Musical chairs signal upheaval for Chinese telcos August 27 2015

The smaller operators swap chairmen, as business pressures mount and radical restructuring may loom

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The three Chinese operators once seemed protected, by their state ownership and vast market growth potential, from the storms that buffet most carriers. That is no longer true, as the companies face economic slowdown, which will only intensify the challenges they share with their free market counterparts - generating profits at a time of massive LTE capacity investment; and increasing ARPU when internet giants like Alibaba control the bulk of consumer usage.

The seriousness of their challenges was highlighted by the recent reshuffle of top executive positions at the three companies. China Mobile's chairman, Xi Guohua, has retired and been replaced by Shang Bing, vice minister of the MITI (Ministry of Industry and IT). Meanwhile, the chairmen/CEOs of China Telecom and China Unicom have swapped companies - Wang Xiaochu now heads up Unicom while China Xiaobing leads Telecom.

These represent the first changes of leadership for 11 years and signify the need for new thinking as the telecoms market faces massive new challenges, to boost capacity and coverage while also reducing costs and boosting profits. Both Mobile and Telecom reported a fall in half-year net profits recently, while Unicom, although its profit was up by 4.5% year-on-year, suffered a drop in revenues and customer numbers (though a major factor in the sluggish results was the imposition of VAT on telecoms services last year).

The total service revenue of the three operators fell by 0.9% in the first half of 2015, as they face rising competition from over-the-top providers as well as from MVNOs, which were allowed for the first time last year. The government has been piling on the pressure for the firms to deliver faster mobile broadband services, as part of its national Internet Plus strategy to boost economic growth and social change - but also to reduce their tariffs. This will entail massive cost reductions, and the three companies have already placed most of their passive infrastructure, such as towers, into a joint venture.

There have also been rumors that the government would consider merging the two smaller players, Telecom and Unicom, to achieve economies of scale, and some analysts believe the CEO swap may be the first step towards that. Guang Yang of Strategy Analytics told ZDnet: "The swap of chairman between the two operators might be the first step to prepare the merge. At least, the two chairmen in their new positions may be willing to strengthen the collaboration between the two operators, such as infrastructure sharing or national roaming. Through the collaboration, the two operators may be able to manage their costs more efficiently and lower tariffs faster."

However, at a time of economic upheaval in China, the executive changes, and the swirling rumors of reforms to the governance of state-owned companies, may increase uncertainty in the market and help China Mobile to surge ahead.

While the last major top-level reshuffle was in 2004, the Chinese telecoms market went through its biggest structural change in 2008, when the government ended the split between mobile and fixed-line operators and created three integrated providers. China Mobile took over wireline carrier China Tietong, and China Telecom gained Unicom's CDMA network, while another fixed-line player, China Netcom, was merged into GSM-based Unicom. There is speculation that the government may be considering another round of convergence, which could involve TV providers, creating quad play giants rather than just combining the two smaller telcos for efficiency purposes.

Whatever the structure of their sector, the operators are having to adjust to a world where they do not control the consumer's mobile usage or primary user experience. Baidu, Alibaba and Tencent, the largest Chinese internet apps players, now account for almost 60% of time spent on mobile devices, according to calculations by Forrester Research. The firm says Chinese consumers spent 18.2 hours a week on mobile internet activities, and about half of that (9.2 hours) went on Tencent's messaging app, WeChat.

Baidu is the leader in mobile search, Tencent in social media and Alibaba in m-commerce, though all three are moving into one another's strongholds via acquisitions and inhouse developments, and adding new ways to dominate the user experience, such as digital wallets.