Own analytical articles of "SV-consulting", LLC.

Chinese telecom operators are on the way to Ukraine?

Rapidly growing domestic market in China is allowing Chinese telecom operators to invest in telecommunication projects around the world. Not long ago "SV-Consulting"in the article "Czech Republic can become the first country in the European Union which will issue a license for China's mobile operator” told about intentions of Chinese businessmen to get the first license to provide mobile services in Europe.

But Ukraine is also going towards Chinese capital. For example, on July 30, 2012 the Parliament of Ukraine approved the granting of state guarantees on $ 3.656 billion loan from China. The money will be spending on projects aiming to replace Russian gas to Ukrainian coal. Although the loan does not directly goes in telecommunications, but it can be a catalyst for taking other similar loans or allowing Chinese companies entering Ukrainian market through issuing licenses, including telecommunication ones.

Anyway, Chinese operators are becoming players, but in China alone the government set ambitious goals to create "smart'' cities and connecting households via fiber. And one of the participants in this and other projects is China Unicom, which, however, looks far beyond the Chinese borders...

China Unicom is developing a strategy to expand its presence outside the domestic market. The company, which is one of the largest operators of China, look at some global projects services such as M2M, investing in submarine and terrestrial communications and developing its relations with partners and competitors around the world.

The operator has the opportunity to implement these global plans, because it is one of three operators which share the largest market in the world. These three companies - China Unicom, China Mobile and China Telecom reported revenue of 988 billion Yuan ($155 billion) in 2011 had revenue, up 10% compared with 2010.

Growth remains at the same level and in 2012. Cnina’s "Big Three" recorded sales of $53 billion for the first four months of 2012, which is 10.1% more compared to the same period of 2011.

"Mobile Internet is on the rise," said China Unicom President Lu Yimin. "Opportunities are wider, and demand is higher" he adds.

Penetration of smartphones in China has risen to 60%, tells Lu Yumin, referring to data of the first four months of this year. And probably, this level will be even higher when prices of smartphones decline: now the cheapest smartphone costs about 1,000 Yuan, or $157.

"The penetration of 3G grew up to 152 million subscribers across the country. China Unicom's own data shows that it has 51.7 million 3G subscribers as of the end of April 2012, an increase of 2.9 million users per month", tells China Unicom President.

Various mobile applications are very popular: their load grew up by 298% more than last year, and the monthly data traffic in the China Unicom network reached 5 mln gigabytes.

We may continue showing figures about Chinese market, but there is no doubt that this market is huge. With a population of 1.33 billion people, the country is a home to one-fifth of the 6.84 billion people in the world, and mobile business is shared between the three operators only, compared with about 700 operators that provide services to the remaining 80% Earth population. As a result, China Unicom has the same number of customers in one country as some multinational companies in several regions of the world. Manufacturers of network equipment, software, and terminals look with exciting at the prospects of growth in China, including those 161 million subscribers of 2G, many of whom will move to 3G in the next few years.

By the way, the number of 2G subscribers increased by only 340 million in April 2012, showing that 2G market is close to saturation, although in many countries of the world connections of new subscribers per month shows good figures.

Overall, these figures mean that China Unicom has about 213 million mobile customers in total, which is two million more than the number of subscribers of the two major U.S. carriers AT&T Mobility and Verizon Wireless combined.

Mobile and stationary

China restructured telecommunication industry in 2008, reorganizing the fixed-line operator China Netcom to China Unicom and transforming mobile CDMA business of Unicom to China Telecom, who also previously was a fixed line operator. At the same time, China Mobile, the largest mobile operator in the world, took over the job of a much smaller operator China Tietong, which is primarily focused on providing services for the railroad industry.

China Unicom was unusual operator before reorganization, because it was one of the few 2G-operators in the world, providing both CDMA and GSM services. However, China Unicom retained its GSM-business, and as a result of mergers, all three operators now provide mobile and fixed communication services.

