Speculation is mounting in the nation's telecoms circles that the days of industry giant China Unicom may be numbered.

Insiders say that a plan to split the firm has been submitted to the National Development and Reform Commission (NDRC), the country's top economic policy-maker.

It is believed that this move is made more likely given the run-up to the licensing of 3G (third generation) mobile communications services.

Rumors have grown in recent months that the government is considering splitting the State-owned China United Telecommunications Corp (China Unicom), the parent firm of Hong Kong and New York-listed China Unicom Ltd, which operates two different cellular networks.

It is understood that the proposal submitted to the NDRC calls for China Unicom's GSM (global system for mobile communications) and CDMA (code division multiple access) networks to be merged with fixed-line carriers China Telecom and China Netcom.

That proposal - just one that the regulators are considering - would create three cellular operators in China including China Mobile.

The NDRC had already dismissed a proposal to consolidate the big four carriers into two firms, insiders said.

Under that plan, China Mobile and China Netcom would have been merged into a single entity, while China Unicom and China Telecom would have been combined to form another company.

But the chances of this new plan seeing the light of day are much greater, according to industry analysts, as it could ensure basically effective competitions while avoiding possible "excessive investment" by four firms in developing 3G technology.

However, NDRC officials say that no specific plans have so far been drawn up for such a reshuffle.

Pros and cons

Some analysts have welcomed the proposal to split Unicom, noting that running two different networks leads to internal competition, which has dented the firm's performance.

"Generically speaking, it seldom makes sense for an operator to have two disparate and incompatible technologies in its network," said Michael Thelander, founder and chief executive officer (CEO) of US research house Signals Research Group.

"I believe Unicom is focused on its CDMA network as its future growth driver. At some point, it may not mind giving up its GSM network, but before it does so I can only assume that it will want to migrate its GSM subscribers to its CDMA network."

The fact that Unicom has been aggressively expanding its CDMA networks, while doing little to upgrade its GSM networks, is an indication of this.

The GSM network has been Unicom's larger revenue contributor, but the firm is investing more into the CDMA service, which can "differentiate" it from China Mobile's GSM service.

Unicom launched its GSM-CDMA dual-mode service, or GSM1X, last August in order to hold on to its GSM subscribers.

But the service appears to be slow to catch on so far.

"The relatively high cost of the (dual-mode) phones will prevent them from permeating into entry-level subscribers," Thelander said.

Due to their technological complexity, dual-mode phones are sold at quite high prices in China.

Unicom officials said the firm has so far sold about 300,000 dual-mode phones.

That compares with Unicom's 83.381 million GSM users last November.

"Splitting Unicom could work; it doesn't make sense for one company to run multiple networks, especially with other carriers waiting to enter the market," said Hong Kong-based technology analyst Robert Clark, the head of Protocol Research.

"And it would help solve the problem of Unicom's continuing poor performance."

China Unicom Ltd signed up 650,000 new CDMA subscribers last November, compared to 686,000 in October and 697,000 in September.

In stark contrast, China Mobile (Hong Kong) Ltd, recorded strong subscriber growth last October and November.

Shi Wei, a senior researcher with the NDRC's Institute of the Economic System and Management, said merging Unicom's GSM and CDMA networks with China Telecom and Netcom would be a reasonable solution as it would help increase the networks' efficiency.

Another option would be for Unicom to sell its GSM networks to a fixed-line carrier, the researcher said.

Whatever the preferred option, Shi was certain about one thing: "I think a reshuffle of the domestic telecoms market is unavoidable this year."

There is a fifty-fifty chance that Unicom's networks will be split.

A spin-off of Unicom's GSM networks would have the double benefits of helping finance this cash-strapped firm and help it focus more on 3G services, he noted.

However, the trading should be based on market prices as the four operators are all publicly listed firms, the researcher said.

"If the split really happens, I would suggest it be done with cash plus stock."

But not all industry experts think a break up of Unicom is such a good idea.

X.J. Wang, a senior analyst with US research firm Yankee Group, said: "Splitting Unicom would be a bad move.

"Unicom has been successful in competing with China Mobile and gaining a market share over the past couple of years. Now, the brand has been established, so I don't believe splitting it would be a wise move," he said.

"The reorganization will be time and money-consuming. The Chinese wireless market needs more mobile operators, not less."

Wang said China Telecom and Netcom would be unwilling to take over Unicom's networks.

"Operating potentially three networks (PHS, GSM and 3G) is quite challenging for any operators, if not a nightmare. Operating two networks (PHS and 3G), is already a difficult task," Wang said.

"What is the real benefit of acquiring a 2G (GSM) network? Sure, they can take over those GSM subscribers (from Unicom), but I believe they will have to pay a high price for it," he said.

Government's role

Supporters of splitting Unicom believe that would suit the government, which wants up to three 3G operators in the country.

Too many licensees would lead to excessive investment as funding a national 3G network could be costly, they argued.

"There's a big debate under way about how to proceed with 3G, which is hardly surprising given the many powerful interests pressing for a decision," Clark said.

Some analysts are calling on the government to give more support to Unicom to help it challenge the dominant position of China Mobile.

"Although I am not necessarily a big fan of government control at the expense of open market competition, government policies that help the 'little guy' could be used to limit 'excessive competition', while at the same time ensuring growth," Thelander said.

The government allows Unicom to set its mobile voice communications rates 10 percent lower than China Mobile.

But that does not seem to be enough. Despite years of growth, Unicom continues to find itself in a very disadvantageous position, especially given that it operates two incompatible networks.

"The government may first need to consider splitting China Mobile, which has a more than 70 per cent share of the domestic cellular market," Shi said.

But a question mark continues to hang over what the government will do next.

The State-owned Assets Supervision and Administration Commission (SASAC) surprised many analysts last November by swapping around the chief executives of the big four telecom carriers without giving any explanation.

While some observers saw this as a prelude to an industry-wide reshuffle, some are calling for more transparency in the regulators' decision-making process.

"Needless to say, uncertainty is never a good thing," Thelander said.

Coordination between different government bodies such as SASAC, NDRC, and the Ministry of Information Industry (MII) which all have some involvement with telecoms carriers, would be key to the telecoms reshuffle, analysts said.

An industry-wide reshuffle should be mainly driven by market forces, rather than regulators, they argued.

"The regulator, MII and SASAC should conduct public policy consultations and explain the reasons for their decisions," said Clark.

"Transparent regulation promotes stability and consistency. Investors and consumers like it, and it is good for the economy."

(China Daily January 19, 2005)