China Telecom’s Planned US Entry Fraught with Risks

State owned China Telecom (NYSE:CHA), the world’s largest CDMA mobile operator, is planning to expand its operations into the US with the sale of wireless services under its own brand, starting next year. According to Bloomberg, the Chinese operator will offer services as a mobile virtual network operator (MVNO) and will target Chinese expats and students, as well as frequent travelers between China and the U.S. ^[1] A MVNO is a mobile operator that neither owns its own spectrum nor does it have any network infrastructure of its own and has to therefore lease out some other company’s. China Telecom is China’s largest fixed-line operator and but lags behind China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU) in the wireless business. After its entry into the U.S., it will also compete with Verizon (NYSE:VZ), AT&T (NYSE:T) and Sprint (NYSE:S) in the wireless market.

The company plans to build its service off an existing network in the U.S to decrease its time-to-market and attract customers. However, it declined to comment on the possible wholesale partners it is considering for its U.S. foray.

Our price estimate for China Telecom is $68, which is about 15% over the current market price.

See the full Trefis analysis for China Telecom.

Wary U.S. Government and Poor MVNO History Stand in China Telecom’s way

If China Telecom manages to generate a good response for its services, the company said that it may consider launching its own network in the U.S. instead of renting capacity from another operator. The growing Chinese-American population may help China Telecom build up demand, but a larger infrastructure play may run into problems with the U.S. federal government, which is wary of China. Huawei was forced to back out of an acquisition of a California-based company’s networking technologies after the federal Committee on Foreign Investment raised “security concerns”. ^[2]

Most importantly, China Telecom has to prove it can be a successful MVNO, as the business model has a spotty history. Disney (NYSE:DIS) SK Telecom and others have tried in the past but made little progress in gaining subscribers. ^[3] SK Telecom, a South Korean carrier, tried the same with Helio but had to ultimately sell it to Virgin Mobile, which killed off the brand after being sold to Sprint. But past failures do not seem to dissuade new players from entering the U.S. market, as evidenced by a recent launch by Japanese telecom provider DoCoMo of its MVNO service earlier this year on T-Mobile, aiming at tourists. ^[4]

The market for people who need phones that can operate both in China and the U.S. is specific but also limited. According to the U.S. Census Bureau, there were 3.8 million Asians of Chinese descent living in the U.S. in 2009. ^[5] So, while it gives a good opportunity for the company to enter the market by creating a niche, we don’t believe it poses any kind of immediate threat to the existing U.S. players as yet.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. China Telecom Plans to Offer Wireless Service in U.S. in 2012, Bloomberg, November 9th, 2011 [↩]
2. Huawei backs away from 3Leaf acquisition, Reuters, February 19th, 2011 [↩]
3. Coming to America: China Telecom launching U.S. service, GigaOM, Nov 2011 [↩]
4. NTT Docomo USA unveils its US MVNO Services and is Live, PrepaidMVNO, April 11th, 2011 [↩]
5. Asian/Pacific American Census Report, US Census Bureau, May 2011 [↩]