Three years after the merger, in 2011, China Unicom's revenue of grew up to 209 billion yuan ($33 billion). The company, which shares are traded on the New York Stock Exchange, announces of providing service for 92.3 million fixed-line subscribers (April 2012), for the 58.8 million broadband connections, and shows the monthly growth of 10%, with an overall increase of about 26 million per year. "This is an important activity of the company, because we are creating "smart" cities, said Lu”. This year, China will have 35 million new FTTH connections."

The Ministry of Industry and Information Technology of China defined 375 cities in China to turn into the "smart cities" with public investment.

But are the investments in the creation of "smart cities" are effective?

"We never talk just about buying/selling. We talk about synergy. We look to the future, when telecommunications, Internet and media merge. Also, there are a huge number of potential customers in the energy, public safety, transportation, education, medical and health ", - says Lu.

There is considerable potential for "cloud" services, he said. "The Chinese market is synchronized with the development of "cloud" services in the world," says Lu. "It serves a lot of data centers, and not only for the Chinese market, but also for customers around the world, including Amazon, Google and Microsoft».

After earthquake and tsunami in 2011 Japanese customers now use facilities in China or as additional centers either are main ones. Low tariffs for energy in China help this trend to grow.

After restructuring of the telecommunications industry four years ago, the Chinese government issued each joint operator 3G-license with indication of what technology should be used.

As a result of this decision, China Unicom has the advantage of working in the most widespread in the world WCDMA standard, in contrast to China Telecom, which along with Verizon Wireless, is one of the few providers with Qualcomm 3G technology as well as in contrast to China Mobile which had a challenge from Chinese government to become a pioneer in the implementation of home-grown version of TDD in 3G and finally in 4G.

China Unicom has updated all its 3G services to HSPA. The company plans to become an incubator for "cloud" services, in particular for the development and testing of applications in biology and biomedicine. The idea is using "cloud" storage for data from medical equipment. "We want to use all of our infrastructure and a potential for transmission of information. This is a way to improve the quality of life. We want to become the basis for innovation," said Lu.

European investment

The company has a number of active subsidiaries in Hong Kong, Singapore and Japan, but it also goes to the European market. "We are expanding our investment in Europe," says Lu Yumin, listing the activities in Frankfurt, Paris and Stockholm, as well as groups based in London. "The UK is the center of our investment."

"We invest in cabling, for example across the Atlantic, and we bought a lot of cables in Egypt and East Africa. We invest in the Pacific, we invest in the Asia-Pacific region from Singapore to Japan", said the the head of Chinese operator.

There is a project for connection of BRICS countries - Brazil, Russia, India, China and South Africa through a submarine cable, and China Unicom is one of the investors of the project.

The company has interest in two projects of links to Europe via Russia, one of which passes through Sweden. "Terrestrial cables have low latency and are more reliable than the submarine cables," says Lu Yumin. "We invest a lot in infrastructure. As a leader in China, we want to provide services throughout the world. We want to share our strengths and solutions. We want to connect people, business and the world with each other. We want to create a" global village".

LTE strategy

But there is technology which China Unicom doesn't in hurry to implement. This is 4G. "The three operators in China have invested a lot in 3G", said Lu Yumin. "When we increase the speed in the networks, enough time is needed for people to evaluate benefits of this. Thus, we do not panic and do not rush with LTE".

But Lu Yumin recognizes tremendous events around LTE worldwide. Thus, significant steps have been made in the implementation of LTE TDD in China and LTE FDD in the rest of the world.

China Mobile is deploying a network of LTE TDD in five cities, while China Telecom has trial LTE network in several regions of China.

At the same time, the industry is waiting for the development of cost-effective terminals. "Clients consider terminal devices in terms of convenience. Users want to have something that can work in any place and at any time. "

So far, China Unicom "does not want to be the driving force" in LTE. "We want to learn," admits Lu Yumin, China Unicom president.

