This record is a partial extract of the original cable. The full text of the original cable is not available.

062300Z Oct 05

UNCLAS SECTION 01 OF 02 TAIPEI 004107 
 
SIPDIS 
 
STATE FOR EAP/RSP/TC AND EB/CIP, STATE PASS AIT/W AND USTR, 
USTR FOR WINELAND AND WINTERS, USDOC FOR 
431/ITA/MAC/AP/OPB/TAIWAN/MBMORGAN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD ECPS TW
SUBJECT: CHUNGHWA TELECOM PRIVATIZATION MEANS BUSINESS AS 
USUAL 
 
REF: A. TAIPEI 3466 
 
     ¶B. TAIPEI 3195 
     ¶C. TAIPEI 2822 
 
¶1.  Summary: the privatization of Chunghwa Telecom (CHT) on 
August 10 reduced the percentage of stock controlled by the 
Ministry of Transportation and Communications (MOTC) to 48%, 
but will have little practical effects in the near term on 
company operations.  The current MOTC-appointed Board of 
Directors will not change, and the government retains the 
right to appoint at least 80% of the Board in the future. 
Although no longer bound by government procurement 
regulations, CHT will continue to use its current purchasing 
system for the foreseeable future.  Labor unrest delayed 
privatization repeatedly, but CHT's strong financial position 
allowed the company to pledge no salary cuts or layoffs for 
five years.  CHT management believes labor protests were a 
last desperate effort by the CHT Union to grab as much as 
possible from the government before privatization and do not 
expect union protests to continue.  End Summary. 
 
¶2.  After several false starts due to labor protests and 
pressure from the Legislative Yuan (reftels), Chunghwa 
Telecom (CHT) was finally officially "privatized" on August 
10 with the sale of 15% of its general stock as American 
Depository Receipts (ADRs) on the New York Stock Exchange. 
This sale, combined with the sale of an additional 2% of 
government held shares on the Taipei Exchange (TAIEX) brought 
the government's stake in CHT to below 50%.  AIT met with 
Hank Wang, Senior Vice President; Mark Lee, Director, 
Planning Department; Harrison Kuo, Deputy Director, Planning 
Department; Kuo Kuo-tsan, Director, Networking Department; 
and Tang Hung-chao, Engineer, Networking Department, CHT to 
discuss changes in CHT operations post-privatization. 
 
============================================= =========== 
Privatization Means Limited Change to Board of Directors 
============================================= =========== 
 
¶3.  Wang explained that privatization of CHT would not affect 
the composition of CHTs Board of Directors.  The current 
Board is composed of 15 members, not including President 
Ho-chen Tan.  Of these, 12 were appointed by MOTC including 
two academics and a lawyer who were appointed by MOTC to 
serve as "independent" Directors.  Members serve 2 year terms 
and will not be replaced before their terms expire in 2006. 
Currently, the Chunghwa Telecom Workers Union (CHTWU) holds 
the remaining three seats.  When the Board is replaced, CHTWU 
representation will fall to one member in accordance with 
Taiwan laws that regulate private companies with significant 
government investment.  As the largest shareholder, Wang 
expected that the MOTC will continue to appoint all Board 
members except for the CHTWU representative.  He noted that 
one benefit of privatization was that non-civil servants 
could be appointed to the Board in the future.  He did not 
rule out the possibility that a foreigner with limited 
previous ties to CHT could be appointed to the Board.  (NOTE: 
Acer corporation made waves in Taiwan in 2004 by trumpeting 
its appointment of a foreigner as CEO.  In fact, other 
companies have foreigners in positions of influence, 
including CHT competitor FarEast Tone, which sports a Dutch 
CEO.  END NOTE.) 
 
=============================== 
No Change to Procurement Policy 
=============================== 
 
¶4.  The privatization of CHT technically frees it from the 
requirements of Taiwan's government procurement legislation. 
However, Wang said CHT will continue to follow its previously 
established process.  CHT developed the Taiwan government 
web-based procurement system and continues to manage that 
system.  Wang expected that CHT would continue to use that 
system as long as it continued to be in the best interest of 
CHT to do so.  The benefits in transparency and ease of use 
for CHT would weigh heavily in any decision to change current 
CHT procurement practice.  When asked about the process that 
will be used for CHT's next large mobile handset procurement, 
expected before the end of 2005, Wang said no changes in 
their long-standing procurement practices had been discussed 
and it was his expectation that the process would be similar 
to past procurements. 
 
===================================== 
CHT's Long-Term Goals Remain the Same 
===================================== 
 
¶5.  Mark Lee, Director of CHT's Planning Department, said 
that privatization will benefit CHT's ability to focus on its 
core strengths, including management of the fixed-line 
network, expansion of broadband and 3G services including 
video, providing value-added ISP services, and improving the 
performance of the CHT network.  Currently, CHT controls 
almost 80% of the broadband market in Taiwan, 97% of 
fixed-line service and just over 34% of the mobile telephony 
market.  Lee expected that privatization would not change 
CHT's goals of providing improved services for customers and 
maximizing profits for shareholders, but that efficiency 
would improve as CHT took steps to improve its administrative 
procedures, control costs, and consolidate billing.  These 
changes will allow CHT to protect its market share and manage 
the shift to its Next Generation Network (NGN), retiring old 
analog switching equipment and replacing it with fiber-optic 
switches over a 15-20 year period.  (NOTE: CHT previously 
told AIT it plans to begin a tendering process for NGN 
equipment in 2006.  END NOTE) 
 
¶6.  Lee also noted that CHT already has extended its 
activities beyond Taiwan, providing service to Taiwan 
businessmen operating in Shanghai in cooperation with Chinese 
carrier IPLE.  In addition, CHT has begun looking for 
opportunities in the U.S., Thailand and other places in 
Southeast Asia.  Prior to privatization, CHT needed Executive 
Yuan approval to establish international operations.  The 
removal of that restriction will allow CHT to make more 
efforts abroad. 
 
=========================== 
Union Actions not a Problem 
=========================== 
 
¶7.  CHT's labor union, CHTWU, has been a vocal opponent of 
plans to privatize CHT, conducting several small 
demonstrations around Taiwan and even following CHT Chairman 
and CEO Ho-chen Tan to the U.S. to protest as he met with 
potential investors in CHT's August share release.  Wang and 
Lee dismissed these actions as a bargaining tactic and noted 
that CHT had no power to meet union demands for continued 
civil service status and pension benefits.  CHT reached an 
agreement with CHTWU representatives in July, but the union 
continued to protest to the government in hopes of securing a 
better deal.  As part of the privatization agreement with 
CHTWU, CHT promised there would be no lay-offs and no salary 
cuts for five years.  Wang said the two sides would continue 
to hold discussions and that CHTWU should fully list their 
complaints prior to the next round of meetings.  Wang did not 
rule out future share sales and suggested that it was part of 
CHT's long-term strategy to convince MOTC to sell additional 
CHT stock until the government controlled only 34% of the 
company. 
 
¶8.  Comment: Taiwan committed to privatize CHT in its WTO 
accession agreement and it took more than three years to do 
so.  However, having officially completed this process does 
not seem to have changed CHT's outlook, plans, or management 
in any noticeable way.  Despite being "privatized," the 
government still controls the management and thereby the 
operations of the company.  For the management of CHT, it is 
business as usual.  CHT's new status may actually have a 
bigger effect on government accounting as CHT was a 
significant profit center for the government (US$1.56 billion 
in 2004) and a source of large pension liabilities.  Over 
10,000 of CHT's 28,000 employees are over the age of 50 and 
have been with the company more than 25 years.  End Comment. 
 
PAAL