Chinese Wireless Carriers In Talks For A Joint Network Infrastructure Company

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The three major telecom service providers in China are in talks to establish a joint venture to enhance network infrastructure sharing and optimize operating costs and costs related to building networks. In separate statements released last week, China Mobile ( CHL ), China Unicom ( CHU ) and China Telecom ( CHA ) confirmed the news of their ongoing discussions but also informed investors that no agreement had been reached yet. China's Ministry of Industry and Information Technology (MIIT) also commented on this development, stating that such a move would help protect the environment and conserve resources, in addition to lowering network construction costs for the telecom industry. This could ultimately benefit end users in the form of lower monthly tariffs.

The proposed infrastructure company would likely be involved in building telecom towers, base stations and other transmission assets for the telecom industry. The carriers could then lease such resources from this company instead of building it themselves. This would help the companies in avoiding overlapping investments and duplication of work, ultimately leading to a reduction in their capital expenditures and operating expenses. This could lead to significant savings, considering that all three companies are in the process of building/expanding their 4G networks this year after the Chinese government granted them TD-LTE 4G licenses in December 2013. China Mobile presently leads the country in 4G network infrastructure and plans to spend about $12 billion this year in adding 500,000 TD-LTE base stations to further improve coverage.

See our complete analysis of China Mobile | China Unicom | China Telecom


Smaller Wireless Carriers Likely To Benefit Most

If the companies reach an agreement for a joint venture, smaller carriers China Unicom and China Telecom are likely to be the biggest beneficiaries as they would get a chance to improve their network coverage (by sharing China Mobile's expansive network) without the exorbitant capital costs involved. With over 781 million subscribers, China Mobile currently holds a dominant share of 62.3% in the Chinese wireless market and is followed by China Unicom and China Telecom with 23% and 14.6%, respectively.

A Boost For Mobile Virtual Network Operators (MVNOs)

MVNOs are companies which provide telecommunication services to customers even though they do not own any network infrastructure of their own. These companies generally lease out network infrastructure from existing players or can also operate through the Internet to provide their services. The MIIT issued telecom licenses to 19 such companies in December 2013 and January 2014 to increase competition in China's wireless market, currently dominated by the three state-run players. The companies that received these MVNO licenses included T.Mobile, jd.com and a subsidiary of e-commerce giant Alibaba, among others.

Chinese MVNOs currently have to enter into agreements with the established carriers individually to rent their network infrastructure, which is one of the likely reasons for their sluggish start. If the discussions to form a joint infrastructure company bear fruit, it could provide a stepping stone to MVNOs to gain access to the huge Chinese wireless market by making it easier to lease networks. However, it is important to understand that even if these companies get easier access to network infrastructure, they still have their work cut out in terms of gaining subscribers, considering that the MVNO business is still in early stages of development and its competitors are some of the largest telecom operators in the world.

Concerns in The Market

Although the possibility of a joint network infrastructure company is being seen in positive light by the Chinese government and users in general, global telecom infrastructure companies have voiced reservations. Their concern is that such an arrangement could create a monopoly situation where network fees might increase at the behest of this joint venture. Zhang Xinzhu, director of the Research Center for Regulation and Competition under the Chinese Academy of Social Sciences, was quoted as saying that "if the upstream base stations resource is monopolized, the downstream fees will be raised." It is unlikely, however, that the Chinese government would allow such a monopoly situation to arise, considering that its recent reforms in the telecom industry have been intended to increase competition.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CHL , CHU , CHA

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