Bottom line: Rumors of a China Telecom-Unicom merger are probably false since they would leave just 2 big players in the market, though the talk could reflect the regulator’s frustration at the continued dominance of China Mobile.
Everyone else is buzzing today about rumors that the smaller of China’s 3 telcos would merge, so I feel obliged to add my 2 cents to the discussion, even though the deal has been denied by one of the companies and the industry regulator. Of course this kind of denial isn’t very meaningful in China, where companies will vehemently deny a rumor one day and then the next day announce a deal that showed the talk was indeed correct. But in this case, a merger of China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 763; NYSE: CHU) really doesn’t make much sense for a number of reasons.
The source of all the commotion was a an online industry publication report, which quickly spread around the microblogging realm and was picked up by a number of large publications. The news was relatively straightforward, saying China Telecom and Unicom would merge, under a new reorganization being engineered by the Ministry of Industry and Information Technology (MIIT). (English article; Chinese article) The rumor sparked a jump in the shares of both companies, which rose more than 3 percent in Hong Kong. Unicom’s China-traded shares surged by their daily 10 percent limit.
Before we do some analysis of why this deal doesn’t seem likely, I should add my own view that there’s still a small chance the rumor is true, perhaps 10-20 percent. Both Unicom and the MIIT have denied such a marriage. The MIIT engineered a similar merger back in 2009, when it combined 2 of China’s smaller telcos to create the current Unicom. That move was part of a broader restructuring that reduced China’s field of telcos to the current trio from a previous 4. But reducing that number further to just 2 big telcos seems a bit anti-competitive, since major western markets have shown that 3-4 telcos is usually the optimal number to maintain healthy competition.
The rumor does seem to show is that the MIIT is feeling a certain frustration at the continued dominance of the market by China Mobile (HKEx: 941; NYSE: CHL), the country’s original mobile carrier and by far its largest player. Even if they were to combine, China Telecom and Unicom would still control just a third of China’s massive mobile market, which has more than 1 billion subscribers. The situation today is slightly better than it was 5 years ago, when China Mobile controlled around three-quarters of the market.
The MIIT has taken a number of steps to try and create more competition and innovation in the market, but without much success. Its biggest move was to force China Mobile to use a homegrown technology for its 3G and 4G networks, with the dual aim of promoting made-in-China technologies while also giving Unicom and China Telecom an advantage by letting them build networks using globally developed, more mature technologies.
That strategy could be one factor fueling the latest rumors, since both Unicom and China Telecom will operate 4G networks based on the same technology, called FDD-LTE, which would theoretically make it easy to merge their networks. The regulator has also tried to shake up the industry by licensing a new field of third-party virtual network operators (VNOs) that can provide alternatives to the big 3 telcos. It’s also trying to create a new national broadband carrier by consolidating the nation’s many regional cable TV companies, which could also eventually offer wireless telecoms services.
Yet despite all those efforts, China Mobile has remained the king of China’s telecoms market due to its strong coverage, and extensive marketing and sales networks. That’s the reason I’m still giving a 10-20 percent chance that the latest merger rumors are true, as such a pairing might help to challenge China Mobile. But honestly speaking, China’s telecoms service market already probably has one too few players, and reducing the number further to just 2 doesn’t really seem to make much sense.