BUSINESSWEEK ONLINE : JUNE 19, 2000 ISSUE
COVER STORY Making All the Right Calls China Telecom rides high on its close ties to Beijing and surging mobile-phone demand Most dreams of profiting from the vast China market have died when faced with the tough reality of making money in a place that is by turns bureaucratic, brutal, and corrupt. China Telecom (Hong Kong) Ltd. (CHL) has been one obvious exception since listing its shares in Hong Kong in October, 1997. The wireless phone company's shares have tripled in the past year and have more than quadrupled since its initial public offering. To what does the company owe its success? Much of it is the result of the company's close ties to the Chinese government. Before its IPO, the company was part of China Telecom, the country's former monopoly phone company that is still controlled by China's Ministry of Information Industries. Even when the wireless business was spun off as China Telecom (Hong Kong), the parent company retained a 75% equity stake. The relationship has continued to pay dividends. After the IPO, the Chinese government sold China Telecom (Hong Kong) lucrative mobile-phone franchises in three provinces, giving it operations in six of China's 32 provinces. And the company hasn't had to pay huge license fees such as those commanded in other markets around the world. Now, the company has 36% of all the mobile-phone users in China--and enjoys an 87% share in its six provinces. The Chinese government is expected to transfer more mobile phone assets to the company in the years ahead. It helps to be a leading player in a huge and fast-growing market. There were 43 million mobile subscribers in China at the end of last year. That number is expected to soar because the government has decided it's cheaper and faster to roll out mobile service rather than traditional phone service. The number of wireless subscribers is on track to surge 50%, to 64 million, by the end of this year. MORE RIVALS. That's leading to impressive financial results for China Telecom (Hong Kong). Revenues surged 47% last year, to $4.7 billion, while net income was a healthy $580 million. Goldman, Sachs & Co. is projecting that revenues will rise by more than 50% this year, to $7.6 billion, while net income should hit $2.1 billion. That will be driven by an expected rise in the number of subscribers from 15 million at the end of last year to 22 million at the end of this year. But the mobile market in China is headed for big changes. China Unicom Ltd., a competitor also backed by the government, has entered most of China Telecom's markets, and more rivals will follow as China joins the World Trade Organization. For the first time, foreign players will be able to own as much as 49% of telecom operators in China. China Telecom will have to fight to remain the biggest and the best as the benefits of early entry diminish. This nascent competition already is leaving an imprint. China Telecom's market share dropped from a near-monopolistic 94% in 1998 to 87% in 1999 in the markets where it operates, with Unicom picking up most of the balance. Goldman Sachs analyst Tim Storey expects China Telecom's market share in its provinces to drop to 83% by yearend. One reason: China Unicom is planning an IPO for later this month and hopes to raise even more than the $4.2 billion that China Telecom (Hong Kong) raised in its 1997 IPO. That will give China Unicom the cash to build a broader network and market more aggressively. The budding competition is leading to cheaper services. Unicom has been cutting prices, even earning a rebuke from Beijing for slashing some rates below a government-set minimum. By contrast, China Telecom usually charges 20% to 25% above the government-set tariff. ''The whole environment is becoming more competitive,'' warns Duncan Clark, a Shanghai-based partner at consultant BDA China Ltd. Still, China Telecom enjoys a huge head start. Clark says the company's ''savvy'' management has the smarts to meet competitive challenges. For example, Chief Executive Wang Xiaochu gets high marks for offering Western-style stock options to keep employees motivated, and he's rolling out Web phones. The Net service is struggling to get subscribers because it's pricey. But the initiative is evidence that the company is working hard to maintain its edge over rivals. Government support should ensure that management has a good chance of staying on top. By Mark L. Clifford in Hong Kong with Alysha Webb in Shanghai _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Asia Gets Hooked on Wireless TABLE: Top of the Telecom World Making All the Right Calls ONLINE ORIGINAL: Powerwave: Amplifying the Wireless Revolution INTERACT E-Mail to Business Week Online

Copyright 2000-2008, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice