

The move will create a new company with 231.4 billion yuan ($36 billion) in network assets, with China Mobile holding a 38 percent stake. Investors probably cheered this move because it will relieve these 3 lumbering telcos of one of their most cumbersome assets. That’s because owning and maintaining their networks of thousands of cell towers nationwide is a costly and time-consuming business that distracts them from their core business of running the nation’s 3 main wireless networks.

The fact of the matter is that western telcos did this kind of restructuring more than a decade ago, selling their cell towers to independent operators that can run such operations far more efficiently. Like in many similar instances, China was slow to adopt such reform because its telcos largely act in unison based on orders from the regulator, and seldom take their own initiative on anything but price wars and promotional packages.

This shedding of cell towers will certainly relieve the telcos of the burdens of ownership, so it’s good in that sense. But it will take far more to turn any of these state-run behemoths into market-oriented innovators, and I expect the trio will continue to be laggards in the global sector despite their state-granted monopoly over the world’s largest mobile market.

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