The great inch forward

03 Oct 2007

The pieces of China's slow-motion telecom reform are beginning to move into place, even if real progress is difficult to see.

With China Mobile and the fixed-line carriers building out TD-SCDMA "trial networks", the National Audit Office has announced an investigation into the five leading carriers.

The NAO says the audit - the biggest ever into the telecom industry - is aimed at improving "operational efficiency" and competitiveness of the four listed carriers plus China Railcom.

However, many believe it is also linked to the planned industry reorganization by the State-owned Assets Supervision and Administration Commission (SASAC). Market speculation on a restructure prompted spikes in the telecom stocks in Hong Kong when news of the audit was confirmed.

SASAC sources have said they will begin work on restructuring the big four - China Mobile, China Telecom, China Netcom and China Unicom - in the final quarter.

The trigger has been the release of recent financial results that show China Mobile taking 61% of industry profit, and the continuing leakage of fixed-line voice to mobile.

However, not even SASAC is certain of the exact nature of the reforms, while it faces the difficult task of forcing rationalization on large and unwilling organizations. Hence the excitement generated by news of the large-scale audit.

The core problem is China Unicom's slow-growing CDMA network. Unicom has rebuffed efforts by fixed-line carrier China Telecom to open up negotiations over the sale of the network, which could cost as much as 120 billion yuan ($15.6 billion).

Sources close to China Telecom says the company is 'absolutely determined' to obtain a mobile license, the mainland press has reported. It has hired an international financial consultant to conduct due diligence on Unicom's operations around the country.

Unicom last month took the unusual step of first contracting and then doubling its capital base. The carrier hasn't explained why, but it is almost certainly in order to ward off a forced merger or asset sale.

Meanwhile, the other long-awaited step forward in the heavily-regulated carrier sector - the launch of TD-SCDMA service - looks set to be postponed because of a delay in both handset supply and network build-out.

China Mobile originally planned to complete its 'trial network' build-out and start service in its ten target cities by the end of the month. However, the carrier and its vendor partners - chiefly ZTE, Datang Mobile and Siemens-Huawei JV TD Tech - have had difficulty acquiring cell sites, in particular in the larger cities such as Beijing and Shanghai.

One engineer involved in the build-out predicted it would take until the end of the year to complete, according to financial daily 21st Century Herald. He said the ample 2G coverage in large cities meant that many of the potential base station sites were already occupied. At the same time, residents were objecting to deployment because of environmental and health concerns.

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