We asked players of the market ans experts to comment the article.

Chen Xiaodong, Head of representative Office of ZTE Corporation in Ukraine

"If we look at ownership structure of Chinese operators, they are state owned and therefore their activities mainly comply with the policy of the state. I would like to draw attention to the fact that to date the only operator that entered the international market is CHINA MOBILE, and its investment are limited to the surrounding regions - Pakistan and Hong Kong, where the operator has a control stake in local operators.

Since last year, CHINA MOBILE has been introducing TDD-LTE technology in the European market, and for this purpose was established a joint lab TDD-LTE with DT. Therefore, we can assume that in the near future in Europe will be CHINA MOBILE’s subdivision.

Regarding Chinese operators' interest in entering the Ukrainian market, I would be very careful because of the following key aspects:

1) Ukraine has lack of transparency in public policy regarding issuing of new licenses or the development of new technologies. The state lobbies interests of some operators, and as a result we see that potential foreign investors are very careful in buying/investing in Ukrainian telecom assets.

2) A big difference in culture, mentality and habits of telecom services by users is preventing Chinese operators to enter the Ukrainian market. Compared to Russian and European telecom giants such as MTS, Beeline and Telenor, for many years engaged in business in Ukraine, Chinese operators do not want to repeat mistakes of their colleagues in the Middle East.

3) There are too many players for providing voice and data services, many of which are regional ones, in Ukrainian telecom market. Flexible management and tariff policy allow them developing and even making profit in their regions.

Chinese operators are not ready for this situation and do not like to feel themselves immediately under hard competition, because in China there only three telecom operators and only television and radio operator, which also may licensed to provide telecom services.

That is why I believe that it is to early to talk about investments in the Ukrainian telecom market. At the same time, there are some other options: to buy shares in existing operators or collaborate in form like Vodaphone and MTC. But the second option could be implemented only after Chinese operator will enter the European telecom market ".

Oleg Bolshashapov, telecommunication expert:

"First of all, we should understand that China today is one of the main engines of economic growth throughout the world, and also one of the few who survived without serious problems.

In China are growing investments in next generation networks, mobile value added services, IPTV, broadband Internet and there is a constant increase in the volume of traffic. Such situation, of course, attracts global players of telecommunication market in China. But the telecom market in China is strictly regulated, and the government effectively controls all major telecom assets of the country. However, some companies can enter the market. An example is Spanish Telefonica, which owns about 9% of China Unicom. And, of course, with such shareholders experience and expansion goes worldwide.

Chinese telecom companies do not hide their plans to enter foreign markets. Furthermore, the first steps have already been taken. Thus, China Telecom (Europe) Ltd. in October 2008 announced plans to expand services in Europe and Asia, to increase the company's turnover in the European market. And especially for the Olympics in London, China Telecom deployed virtual network CTExcelbiz on the base of Everything Everywhere by renting capacity and providing services under its own brand.

China Mobile also has plans to continue its expansion. In 2008, the operator announced its interest in acquiring additional assets in Asia. But after purchasing in January 2007 89% stake in Pakistan GSM-operator Pactel the company is seeking a way entering other markets.

Regarding entering Ukrainain market by Chinese telecommunications giants, it seems that it is a good time to do this:

- There are several companies in Ukraine with WiMax licenses which do not operate or develop very slowly and they are ready to consider the question of their sale (the entire Chinese "Big three" worked with this technology, although it considers it as additional technology);

- Future of Trimob operator is not defined;

- There are plenty of local Internet service providers (some of them are large enough), which are ready to be sold.

And after entering our, market Chinese operators will be able to compete for one of the 3G licenses (sooner or later these licenses will be issued), because Chinese have financial and lobbyist abilities to do that.

So, it seems that appearing on Ukrainian telecom a Chinese operator is an issue of not very distant future"

Mikhail Vilchinsky



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