BMI China Telecommunications Report Q1 2012.pdf

Q1 2012 www.businessmonitor.com telecommunications RepoRt issn 1748-4472 published by Business monitor international ltd. cHina INCLUDES BMI'S FORECASTS Business Monitor International 85 Queen Victoria Street London, EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subsbusinessmonitor.com Web: http:/www.businessmonitor.com © 2011 Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. CHINA TELECOMMUNICATIONS REPORT Q1 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMIs Industry Survey Googles threats to quit China after accusing the government of hacking may set a precedent over the future actions of other foreign firms. Opportunities ? Appeal among younger segments of the population regarding online content, particularly in relation to multimedia services such as gaming, video and music. ? Accessibility to the internet through universities, internet cafés and schools has meant that demand for online content continues to thrive. ? Growth of broadband sector likely to lead to expansion contracts for manufacturers such as Alcatel Shanghai Bell and Huawei Technologies. ? Growing number of regional cable operators supplied with broadband licences leading to lower tariffs. ? First WiMAX services and demand for mobile broadband services are rising rapidly, which will aid growth of the broadband sector. Threats ? The greater sophistication and ownership of mobile services represents a threat to broadband, with the possibility of mobile broadband services becoming more widely accepted rather than fixed broadband. ? High international gateway and backbone network fees charged to cable operators by fixed-line operators could stifle growth in the broadband market. ? Fixed-line and broadband sectors remain dominated by China Telecom, offering few options for customers. China Telecommunications Report Q1 2012 © Business Monitor International Ltd Page 9 China Mobile Market SWOT Strengths ? The size of the mobile market; China Mobile is the worlds largest operator in terms of subscriber numbers. ? Strength of domestic manufacturers Huawei Technologies and ZTE grows, and both firms are likely to continue winning major equipment contracts. ? 3G equipment spending following licence awards will fuel the telecoms capex for China. ? Government determination to invest in Chinas telecoms industry ensuring that it becomes innovative. ? Demand for mobile broadband will aid growth of 3G subscribers. Weaknesses ? Many rural areas have neither fixed-line nor mobile telephony services available. ? Many local handset manufacturers (Soutec, Eastcom and Kejian) are beginning to suffer as Nokia, Motorola and Samsung have all picked up in handset sales due to better distribution. ? Handset sales in general are being impacted as customers refrain from upgrading. ? Economic downturn in the export-reliant China has meant that migrant workers have relinquished their services as they leave for their hometowns; local, regional-based operators have reported a drop in mobile revenues. ? Increasing rural penetration would have a negative effect on ARPU levels. Opportunities ? Significant room for growth in the Chinese 3G market. The number of subscribers accounted for about 11% of the entire mobile market. ? Growth in usage of value-added services (VAS) should translate to 3G success. ? Reduced tariffs for long-distance and international calls for mobile from January 2010 will contribute to the popularity of mobile above that of fixed line. ? LTE trials are under way, although the government said it will refrain from providing licences until operators recouped their investments for 3G. Threats ? Several US equipment vendors expecting to win 3G contracts could miss out on TD- SCDMA infrastructure deals, with carriers more likely to award contracts to local companies or Western companies in joint ventures (JVs) with local companies. ? Multinational handset manufacturers are facing more opposition from the likes of Huawei Technologies, ZTE, Ningbo Bird and TCL. China Telecommunications Report Q1 2012 © Business Monitor International Ltd Page 10 China Political SWOT Strengths ? The Communist Party of China, which has governed for 60 years, remains secure in its position as the sole political party in China. ? China's expanding economy is gradually giving it greater clout in international affairs, which will allow it to build politically important ties, especially with the developing world. Weaknesses ? As with any other one-party state, China's political system is inherently unstable and unable to respond to the wider changes taking place in society. Provincial governments often fail to enforce central government directives. ? Although bilateral ties have warmed since the election of Ma Ying-jeou as Taiwanese president in March 2008, China's relationship with Taiwan remains problematic, with Beijing refusing to rule out the threat of force in the event of a declaration of independence by Taiwan. Opportunities ? China is actively expanding its political and economic ties with major emerging markets such as Latin America, Africa and the Middle East. ? A new generation of leaders (the so-called 'fifth generation') is being prepared to take power in 2012-2013. This should ensure the continuation of reform and modernisation. Threats ? Growing corruption, widening inequalities, increasing rural poverty and environmental degradation have led to an increase in social unrest in recent years. ? The Communist Party is facing increasing factional rifts based on ideology and regionalism. While greater political debate would be welcomed by many, internal regime schisms could prove politically destabilising. ? China faces major challenges in ensuring that separatism in ethnically distinct regions such as Tibet and Xinjiang is kept at bay. China Telecommunications Report Q1 2012 © Business Monitor International Ltd Page 11 China Economic SWOT Strengths ? China is the fastest-growing major economy in the world, and this has lifted hundreds of millions of people out of poverty over the past generation. ? China has a massive trade surplus and its huge foreign exchange reserves serve as a major cushion against external shocks. ? China's economic policymakers are committed to continuing their gradual reform of the economy. Weaknesses ? China's economic growth boom has led to major imbalances and environmental degradation. ? The country's dependency on exports to boost growth has made it vulnerable to the global recession. Private consumption remains weak at less than 40% of GDP. ? The close relations between provincial leaders and local businesses are fostering corruption, making it harder for the central government to enforce its policies. Opportunities ? China's economic growth is slowly becoming more broad-based, with domestic consumption likely to rise in importance vis-à-vis exports, due to a middle class of 200-300mn