TELECOMS: Unicom, China Telecom Study 4G Network Sharing

Bottom line: A plan to pool 4G network resources between Unicom and China Telecom could be a cost saving move, but could also be the latest signal that the regulator may ultimately merge the pair.

New signs of Unicom, China Telecom merger

China’s 2 smaller telcos are reportedly studying a plan to pool their 4G networks, in the latest sign that a major industry overhaul could be coming that would see the merger of Unicom (HKEx: 763; NYSE: CHU) and China Telecom (HKEx: 762; NYSE: 728). It’s hard to say what’s happening behind the scenes in China’s opaque telecoms sector, since any plans for such a merger are probably only known to regulators at the secretive Ministry of Industry and Information Technology (MIIT).

A high-ranking MIIT official said recently that he was unaware of plans for such a merger, indicating that nothing was imminent. But a growing number of signs are pointing to such a plan, though the cautious MIIT appears to be taking a very slow approach whose end goal wouldn’t necessarily be an outright merger but could instead also include a complex network-sharing arrangement.

There are several bigger stories happening here, led by the MIIT’s disappointment at the failure by China’s big 3 telcos to become global leaders despite their monopoly over the world’s biggest mobile market. Another factor is the big expense of building 4G networks for such a big country like China. In this case, both Unicom and China Telecom are building such networks costing tens of billions of dollars, even though they collectively control just a third of the nation’s wireless market.

The MIIT is realizing it doesn’t make sense for 2 such small companies to spend so heavily on building large independent networks, which may explain the latest news saying Unicom and China Telecom are drafting plans to share their 4G networks. (English article; Chinese article) Reports are actually citing a plan being drafted by Unicom, which would see the 2 companies share base stations, equipment rooms and transmission resources.

The plan would also reportedly see Unicom and China Telecom pool some human resources related to their sharing arrangement. China Telecom declined to comment on the reports, but Unicom confirmed it is still studying the matter. It added the sharing arrangement wouldn’t involve any restructuring of either company, in an apparent move to address recent rumors of a potential merger with China Telecom.

This latest report seems to confirm comments from leading global telecoms equipment maker Ericsson (NYSE: ERIC), which last month cited weak spending from China behind its disappointing latest quarterly results. (previous post) Ericsson didn’t get more specific, but it’s likely that Unicom and China Telecom were the main companies paring their spending. That’s because the nation’s dominant carrier China Mobile (HKEx: 941; NYSE: CHL) has already largely completed construction of its 4G network, after receiving a license more than a year before the 2 smaller companies.

Eye on Cost-Saving

The MIIT has embarked on a similar cost-saving plan already with wireless base-stations, by ordering all 3 carriers to pool their relevant assets into a single new company. Each company would then lease back the base stations from the new company. Such independent operation of base stations by third-party companies is already quite common in the west, though network sharing is less common.

So the question becomes: What’s the MIIT’s end game with China Telecom and Unicom? It’s increasingly clear the MIIT is disappointed at these 2 smaller companies’ inability to pose a serious challenge to China Mobile, despite receiving some major technological advantages after a major industry restructuring more than 5 years ago.

As it loses confidence in the innovative ability of the big 3 telcos, the MIIT is turning increasingly to the private sector to offer more creative products and services. Against that backdrop, a merger of China Telecom and Unicom could still be possible and would represent their emerging role as network operators that mostly sell capacity to actual third-party telecoms services providers. But it does appear the MIIT is taking a go-slow approach and could still decide to keep Unicom and China Telecom as separate companies that work closely together in resource sharing.

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