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China Unicom and China Telecom alliance not seen as threat to China Mobile

Ambitious cooperation deal aims to promote structural reforms in China’s telecommunications industry

PUBLISHED : Sunday, 17 January, 2016, 6:49pm
UPDATED : Sunday, 17 January, 2016, 6:49pm

A strategic alliance between China Unicom and China Telecom is not expected to be enough for the two companies to close the competitive gap with China Mobile, the mainland’s top wireless network operator.

In a joint announcement last Wednesday, Unicom and China Telecom agreed to an ambitious cooperation deal that aims to promote structural reforms in China’s telecommunications industry and help advance the government’s “Internet Plus” strategy for broader online access nationwide.

Chris Lane, a senior analyst at Bernstein Research, said in a report that the deal was a welcome development for Unicom and China Telecom to help improve their market position in the world’s second-largest economy.

“We see any adverse impact on China Mobile as being quite minor ... we continue to believe China Mobile’s absolute network advantage – and by virtue of this, its hold on premium customers – will remain for the foreseeable future,” Lane said. “We see China Mobile benefiting financially from its strong 4G subscriber momentum in 2016, while China Telecom and Unicom suffer from significant network expansion costs and poor subscriber momentum.”

China Mobile, the world’s largest wireless network operator by subscribers, is targeting 500 million 4G subscribers by the end of this year.

As of November 30, China Mobile had 287.32 million 4G users out of its total subscriber base of 825.19 billion.

To build up a competitive 4G network as quickly as possible, we expect Unicom and China Telecom to invest heavily in base stations
Huang Leping, Nomura

The company is also undertaking the final phase of its domestic 4G network rollout this year. It started offering 4G service, based on the Chinese-developed time-division long-term evolution (TD-LTE) standard, in December 2013.

Analysts said the most significant parts of Unicom and China Telecom’s plan for a five-pronged strategic cooperation were their joint regional 4G infrastructure buildout and a proposed national smartphone standard.

Unicom and China Telecom aim to narrow the 4G network gap with China Mobile and lower their capital spending by sharing costs on new rural 4G network deployments.

Nomura analyst Huang Leping said in a report that the shared rural network buildout by the two network operators would remain a hefty financial endeavour.

“To build up a competitive 4G network as quickly as possible, we expect Unicom and China Telecom to invest heavily in base stations,” Huang said. “As a result, their capital expenditure this year is expected to remain relatively stable, down by less than 10 per cent on a group level.”

Nomura estimated Unicom’s total capital expenditure this year, including 4G network expansion, to reach 100 billion yuan (HK$118.39 billion), while that of China Telecom is forecast at 98 billion yuan.

Unicom had 180.24 million combined 3G and 4G subscribers as of November 30, while China Telecom had 141.03 million total 3G and 4G users in the same period.

Their alliance will also champion the promotion of so-called six-mode smartphones with “all network access” as a national standard. That included all the 2G, 3G and 4G standards supported by the three mainland wireless network operators.

“The proposed six-mode national standard for mid- to high-end handsets appears to be an attempt at political poker to force China Mobile to join in,” Bernstein’s Lane said. “We think it will work.”

China Telecom is currently at a big disadvantage against Unicom and China Mobile because it has to continue to support users of its 2G code division multiple access (CDMA) network and 3G CDMA-2000 network, technical variations that have led to higher-priced mobile phones for China Telecom subscribers.

China Mobile has traditionally focused on five-mode handsets that did away with CDMA support. Unicom supported only four-mode smartphones that left out the locally developed 3G standard called Time Division Synchronous CDMA, on which China Mobile’s old 3G network is based on.

Lane said a single national standard for smartphones “has some positive benefits regulators are likely to appreciate”, including making it much easier for users to change networks through their Subscriber Identity Module (SIM) cards.

“A mobile user would simply swap a SIM card, rather than buy a new handset,” Lane said. “Smartphone manufacturers would also be able to produce greater volumes and manage less units with different variant for each operator.”

Unicom and Telecom are rolling out 4G networks built on China’s TD-LTE technology and the more mature frequency-division duplex long-term evolution, or FDD-LTE, standard.

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