two customers walking into a china unicom storefront

China is looking to merge the country’s second and third largest telcos. Source: Shutterstock

China’s telco merger plan affects 5G ambition

CHINA is looking at merging two of the country’s dominant telecoms companies, China Unicom and China Telecom.

This has led to mixed reactions in the market: some lauding this as the country’s efforts to speed up 5G deployment, others criticising the move as counterintuitive.

If this merger is given the green light, this would result in a market duopoly; the current largest player in the market, China Mobile, will be rivals with the merged entity.

The combination of China Unicom and China Telecom would create a telco giant worth over US$70 billion. Having said that, this is nowhere near even half of China Mobile’s US$198 billion valuation.

Beijing has ambitious plans for dominating the global race for 5G. However, its ongoing spat with the US on trade and security matters has led to setbacks and delays.

Leaders are hoping that it will be more efficient to build a single network with the shared resources of both companies. In turn, this could spur more aggressive action from China Mobile as well.

A similar strategy was used in the US, where T-Mobile bought Sprint for US$26.5 billion. The rationale behind the acquisition was that it will push rivals AT&T and Verizon to be more active in developing 5G.

As a result, T-Mobile and Sprint saw US$6 billion in cost savings, with the combined company valued at US$43 billion today. However, experts are skeptical about whether a similar dynamic will be observed in China.

According to a Reuters report, Bernstein analyst Chris Lane observed that similar mergers in other countries saw a 30 percent cut in the labor force. This translates to around 160,000 people from the two Chinese telcos, which could spell a political storm for the Chinese government.

On top of that, both companies are noted to have very different legacy networks that are not compatible with each other. In this case, the amount of operational cost savings the companies can achieve might be nominal in comparison.

While the government strives to roll out 5G cheaply and push for widespread adoption at the earliest possible juncture, it might be at the cost of profitability of the mobile carriers.





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