tele.com. The Long March to Equity [on Chinese telecom market]
by Ken Zita. Ken Zita is managing director of Networks
Dynamics Associates LLC (New York), a telecom strategy
and investment advisory firm. He can be reached at
kzita@telecomstrategy.com.
Some say China takes forever to change course but the speed
of change is breathtaking once consensus is achieved. Chinese
telecommunications now appears ready to make the
long-awaited transformation from claustrophobic state
monopoly to managed competition. A policy shift orchestrated
at the highest levels of government indicates that foreign
investors will almost certainly be allowed to take direct equity
positions in some Chinese operating companies, ushering in a
new era of corporate capitalism in China.
The emerging policy environment is a welcome reversal from
the chaos that enveloped Chinese telecommunications last fall
(see "Chinese Telecom Torture," Feb. 8). Premier Zhu Rongji,
the no-nonsense ex-mayor of Shanghai, has effectively
wrested control of telecom policy from the conservative
Ministry of Information Industries (MII). The MII has warded
off every attempt at liberalization for years. But Zhu, a
consummate policy wonk and tactical genius, recognized the
greater economic good of telecom reform and has put MII in
its place.
The chief beneficiary is China Unicom. A recent State Council
policy document indicates that Unicom will be supported
through a variety of measures intended to help the fledgling
operator. The strategic path is to build value into Unicom and
prepare it for an IPO that could raise $1 billion or more.
Toward this end, China Telecom's nationwide paging assets
have been transferred to Unicom, apparently without
compensation. Unicom has also been granted full rights to
develop international gateways for switched and IP traffic in
direct competition with the dominant carrier. Operating
margins from these services will allow Unicom to
cross-subsidize its domestic backbone and local PSTN
operations, where progress has been poor.
Unicom has also been granted nationwide rights to
code-division multiple access (CDMA), once the province of
China Great Wall, an interim joint venture between China
Telecom and the army. When the military was ordered to step
down from business last year, CDMA suffered. It now seems
clear that all Great Wall assets, including radio spectrum and
four trial networks already in operation, will be transferred to
Unicom. It expects to spend $845 million on CDMA in the
first year of deployment, and between $5 billion and $10
billion over five years.
China will probably let foreigners take an initial equity stake of
35 percent in CDMA joint ventures with local Unicom
branches. This is what the industry has been waiting for: the
right to participate directly in owning and operating telecom
network services in China. The equity benchmark is
associated with China's offer to join the World Trade
Organization (WTO) agreement for global market
liberalization. By all accounts, American and Chinese
negotiators have agreed on the terms for a deal. The deal may
have been postponed this spring in order to sidestep
congressional furor over the Cox Report on nuclear spying.
The equity offer could proceed even if the WTO stalls, as
direct foreign investment is a critical pillar in Unicom's
proposed financial restructuring.
Unicom is hiring an investment bank to help chart its course to
the capital markets. The advisers will also try to resolve the
fate of Unicom's 46 global system for mobile communication
(GSM) joint ventures based on an indirect financing method
known as CCF. Foreign partners will be offered a one-time
buyout or the right to convert their interests to debt; equity
stakes might be allowed after an IPO. Small investors may
take the cash offer, while strategic players will want to convert
their investments to debt before an IPO. Managing this gulf in
perspectives will take some skill.
Owning equity in Chinese telecommunications will be great
cause for celebration. At the same time, the markets will be
watching closely to see how Unicom manages its current
obligations with investors.
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