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Published 8/31/2008 11:52:00 PM - Greater China

Olympics has finally completed with splendid fireworks above the sky in Beijing.  In the meanwhile, top 4 Chinese telcos have posted their first 6 months earnings in the past week.

Both mobile carriers China Mobile and China Unicom posted above expectation results with 45% and 98% profit growth compared to same period in 2007.  On the contrary, fixed line operators China Telecom and China Netcom posted net profit decline of 4% and 5% respectively for the same period.

The first 6 months performance proved that the gap between mobile and fixed operators in China will become even wider, if further reform of the telecom market in China does not happen as soon as possible.  That was why the Chinese government has announced the restructuring of the top telecom operators in China to form 3 full licensees in the country earlier this year.

After announcement of the restructuring of Chinese telcos, the actual split and formation of the new 3 telecom operators have not officially taken place because of Beijing Olympics.

Recently we have seen significant movement from China Telecom, announcing winners for CDMA network upgrade, which they have bought from China Unicom through this restructuring process.  The over $1.5 billion first phase investments is the first move of China Telecom trying to retain their existing customers and explore new opportunities in mobile market.  China Telecom has seen subscriber decline for its fixed telephone users for the first 6 month in 2008.  That is why it is extremely active to start the network upgrade to CDMA 2000 EVDO, though the actual network transfer will only complete in October.

From China Unicom, with the sales of CDMA network, it can finally focus on its GSM network and upgrade it to the most commonly used 3G standard WCDMA.  It has a plan of approx. $15 billion in the next 3 years for 3G network construction.  However, the merger with China Netcom will potentially last for 12 months and it may bring challenges to integrate over 200,000 of China Netcom employees into their much smaller organization at China Unicom currently.

Uncertainties also remain for the giant China Mobile.  With largest mobile subscriber number and as the most profitable telecom company in the work, China Mobile may need to use home-grown TD-SCDMA as its 3G standard.  There are challenges regarding the limitation of handset availability and technology immaturity of the Chinese local standard.  Also, with very limited fixed network through its acquisition of China Railcom, China Mobile may need to fight very hard with new China Telecom and new China Unicom, who will try to bundle fixed and mobile services to most consumers.  So we have seen China Mobile’s announcement last week of building TD-SCDMA 3G network in another 28 cities in China.  It is trying to get comprehensive 3G network faster than competition, to maintain high end customers.

Therefore, telecom equipment manufacturers will see another peak period of heavy investment on 3G mobile networks in the next 3 years for a total market opportunity of over $50 billion.  That is surely good news for struggling Alcatel-Lucent and Nokia Siemens Networks.  This round, they will face stiff competition from stronger Chinese vendors Huawei and ZTE as well.

By Bryan Wang

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 China goes the SaaS route

Published 6/30/2008 2:10:00 AM - Greater China

CIOs in China are realizing the benefits and global trends for software as a service in their enterprises.

As large enterprises start to change their business model to a more service-oriented focus, cloud computing or Software as a Service (SaaS) will help companies make this transition.  In fact, many financial and manufacturing companies have already introduced collaboration, real-time data streaming, social networks and web 2.0 applications in their business environment.  We are now seeing more Chinese companies starting to look at the next generation data centers and trying to bring cloud computing into their data centers.

On June 24, IBM hosted the opening ceremony for its Greater China Cloud Computing Center at its China Innovation Center in Beijing.  Having established its first Cloud Computing Center in China, in Wuxi (near Shanghai), in February this year, IBM is the only company to have two such centers in China.

In IBM’s vision, cloud computing is helping to foster the growth of new software companies in China.  Like many new software companies seeking growth opportunities both locally and abroad, these Chinese software companies will rely on technical infrastructures built on open standards and delivered as a service. This open approach to computing will help them deliver innovation and pursue global market opportunities.

With more software companies in the country developing business applications that cater to diverse needs of enterprises, cloud computing will help corporate customers to further leverage the latest technology to speed up its expansion in the country, and overseas.

The new SaaS or cloud computing concept is also a greener choice for Chinese companies as it promises to better utilize resources and therefore save energy.  In this age of high oil prices, the government is getting more concerned about the increasing energy consumption of IT equipment.  I therefore believe that the Chinese government will also encourage the transition to SaaS- indeed anything that helps control the ever-growing usage of energy in the fastest growing economy in the world, incidentally also ranked number 2 in the energy consumption list.

By Bryan Wang

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 The Game Starts Again - Restructuring of the Chinese Telecom Landscape

Published 6/4/2008 5:08:00 AM - Greater China

We have finally heard about the restructuring of Chinese telcos. To follow up, the second largest mobile operator China Unicom this week announced selling its CDMA network to China Telecom, the largest fixed line player in the country, at $15.7 billion, with over 40 million subscribers.

Merging with China Netcom, China Unicom is believed to be the one with most benefits from this restructuring activity. It will create the true full licensee in the country, with approximately 30% market share for both fixed and mobile business.

This is the reshape up of telecom market landscape we have being discussing and expecting for a long time. This is to change the scenario that China Mobile was dominating the telecom market growth in the country in the past 3 years.

However, this is not going to be easy. Though all the parties involved in this restructuring are government controlled, getting these giants up running is not an easy job.

China Telecom may need to struggle a little bit longer, to obtain professionals in the areas of CDMA operation, engineering, sales and marketing. They will also need to spend significant capital expenditures to upgrade the current CDMA network with 70 million lines capacity. It would be challenging for China Telecom for its cash flow and capital structure for at least 2-3 years.

Apparently, China Unicom will gain cash from the sales of CDMA network. However, to ease tension of its over-running GSM network and upgrade it to 3G WCDMA, the CAPEX for China Unicom will rise significantly from 2009 to 2011, not talking about the challenges to merge all the different provincial China Netcom entities into China Unicom framework. We do not expect it to be completed within 12 months.

Under such circumstance, I expect China Mobile will continue to dominate the market with largest customer base, and most high value customers in the next 2 to 3 years.

The only weapon the new China Telecom and China Unicom could fight against China Mobile would be service bundling. With both fixed and mobile networks, both China Telecom and China Unicom will be able to offer bundled fixed telephone, fixed broadband, and mobile voice and data services to consumers, without going to multiple service providers. Furthermore, this will not only save consumers up to 20% of total cost by getting all services from one single service provider, but also lower the churn rate for more than 30%, from experience in other countries. However, I expect we will only see the synergy after 12 or 18 months.

Overall, we expect the Chinese government will finally issue 3G licenses within the year 2008, after all the restructuring deals are announced. Completion of the acquisition of CDMA network from China Unicom to China Telecom may be completed in the next 9 months, while the complete merger of China Unicom of China Netcom may need 12 months or even more.

By Bryan Wang

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