China Mobile’s first problem is a nice one: it has too much cash. The world’s largest wireless operator by subscribers is sitting on $37.5 billion – five times more than Deutsche Telekom, the world’s biggest phone company by sales.
The company’s second problem is more serious: investors expect that it will always grow profits. But due to expenses from its 3G standard TD-SCDMA, and heavy competition from smaller rivals China Unicom and China Telecom, China Mobile’s net income is likely to slip for the first time in its 10 year history.
The mobile phone operator may have found a solution to both problems. On Wednesday it announced a deal to buy a 20% stake in Shanghai Pudong Development Bank (SPDB) for $5.83 billion. It is the first time a Chinese telco has invested in the banking industry.
Already, the move has sparked controversy among investors and analysts. Some are concerned about China Mobile deviating from its core business: “It doesn’t make sense to move from telecoms into banking. They should just stick to what they do,” says industry analyst Huang Guoying, “Just because you have cash flow doesn’t mean you need to spend it.”
Investors don’t seem that enthusiastic either. Shares in China Mobile, one of Hong Kong’s biggest listed firms, sank 6% when the deal was announced. But supporters of the deal insist it has commercial logic. By tying up with SPDB, China Mobile will expand its presence in mobile payment services.
So what exactly is mobile payment? Put simply, it lets subscribers use their phones to make electronic payments – for things like subway tickets or cups of coffee. All you do is hold your phone next to a special reader at the checkout.
In Japan and South Korea, some carriers have already tied-up with credit-card companies to offer something similar. Japanese telco, NTT DoCoMo bought a stake in Japan Net Bank in 2000 and launched its mobile payment service in 2004. By the end of 2008, 29 million customers – 28% of its subscribers – were using the service, says BDA Connect.
More recently, South Korea’s SK Telecom agreed to buy a 49% stake in the credit card unit of Hana Financial for $343 million. It plans to introduce mobile phone-based credit-card payment services in the coming quarter.
“In our push into the mobile e-commerce business, we need a dedicated partner in the banking field to help us roll out the mobile banking business,” China Mobile Chairman Wang Jianzhou told analysts during a teleconference last Wednesday. He added that the move will help lift earnings as mounting competition slows profit growth.
Buying a stake in SPDB could help smooth the path for China Mobile’s home-grown mobile payment technology, RF-SIM, which launched an experimental trial last year. (Rival China Unicom uses an alternative system).
“China Mobile may need this type of investment in SDPB so as to smooth the way to spreading its mobile payment technology throughout the country,” says Michael Clendenin from RedTech Advisors.
But the deal still needs to be approved. According to a report published by the National Business Daily on Tuesday, Sasac, the holding company for China’s state-owned assets (see WiC45, Talking Point), is said to oppose its portfolio companies buying non-core businesses. And China Mobile would need Sasac’s clearance to buy the stake.
Moreover, the relationship between China Mobile and its parent has been patchy of late. Last month, China Economic Review reported that Sasac had accused China Mobile of “excessive labour costs “.
Its solution? Sasac is rumoured to be demanding that the telecom operator cut both management and staff wages by 10% for each of the next five years.
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