Chinese Telcos Searching for Growth in Brazil

In September 2017, China Telecom was reported planning to acquire Brazilian telco, Oi. The smallest mobile telco in China has engaged TPG and Goldman Sachs to explore options in their effort to acquire the struggling Brazilian operator.

Back in June, Oi filed for bankruptcy protection after failing to restructure its total debt of BRL65.4 billion (US$19.2 billion). The telco claimed that it had failed in its restructuring talks with creditors, and 92 percent of existing cash would be depleted by end of 2017. Oi highlighted a few factors that led to its struggle, including cuts in the regulated interconnection prices, decline in fixed voice traffic and reduction in the B2B segment revenues.

At the same time, on September 15, China Mobile has also unveiled its Brazil subsidiary at Sao Paulo. The subsidiary, known as China Mobile International (Brazil) Holdings, was launched on September 15 and will strengthen China Mobile’s international roaming services. The subsidiary will also serve as the bridge to promote the joint innovation of telecommunication and information technology between both countries. Coincidentally, China Mobile was also reported to have expressed its interest in the acquisition of Oi.

Brazil is a growing market for LTE. Total LTE subscriptions have reached 88.5 million in August 2017, according to Anatel, the telecommunication regulator of Brazil. This represents 36.5% of total subscriptions. VIVO, or Telefonica Brazil, is the largest player, capturing 35% of the total LTE subscriptions, following by TIM at a distant second (27%), Claro (21%), and Oi (15%).

Oi’s financial struggle is not only attributable to its small market share, but also its failure to keep up with the innovation of its peers. For example, VIVO has been vocal and aggressive with its business process transformation that started in 2014. The leading Brazilian telco has established dedicated service team to manage special events, adopted Lean Six Sigma and reduced its time to market for M2M subscriptions. Both TIM and Claro, in partnership with Nokia and Huawei respectively, have also been aggressive with the deployment of LTE-Advanced Pro to provide better user experience. 

Like the telcos in the U.S., telcos in China generally focus on domestic market and seldom, if ever, venture overseas. China Mobile has controlling stake of TRUE in Thailand and was looking to invest in M1, a Singapore-based telco, before deciding against the plan. The shortened cycle of technology upgrade, i.e. from 3G to 4G, 4G to 4.5G, has led to the Chinese telcos to focus more on domestic business. Active involvement in NFV trials and testing, together with NB-IoT deployment, has since occupied most of telcos’ resources.

However, there have been some changes to the industry. A new ownership system has been introduced in China Unicom (comprised of both government-linked corporations and webscale giants), with the intention to make China Unicom more agile and adaptable to future technological changes. China Mobile has hit the brake on its own public cloud business, choosing instead to partner with Alibaba and leveraging the webscale company’s global footprint. As the smallest player, China Telecom have opted to be aggressive in NB-IoT trial and has managed to achieve commercial success in NB-IoT via the world’s first commercial water metering system on NB-IoT. These developments bring new rejuvenation and opportunities to Chinese telcos.

ABI Research believes that the intention to acquire Oi reflects a change in corporate strategies within Chinese telcos. China Telecom’s commercial success in NB-IoT will benefit Oi’s struggling B2B business. At the same time, it is also likely that China Telecom is responding to the One Belt One Road initiative. Under this initiative, Chinese enterprises are encouraged to invest in overseas markets and bring Chinese expertise to the rest of the world. The government has placed heavy emphasis on 5G as an important aspect of economic development plan, by having the world’s first government-led 5G test. As the fifth most populated country in the world, Brazil offers plenty of opportunities in 5G. Since Chinese telecom equipment vendors, namely Huawei and ZTE, already have strong relationship with local telcos, the participation of China Mobile and China Telecom in Brazil will certainly open new market opportunities.