The Trump Administration recently blocked China Mobile (NYSE: CHL), China's top wireless carrier, from obtaining a FCC license to expand its operations into the United States. The company applied for the license in 2011, but its approval was stuck in limbo due to security concerns.
David Redl, assistant secretary for communications and information at the Department of Commerce, stated that "after significant engagement with China Mobile, concerns about increased risks to US law enforcement and national security interests were unable to be resolved."
That decision wasn't surprising given the escalating trade tensions between the U.S. and China. But will it actually affect China Mobile, which generates most of its revenues from its home market?
Image source: Getty Images.
Why would China Mobile want to enter the U.S. market?
Expanding into the U.S. might seem foolish for China Mobile given that the wireless market is already dominated by three major players: Verizon, AT&T, and T-Mobile US (NASDAQ: TMUS), which could soon merge with Sprint (NYSE: S).
This market is already so saturated that the top telecom companies are all diversifying into adjacent markets like connected gadgets, streaming media platforms, and advertising. An ongoing price war featuring unlimited plans and bigger digital bundles makes it even tougher for new challengers to crack the market.
However, China Mobile's own domestic market is also saturated. It finished May with 901.9 million wireless subscribers, which represented just 0.3% growth from April. Within that total, its 4G customer base only grew 0.4% month-over-month to 671.8 million. To boost its customer growth, China Mobile and its state-backed peers China Unicom and China Telecom all recently agreed to eliminate domestic roaming charges and cut their mobile data fees by up to 30%.
Meanwhile, China Mobile's expenses are rising due to an ongoing expansion of its 5G networks. That combination of margin pressures and slowing customer growth spooked many investors, and the company's stock stumbled 13% this year. Analysts expect China Mobile's revenue to grow just 3% this year as its earnings rise less than 1%.
Image source: Getty Images.
That's why China Mobile wants to expand beyond China. China Mobile's only overseas market is Pakistan, which it entered in 2008 with its Zong wireless brand. Zong is Pakistan's second largest wireless carrier, but its 31 million annual subscribers (many of which aren't using 4G devices) can't generate enough revenues to offset its slowdown in China.
China Mobile's expansion into the U.S. wouldn't be unprecedented. Japanese telecom Softbank (NASDAQOTH: SFTBY) also entered the American market nearly six years ago, taking a majority stake in Sprint to offset a slowdown in its home market. It then repeatedly pushed Sprint to merge with T-Mobile US.
The mobile landscape is different today
When China Mobile applied for the FCC license in 2011, it probably shared Softbank's view of the U.S. market. But a lot has changed over the past few years, and even SoftBank seems to regret its expansion into the U.S.
Sprint has been a money pit for SoftBank, and investors cheered when the company stated that it could spin off its entire wireless unit in an IPO earlier this year. The delayed merger between Sprint and T-Mobile US, however, remains a major hurdle, and U.S. regulators are currently scrutinizing the deal due to Softbank's ties with Chinese tech giant Huawei, which the U.S. has branded a national security threat.
China Mobile also can't take a majority stake in an American telecom company as SoftBank did. The U.S. Department of the Treasury is drafting new regulations that would bar Chinese companies from owning over 25% of American companies with "industrially significant technology."
Why China Mobile investors shouldn't worry
There are valid reasons to be bullish or bearish on China Mobile, but the Trump Administration's latest move shouldn't be considered a headwind. China Mobile probably didn't expect the FCC application to be approved after all these years, and SoftBank's failures with Sprint likely taught an important lesson that an expansion into the U.S. would be pointless and painful.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- 3 Stocks That Are Absurdly Cheap Right Now
- 5 Warren Buffett Principles to Remember in a Volatile Stock Market
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- The Must-Read Trump Quote on Social Security
- 10 Reasons Why I'm Selling All of My Apple Stock