Spillover from the Cooking Oil Scandal

By Jens Kastner

Last year’s 4G spectrum auction was much fiercer than expected, due mainly to the addition of two new players in the telecom sector – Ambit Microsystems and Taiwan Star. Ambit belongs to Terry Gou’s Hon Hai Group and Taiwan Star to the Wei family’s Ting Hsin International, both Taiwan-based conglomerates that made their fortunes chiefly in China, in electronics manufacturing and instant noodles sales respectively.

While Ambit is seen as a force to be reckoned with, serious doubt has been cast over Taiwan Star’s prospects. This past September, Ting Hsin’s owners were at the center of an ugly food safety scandal involving tainted cooking oil, leading to consumer boycotts against the entire group. Adding to the group’s woes, Taiwan’s nine major state-run banks froze credit lines to its companies.

“The growth rates of Taiwan Star in both subscriber number and revenues are no doubt affected by the scandal, meaning it will find it difficult to reach the break-even point,” says Kuang Chiu-huang, an assistant professor at National Cheng Kung University’s Institute of Telecommunications Management. “Although its churn rate [subscriber loss rate] will be stable for a while, given that most of its two-year contracts for mobile services were done before the scandal unfolded, the company’s capital would be burned out quickly if it cannot change the adverse image.”

Chairman Wei Ying-chiao Taiwan Star
Chairman Wei Ying-chiao and other executives promote Taiwan Star, an investment of the embattled Ting Hsin group.

Huang adds that Taiwan Star is therefore a potential acquisition target both for Far EasTone and the Hon Hai Group, “since they could expand their market shares from that merger activity.”

If Taiwan Star instead decides to try to weather the boycott, however, it will have to shoulder high costs not only for advertising and brick-and-mortar service outlets but also for the completion of its 4G base station network. The number of base stations an operator has installed is crucial for good coverage, which in turn is vital for customer satisfaction. Spotty signals in rural and mountainous areas are the number-one complaint of consumer rights advocates.

But building a comprehensive network is extremely costly. “The hardware for just one such base station costs around US$50,000, while the rental fee for the rooftop or plot of land where it is installed can reach to between US$1,000 and US$2,000 per month in urban areas.” Renting space to lay the wire from the base station to the data terminal is also costly, “setting the operator back by at least another US$600 per month” for each station, says Kuang.

Telecom operators are reluctant to divulge the number and locations of their 4G base stations, “since they dread possible public backlash over health concerns,” in the words of an industry insider. But to give some indication of the volume, Taiwan Mobile alone reportedly plans to deploy between 8,000 and 10,000 4G base stations.

Ting Hsin, which according to media reports is currently looking to divest itself of Taiwan-based assets, seems in no position to provide Taiwan Star with the financial support it will need.

 

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