people. ? China's ongoing urbanisation will be a major driver of growth and new cities will emerge in less developed inland provinces. The UN forecasts China's urban population rising from 40% in 2005 to 73% in 2050: a gain of 500mn people. ? As China moves up the value chain, it will develop its own global brand name companies, fostering innovation and growth. Threats ? We believe that the global recession of 2008-2009 will mean an end to China's double-digit annual growth rate. ? Despite a halt to the appreciation of the yuan, the recession is leading to job losses in China's export sector and thus increasing social instability. ? An over-reliance on construction activity in economic growth could become a threat if credit flows are reduced and property prices begin to cool. China Business Environment SWOT Strengths ? China is continuing to open up various sectors of its economy to foreign investment. ? With its vast supply of cheap labour, the country remains the top destination for foreign direct investment (FDI) in the developing world. Weaknesses ? Foreign companies continue to complain about the poor protection of intellectual property in China. ? Chinese corporate governance is weak and non-transparent by Western standards. There is a considerable risk for foreign companies in choosing the right local partner. Opportunities ? China's ongoing urbanisation and infrastructure drive will provide major opportunities for foreign investment in landlocked provinces as well as the transfer of skills and know-how. ? The Chinese government is giving more protection and encouragement to the private sector, which is now the most dynamic in the economy and accounts for most of the country's job growth. Threats ? China's government will block attempts by foreign firms to take over assets of national importance. ? China is experiencing rising labour costs, prompting some investors to turn to cheaper destinations such as Vietnam. China Telecommunications Report Q1 2012 © Business Monitor International Ltd Page 12 Risk Reward Ratings Asia Pacific Although there were a few changes in this quarter's update for the Asia Pacific Telecoms Risk Reward Ratings (formerly Business Environment Ratings), Japan remained firmly on top with a Telecoms Rating of 75.3 while Sri Lanka continued to occupy the bottom spot with a score of 38.3. Technological advancements and consumers' ability to afford new premium products and services compensated for limited growth opportunities in developed countries such as Singapore and South Korea following market saturation, which explained why these countries sat in the top half of our ratings table. Of all the emerging markets, only Malaysia, China and Indonesia had a Telecoms Rating score that exceeded the regional average of 56.1. Consumer confidence and retail sales data published in July 2011 suggested that the Japanese economy was gradually recovering from the effects of the March 2011 earthquake and tsunami. However, we had cautioned that the recovery was still in process and our view was vindicated when the Ministry of Economy, Trade and Industry reported that retail sales fell by 2.6% year-on-year (y-o-y) in August 2011, a much sharper decline than the 0.6% that was expected. As the Japanese consumer bore the brunt of the economic hit, we expect spending on discretionary items to remain weak. However, we believed that the Japanese telecoms industry would remain resilient as evident from the fact that mobile operators are aggressively increasing their portfolio of smartphones and tablet computers to attract consumers. This is partially due to the fact that telecoms services and the convenience of having internet on-the-go are an integral part of the lives of Japanese consumers. Australia and Singapore exchanged positions once again with the former emerging on top in the Q112 Risk Reward Ratings update. Australia edged in front largely due to its higher Industry Rewards score of 61.8, which compensated for the lower Industry Risks (80) and Country Risks (81.1) scores. Given that Australian and Singaporean telecoms companies enjoy relatively high ARPU levels, Australia's higher Industry Rewards score was attributed to its larger population size and the growth potential. However, we note that while Australia's ambitious National Broadband Network is slowly grinding forward, there are many challenges ahead, especially given the precarious nature of the country's political scene. By contrast, Singapore's nationwide fibre network is expected to reach 95% coverage by mid-2012. Australia's lower Country Risks score was partially due to its heavy reliance on Asia Pacific Telecoms Risk Reward Ratings Q112 Source: BMI. China Telecommunications Report Q1 2012 © Business Monitor International Ltd Page 13 the Chinese economy. Nevertheless, we envisage Australia to face a sharp slowdown of its own regardless of the outlook for China due to its own domestic frailties. A Chinese hard landing, however, would push the Australian economy over the edge, likely ushering in a recession and potentially triggering a financial crisis. Hong Kong was ranked fourth with a Telecoms Rating score of 68.2. Despite having one of the highest mobile penetration rates in the Asia Pacific region, the territory continues to exhibit healthy subscriber growth. However, it is worth noting the prepaid subscriber growth momentum has been outpacing that of postpaid since late December 2010. We believe that this was due to market saturation, which has prompted mobile operators to focus on prepaid segments that were previously neglected due to lower profitability. Hong Kong's economy is also facing the threat of further economic weakness besides a reversal in the territory's booming property market, which we believe is playing out at present. Given that Hong Kong's real estate is also a dominant force driving the economy, we expect weakness in both the property sector and the broader economy to reinforce each other. South Korea came in fifth while Taiwan was the lowest ranking developed country in Asia Pacific with a Telecoms Rating score of 63. The telecoms industries in South Korea and Taiwan both enjoy strong support from their respective governments, which was evident from recent government-led initiatives. For example, the Korea Communications Commission assembled the Grand NFC Korea Alliance comprising stakeholders such as mobile operators, financial institutions and device manufacturers to coordinate the development of near field communication (NFC) technology. The South Korean government is also committed to developing the fledgling medical and ecological tourism subsectors, which bodes well for prepaid telecoms services. Meanwhile, Taiwan's National Communications Commission has announced a submarine cable linking Kinmen (an outlying island of Taiwan) and Xiamen (a city in China's south eastern cost), which would be a major boost to c