December 19, 2018 / 2:40 AM / 5 months ago

Breakingviews - China’s three mobile carriers will become two

Two mobile phones lie on a table as a man uses a laptop at a cafe in Beijing, China June 3, 2017. REUTERS/Thomas Peter

HONG KONG (Reuters Breakingviews) - China’s three mobile carriers will become two. As investments in fifth generation mobile telecommunications technology ramp up, providers will face mounting bills. That might make 2019 the year that the two smaller players, China Unicom and China Telecom, finally join forces. It would mean less competition, but consolidation might bring other strategic benefits.

Each new generation of mobile communications requires large dollops of up-front investment by carriers. Once rolled out, the investment pays out over a long period of gradual revenue growth from the expanded network. But in China, carriers must often upgrade before the volume of data traffic justifies it economically. And Beijing also restricts what they can charge consumers; in 2018 they were ordered to scrap data roaming fees. That curbs their ability to recoup costs quickly.

Next year the capex cycle will start again with 5G. It could cost up to 1.5 trillion yuan ($220 billion) between 2019 and 2025, according to consultancy EY. Much of that is likely to be borne by the biggest of the three, the $200 billion China Mobile, usually called on to do the heaviest lifting for national service projects. But the smaller players will have to chip in too, and there’s the rub.

It could be ruinously expensive for both to create separate 5G networks on their own. One option would be to have them share a single network, and split the cost. Another option would be to merge the two. Personnel reshuffles at the two firms earlier this year prompted speculation Beijing might be planning something along those lines.

Few countries have a mobile market with just two carriers; it’s bad for competition and thus forces regulators to exert a heavier hand over pricing. But such complaints miss the point in China: Beijing has its eyes on the bigger prize.

The government’s goal in pushing its telecoms giants to roll out new technology ahead of market demand is in part because it wants to develop world-beating 5G standards that can later be incorporated into locally made equipment and exported by hardware makers like Huawei, ZTE and others. A merger might bring that goal a bit closer – even if it leaves market efficiency on hold.

- This is a Breakingviews prediction for 2019. To see more of our predictions, click reut.rs/2R6H5pG

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below