China Mobile (941.HK, CHL.NYSE) has been instructed by the State-owned Assets Supervision and Administration Commission (SASAC) to cut staff salaries 10% each year for the next five years, according to company insiders. The new policy took effect in January and extends across all branches of China’s largest mobile company.
The edict followed two previous requests from the SASAC to lower salaries in 2004 and 2007. The regulator took a harder line after China Mobile’s excessive labor costs were revealed during the recent consolidation and restructuring of China’s telecommunications industry in preparation for the rollout of 3G services.
Although the cost-cutting measures are part of a larger SASAC strategy to reduce costs across state-owned enterprises in the wake of the downturn, China Mobile’s business has remained consistently strong, with a net profit margin of 26.47% in the last 12 months. If the salary cuts are imposed on China Mobile alone, however, the company’s ability to attract talent for both its 3G and international expansion efforts would be severely constrained. As a result, performance may suffer.
Under the guise of the national cost-cutting measures, China Mobile may be able to reallocate the money formerly designated for wages, giving it a greater cash basis from which to fund its 3G phone subsidies and network development. Still, these benefits might be outweighed by the loss of talent to competitors China Unicom (0762.HK, 600050.SH, CHU.NYSE) and China Telecom (0728.HK, CHA.NYSE).