Talking Point, Telecoms

Better together

Does Unicom and China Telecom pact signal a full-blown mega-merger?

Wang and Yang

Working together: Wang and Yang

At the heart of Beijing’s commercial district is Financial Street and there you will find – aside from investment banks – the glass-and-steel headquarters of many of China’s giant state-owned-enterprises. That includes all three state-owned mobile carriers.

In fact, not only are the three telcos on the same street, they are very close-by. China Mobile is located on 29 Financial Street, while China Telecom is number 31. China Unicom, meanwhile – at number 21 – is a five-minute stroll from China Telecom’s HQ.

WiC suspects there’ll be a lot of executives making the walk between numbers 31 and 21 now that China Telecom and Unicom have entered into an alliance. Last week the pair announced they’d signed a multi-pronged strategic agreement to share resources, so as to enable them to cut costs and better compete with their neighbour: the larger and better capitalised rival China Mobile.

“21 Financial Street working with 31 Financial Street, has anyone considered the feelings of 29 Financial Street?” went one popular online joke in the wake of the news.

What is the partnership about?

In an unexpected joint statement last week, China Unicom and China Telecom said their new partnership will help them to better compete in China and abroad.

The duo will cooperate strategically in areas that include sharing capital expenditure, expanding network coverage as well as promoting new smartphone models and standards. The two will also ally to negotiate better international roaming rates.

The news was greeted favourably by investors. The shares of both companies climbed more than 3.5% in Hong Kong after the announcement.

Mind you, it wasn’t a total surprise. A tie-up has long been rumoured, following some mega-mergers within China’s state-owned sector. Predominantly these have been in sectors which are either struggling (such as shipping and coalmining) or competing for contracts overseas (i.e. to sell high-speed trains or nuclear equipment). That said, the telecom carriers don’t really fit either trend. They compete locally. They are profitable.

But the government has made clear the sector needs shaking up. For instance, it instructed the state-owned trio to join hands to create a new national tower company to hold their infrastructure assets and avoid repetitive investment (see WiC236).

Similar thinking seems to be behind the latest tie-up between Unicom and China Telecom. The most significant aspect of their agreement: they will team up to build (and share) some of their 4G base stations. Analysts reckon that active network sharing could save the two firms up to 40% in capital expenditure.

HSBC notes in a recent research report that both Unicom and Telecom are “substantially behind” China Mobile when it comes to deploying faster 4G technology. The government now wants to change that. “We [often] come back to the question: what does the government want? It wants more investment and faster networks… approving active sharing between Unicom and Telecom fits this goal,” surmise the HSBC analysts.

It’s about taking on China Mobile?

China Mobile has been offering 4G since 2013, using a standard called time-division long-term evolution (TD-LTE). Keen to promote the homegrown technology, the government gave the company a head-start – issuing it with a 4G licence a year before its rivals (see WiC174).

China Mobile didn’t waste any time. It’s now in the final phase of its 4G infrastructure rollout and thanks to having the broadest national network it has the bulk of China’s current 4G subscriber base.

Last November the company said it had 287 million 4G users and predicted that figure would reach 500 million by the end of this year.

Opting instead for an international 4G standard, both Unicom and China Telecom faced a delay in rolling out their network – lagging China Mobile’s aggressive push. By November China Telecom had 58 million 4G subscribers while Unicom possessed a combined 180 million 3G and 4G subscribers (unhelpfully, it did not break out exact figures, indicating perhaps the 4G number is unflattering).

“If China Unicom and China Telecom don’t work together there’s no way they can take down China Mobile,” concludes Fu Liang, a telecoms analyst.

Caijing magazine, too, says there is little downside to the alliance: “At its best, the move can help the two gain ground [against China Mobile]. At its worst, the move still eliminates one enemy for each other.”

How about the job changes at the top?

The alliance follows a series of personnel shuffles. The first was in August when Chang Xiaobing, former chairman of China Unicom, took up the same role at China Telecom. Wang Xiaochu, departing chairman of China Telecom, was named to the same post at China Unicom.

At the time that looked like just another round of the sort of musical chairs frequently seen in the state-owned sector. But Chang’s tenure at China Telecom proved to be short-lived: a few months after his move, he was forced to resign after an anti-corruption probe revealed malfeasance during his time at Unicom. The Central Commission for Discipline Inspection accused Chang of pursuing “personal rather than Party loyalty” (see WiC308).

Chang had held the top job at China Unicom for more than 10 years. His job change and his subsequent arrest now looks uncannily similar to the tactic used to take down the former boss of China’s biggest oil company (see WiC207). In both cases the official’s entrenched power base was broken first (by taking them out of a company they’d run for a long time) before their later purge. The tactic also seems to presage an industry overhaul. In fact, China Mobile’s long-serving Party boss Zhang Chunjiang was also put under anti-graft investigation before the telecom sector’s restructuring in 2008 (when four carriers were reduced to three) and resigned a year later.

Meanwhile, China Telecom has promoted Yang Jie, formerly its chief operating officer, to replace Chang. Caijing points out that Yang worked under Wang Xiaochu for many years – and was widely regarded as his ‘right-hand man’. This may explain how the new Unicom boss and new Telecom boss were able to agree a deal so quickly. Only a few weeks after Chang’s removal, Wang and his protege held a signing ceremony at China Telecom’s HQ.

So is the stage being set for a full-blown merger then?

Rumours have been circulating since last year that Beijing is looking to merge the two companies to create a more formidable competitor to China Mobile.

“Reading the tea leaves, this seems to support a lot of rumours of late that China Telecom and China Unicom will eventually merge,” Chris DeAngelis at Alliance Development Group, a Beijing-based consultancy, told the Financial Times.

But during the press conference, Yang stressed that the partnership was not the forerunner of a bigger deal: “The signing of this agreement suggests that our cooperation has entered a new phase. It has nothing to do with restructuring or a merger in any way.”

As CCTime, a technology portal, puts it: “The two are only living together; they are not getting married.”

HSBC telco analysts are also not anticipating a merger. After all, network sharing can be implemented relatively easily while a “full-blown merger of Unicom and Telecom – as well as reducing competition – would be complex, time-consuming and potentially difficult.”

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