China Telecom, one of the country’s three telecommunications companies, warns that its profits for last year could ‘decline significantly’ from 2007 because of a provision for impairment losses at its low-cost wireless network.
The company is writing off the value of its Xiaolingtong, or ‘Little Smart’, network which powered its growth earlier this decade but will be terminated by 2011 as China introduces third-generation telecom services.
In 1998, China Telecom — which did not then have a mobile license — launched the network modelled on Japan’s personal handy-phone system as its answer to the full wireless services provided by the country’s two official mobile operators, China Mobile and China Unicom.
Xiaolingtong is a limited service that does not allow roaming but it has in the past been popular among poor households and migrant workers because it was cheaper than true mobile phones.
Xiaolingtong reached its peak in 2006 when China Telecom and China Netcom, another provider of the service, shared more than 90m users. It has suffered since China Mobile and China Unicom cut prices aggressively and had fewer than 69m subscribers last year.
For China Telecom and China Netcom, Xiaolingtong has also lost its value because these two former fixed-line operators have now obtained full mobile licences under an industry-wide restructuring last year.
Last month, the Ministry of Industry and Information Technology ordered China Telecom and China Netcom to discontinue Xiaolingtong to free the spectrum for TD-SCDMA, China’s home-grown 3G standard.
China Telecom is estimated to have RMB27 -30 billion worth of Xiaolingtong assets. According to the average forecast of five analysts, this year’s write-off is expected to bring 2008 net profit down by 90% cent to RMB 2.1 billion.
According to the Financial Times the aggressive price cuts in the industry have continued and following the reorganisation, the country now has three mobile phone operators and competition is expected to intensify. Wang Jiaozhou, China Mobile’s chairman, has warned that the company’s profit margin would suffer as prices continue to decrease.
According to Li Yizhong, industry and information technology Minister, tariffs in China’s telecommunications sector dropped 11% last year, following a 13% reduction a year ago.
‘As the telecommunications industry continues to develop and orderly competition forms, there is still room [for tariffs] to fall,’ said Mr Li in Beijing.
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