Beyond the Great Wall
China’s telecoms industry has undergone radical changes in the last decade, offering new and vast opportunities for both Chinese and foreign carriers. Alex Hawkes investigates.
When it comes to market growth, China completely tears up the rulebook. The country has the fastest-growing major economy in the world and recently overtook Japan to become the world’s second largest economy in dollars – with some economists predicting that the nation will go on to surpass the US some time between 2020 and 2030.
The country’s telecoms sector likewise does not adhere to conventional market trends and forecasts. Today, the Chinese market is dominated by three multi-network, multi-service operators – China Telecom, China Mobile and China Unicom – each armed with varying degrees of prominence in the fixed-line, mobile and broadband segments. But flash back just a few years and the structure of the market was vastly different.
Faced with the challenge of establishing a framework for the introduction of 3G services across the country, the Chinese government held off allocating 3G licences in 2004; instead, it waited for some five years in order to radically restructure the telecoms market. In 2008, a series of mergers and takeovers occurred which had the effect of almost instantly altering the dynamics of the Chinese telecoms market overnight.
The country’s largest fixed-line operator, China Telecom, entered the mobile market via the purchase of China Unicom’s CDMA network; meanwhile China Mobile – the world’s biggest mobile operator – was given a presence in the fixed-line market via the acquisition of China TieTong, formerly the telecoms branch of the state railway. All three operators were then awarded 3G mobile licences in January 2009: China Telecom secured the CDMA2000 1xEVDO licence, China Unicom the W-CDMA licence, and China Mobile the Chinese-developed TD-SCDMA.
According to Charice Wang, an analyst at Ovum, while this move has helped to create three players of more similar scope, each operator has still retained prominence in its original market segment. “China Telecom, for instance, remains the largest operator in the fixed-line and broadband markets, while China Mobile has the lion’s share of the mobile services market. China Unicom, meanwhile, holds a comfortable position just behind each market leader in fixed-line and mobile services,” says Wang.
Peaks, more peaks and the occasional trough
Given recent growth patterns in the Chinese market and the phenomenally huge population it serves, which stood at approximately 1.3 billion in 2009, the need for some operators to diversify their services will only become more pressing. According to statistics from TeleGeography, the number of mobile subscribers in China stood at approximately 804 million in September 2010, after experiencing a quarterly growth of 3.4%. Likewise, broadband has experienced a quarterly growth of 3.6% and the total number of broadband subscribers stood at approximately 114 million in September 2010, with a household penetration of 29.6%. The fixed-line market, however, is declining and experienced an annual growth of –14.5% in 2009.
The development of 3G and, in the longer term, 4G services is therefore likely to be pivotal to the future dynamic of the market. “Since the allocation of 3G licences, China Telecom and China Unicom have established a very similar sized share of the 3G market, but as of last year China Mobile still dominated this market with about a 44% share,” says Wang. “China Mobile has such a strong reputation and marketing strategy across China that the launch of 4G services will only help to increase its position. However, looking to the long-term future, the next major step for each of the three major Chinese operators will be to look at ways to converge services. China Telecom and China Unicom’s stronger positions in the fixed-line market could prove beneficial and give them the means to compete with China Mobile in the mobile market,” says Wang.
This notion is shared by China Telecom’s managing director of global business department, Hongjian Zeng, who highlights the company’s present trajectory. “We only started our mobile service three years ago, but already we have seen growth. When we took over China Unicom’s CDMA business, its market share was about 7%. That share now stands at more than 10% and we expect it to grow to 15% over the next two years,” says Zeng. “Right now, China Telecom is trying to become a leading full service provider in China.”
China Telecom, however, is far from solely concentrating on its domestic market. The demand for internet traffic to and from the vast country is such that Zeng estimates it has been increasing at about 30-50% each year. To keep pace, the company owns no fewer than 28 land cable systems and over 15 international submarine cables of capacity, which connect to more than 70 countries and regions across the world. It co-operates with 42 operators in 24 countries and regions to provide IPLC, IEPL, IPVPN and related value-added services.
