Chinese Lesson

China Telecom, the world's largest wireline telecommunications and broadband
service provider, has registered a negative growth in FY 2008, with the company
earning 884 mn yuan ($129.4 mn), which is about 96% lower than the previous
year, despite a 3.3% increase in revenue. In FY 2007, it had earned 24.2 bn yuan.
The net profit fall was attributed primarily to impairment losses worth 24 bn
yuan on its personal handyphone assets. The loss is attributed to the shutting
down of its wireless Personal Handyphone System business in anticipation of 3G
mobile introduction. The net income fall and the company's strategies to revive
its revenues can be helpful in drawing some interesting observations for Indian
players, including service providers and handset manufacturers.

Now to absorb the shock, the Chinese major intends to cut its capital
spending by 19% to 39.2 bn yuan this year. In another of its revival efforts,
the company is to focus on spending on its transformation into an integrated
full service operator and to focus on high growth businesses. The company will
also delay plans to seek a strategic investor due to weak market conditions. It
has wisely decided to indulge in debt refinancing due to its lower costs, rather
than introducing strategic investors. According to analysts, the company's
uncertainties were removed after the company booked the impairment losses. Also,
the company's chief executive, Wang Xiaochu, said that there wouldn't be any
more write-offs from its personal handyphone assets.

When this kind of crisis strikes service providers, the first thing they need
to resort to is to lay their hands on capital expenditures and streamline
operational expenditures to yield maximum results. These measures need not wait
till the crisis strikes the players, but can be used as pre-emptive measures by
service providers and other telecom players.

Also, when there is sharp fall in net profits, players can jump into new
areas of mobile businesses cautiously by offering innovative services. The
Chinese major also said that it would issue up to 90 bn yuan in debt this year
to fund its expansion in the mobile business. Now it is also relying on its
newly acquired 3G wireless network, based on the CDMA standard, to revive its
sluggish, staggering growth as its fixed-line business seems to have reached a
saturation point, with its revenue from main wireline voice services falling
13.7% to 96.33 bn yuan. The company has plans to invest 20-30 bn yuan to
bankroll its CDMA business in the ongoing fiscal. The ARPU of its mobile service
was 63.5 yuan in February and the company is hopeful of maintaining 60 plus yuan
ARPU in the entire year.

Though, there has been a regular fall in China Telecom's net profit from FY
2006, the net profit in FY 2008 recorded the sharpest decline since FY 2002.

The impact of the recession is becoming visible day by day. The latest
evidence has come from the handset manufactures- Nokia and Sony Ericsson. Nokia,
the world's largest mobile phone manufacturer, reported a 90% fall in its
profits in the first quarter of this year, as cash-strapped consumers hold on to
their existing handsets. Nokia, which last month had announced 1,700 job cuts
across the globe to cushion the negative impact of the recession, saw the
average selling price of its phones fall to 65 euros in March end, from 71 euros
over Christmas and 79 euros a year ago.

Sony Ericsson has announced plans to cut further 2,000 jobs as it will save
400 mn euros in the ongoning recession. According to reports, the handset maker
has a pre-tax loss of 358 mn euros in the first three months of this year.

The recession-related crisis suggests that players need to adopt a more
cautious approach in any new investments, and reduce capex and opex.

Kannan K

kannan@cybermedia.co.in