If 2007 proves to be the year that the global telecoms industry woke up to the full potential of investment in emerging markets, 2008 is shaping up as the year when some of the sector's largest players formulate strategies for harnessing the power of the Chinese market, potentially one of the most lucrative for mobile phone services in the world.
China has proved a tough nut to crack for the world's most acquisitive telecoms players, with Vodafone, Spain's Telefonica and SK Telecom of Korea the only foreign companies to invest in the region's state-owned players – moves that have provided limited exposure to the world's most populous country and its low-cost, innovative technology.
Yet the emergence of China as one of the world's most significant economic powers and a staggering rise in the value of Chinese companies has refocused attention on the its communications industry. The phenomenal growth in the Indian mobile phone market has also thrown the Asian market into the spotlight, putting pressure on companies with serious ambitions to take a leading position in the region to ensure they are in the right place to swoop if and when the market is opened up to foreign competition.
Yet, for now, companies like Vodafone must bide their time as Chinese regulators ponder a radical restructuring of the country's telecoms industry led by The Ministry of Information Industry, the telecoms regulator. The last time the Chinese government turned its attention toward the sector, it arbitrarily swapped around the chief executives of the country's four major telecoms players as it was concerned the industry was too competitive and that a culture of collaboration had to be fostered.
Analysts are expecting much more than a game of musical chairs this time around, with the dominance of China Mobile in focus. In recent years, the company – the world's largest wireless operator in terms of market valuation and subscriber numbers – has powered ahead of its only rival in the mobile sector, China Unicom, capturing a market share of nearly 75 per cent.
Kelvin Ho, an analyst with the Japanese investment bank Nomura, said the government won't break up China Mobile as it would be seen as punishing it for its success. Mr Ho said it is more likely that the underperforming China Unicom will be split up between the country's two largest fixed-line operators, China Telecom and China Netcom, which don't have mobile arms. Mr Ho said that the shake-up will be focused on rebalancing power among the telecoms operators.
Another key unknown is when 3G licences will be awarded after several delays to the timetable. The Chinese government intends to introduce 3G services in time for the Beijing Olympics next August and how the licences are awarded will determine the shape of the industry for years to come. A home-grown technology called TD-SCDMA looks likely to be central to China Mobile's plans to roll out 3G services which could trigger some consternation as companies in Europe and North America use different network platforms.
Since a Danish company called Great Northern Telegraph opened China's first telephone exchange in Shanghai in 1882, telecoms growth has been painfully slow. Yet the advent of the low-cost mobile handset has triggered a wild upswing in mobile phone usage in Chinese cities and even in the poor rural areas where farmers are utilising mobile data services to help with a variety of tasks, from selling shiitake mushrooms to yak herding. With China Mobile adding 5 million users a month and rural penetration rates below 20 per cent, the world's most populous country rivals India in terms of growth potential. Ernst & Young argues the growth potential in India and China dwarfs all other markets "bar none" and can act as catalysts for regional growth.
Yet while India has lifted a number of restrictions related to foreign company ownership of telecoms assets, the picture in China is far less certain. Vodafone built a stake of 3.3 per cent in China Mobile between 2000 and 2002, an investment that has ballooned in value. Yet this rise in value has prevented Vodafone from increasing its stake further. Meanwhile Telefonica, the Spanish telecoms giant that owns O2 in the UK, has built a 5 per cent stake in China Netcom, a holding it intends to double by the end of the year.
Both companies extol the benefits of working with the high-growth Chinese telecoms companies which gives them insight into the technological and service developments in the world's largest country. The investments also position the European giants well if the market is liberalised further and opened up to more foreign investment as both companies have experience working with the Chinese government.
While Telefonica is accustomed to taking sizeable strategic stakes in its rivals – it holds 10 per cent of Portugal Telecom and Telecom Italia – the end game for Vodafone is less clear. The acquisitive UK telecoms giant likes to lead from the front by taking controlling stakes in its targets or buying them outright, to the point where its minority stake in US carrier Verizon Wireless has become a bone of contention with some of its investors who want the UK company to sell the asset.
Vodafone, of course, has the option of selling its stake in China Mobile – a move that would please investors given its valuation has doubled in the past three months. Yet that appears unlikely at this stage, and the company maintains it is happy with its position and has no plans to change anything. For now, investors will likely be comfortable with Vodafone's position, but as the Chinese operator expands further outside its home territory – it recently acquired a company in Pakistan and has designs on Europe – and begins to compete with its partner for assets, the UK company will no doubt consider its position carefully.
With the impending industry upheaval likely to throw up a variety of options, it will be interesting to see how Vodafone reacts. It is nearly impossible to make a meaningful prediction about what the industry in China will look like in five years due to the likely shake-up in the ownership of assets, but Vodafone is well positioned to make such a call if it sees fit. It will no doubt think hard before making any strategic changes to its position in China – which could entail exiting the country with a large cheque or perhaps switching its holding to a smaller player that it can control as it did in India. Either way, its foresight in investing in China Mobile looks almost certain to pay off.