The Chinese Telecom Rush Is On

The huge country is seen as the last gold mine

Robert Mao is a rarity among Nortel Networks Corp. (NT ) executives. Unlike most of his peers at the telecom equipment maker, he has good news to report. The chief executive of Nortel China, Mao has in hand a slew of new contracts to provide hardware to the Chinese telecom sector. Just since the start of the year, Nortel has made deals worth $1 billion, $850 million of it from China's two big wireless companies. With the global telecom slowdown hurting business just about everywhere else, China "is a very important market," says Mao. "A billion dollars is real money."

It sure is. And there appears to be a lot more where that came from. China is one of the few nations in the world where the telecommunications boom is still echoing. What's driving the market is both rapid natural expansion and Beijing's decision to allow liberalization of the industry. With China hoping to join the World Trade Organization this year, the government is trying to toughen up the local players before trade barriers fall and foreign telcos get to enter the fray. So it's encouraging new entrants to take on state-owned, fixed-line monopoly China Telecommunications Corp. and its offshoot, cellular power China Mobile (Hong Kong) Ltd., which recorded 2000 profits of more than $2 billion. The idea is that this free-for-all will force China's telcos to provide better service and boost productivity before the advent of WTO. These companies need state-of-the-art equipment, and fast.

With more than 110 million subscribers and 65% annual growth, China's cellular market will soon surpass the U.S. to become the world's largest. In 2000, total telecom revenue grew 33%, to $37 billion. By 2005, says Hong Kong-based Bear, Stearns & Co. telecom analyst Jonathan Shaw, revenues should hit $70 billion. That is creating a "bonanza" for foreign suppliers, says J.Jonathan Zhu, managing director at Morgan Stanley & Co. in Hong Kong. "Everywhere else in the world, telecom companies have substantially cut back on spending," he says, while China's big players "are flush with cash."

PARTNERS, ANYONE? One of those is state-owned China Unicom, the No. 2 cellular operator, which last year raised $5.6 billion in an initial public offering. On June 21, Unicom announced it had appointed Morgan Stanley and China International Capital Corp--a joint venture between Morgan and the China Construction Bank--to help raise billions more to fund expansion. "Today, our competitors are just domestic operators," says Unicom President Wang Jianzhou. "But tomorrow, more and more foreign companies will be in the domestic market."

Like Nortel, struggling telecom equipment players such as Motorola and Lucent Technologies have been raking in hundreds of millions in new business from China. Unicom's decision to roll out a cellular network based on the CDMA standard created by Qualcomm Inc. (QCOM ) has given a boost to the San Diego company, whose CEO, Irwin Jacobs, was in Beijing on July 3 to ink licensing agreements. Semiconductor giants such as Intel Corp. (INTC ) are counting on growing Chinese demand for telecom-related chips to spur demand. China "is the last gold mine," says Jason Chen, head of Greater China operations for Intel. "Everyone is rushing into it."

The growing number of Chinese telecom companies is good news not just for Western equipment suppliers but also for foreign telecom operators looking to find partners to get into the market after China enters the WTO. There is a burgeoning group of possible partners smaller than China Telecom, China Mobile (CHL ), and China Unicom (CHU ). The nation's Railways Ministry has long had its own telecom network for internal use, and now it has spun that off into China Railcom, which this year opened a fixed-line network that will compete with China Telecom's. Agencies that control the power, oil, and cable-TV industries may also jump into the business.

WELL-CONNECTED. The most aggressive of the newcomers is China Netcom Corp., whose network offers data services as well as Internet telephony. The company boasts some high-profile backers: President Jiang Zemin's son, Jiang Mianheng, sits on the board, as does Rupert Murdoch, whose News Corp. is among a handful of foreign shareholders. In June, Netcom announced that it had teamed up with Hong Kong utility CLP Holdings Ltd. to create a fiber-optic network linking the former colony with the southern province of Guangdong. Netcom's brash CEO, 37-year-old Edward S. Tian, is pushing high-end data services in a bid to catch up to industry leader China Telecom. Investment bankers predict an IPO next year.

China Unicom's recent performance shows how important foreign shareholders are to the success of China's new telecom players. Unicom, created in the early 1990s as China's early attempt at market liberalization, had long been an also-ran. But thanks to the success of the IPO in which its state-owned parent of the same name sold off 23% of the company in a Hong Kong listing, Unicom now has the capital to pump up its marketing efforts and grab share. The company, which operates in a dozen provinces, is adding 1 million subscribers a month and is looking to buy an additional 18 provincial operations from its parent, plus a CDMA network. Since April, Unicom has awarded $1.5 billion in contracts. By 2005, Wang predicts, it will have 100 million subscribers. "We're not afraid of competition," he says. Unicom earned $390 million last year on sales of $2.85 billion.

Meanwhile, cellular market leader China Mobile is not sitting still. It has also expanded its network, spending $3.5 billion last year and a planned $5.4 billion this year. Mobile's strategy for staying ahead of Unicom includes offering more data services and hooking up with British giant Vodafone Group PLC. The two companies signed an alliance agreement in February, and Vodafone chief Chris Gent now sits on China Mobile's board. "We have been making very good use of the time before China's entry to the WTO," says China Mobile Chief Financial Officer Ding Donghua. "We are accelerating our development, [getting] better coverage, and acquiring customers better."

China Mobile, once part of China Telecom, was spun off last year by Premier Zhu Rongji and his planners as part of their effort to break up the monopoly. Now, Telecom's fixed-line business may be the next target. China Telecom still "holds a monopoly-like grip on China's [fixed-line] telecom market," carps official news agency Xinhua in a recent report on the telecom industry. According to Xinhua, the Chinese people are "furious" at China Telecom and "fiercely advocate a breakup."

Because of such talk, the industry is abuzz with rumors about how Zhu is going to carve up China Telecom. Some envision an AT&T-style breakup into Chinese Baby Bells while others see a division into nationwide operators of different services. On hold are plans for a China Telecom IPO, which Morgan Stanley had hoped to underwrite. No matter the outcome, though, the result will be greater competition, and China will continue to be a rare point of light for foreign execs like Nortel's Robert Mao.

By Bruce Einhorn in Hong Kong

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