Why a Massive China Telecom Merger Matters to the US

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Two of China’s three largest wireless carriers are reportedly discussing a merger. China Unicom (Hong Kong) Ltd. (NYSE: CHU) and China Telecommunications Corp. Ltd. (NYSE: CHA) are both state-controlled wireless carriers and the second- and third-largest wireless carriers in the country with a combined total of more than 590 million subscribers. China Mobile Ltd. (NYSE: CHL), the country’s largest wireless carrier with more than 900 million subscribers, is also a state-controlled enterprise.

According to a report from Bloomberg News, the government is considering a merger of China Unicom and China Telecom to speed up development and deployment of a 5G network. The current argument for a merger between the two is based on the ability of a combined company to more easily make the huge investments required to build out a 5G network.

When President Trump killed the acquisition of Qualcomm by Broadcom, he cited national security concerns related to 5G development as the primary reason for his action. Because new advances in technology typically pay huge dividends to the first mover, China apparently hopes to seize an advantage in shaping and controlling the development of 5G.

Neither China Unicom nor China Telecom responded to Bloomberg’s request for comments. The state agency that oversees China’s state-controlled enterprises also refused to comment.

Two Chinese telecom equipment companies, ZTE and Huawei, both have run into troubles selling their gear into the United States and, more recently, Australia. The United States has banned the sale of ZTE and Huawei equipment. Australia also has banned sales of the two firms’ equipment.

In April, global telecom research firm Analysys Mason ranked 10 countries on their readiness to implement 5G networks. China narrowly leads the United States due to “both proactive government policies and industry momentum,” according to the firm’s report.

Meredith Attwell Baker, CEO of U.S. telecom industry trade group CTIA, said at the time:

The United States will not get a second chance to win the global 5G race. I’m confident that America can win and reap the significant economic benefits of 5G wireless due to our world-leading commercial investments. … I’m optimistic we will leapfrog China because key leaders in the Administration, on Capitol Hill, and at the FCC are focused on the reforms needed to win the race.

Roger Entner, CEO of Recon Analytics, which participated in the Analysys Mason report, noted:

When countries lose global leadership in a generation of wireless, jobs are shed and technology innovation gets exported overseas. Conversely, leading the world in wireless brings significant economic benefits, as the U.S. has seen with its 4G leadership. These are the serious stakes that face American policymakers in the escalating global race to 5G.

Entner noted that winning the 4G race added about $100 billion to U.S. GDP and led to an 84% increase in wireless-related jobs. Leadership in 4G technology also helped U.S. firms “secure leading positions in key parts of the global wireless ecosystem, including the app economy.”

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