TELECOMS: Consolidation Hiding in Unicom Corruption Probe?

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Bottom line: A corruption probe against the head of Unicom could be the latest signal that Beijing plans to merge the company with China Telecom in the next 2 years to create a serious rival to China Mobile.

Corruption probe nets Unicom chief

China’s 2-year-old corruption crackdown has finally  made the inevitable move into the nation’s telecoms sector, with word that the newly named head of Chinia Unicom (HKEx: 763; NYSE: CHU) is being probed for corruption. But while many are speculating that Chang Xiaobing is just the latest victim in the anti-corruption campaign, the timing of his downfall could also be the newest signal of a coming overhaul for China’s big state-run 3 telcos.

Industry watchers will recall that Chang assumed his position at the head of Unicom just 4 months ago, in a slightly bizarre but also somewhat typical case that saw him swap positions with the then-head of Unicom who is now the chief of rival China Telecom (HKEx: 728; NYSE: CHA). (previous post) That led to buzz that the telecoms regulator might be preparing the consolidate Unicom and China Telecom into a single company, a move that would have reduced the current field of 3 major telcos to just 2.

Industry watchers pointed out that even after such a merger, the combined company would still just have just one-third of China’s mobile market, with industry heavyweight China Mobile (HKEx: 941; NYSE: CHL) holding the remainder. That lopsided reality, combined with a series of separate reforms to breathe more private sector innovation to the industry, were the main reasons that a growing number of people believe the current trio of big state-run telcos could be set for a Beijing-led shake-up as soon as next year.

Word of the new corruption investigation emerged over the weekend, when the Communist Party’s disciplinary arm announced on its website that Chang was being investigated for “severe disciplinary violations”. (English article; Chinese article) Unicom followed a short time later with an official statement, saying only that Chang was being investigated and that its business operations are unaffected. (company announcement)

There’s no indication in the announcement that Chang has resigned from his position at Unicom. The “severe disciplinary violations” terminology has become standard wording for any corruption investigation under a 2-year-old campaign by President Xi Jinping to tackle the problem. So far the campaign has targeted mostly government officials, but it has also claimed a small but growing number of high officials at big state-owned companies.

Politically Motivated?

One of my oldest contacts in the China telecoms industry is quite familiar with Chang, and has never had anything bad to say and characterizes him as a generally upright manager. But of course such high officials don’t exactly go around telling everyone about their corrupt practices, many of which are ingrained parts of China’s business culture.

My point is that Chang may not be all that different from many of his peers, and that perhaps his removal is being orchestrated for at least partly political reasons. While I doubt he would be removed like this purely as part of an industry restructuring, the probe certainly does make a merger of the 2 companies more convenient since it removes one of their highly entrenched heads from the picture.

All that said, Chang’s removal does seem slightly strange due to another recent development that hinted at a sector overhaul. That development saw Unicom confirm earlier this month that it was studying a plan for pooling its resources with China Telecom in a bid to make better use of their networks. (previous post) China Telecom didn’t disclose a similar plan, which hinted that perhaps Chang at Unicom was a driving force behind any upcoming sector overhaul.

Of course it’s also quite possible that this sudden probe of Chang is totally unrelated to any overhaul plans, and that the action also caught the telecoms regulator by surprise. If I were making bets, I would still say that Chang’s removal is probably connected to the overhaul rumors, and that there’s a growing likelihood that we’ll see Unicom and China Telecom combined into a single company in the next 2 years.

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