BEIJING-China Unicom has big ambitions. That’s no big news. When it was established in 1994, the company hoped to capture one-third of the mobile phone market and a 10th of the fixed-line market by 2000. However, today it has less than a 2-percent market share.
Monopoly operator China Telecom time and again has thwarted Unicom’s ambitious plans. But the company might still take off.
In October, Unicom wants to go to the Hong Kong and New York stock exchanges to raise the US$1 billion to US$3 billion it needs to mount a credible challenge to China Telecom.
Pressures to end China Telecom’s virtual monopoly are mounting day by day. Researchers from the Institute of Economic Research chided the company for its plans to split into four because they say this structure will only lead to new monopolies instead of helping foster competition.
Unicom has one major hurdle to overcome, though; it has to wind up the ill-fated China-China-Foreign (CCF) schemes set up with the approximately 40 major foreign telecom companies, including Sprint, Hong Kong Telecom (now called Cable & Wireless HKT) and France Telecom, which have together invested US$1.4 billion.
The CCF scheme involves a foreign company setting up a joint venture with a Chinese company, which in turn invests in a Unicom telecommunications project. The foreign partner does not co-own the network, but does have a certain measure of control, which is unacceptable to the Chinese government.
After accession to the World Trade Organization (WTO), China will no doubt allow foreign participation in its telecommunications operators, but for now it wants to clean up this CCF business. Foreign partners have been notified in writing to start negotiations with Unicom about repayment of investment and compensation and were supposed to finalize a deal by the end of August.
That may be overly optimistic as foreign investors are furious and holding out as long as possible hoping to get a better deal. They all dreamed of raking in handsome profits from a 15- to 20-year investment in China’s huge telecom operating business, but will now at best only get their original investments back, plus a paltry compensation.
Refusing to negotiate is not an alternative, however, as foreign investors might lose everything since the Chinese government has declared the CCF schemes illegal.
Siemens may have found a golden-and legal-back door. Its venture with the China International Trust and Investment Corp. (CITIC), called Xinde Telecom International, is structured as a leasing business whereby the foreign partner is not technically co-owner of the network. Xinde provided US$180 million to Unicom to lease equipment from Siemens, and repayment is tied to a periodic assessment of the financial performance of the project. The Xinde-way may prove to be a viable alternative for other foreign companies.
Until China Unicom solves the CCF mess, which could lead to litigation by foreign investors and a complaint with the U.S. Securities and Exchange Commission, its initial public offerings (IPO) will be postponed, probably until early next year.
Even so, it will not be all smooth sailing because China Telecom is sure to defend its turf with all its formidable might. Unicom thought it received an exclusive license to develop CDMA networks in China through a merger with China Telecom Great Wall, a joint venture between China Telecom and the People’s Liberation Army (PLA), which has built four trial networks. Unicom took over the networks, but there will be no merger. China Telecom is to withdraw from the venture, which will become an independent operator competing with Unicom in the CDMA field. The PLA, which is technically not allowed to run any businesses, is likely to look for another commercial partner.
China Telecom, for its part, has already divested its mobile businesses in three provinces and transferred them to a provincial Mobile Telecom Company, which will become part of a national entity, the China Mobile Telecommunications Group.
An independent company focused on mobile business may turn out to be an even more formidable roadblock to Unicom’s long march to stardom. On top of it all, the Ministry of Information Industry announced it will shortly issue one or two new mobile phone operating licenses.
