China Telecom's Big Plans

Some might call China Telecom Group courageous. Other would say it’s simply crazy.

While one of the Chinese carrier’s subsidiaries is attempting the largest public offering in Asia this year, another one is trying to go where no other Chinese telecom has gone before: The U.S. market (see China Telecom Sets Up Shop in US).

First off: The controversy surrounding China Telecommunications Corp.’s attempted IPO. The fixed-line carrier, which was hoping to complete an IPO yesterday to raise as much as $3.68 billion, has confirmed that it was unable to fix the offering price. The company’s shares could still start trading on the New York Stock Exchange (NYSE) on November 6 and on the Hong Kong stock exchange on November 7 if it manages to complete the offering by the cutoff date next Tuesday.

While the company has not given any reasons for its failure to set the price yesterday, news reports citing people close to the company state that the carrier fell victim to regulatory difficulties and poor response from international investors. While the domestic portion of the shares were fully subscribed, only 80 percent of the shares offered to international investors were filled, according to the reports. The company has apparently been forced to return the checks to the Hong Kong investors who have already signed up for the domestic portion of the offering.

Industry observers say that the lack of international investor interest is hardly surprising in the current financial climate. "It’s sort of amazing that they’re doing this now," Network Conceptions LLC analyst Farooq Hussain says. "I can’t see investors thinking it makes sense to have another global carrier… It would have looked perfectly sensible 2 or 3 years ago, but it’s completely out of phase at the moment.”

Another part of the controversy concerns a steep hike in international direct dial (IDD) tariffs announced by China Telecom on Monday. The carrier said that it will raise the amount it charges overseas carriers connecting mobile calls to its fixed-line network (now US$0.008 a minute) by as much as 850 percent. The tariff increase was widely considered to be an attempt by the company to boost its profits ahead of the IPO. Today, however, the carrier was expected to lower its planned increases following massive protests in Hong Kong.

The initial IPO plan included an offering of a 20 percent stake in China Telecom Corp., reducing parent company China Telecom Group’s stake in the carrier from 87 percent to 69.5 percent. Following yesterday’s failed launch attempt, however, the company is expected to scale back the offering by as much as 20 percent.

Hussain, however, doubts whether the carrier will be able to gain more support for the dual IPO on its second attempt. “Whatever is done to work around this problem is going to be a hard sell to investors who have already balked,” he writes. “In my opinion bringing the price down is as likely to further scare off investors as to attract them, since they are bound to wonder whether the new value may still be too high.”

In addition, he points out that the original price of HK$1.48 (US$0.19) the carrier was asking for was already reportedly very close to the company’s book value. This is important, because the Chinese “government prevents state firms from being sold to the public at less than book value,” he says.

China Daily, a state-run paper, reported today that the carrier is seeking regulatory approval to set a lower IPO price.

While China Telecom’s IPO-plans look a little wobbly, to say the least, some might say that China Telecom (USA)’s choice of timing to enter the U.S. market is a little risky.

Although some observers are now saying there are signs that the plummeting telecom market may be bottoming out, incumbent carriers in the U.S. are still facing colossal challenges. Many more are expected to go under or be forced to restructure before the telecom winter comes to an end.

China Telecom (USA) vice president Jun Wan, however, says that the company, which will be opening its Washington, D.C., headquarters on Monday, has found a sweet spot in the U.S. carrier market. “China Telecom (USA) is the first Chinese carrier to provide end-to-end service from the U.S. to China,” he says, pointing out that an ever-growing number of American companies are doing business in China, especially since the country was recently accepted into the World Trade Organization (WTO) (see Cisco's China Syndrome). “We hope we can provide the best service to those U.S. companies... Maybe later, we’ll also offer voice services to the Chinese community here.”

"It is certainly an interesting strategy," Peter Cohan, an analyst with Peter S. Cohan & Associates says, "but I wonder if there’s enough traffic between the U.S. and China [to justify it]... It’s hard to figure out how they’re going to come in and make it into a profitable business.”

