Risk Professional: Doing business in China is still not certain
The shock waves in the market in China Telecom is a symptom of a deeper problem - doing business in China remains unpredictable. But like all waves, they have an upside and a downside. The China Mobile case isn't all bad news by any means.
When Shanghai Auto and Nanjing Auto were bidding for MG Rover, one thing was certain: the two companies were clearly at each others' throats. Two years on, and the Chinese government told them to grow up and co-operate so as to better develop both domestic and overseas markets. A full merger was soon being talked about.
In the Telecoms market, the battle was not so much between direct competitors as between competing technologies. As China rapidly industrialises and as wealth and business grow, so do telecommunications needs.
China Telecom is a massive company. In two days, its market capitalisation fell by USD25 thousand million dollars - and that was less than 10% of its full value. It dominates the Chinese cellular market which is nowhere near saturation.
But what concerned the Chinese government was that cellular communications have become the medium of choice for many new subscribers for both voice and short messages. That means that land-based services are developing at a disproportionately low pace.
But businesses need land-based services so they can use, amongst other things, internet. And in all land-based systems, it's the last mile that is the most expensive to install and maintain. Few subscribers means high cost for them, and that puts them at a competitive disadvantage.
There are options - the simplest and cheapest is to abandon the concept of last-mile wiring and install WLAN, and provide users with VoIP devices. But that's a huge leap in the dark and with the best will in the world, VoIP is complicated to set up and often unreliable. Also, it's still not ready for prime-time as incoming calls are difficult to manage unless both parties subscribe to the same VoIP provider. And even with VoIP now available on e.g. Nokia handsets, it's still cranky to set up and grumpy in use.
So the Chinese government decided to change the rules and make China Mobile "adopt" a land-line based company. That means that some of China Mobiles vast resources will be diverted from its rapidly developing mobile business to the development of landline business.
China Mobile will now have to work out the most cost effective way of integrating mobile and fixed line comms - and pay for the infrastructure.
That is not quite as daunting a task as it first seems - after all, mobile calls travel on landlines for much of their journey. That means that China Mobile can put in fibre optics that will service both its mobile towers and nearby homes and offices, and combine the switchgear.
Short term, it means more cost. Long term, it means more business. And even more, it hedges China Mobile's bets because as VoIP takes off, those fibre optics will carry increased internet traffic and internet means VoIP.
As VoIP matures and solves the inbound call issues and the issues of uncertain connections from handsets, revenues from mobile calls will fall away.
China Mobile's new little friend may well move from saved to saviour.
But the case demonstrated something that many have known for a long time. The Chinese government has not let go of all of its control and it can, and will, exercise its muscle even in relation to large public companies. How much that translates into business uncertainty will remain the big question for some time to come.
Download PDF version of this page