Chinese Lesson

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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