Other observers, however, insist that the Chinese telecom market is going to become more and more important in the years to come. Craig Johnson, an independent analyst based in Portland, Ore., says that China will be the market that increasingly decides what telecom technologies get developed and deployed. “Remember, most of the rest of the Western world is already ‘in bed’ with their solutions sets (thus why ATM will not die, well at least not for several more years),” he writes in an email, “but China (and much of [the Asia Pacific]) is able to skip generations of solutions and thus represent a potential large chunk of sales dollars for telecom equipment worldwide.”

For American businesses trying to set up shop in China, already having a working relationship with a large, Chinese-state-backed company like China Telecom (USA) could help grease the machinery, and make things move more smoothly, Johnson says.

The Chinese carrier also has an advantage that U.S. carriers trying to serve American businesses in China don’t have, according to Network Conceptions’ Hussain. “Specifically, U.S. carriers are going to be disadvantaged in trying to obtain local loops at the China end for any U.S. customer, since China Telecom owns and operates that part also,” he writes in an email.

China Telecom (USA) is launching a suite of three products called ChinaDirect: Fully managed private line services from the U.S. to all points in China; direct IP connections to Chinanet; and an MPLS VPN service. The carrier already has points of presence in Los Angeles, San Francisco, New York, and Washington, and has its own submarine cable connecting the U.S. and China. Wan says the company has established relationships with several of the large U.S. carriers, and that it will primarily be leasing facilities and capacity to complete its U.S. backbone.

As for the troubled U.S. economy, Wan says he’s not worried. “I think this is a good opportunity for us to purchase or lease facilities at low prices,” he says.

— Eugénie Larson, Reporter, Light Reading
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melao 12/4/2012 | 9:25:08 PM
re: China Telecom's Big Plans >Heard they are seriously exploring entering the
>US carrier market by 2005. They seemt to have
>done an excellent job in India.

>Reliance Telecom hasn't even launched their >services yet. Maybe you meant they've done an >excellent job at laying fiber in the ground. >Perhaps.

I am at Reliance right now. And i will tell you something, they've got the money and the people. But they are terribly desorganized and they haven't launched their services yet mostly because of it.

About laying fibers, i would say that they're not that good after all we have fiber cuts almost every day in every part of the country!
whyiswhy 12/4/2012 | 9:24:56 PM
re: China Telecom's Big Plans For several generations most laws in China were political, and the only "real" police were political police. In most of China (outside of the main cities), that is still the case.

With the advent of capitalism (at least in the cities), but no capitalist legal infrastructure (outside HK), it will be exceedingly difficult for all but the largest foreign companies to do business inside China. Example: >90% of the software and entertainment business is pirate.

The good news is there seems to be some movement to clean this up. And the profit motive (greed is good) is working. Chinese companies are finding out that quality (and a slightly higher price) means something when their network goes down and they lose customers. Contracts that might have gone to internal companies continue to go to overseas companies, much to the frustration of the government.

The bottom line here is the Chinese telecom companies have proven they can buy things and make them work (somewhat), but that is a far cry from being able to operate a mega-business in a competitive environment far from home.

futureisbright 12/4/2012 | 9:24:51 PM
re: China Telecom's Big Plans Gea wrote:"This is a perfect example of how your brain is on the fritz Booby. So do you really believe that if/when Chinese carriers start operating in the US that they'll be able to maintain that cost structure? One of the main reasons for Chinese cost structure is the cost of labor, and there's no way to do that on US soil (which in case it's not obvious to you is absolutely necessary to perform telecom services in the US)."

It's more than just low labor costs; it is an entire culture of cost consciousness that is very scarce in the US of A. Every one knows that China is the place to go for productive low cost manufacturing labor. Taiwan across the straits, is the place that many US companies go to for cost conscious engineering design work. Although engineering talent is less costly in Taiwan than in the US, it's not cheap by any stretch of the imagination.

In the end, the reason that China Telecom will fail in the US service market is the same for which US industry has failed in China: they just don't get the culture of their market.

Chinese companies think that it is all about 1) (intimate) relationship and 2) (low) price. In a sense they are right of course. Let's see them buid a cheap product offer for the US market using US labor. Maybe. And, let's see them build relationships with 100 million US households. Let 10,000 million price coupons bloom!!
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