China's largest mobile communications company, China Mobile Communications Corp., announced on May 23 that it would acquire China Railway Communication Co. Ltd., also known as Tietong, a smaller fixed-line carrier. The move kicked off the long-awaited restructuring of the country's telecommunications sector.

The next day, the newly formed Ministry of Industry and Information, the National Development and Reform Commission (NDRC) and the Ministry of Finance jointly issued the final restructuring plan. Under the plan, the country's six major fix-line and mobile network operators will be merged or split into three new operators and offer both mobile and fixed-line services. At present, Chinese fixed-line operators are split along geographical lines and are only licensed to offer fixed-line services, while mobile operators are permitted to offer only cellular services.

Following China Mobile, the country's biggest fixed-line carrier China Telecommunications Corp. (China Telecom) will acquire the CDMA (Code Division Multiple Access) mobile network from China United Telecommunications Corp. (China Unicom), the country's second largest mobile network carrier. China Telecom also will acquire the basic telecommunication services of China Satellite Communications Corp. (China Satcom), which offers satellite-based communications services. China Unicom will retain its GSM (Global System for Mobile Communication) network and merge with the second biggest fixed-line operator China Network Communications Group Corp. (China Netcom).

When the top four operators complete the restructuring, China will issue 3G licenses, according to the joint statement. The statement did not give a deadline for when the restructuring would be finished, but a Xinhua News Agency report estimated it would take 12 to 18 months.

Some telecom analysts widely believe that China Mobile will get the license for offering 3G services based on the TD-SCDMA (Time Division-Synchronous CDMA) standard. They say China Telecom will get the CDMA2000 license and China Unicom the WCDMA (Wideband-CDMA) license, triggering real competition for 3G services after the telecommunications landscape in China is reshaped.

The lay of the land

China topped other countries in the world last year in terms of the number of subscribers for fixed-line and mobile services. From 2001 to 2007, its telecom industry revenue increased more than 11 percent annually from 371.9 billion yuan ($53 billion) to 728 billion yuan ($104 billion). The number of subscribers increased by around 100 million every year during this period from 326 million to 913 million at present, of which 547 are mobile phone users.

But the Chinese telecom market is not a solid one.

"The sound development of the telecommunications industry needs sufficient and effective competition among a few big corporations," said Yang Peifang, Secretary-General of the Telecom Economists Panel under the Ministry of Industry and Information, in an interview with China Central Television. "The development of the telecom industry can benefit customers only when its resources are properly distributed."

In this market, China Mobile is the unquestionable winner and has left the other three operators far behind in terms of performance. Its revenue last year hit about 357 billion yuan ($51 billion), up 20.9 percent from the previous year. China Telecom's revenue was 178.66 billion yuan ($28.4 billion); China Unicom's 99.54 billion yuan ($14 billion); and China Netcom's 84 billion yuan ($12 billion). China Mobile's net profit last year was 87.1 billion yuan ($12.44 billion), an increase of 31.9 percent from the previous year and almost double the net profit of the other three operators combined, which stood at 45 billion yuan ($6.4 billion).

The main problem with China's telecom industry is "the structural imbalance between fixed-line operators and mobile operators, which has contributed to the shrinking of the fixed-line business," said Lu Yuanjie, Dean of Economics and Management School, Beijing University of Post and Telecom, in an interview with China Central Television.

As new customers opt for and existing subscribers switch to mobile services, fixed-line carriers have seen their demand slump in recent years, especially after the two mobile operators put an end to the two-way charging scheme and began to charge only the callers last spring. China Telecom, for example, said in its annual report on March 31 that income from its voice business fell 7.9 percent from the year before, contributing to a nearly 13 percent drop in its net profit last year.

Because 3G services represent the future of telecommunications, it will be necessary to grant fixed-line operators licenses to offer both fixed-line and mobile services, Yang said. He believes that the industry's restructuring will help invigorate competition, promote technological innovation within the sector and enhance the competitiveness of local operators.

