China Mobile's Offshore Play

Turning a state enterprise into a commercial company is never easy, yet the mainland is taking the former government department abroad

There's nothing more difficult than trying to turn a government enterprise into a competitive business. It not just a telecom problem: government trophy firms in passenger aviation, aerospace and toll roads that do not come to grief inevitably require a hefty taxpayer bailout.

At heart it's about OPM - Other People's Money. No one looks after OPM like they look after their own.

A state-owned enterprise is responsible usually to a minister, whose prime concerns are political, and who in turn is assisted by civil servants, none of whom has ever run a business.

The board and management might be professionals paid at industry rates but - well, it comes back to OPM. The minister hasn't put his own cash on the line, has he? And neither has anyone else.

For sure, many government enterprises are founded with a non-commercial purpose - but that merely underlines this point. Issues of accountability and purpose dog all government-owned businesses. Others carry burdens of ideology and national expectation.

China Mobile, a hardly-reconstructed former government department, falls into that category.

With a market cap of $198 billion, it is one of the biggest companies in the world. Roughly one in every ten wireless users is a Mobile customer. It recorded 301 million subscribers at December 31, adding 4.8 million customers in that month alone.

Yet China Mobile would struggle to compete in any market outside its home market, a tame duopoly.

It is the anointed national champion in China's plans to play in the global telecom services industry. To that end, it's been very well-protected, and that is its first problem. A company that's not competitive at home can't compete abroad.

The comparison with gear-makers like Huawei and ZTE is instructive. For all the government support they received, they still had to beat off foreign competitors to win networking contracts.

China Mobile has had no one to beat except for puny Unicom, crippled by enforced adoption of CDMA.

UNIMPRESSIVEFor that reason, the record of incumbent telcos abroad is an unimpressive one. The large American and Euro carriers in particular have fared badly. In the 1990s they streamed into Asia Pacific to invest in - mostly cellular - joint ventures. By the time of the crash, most had already departed.

Not least among the reasons for failure were the inability to adapt to the role of challenger and the unfamiliar regulatory and cultural environment. It also had a lot to do with scale. For companies accustomed to thinking in billions, a share in an Asian mobile venture would have seemed hardly worth the effort.

It's no coincidence that of those operators with an incumbent heritage, the most successful have been Telenor and SingTel: both hailed from small markets, and both happily accepted minority stakes in operators. The result is that each has a string of profitable investments across Asia.

Now, China Mobile's long-foreshadowed plan to go offshore has finally taken wing with its acquisition of 88% of Paktel.

This would be a challenge for any company.

Paktel is running fifth in a six-horse race with just 4% market share. No senior Mobile executive has experience of any market outside China. Few speak English to any extent, let alone Urdu or Pashto.

The strength that CM will bring to Pakistan, where 70% of the population lives in the countryside, is its rural experience. It has won business in western China by deploying low-cost networks, and selling handsets for as little as $38 with low-denomination prepaid top-up.

Certainly, acquiring PakTel from Millicom for $284 million is better than buying all of Millicom's operations for $5 billion.

This year CM has put itself on a learning curve, but to succeed abroad it will have to defy history as well as its own legacy culture.

Before it's here, it's on the Bloomberg Terminal.