China Mobile Probes, Unicom Meddles

Includes: CHA, CHL, CHU
by: Doug Young

We're just a week into the New Year, and already new signs of political shenanigans at the nation's 2 leading wireless telcos, China Mobile (HKEx: 941; NYSE: CHL) and China Unicom (HKEx: 762; NYSE: CHU), are hinting at turbulence ahead as Beijing tries to liberalize the state-dominated telecoms services sector. Media are reporting that China Mobile has launched an internal probe into a botched initiative in Hong Kong, which looks to me like an extension of Beijing's fast-expanding series of anti-corruption probes at major state-owned firms. In the meantime, media are reporting separately that a top Unicom executive has left the company to join one of the nation's newly licensed virtual network operators (VNO), in a deal that looks aimed at undermining Beijing's plans to inject new competition into the telecoms services sector.

Let's start with China Mobile, which is in the headlines after announcing it is launching an internal probe into a joint venture that was supposed to tap the local TV market in Hong Kong. I followed this deal last year, which involved a failed bid for a TV license by a local Hong Kong company called Hong Kong Television Network (HKEx: 1137). As part of that bid, China Mobile's Hong Kong unit formed a venture with HKTV to supply content for the new service. Now media are saying that China Mobile is launching its own probe to determine whether its participation in the venture broke any internal management rules or rules of the State-owned Assets Supervision and Administration Commission. (English article)

If China Mobile were an ordinary, privately owned telco, I would say this kind of probe looks routine and is part of any company's good internal controls. But as China's dominant wireless carrier and a state-controlled firm, China Mobile is a highly political company. Accordingly, I suspect this new probe is the company's own way of following Beijing's broader recent campaign to root out corruption at major state-owned enterprises. If that's the case, we could see a growing trend for this kind of internal witch-hunt at many of China's big state-run companies in the year ahead, as firms launch such probes to curry favor with Beijing.

Meantime, media are saying that Unicom Vice President Li Gang has left the company to take the helm of a new virtual network operator recently licensed by Beijing. I should start by saying the latest reports say Li previously denied his pending resignation. But the same reports say Li has suddenly become mum on the matter, and a source close to him confirmed his move to a company called Huaxiang Lianxin.

Huaxiang Lianxin was one of 11 companies to win VNO licenses in late December, as part of a Beijing plan to inject competition into China's telecoms services sector that is now dominated by China Mobile, Unicom and China Telecom (HKEx: 728; NYSE: CHA) (previous post). The new VNO licensees are mostly private companies, which will offer their own-branded telecoms services by leasing network capacity from China Mobile, Unicom and China Telecom.

While some might say Li's departure is part of a broader recent management shakeup at Unicom, I would say the move highlights Unicom's efforts to undermine the new VNO plan. Put simply, I suspect that Huaxiang Lianxin will become a de facto arm of Unicom under Li Gang's new leadership, and that this new VNO will get preferential access to Unicom's networks and Unicom will get a share of its profits through a back-door arrangement. That may be a smart move by Unicom, but it won't do much to promote the kind of new competition that Beijing wants to see in the sector.

Bottom line: A new China Mobile probe at its Hong Kong operations and an executive move by Unicom hint that politics will play a growing role in China's telecoms sector in 2014.

Disclosure: No position