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China Moves May Hit Vendors

Reports today of a major shakeout in the Chinese carrier market have left the number crunchers at Lehman Brothers mulling the prospect of a blow to vendor revenues.

According to a report in the South China Morning Post, China’s State Council is considering a plan to merge the country’s four carriers into two larger entities in an effort to resolve the country’s long-delayed 3G licensing program (see Chinese 3G Faces Further Delay).

Four 3G licenses are expected to be awarded next year, amid fears that the market will suffer from excessive competition (see Global Vendors to Rule China?).

“If four 3G licenses were issued and all four build their 3G networks, it will not only create investment overlapping but too much competition,” the paper quotes one executive as saying.

Under the reported plan, the Chinese government would adopt a “4 to 2 merger,” pairing fixed-line player China Netcom Corp. Ltd. with China Mobile Communications Corp., while wireline carrier China Telecommunications Corp. (NYSE: CHA) would join with mobile venture China Unicom Ltd..

“If such a merger were to take place, it is likely that spending on telecom equipment would be adversely affected,” note Lehman analysts. “We believe that any reduced spending would likely have a greater impact on wireline equipment, but wireless spending would most likely also suffer.”

The Brothers judge Alcatel SA (NYSE: ALA; Paris: CGEP:PA) to be “most exposed” to the Chinese fixed-line market, with the region accounting for 10-12 percent of the French incumbent’s overall revenue. In the mobile space Lehman cites LM Ericsson (Nasdaq: ERICY) as having “the greatest exposure to China (15-20 percent),” followed by Nokia Corp. (NYSE: NOK) and Motorola Inc. (NYSE: MOT) (10 to 15 percent each).

Such consolidation could also affect the choice of 3G technology deployed. “If the 4 to 2 merger happened, then the technology adoption picture will likely change dramatically: from the current 3 W-CDMA/1 CDMA to 1-WCDMA/1 CDMA2000. TD-SCDMA, as an add-on to the WCDMA network, will effectively lose around 20-30 percent of the addressable market.” (See W-CDMA: China's No. 1 Son?.)

— Justin Springham, Senior Editor, Europe, Unstrung

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