On Jul 2, the U.S. government denied Chinese telecom behemoth China Mobile (Hong Kong) Ltd. CHL from offering various telecom services in the United States. Notably, in 2011, China Mobile applied to the Federal Communications Commission (“FCC”) requesting permission to offer telecom services between the United States and other countries.
The Trump administration is highly skeptical about the motives of China Mobile as it suspects that wireless services offered by the Chinese giant will be ultimately used to spy on U.S. strategic establishments. It is to be noted that the Chinese government controls 73% of China Mobile.
National Security Concern: Government’s Top Priority
In April, President Trump had issued an executive order to restrict select Chinese telecom equipment giants primarily ZTE and Huawei Technologies from selling products in the United States. The U.S. government had also prohibited indigenous mobile chipset developers and optical fiber component makers from selling products to these two firms.
Further, Trump’s intention of restricting Chinese companies from investing in U.S. tech firms to prevent technology export to China is likely to add fuel to the fire.
Trump administration is deeply concerned about China’s drive to unseat the United States as the primary developer and supplier of products in the fields of high-tech digital technology driven sectors.
Notably, most of the big manufacturers of these products are patronized by the Chinese government. These companies have become a serious threat to U.S. economic and military supremacy.
U.S. Wireless Operators are Likely Gainers
President Trump’s decision to ban China Mobile from offering services in the United States will be a boon for incumbent wireless operators. Competition is intensifying in the U.S. wireless market.
Technological upgrades and breakthroughs have resulted in cutthroat price competition. After a lackluster 2017, the U.S. wireless service operators have failed to turn their fortune around in 2018 so far.
Intensified pricing competition has resulted in lower ARPU (average revenue per user) and margins. Moreover, massive investment for upcoming 5G wireless network and fiber optic buildout are the reasons for low free cash flow.
Industry Consolidation and New Entry
The U.S. wireless industry is currently undergoing major consolidation. On April 2018, T-Mobile US Inc. TMUS and Sprint Corp. S decided to merge their businesses. At present, Verizon Communications Inc. VZ and AT&T Inc. T together control around 68% of the U.S. wireless market. The merged entity of T-Mobile US and Sprint with around 32% market share will be a formidable challenger to both Verizon and AT&T.
Furthermore, the largest cable MSO (multi service operator) and media behemoth Comcast Corp. CMCSA has already forayed into this space with its Xfinity Mobile offering. Another cable giant Charter Communications Inc. CHTR is reportedly close to launching its Spectrum Mobile wireless services.
At this juncture, the entry of a big competitor like China Mobile — the largest wireless operator globally based-on subscriber count — would be detrimental to U.S. national wireless operators.
The chart below shows price performance of four major national wireless operators year to date.
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All the above-mentioned stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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