In July 2014, the world’s largest towerco China Tower Corporation (CTC) was formed to drive infrastructure sharing, also known as “co-build, co-share” in China. With the approval of the General Office of the State Council and led by State-owned Assets Supervision and Administration Commission of the State Council (SASAC), and the Ministry of Industry and Information Technology (MIIT), the three MNOs transferred all their tower assets to the joint venture. Since then, the roughly 200 independent towercos in China have been experiencing challenging market dynamics relegating them to an awkward position; occupying a grey space as if their existence may not be permitted. Read on to find out what TowerXchange’s research in the past few months have revealed.
China currently has approximately 200 independent towercos spread across the country serving the market alongside CTC. Some have been in the tower game since 2008, well before the creation of CTC in 2014. Most have enjoyed success and profitability, developing positive working relationships with the operators and earning reputations as efficient and effective tower developers. However, as the State-owned entity started to become operational, ripple effects began to be felt by the independent towercos. The first being new build demand reportedly slowing around 2015. A second blow came in July 2016, once CTC finalised its lease rate formula, driving downward pricing pressure in the marketplace.
Since the formation of CTC, the consensus seems to be that the three operators, China Mobile, China Telecom, and China Unicom, all have different attitudes towards third-party towercos; some accept their continuing role in the market, others do not. Rumour is China Mobile has been the most friendly of the three. But there is also another layer of complexity at the geographical level, where some operators in some regions are happy and willing to work with independent towercos, while others won’t touch them at all. Most CTC management used to work for the operators, as such have the influential customer relationships, as well as with government. All in all, Beijing appears to be hit hardest, where operators reportedly won’t entertain conversations with independent towercos.
China Tower Corporation lease rates
CTC lease rates are significantly lower than anywhere else in the world, with estimates around CNY ¥26,000 per tower on an annual basis or CNY ¥2,166 pcm (US$320). This figure is surprisingly low and suggests a business model calibrated in favour of the MNOs. Since the summer, Goldman Sachs came out with a report suggesting per tower leasing fee of around CNY ¥3,900 pcm (US$575) for CTC in 2015, and CNY ¥3,000 pcm (US$445) for 2016.
Legality versus legitimacy
Needless to say, the introduction of a State-owned giant means it is no longer business as usual for the independent towercos in China. There is a lot of chatter within China and in the international community on whether a monopoly is the desired end result of creating CTC and whether third-party towercos have a right to exist in the long term. To be clear, under the current regulatory framework, an independent towerco is legal. The issue right now is really around legitimising and clarifying status, in light of some of the issues experienced by independent towercos.
Some of the realities reportedly include:
- A local CTC office, with the support of the local government, could tear down a third-party towerco’s tower assuming CTC was capable of building its own in the same location.
- Many future site builds are being denied to third-party towercos as CTC has set up strategic partnerships with planning departments across 300+ cities, effectively allocating all sites in those cities to CTC.
- In many instances site build requests go to CTC first, so independent towercos are in effect relegated to the role of sub-contractors with the most difficult sites to build, at the lowest pricing.
- In one city, CTC was allegedly building adjacent to existing independent towers.
- Some local governments have enacted processes and documentation such that CTC is the only party allowed to build.
- In extreme cases, there were reports of operator staff being fired for working with independent towercos.
- Government departments across the country, and at different levels, are not well educated on the nature of the tower business, and misled by interpretations of existing policies related to the telecom industry and infrastructure sharing.
- Inconsistent taxation by operators across different regions, where at times CTC is charged 6% compared to 11% and 17% for independent towercos.
- Independent towercos contracts were flipped to local CTC offices so that the towercos were directed there to collect annual payments. At which time, CTC also reportedly pushed to renegotiate contract terms citing its inability to pay what the operators previously agreed to.
- CTC’s lease rate formula, calibrated to heavily favour the MNOs, has forced market lease rates down.
- The window for independent towercos to attract foreign investors may close if this lack of clarity persists.
While some acknowledge the creation of CTC provided important recognition for the role of tower builders and operators, it has also put the independent towercos in a challenging – and potentially unfair – competitive position against the State-owned giant. In this situation, more systematic ways to reshape the industry could include a licensing or permitting regime.
Licensing
Most towercos are not in favour of licensing regimes, however, this approach could make the “grey” independent Chinese tower market more investible by reassuring investors these entities are permitted to exist along side State-owned CTC. In general, should the powers that be decide to license, they are recommended to 1) do it as soon as possible, 2) work out the criteria and clearly communicate them and 3) make sure the licensing fee is a fair reflection of the administrative costs incurred by the agency body.
In Myanmar, while there were initial objections to the licensing approach, it then earned the appreciation of stakeholders for not only legitimising and professionalising the tower industry, but also creating the right barriers to entry. As licensing typically involves meeting certain qualifications such as management credentials, access to capital, and the ability to pay the fee, it serves to weed out pirate towercos looking to make a quick buck with poor practices to the detriment of the entire industry.
Permitting
The other alternative to licensing is through permitting. Regulators can make it a lot easier to build towers if they create a uniform approach to permitting and thereby accelerate build. The most sophisticated version of this is the “shot clock” seen in the US and being introduced to India, a regime whereby if a towerco complies with the standard approach, then permit to a new site is assumed granted if not rejected within 30 days. In the US and India, this is seen as transforming the industry’s ability to deploy sites quickly and accelerate a nation’s infrastructure development.
International examples
There are no direct comps in scale to China, but two countries provide useful comparisons when it to comes to MNO-led infrastructure sharing firms co-existing with independent towercos. In India, independent towercos have prospered alongside MNO-led giants Indus Towers and Bharti Infratel, although the giants effectively set contract structure and pricing as a function of volume. In the UK, independent towercos flourish alongside joint venture infrastructure sharing companies CTIL (Vodafone + O2) and MBNL (Three + EE / BT); indeed CTIL and MBNL are primary clients of independent towercos.
For further details, refer to our articles “The unique structure of the UK market” and “The history of the Indian tower industry.”
The way forward
Independent towercos in China are in the unfortunate situation of having to seek further clarification regarding their legitimate status in the market place. The current structure may not need to change, but simply a matter of the MIIT taking action to ensure all stakeholders recognise the valuable role independent towercos play, such that they can co-exist and thrive alongside State-owned CTC. In the mean time, some towercos are tinkering with expanding their business models and tapping into different opportunities.
How independent towercos can add value in China
1) Support the country’s infrastructure sharing mandate. Towercos are in the business to create value
and efficiencies and are naturally driven to build up tenancy ratios.
2) Supplement CTC build capacity, particularly in tier two and three cities.
3) Enable a competitive market where time to market, quality, and value become differentiators.
4) Play a role in setting fair lease pricing, guided by market supply and demand.
5) Provide opportunities for inorganic growth for CTC, as it could simply buy mature independent developers.