As further testament to the company’s fierce global ambitions, it not only has a global business department, but also several regionally-focussed subsidiaries as well – China Telecom (Hong Kong) International, which focusses on the Asia-Pacific region; China Telecom Europe (see box: ‘A 21st century Silk Road’); and China Telecom Americas.
“Our primary concern in the past was to serve our domestic Chinese customers and accommodate the incoming calls from the world to China. Today, Chinese customers are found all over the world and we have to follow them by providing a truly global service. Our perspective has changed,” says Zeng. “We hope to go on to mesh our global network – to reach a stage where we connect from China to other countries directly from point to point.”
The company’s more imminent task, however, is to extend telecoms infrastructure into neighbouring Asian countries, which its wholly-owned subsidiary China Telecom (Hong Kong) International has been doing with great speed. The carrier has the largest landline network in the whole of Asia-Pacific, with a business presence across nine countries in the region.
“Given the continuing growth of both the Chinese and Asian economy, more Chinese companies are going global and more multinational companies are shifting their main market focus from other continents to the Asia-Pacific region. We think of this region as the strategic market in our overall global expansion strategy,” says Steven Tan Xu, EVP of China Telecom (Hong Kong) International.
A marriage of two countries experiencing fierce economic boom, last December China Telecom International launched an underground terrestrial fibre network with Indian operator Bharti airtel. The 40Gbps link was constructed by both carriers within their respective territories and is said to offer the shortest transit route between the two countries.
Although China Telecom International refused to disclose any further details on the project, Tan Xu added: “We are glad to confirm this cable landline offers a new channel from China through to India, which opens a door for India to the whole world, such as Europe and the US.”
hina has traditionally been a very tough market for foreign operators to crack, but over the course of the last decade this has started to noticeably change – with the Chinese government taking steps to attract more foreign investment into its telecoms industry.
One of the more glistening examples of this is Spanish giant Telefonica’s blossoming alliance with China Unicom, which in January 2011 was further strengthened by each investing an additional $500 million in the other. Following the move, Telefonica will hold a 9.7% stake in its Chinese partner, while China Unicom will own a 1.4% share of the Spanish company. China Unicom’s GM of global business, Yan Bo, identifies the company as having a “multi-faceted strategic partnership with Telefonica” which he hopes will help: “strengthen cooperation in international business and develop extensive deep-level cooperation in 3G roaming, voice and data business areas.”
This partnership, however, is succeeding where plenty of others have failed. South Korean operator SK Telecom sold its entire 3.8% stake in China Unicom back to the company in 2009 after incurring losses on the investment. Vodafone also exited the Chinese market in 2010 after selling its 3.2% stake in China Mobile – although it must be noted it pocketed an estimated $6.5 billion from the sale.
Ovum’s Wang notes the significance of the Telefonica-China Unicom partnership: “The size of the shares which foreign companies traditionally had in Chinese telcos tended to be around the 3% mark – which doesn’t give much space for long-term development. The size of Telefonica’s stake in China Unicom (9.7%) changes this.”
Fixed telecoms network operator Hutchison Global Communications (HGC) has also documented considerable progress in the mainland Chinese market in recent years. Before 2000, the Hong Kong-based company’s network connection to mainland China was diverted through the SEA-ME-WE 3 cable. By 2008, however, HGC had established four cross-border routes into mainland China.
“Over the past 15 years, we have seen an increasing number of foreign companies tapping into the mainland China market, more Chinese enterprises expanding overseas and more frequent cross-border travel for business and leisure purposes,” says Andrew Kwok, SVP of international business at HGC. “All of this boosts market demand for voice, data and internet services.”
A 21st silk road
Named after the lucrative Chinese silk trade established during the Han Dynasty that began in 206BC, the Silk Road is an extensive interconnected network of important trade routes across the Asian continent connecting east, south and west Asia with Europe and north Africa.
