The Accelerating Internationalization Strategy of Chinese Communication Service Companies

Beginning of Communication Companies’ Internationalization Strategy

This structural change in China’s domestic communications market is having a significant impact on the growth of Chinese communications companies. For example, the 2006 sales of China Telecom, which focuses primarily on fixed-line communications, came to US$24.8 billion (9% increase), while profits were sluggish US$2.28 billion (4.1% decrease). Meanwhile, China Mobile, a mobile communications company, recorded sales of US$35.9 billion (24.8% increase) with profits reaching US$6.29 billion (23.9% increase). In fact, China Mobile boasts 330 million subscribers and has become the largest mobile communications service provider in the world in terms of the number of subscribers and the size of its network. Moreover, after surpassing Vodafone in the beginning of 2007, China Mobile now boasts the world’s largest market capitalization.

Companies forced to swallow lower profits in the domestic market such as China Telecom and China Netcom have begun to seek growth frontiers in overseas markets. Not satisfied with its domestic market development, the mammoth China Mobile is leveraging its ample cash flow to also begin expansion into overseas markets. Moreover, China’s Ministry of Information Industry and Ministry of Commerce have established joint policy to encourage the internationalization of China’s communications companies (including both service companies and equipment makers). This is favorable policy in areas that are necessary for global business development such as loans, export insurance, and international settlements. In other words, the desire seen in Chinese communications companies to expand overseas is being fanned by government support.

The Internationalization of Chinese Communication Service Companies

Among the six communication service providers in China, the specifics of overseas expansion of China Telecom and China Netcom, which deal primarily with fixed telephone lines, and of China Mobile and China Unicom, which deal primarily with mobile communications, are shown in the graph (refer to the PDF file).

While China’s communications providers are all state-owned companies, in terms of internationalization they do show differences in their regional strategies and methods of expansion. For example, developing regions such as Southeast Asia, the Middle East, Latin America, Africa, and Central Asia are the favored regions of expansion for mobile communication companies, while fixed-line providers and their the data communication services show interest in both developing and developed countries. Mobile service providers target individual users of emerging markets where growth is expected. Fixed communication providers, on the other hand, are likely aiming for network construction or data communication with global companies with operations in China or Chinese companies aiming to expand overseas.

The following is a closer look at the internationalization of China Telecom and China Mobile, two leading Chinese communication companies.

China Telecom

China Telecom is aggressively pursuing overseas development based on the basic strategies of “client expansion, operations expansion, and network expansion”. The goals of China Telecom’s overseas expansions are to provide communication services to Chinese companies doing business overseas and to foreign companies doing business in China. Six branches and offices have so far been established in Hong Kong, the US, Europe, Kazakhstan, Toronto, and Singapore. China Telecom’s overseas strategy does not involve the acquisition of communication service providers, but rather focuses on building networks while at the same time constructing new overseas bases and expanding and upgrading. It has established a “Global Customer Service Center” in Shanghai and provides “Focusone” (one-stop service) to multinational companies.

China Mobile

In the second half of 2004, China Mobile installed the “Overseas Investment Strategy Office” which conducts research on the technological possibility and economic rationality of investment proposals. The regional strategy of China Mobile’s overseas development is centered in Hong Kong and Macau, and is followed by expansion to Southeast Asia, South America, and the US and European markets. Unlike China Telecom’s method of internationalization, China Mobile will focus on acquiring existing overseas service providers. So far it has acquired 100% stock of Hong Kong’s China Resources People’s Telephone and Pakistan’s Paktel Limited for US$438 million and US$477 million, respectively.

However, China Mobile’s attempts to acquire 26% of Pakistan Telecommunication Company’s stock in June 2005 and Luxembourg’s Millicom International for US$530 million in July 2006 both failed. In addition, it has been reported that bids to take over both Yemen Mobile and Uzbekistan Telecom in August 2005 were unsuccessful, although China Mobile denies such reports. In any event, as shown by media reports of expansion into Nigeria, it is plain to see that China Mobile’s expansion into emerging communication markets of developing countries is accelerating.