And the winner is

The biggest winner of the restructuring will be China Telecom, said Chen Yunhong, an analyst with Sinolink Securities Co. Ltd., in an interview with China Securities Journal. As the country's largest fixed-line operator, it will obtain a variety of new services and technologies in a short time when it acquires the CDMA network and secures licenses for both fixed-line and mobile services, he said. Chen also believes China Telecom's new and incremental services will develop much faster this year than those of the other two dual-network operators.

After taking over the CDMA business, China Telecom will see additional revenue of at least 27.7 billion yuan ($4 billion) and 41.8 million more customers, based on China Unicom's CDMA revenue and user figures from last year, said Li Jinliang, former chief engineer at China Electronics Technology Corp.

China Mobile no longer will enjoy absolute dominance in the market, although its revenue will not likely shrink after the reshuffling, Chen said.

The world's largest mobile operator may see a drop in its market share, but its overall profitability will stay intact, Chen said, because "China Mobile is the most competent among China's major telecom carriers in terms of investment acquisition, overseas investment and business range."

Unlike China Mobile's acquisition of Tietong, in which the latter could be allowed to operate independently, China Telecom, China Unicom and China Netcom have to address tricky problems in their networks, businesses and personnel integration to compete with the industry's number one, said Zhang Peng, an analyst at the private investment bank China eCapital Corp.

The integration has been particularly difficult for Unicom and Netcom, Chen said, because they are both "number two" respectively in mobile services and fixed-line services in China and "roughly equal in size and strength."

"China Telecom and the newly formed China Unicom will be left far behind in three years if they merely rely on existing resources and services without innovations after the restructuring," said Shi Wei, an NDRC official, in an article in 21st Century Business Herald.

Equipment makers rejoice

Besides encouraging effective competition in the industry, another goal of China's telecom restructuring is pushing through the long-awaited release of 3G licenses. China has one of the world's biggest mobile markets, but it will be one of the last countries to launch commercial 3G services. Deng Shoupeng, Director General of the Economic Development Research Center of the State Council, says China will invest 600 billion yuan ($85.7 billion) in the first six years after it launches commercial 3G services on a trial basis.

Of the three major 3G mobile communi-cation standards, W-CDMA dominates European and Japanese markets, while American and Korean customers prefer the CDMA2000 standard. China has its homegrown TD-SCDMA standard. China Mobile has been developing services for its own platform for a couple of years. With China Unicom's CDMA network, China Telecom will be able to offer CDMA2000 services, while the new China Unicom will merge with China Netcom to co-develop WCDMA services.

Of the global telecom equipment providers, Ericsson Corp., Nokia Corp., Siemens Corp. and Huawei Technologies Co. Ltd. support the WCDMA standard. Alcatel-Lucent Corp. and ZTE Corp. have chosen the CDMA 2000 standard of which Qualcomm Corp. holds key patent rights and has raked in excessive royalties from each CDMA-enabled handset. Major supporters of TD-SCDMA are local equipment providers such as ZTE, Datang Telecom Technology Co. Ltd. and Shanghai Potevio Co. Ltd.

Despite that Nokia and Ericsson have already established 3G research centers in China, local equipment providers have secured the lion's share of 3G purchase orders from Chinese telecom operators. Multinationals have had to enter the Chinese 3G market by cooperating with local providers. Ericsson, for example, has managed to stick its finger in the 3G pie here by teaming up with ZTE to deliver TD-SCDMA solutions on an original equipment manufacturer basis.

Ericsson has made a huge investment in the research and development of 3G technologies, which accounted for 15 percent of its total revenue last year, said Jiang Hao, Vice President of Ericsson (China) Co. Ltd., in an article in 21st Century Business Herald. By this April, Ericsson had provided 144 WCDMA commercial networks to the global market, accounting for 53 percent of total WCDMA networks worldwide.

Local provider ZTE is one of the pioneers in developing 3G mobile services in China. It has developed a variety of products based on CDMA 2000 technology. Its market share for TD-SCDMA terminal equipment is more than 35 percent.

ZTE holds nearly 50 percent of China Mobile's orders for TD-SCDMA system equipment. Datang and Alcatel-Lucent together have 30 percent, while Huawei and Siemens both have 10 percent of the network equipment orders, according to a report in Economic Observer weekly on May 12.