Divide and Rule....... Literally !!

After defending quite a few comments from people about being excessively biased towards Western Markets in most of my articles, i thought its high time i pen down my thoughts on markets much closer to home. And where better to start than the world's biggest telecom market, the Chinese Wireless market. The Market is abuzz with news of a major restructuring, a long overdue one. The MII says that a restructuring would help the industry sustain its high growth rates but the reasons behind such a restructuring tell a different story.

• The Chinese market has been trailing its Indian peers since quite some time now in net subscriber additions and although the penetration numbers of china are higher than those of India, but this doesnot completely explain the fall in net subscriber additions.
• In India, competition & huge FDI inflows are the main reason behind falling call rates, something that china with the present industry structure is not able to enjoy.
• Although, the government holds stake in all the operators, China Mobile with more than 80% of the wireless market share is creating a monopolistic market situation controlling both the technology that enters the market and the prices that customer have to pay.
• With Technology, China Mobile is single handedly blocking innovation from entering the market. One recent example is that of Apple when it had no other option but to approach China Mobile(with more than 80% market share) for the introduction of iPhone. Talks hit a deadlock (followed by Apple withdrawing its proposal)because both the operators could not finalize on a revenue share formula.
• Continuing the trend which is affecting its Asian & European peers, state owned fixed line operators like China Telecom & China Netcom are bleeding profusely because of declining fixed line numbers and Fixed Mobile Substitution.
• Issue of 3G licences under the present market scenario will hand China Mobile (with its huge network) an un due advantage over an already weak competition.

So what does this whole restructuring thing place on the platter ?? The scapegoat as per many internal industry sources is China's No.2 mobile operator China Unicom which has investments in both GSM & CDMA technologies. The Chinese Government hopes that post restructuring, there will be 3-4 operators with substantial investments in both fixedline and mobile operations. The Plan is that the two fixed line operators will get one each of China Unicom's GSM & CDMA assets and the talk is already in the air that No.1 operator China Telecom is going to take control of the CDMA assets with the No.2 China Netcom bagging the GSM network. China Railcom, another small fixed line operator will get integrated into China Mobile. This would create 3 major companies viz., China Mobile, China Telecom, China Netcom capable of producing both fixed and landline services.

From a foreign investor point of view, the shareholders of vodafone(with around 3% stake in China Mobile) should take this as negative news. The entire restructuring thing does post significant threat to the existing market share of China Mobile. It is still not clear what happens to the stake that SK telecom holds in Unicom. Under the circumstances, the best it can do is to lobby for a stake in China Telecom(thereby leveraging on its worldwide CDMA economies) in return for its stake in Unicom. The Winner undoubtedly is Telefonica with almost 8% share in China Netcom. Post restructuring, it is getting access to Unicom's GSM assets (with GSM being its worldwide choice of technology). It significantly raised its stake in Netcom just months before the news of market restructuring broke out.

So is restructuring a rational thing to do or is there another way out for the MII. Considering the present circumstances, where the focus is on increasing the competition, the better option would have been to break up China Mobile into 3 independent entities (a la AT&T style) and amalgamating them into each of China Telecom, China Netcom & China Railcom rather than merging the assets of an existing operator into other existing companies. Breaking up of China Mobile would have a four fold advantage to the chinese government

• Post the breaking up of China Mobile, the chinese telecom ecosystem will have multiple operators having extensive experience in managing wireless operations. This would also ensure that all the operators have significant market shares. The idea is better compared to the MII's proposed restructuring plan, because after the restructuring, the only operator with a meaningful background of managing wireless assets (Unicom) will be bifurcated and sold off to entities with completely different knowledge base and expertise.
• Through multiple entities, chinese government can attract a lot of foreign investments into the wireless space although this point of view may be debatable considering the chinese government's disinterest in allowing large foreign investment into the telecom industry.
• Competition will also ensure innovation in the telecom market, something which China desperately needs before the Beijing Olympics.
• Although, the presence many competitors will help reduce the prices and break the prevailing monopolistic scenario, a bigger advantage will be in terms on higher prices during the auction of 3G spectrum & licenses, if and when they happen.

The Chinese MII, got it right when it recognized the need for restructuring the telecom industry to maintain/sustain its long term growth. A bigger challenge will be to recognize the priorities and breaking up of China Mobile does fulfil most of the medium to long term priorities.