The Silk Road remains today one of the quickest overland routes between the Far East and Europe, a fact which hasn’t gone unnoticed by China Telecom Europe; a wholly-owned subsidiary of China Telecom looking to facilitate its parent company’s business in the EMEA region. Five years ago, the company launched an ambitious project to bring the Silk Road into the 21st century with an information highway linking Europe and Asia.
“The Silk Road is a remarkable achievement of our ancestors and so we wanted to replicate its success,” says Yan Ou, MD, China Telecom Europe. “We intend to continue the economic prosperity between the two continents by creating an information highway. By using overland cables to link Asia with Europe, we feel we are able to offer a more reliable network than submarine cables.”
Three diversified terrestrial cables linking Europe and Asia have already been established so far under ‘Information Silk Road’; all of which connect China through Russia, but one of which also goes via Mongolia. In the second quarter of this year, the company hopes to launch a fourth terrestrial cable link, running through Russia via Kazakhstan. “Once the fourth cable is complete, we will have laid the foundations of ‘Information Silk Road’. We have connected Asia and Europe, and next we will look to connect Asia to Africa and the Middle East,” says Ou.
China Telecom Europe has already invested over €30 million on establishing its network, which offers single channel speeds of up to 10Gbps and supports SDH and DWDM transmission technology. With two points of presence (PoPs) in London and Frankfurt, and others in Helsinki, Johannesburg, Moscow, Paris, Dubai and Stockholm, China Telecom Europe is also planning to add PoPs in Nairobi, Cairo and Istanbul during 2011. “Later this year, we hope to add a number of eastern European countries to that figure as well,” says Ou.
Concentrating on cables
As further evidence of the growing number of partnerships between Chinese and overseas companies, Huawei Marine Networks (HMN) was formed in late 2008 by Chinese telecoms solutions giant Huawei and UK-based submarine cable specialists Global Marine Systems.
The joint venture aims to leverage on the strong market position of each company in its respective market. Huawei has emerged as a considerable force on the global telecoms equipment scene in recent years, claiming to serve 90% of the top 50 telecoms operators in the world. Global Marine Systems, meanwhile, has almost a century’s worth of experience in submarine cable and maintenance, and is estimated to have built more than 30% of the world’s submarine cable systems.
According to Huawei Marine’s CEO, Nigel Bayliff, these backgrounds have helped their launch in a specialist area where reputations really count. “Chinese carriers are playing an increasingly important role in submarine cable consortiums worldwide, and of course they are all very familiar with Huawei. As opportunities arise to connect China to other countries, HMN is therefore in a strong position to assist,” says Bayliff.
HMN markets itself as a complete submarine cable solution provider, covering everything from cable system design and manufacturing through to installation and support. In the past two years, the company has set up research and development centres in China and the UK, which focus on wet and dry plant product development and feature a fully functioning system verification test bed. “We have also built a project management team for system delivery, incorporating experts from both companies and bringing together key help from the wider industry. During our initial launch, we worked very closely with cable solutions expert Nexans, which helped with qualifying their repeater types and our two repeater designs,” says Bayliff.
HMN’s first submarine cable system project was completed in May 2010. Connecting the South American nations of Suriname and Guyana to the Caribbean island of Trinidad, the SG-SCS system stretches over 1,249km and was laid at depths exceeding 3,500m in order to utilise HMN’s small form-factor two-fibre pair repeater. “This was developed in the early part of last decade and became the first totally new subsea product deployed in the last 10 years,” says Bayliff.
The company is also near to completing a cable system connecting several islands in Indonesia, but in the future hopes to collaborate with Chinese carriers. “There are many submarine cables linking China, but we believe there are still not enough. Although the country has the second highest GDP in the world, it remains very low per capita and so there are still many international bandwidth requirements to fulfil,” says Bayliff.