This is a guest article by Winston Qiu, an industry professional who writes over at submarinenetworks.com.
No doubt, Chinese are now leading the submarine cable industry. Chinese chair in several important submarine cable systems across the Pacific or connecting Asia, Africa and Europe, including APG, AAE-1, SMW5, NCP, Faster Cable, no matter under constructing or in planning. There are skeptical and anxious voices, some even think it as a threat. With my perspective and research, I consider it as a natural achievement of the development of the submarine cable industry, natural power of economy, natural power of market.
In this article, I am trying to analyze reasons why it turns for Chinese to lead the submarine cable industry.
First, it is a pure power of economy. China is now the second largest economy in the world, Chinese carriers are all in good financial standing. Any consortium or private submarine cable system calls for heavy investment of hundreds of million dollars or even billion dollars, and it takes quite a long time to return the investment in a submarine cable system. For most of the submarine cable operators worldwide, investing 50 million dollars as a consortium member of a submarine cable system would be considered as a significant investment. Although Chinese carriers are quite cautious on each overseas investment, an investment of 50 million dollars is just a small project from economy scale point of view, accounting for less than 1% of the annual investment of any of the three incumbent Chinese carriers, China Mobile, China Telecom and China Unicom. According to the MIIT Statistics, the investment in fixed assets for China communications sector amounted more than 60 billion dollars in 2013. The good financial standing shapes the most fundamental reason for Chinese to lead in the submarine cable industry. Without a strong financing support, a submarine cable project is hard to successfully move forward. We all witnessed the latest sad story on the profit promising Pacific Fibre which ceased operation on 1 August 2012 due to an inability to raise enough investment to fund the cable build. And the Hibernia Project Express also moved ahead on difficultlies without financing support from Huawei Marine.
Second, the traditional USA carriers have ceased investment in submarine cables, or they are lack of incentives to invest in any submarine cable system, let alone to lead the submarine cable industry. When the US dominated in the submarine cable industry, before the early of 2000, the international telecom business was based on a bilateral model. Then, for a US carrier to connect with any non-US carrier in any other continent, the US carrier is required to activate an international circuit with its counter partner over a submarine cable system by ahalf-matching practice, each owing or providing a half part of the international circuit on the bilateral basis. At that time, the US carriers took it necessary and profitable to construct submarine cable systems and own international capacity. As the booming of internet since the end of last century, internet has been consuming increasing part of the lit international submarine cable capacity, which is now more than 85% with my understanding, and internet has been a US-centralized business since the very beginning. With current internet business model, almost all the well-know non-US carriers have set up PoPs in the US, bringing full circuits at their sole cost to the US, setting up free peering with or even buying IP transit from the US carriers in the US. The US carriers have been collecting huge revenue from non-US carriers on internet business, while without providing or bearing the cost of submarine cable capacity. So, submarine cable capacity is not one of their business critical assets. Moreover, the low rate of returns in submarine cable system and even the risk of loss make traditional US carriers unwilling to invest in any submarine cable system. For example, except for investments in the upgrade of older systems, the latest investments in submarine cables from US carriers are those in TPE and AAG submarine cable systems. Both Verizon which invested in TPE and AT&T which invested in TPE and AAG use small part of their capacity on these cables, mainly for enterprise business, or sell their capacity on wholesale market at prices quite close to their cost. AT&T and Verizon found it's not profitable to invest in a submarine cable system. Without sufficient demands, AT&T and Verizon are both lack of incentives to upgrade the cable systems and even become negative powers on the upgrade. The traditional US carriers have almost left the submarine cable industry, as a result of their market behavior to maximize the return of investment. On the other hand, there are now new players from the US, such as Google, Facebook and Miscrosoft, the internet content providers. These US-based ICPs have been participating in the game of telecom carriers, it takes time for them to change the game of submarine cable industry and even longer for them to lead the submarine cable industry, if it is possible.
Third, the recession of Indian carriers. When Indian Reliance acquired US-based FLAG Telecom for $211 million and VSNL(a Tata group company) acquired Tyco Global Network (TGN) for US$ 130 million successively in 2005, it promised an era of Indian in the submarine cable industry, taking over the turn from the US. Since then on, Indian have invested in many new submarine cable systems such as TGN-IA, FALCON, I-ME-WE, EIG and the upgrades of TGN-Pacific, TGN-Atlantic, FEA, FLAG-Atlantic, etc. Indian had a glorious period to control significant amount of global submarine cable networks and capacity in Asia, across the Pacific, across the Atlantic, from Asia to Africa and Europe. Indian dominated the submarine cable industry for almost the last decade. Indian wanted to control the global submarine cable market or at least impose substantial power of influence on the global submarine cable industry on a private model. Indian expected to control or at least hold the prices of submarine cable capacity. With my understanding, Indian carriers failed. The prices of submarine cable capacity fell as it should be. On the other hand, Indian carriers in fact accelerated the drop of capacity prices. As I observed, Indian carriers won several IP transit cases in Asian with the then market lowest price. No matter a case with IP transit ports in Asia alone or a case with IP transit ports in the US plus submarine cable capacity to access the ports from Asia, they won the cases in a way just covering the market prices of IP port and underselling their submarine cable capacity from Asia to the US, which in turn became the benchmark lowest price of capacity in the market. With the private model, both Tata and Reliance don't have enough demands on global capacity, they have to sell the surplus capacity to the wholesale market, often on market lowest prices. The latest news on Tata Communications' listing for sales and the difficulties of Reliance Globalcom show that Indian's private model on submarine cable industry can not last long. It is now quite obvious that private cables is hard to compete with consortium cables. The market power has voted that Indian private model is not sustainable.
Fourth, the demands drive and uphold Chinese carriers in the submarine cable industry. With the development of broadband internet in China, Chinese carriers need huge international capacity. As I wrote in another article, Broadband China Strategy Calls for Huge International Capacity,there was about 2 Tbps international internet connections in China by the end of 2012, it will be upgraded to more than 6 Tbps within 3-5 years. All the Chinese carriers, China Mobile, China Telecom and China Unicom, don't have enough capacity reserves. They have strong incentives to acquire new capacity and invest in new cables connecting China, and lead the new cable projects as possible as they can to secure their core interest. Chinese carriers will use most of the capacity for their own business demands, instead of selling to the wholesale market. On the other hand, the expertise Chinese gained in the past two decades makes them technically professional in the submarine cable industry.
And finally, the Chinese approach wins. When we look at the cables led by Chinese carriers, they are all consortium cables, none of them is private cable. Most of the consortium members have their own demands to support the long term investment in the cable. On the other hand,Chinese carriers have better understanding of the status quo of submarine cable industry, the cable landing station is not carrier neutral in most of countries worldwide, no matter in the US, China, Singapore, India, UAE, etc. The carrier own and operate a cable landing station enjoys the rights to control or access with priority the capacity of cables landing there. Chinese carriers lead the cable to benefit the consortium members in the landing countries, not trying to compete with them or force them to open access to the cable landing stations. Consortium prevails over private.
Chinese have taken the turn to lead the submarine cable industry. It will last for five years, ten years or even longer, until the US are back to the submarine cable industry, or until overseas carriers are permitted to operate internet business in mainland China. It will be another turn of economy and market powers.