CHUNGHWA TELECOM PRIVATIZATION MEANS BUSINESS AS

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