Chinese telephone operators are expected to continue cutting back on their fixed-asset investments this year.

Analysts expect a looming industry reshuffle and the upcoming 3G (third-generation) services will put the brake on operators' investment decisions for the next several months.

That could spell another tough year for equipment vendors, which have been counting on an investment boom to take up some slack.

Shrinking investment

Telecoms fixed-asset investment is expected to be around 206 billion yuan (US$24.82 billion) this year, said Lou Qinjian, deputy chief of the Ministry of Information Industry (MII).

That compares with 213.65 billion yuan (US$25.74 billion) last year.

Lou made the remarks at an MII policy briefing on February 28.

That represents a second consecutive year of decreases. In 2003, fixed-asset investment in China's telecoms sector stood at 221.5 billion yuan (US$26.69 billion).

Guo Faming, an analyst with Wangxin Botong Consulting, an MII-affiliated research firm, said a possible restructuring of the domestic telecoms sector will make operators more prudent when investing.

China Unicom, which operates two cellular networks based on different standards, will be the most aggressive at cutting spending, he said.

"China Unicom spent much on its network build-out last year, and the firm will not be aggressive in network expansion in 2005," Guo told China Business Weekly.

"And a possible spin-off of Unicom's networks will affect its investment decisions."

Guo said the split is very likely although regulators have denied such an arrangement as it is becoming increasingly difficult for Unicom to run two networks.

Fixed-line carriers China Telecom and China Netcom "basically" won't spend money to expand their limited mobility Xiaolingtong networks, or PHS (personal handy service), the analyst said.

That would apply more pressure on PHS providers, such as UTStarcom, which is already coping with operators' investment contraction.

UTStarcom Inc last month reported a pre-tax loss of US$66.4 million for the fourth quarter ended December 31.

That compared with a net quarterly profit of US$66.4 million one year ago. The firm blames the loss on the difficult sales environment the company faced in its major market, China, where operators are cutting PHS investment.

China Mobile, the dominant cellular operator, will also see a slight decrease in fixed-asset investment, as the firm will reserve capital for the 3G network build-out, Guo predicted.

Lea Cai, an analyst with Noron Telecom Consulting, said domestic operators' investments on telecoms equipment last year was around US$12 billion, a slight decrease year-on-year.

Operators' investments slowed down in the second half of last year, when the top executives of the top four operators were swapped under a government arrangement, Cai told China Business Weekly.

Uncertainties brought on by the swap affected firms' investment decisions, the analyst noted.

Fixed-line carriers' investments last year dropped about 10 per cent.

"The total investment will continue to drop this year, with PHS and Unicom's CDMA investments recording the steepest decreases," Cai said.

Cai expects China Telecom to cut back on PHS investment as much as 40 per cent this year.

China Telecom's investment in fixed-line networks last year dropped 2.6 per cent.

China Netcom last year cut its investment on telecoms equipment by 23 per cent while preparing for its overseas listings.

Guo said Netcom will continue to cut spending while focusing on profits to sweeten enticements to attract investors.

China Tietong, the smaller telephone operator, will see its investment on equipment drop 23 per cent, Cai predicted.

That is largely the result of slowing growth of new subscribers to Tietong's traditional voice telecoms services, she added.

3G investment

Analysts expect operators will earmark much money for investments in the upcoming 3G roll-out.

The Chinese Government has yet to decide when it will award operators with the licences to deploy 3G networks.

Guo said the licensing will occur at the end of this year, at the earliest.

However, operators will make some "initial investments" to warm up for the 3G offerings.

Wang Guoping, an analyst with China Galaxy Securities, predicts investments in 3G this year will reach 55 billion yuan (US$6.63 billion).

About 60 per cent of the investments will be made on 3G equipment, Wang said.

Such a bold prediction rests largely on the government's adjustment of the economy.

"The 3G investment will very likely become a major tool for the government to fine-tune the macroeconomy," Wang said.

"We predict the fixed-asset investment in towns and rural areas will grow 25 per cent this year, quite a high figure. As a result, the government may restrict, to some extent, the 3G investment."

Cai said China Unicom is expected to earmark 15 per cent of its total equipment spending for the 3G this year.

"But it will rest with the possible restructuring of operators," she said.

More rational

Continuing spending cutbacks also underlines the fact Chinese operators are becoming increasingly rational in their investment decisions, analysts said.

The miracle in China's telecoms sector in recent years was largely driven by operators' huge investments, they said.

From 1996 to 2000, the average percentage between operators' investments and revenues stood at 72.1 per cent.

The figure has since fallen to about 40 per cent, underscoring operators' focus on revenues and profit growth, Guo said.

For many major global telecoms operators, the figure was about 20 per cent.

"Putting the brake on spending has become the trend for operators," Guo said.

The analyst said he is not optimistic about the growth in operators' revenues this year.

All operators will see their annual revenue growth slow down this year, he noted.

Lou expects operators' combined revenues to reach 577 billion yuan (US$69.6 billion) this year compared with 518.8 billion yuan (US$62.5 billion) last year.

What's hot?

Despite the spending cutbacks, operators will continue ramping up investment in some services, which are emerging as new profit drivers.

Guo said mobile operators China Mobile and China Unicom will continue increasing investments this year on value-added services such as MMS, WAP, mobile payments and multimedia advertisements.

China Telecom and China Netcom will significantly boost investment on broadband Internet and IPTV (Internet Protocol TV).

"Broadband Internet and IPTV are definitely the two big things for fixed-line carriers," Guo said.

"The two offerings also complement and benefit each other."

IPTV allows users to watch TV programmes over broadband Internet networks.

Yang Jie, deputy general manager of China Telecom, said the firm's broadband Internet subscription number doubled last year, to reach 14 million.

He expects the number to reach 24 million this year.

Zhang Changsheng, deputy general manager of China Netcom, said the number of Netcom's broadband Internet subscribers reached 8.64 million last year, up by 5.14 million subscribers.

Zhang did not reveal the firm's target for this year.

Guo expects both China Telecom and Netcom to ramp up investments on IPTV, despite some regulatory risks.

The uptake of IPTV in China may be thwarted by the possible conflicting interests between MII, the State Administration of Radio, Film and TV and the Ministry of Culture, he said.

But "in practice, the markets for most nascent telecoms services, which should fall into grey areas, are always already thriving before the related policies are put in place," the analyst said.

"As a result, the operators' investments on IPTV will not be impeded."

(China Business Weekly March 21, 2005)