CSPT Signs MOU with TE SubCom for New Transpacific Cable

The Board of China Soft Power Technology Holdings Limited (CSPT) wishes to announce that on 13 November 2015, Pacific Light (an indirect wholly-owned subsidiary of the Company) entered into a non-legally binding memorandum of understanding (the ‘‘MOU’’) with TE SubCom in relation to the Pacific Light Cable Network Project (the ‘‘Project’’).

The Project is a proposed high-capacity submarine cable project, which is approximately 12,800 kilometers long and linking Hong Kong to Los Angeles, California, the United States with two branching units for potential regional connectivity. Pursuant to the MOU, both Pacific Light and TE SubCom propose to negotiate and discuss with the intent of entering into a supply contract (the ‘‘Supply Contract’’), pursuant to which TE SubCom will design, install, construct and maintain the Project for Pacific Light.

THE PROFESSIONAL SERVICES AGREEMENT

As the construction of the Project requires certain preliminary study and survey (the ‘‘Services’’) to be provided by TE SubCom, on 13 November 2015, Pacific Light and TE SubCom also entered into a professional services agreement (the ‘‘Services Agreement’’), pursuant to which TE SubCom will provide the Services to Pacific Light and Pacific Light agrees to pay TE SubCom a sum of US$10,000,000 as working fee (the ‘‘Fee’’). The payment of the Fee will be funded by internal resources of the Group.

The Project will be designed using advanced technology supporting WDM 100 gigabits/s transmission in the ‘‘C+L’’ ultra-wide transmission band. The design will support the use of leading edge undersea OADM techniques to optimize the capacity utilisation. The Project design capacity will be up to 120 terabits/s, subject to technological and geographical variables. The contract value of the Supply Contract is currently estimated at approximately US$400 million, subject to final negotiation of the Supply Contract and its final scope.

Currently, Pacific Light and TE SubCom target to (i) commence the construction of the Project in the second quarter of 2016; and (ii) attain provisional acceptance of the Project in 2018.

Upon completion, the Project is anticipated to be one of the direct links between Hong Kong and the United States across the Pacific with advanced fiber-optic undersea technology, providing global customers with high quality, reliable communication services. Additionally, the Project will supplement the existing Pan-Pacific submarine cable communication systems to help reduce connectivity costs, enhance network security, and help meet the needs for Internet and international communications services in the fast-growing Pacific Rim.

PRINCIPAL TERMS OF THE MOU

Investment strategies: The Parties have discussed the following investment strategies, which is subject to mutual agreement of the final scope of the Project:
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• Pacific Light will own four (4) of the five (5) fiber pairs of the Project. It will take advantage of its local knowledge in Hong Kong and be responsible for the completion of the Hong Kong landing, and any associated and necessary approvals in accordance with Hong Kong laws. Upon the Project’s completion, Pacific Light will participate in the operation and maintenance of the Project. It will fund its proportionate share of the Project costs, which are yet to be determined and are subject to technological, geographical and other potential variables.
• TE SubCom will partner with Pacific Light on one (1) of the five (5) fiber pairs of the Project. It will utilize its local knowledge in the United States and will be responsible for securing required operational permits to carry out the work and, upon agreement with Pacific Light, could potentially act as the landing party in Los Angeles, California, the United States. TE SubCom will fund its proportionate share of the Project costs, which are yet to be determined and are subject to technological, geographical and other potential variables. Upon the Project’s completion and upon mutual agreement with Pacific Light, TE SubCom will provide maintenance services for the Project.

Exclusive negotiation: For a period of twelve (12) months from the date of the MOU, Pacific Light grants TE SubCom the sole and exclusive right and privilege to negotiate the Supply Contract and to design, engineer, manufacture, provide, install, test, and commission the Project or any submarine fiber optic cable system similar to the Project, or any portion thereof, undertaken (directly or indirectly) by Pacific Light or its shareholders, directors, employees, partners, or affiliates.

Term of the MOU: The term of the MOU commenced on the date of the MOU and shall continue until it expires on the date that (a) is twelve (12) months after the date of MOU or (b) the Supply Contract comes into force, whichever is earlier.

Source: Adapted from: http://www.hkexnews.hk/listedco/listconews/sehk/2015/1113/LTN20151113901.pdf
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JRC ANALYSIS:  This is a highly unusual announcement for a number of reasons. First, CSPT is completely unheard of in the submarine cable industry and, to the best of this author's knowledge, has never been involved in international telecom before. The wave of investment by the Chinese government in its "Silk Route Initiative", building new routes through emerging markets, is one thing but now we are seeing an influx of private Chinese capital in the submarine cable market which gives some cause for concern.

The last time excess capital was invested in this market in the early 2000s, it collapsed under the weight of huge oversupply. The transpacific market is already in the midst of a construction boom with NCP, FASTER, and SEA-US likely to add 140 Tbit/s of available capacity within the next couple of years and at least two more credible initiatives, AAG-2 and Japan-US-2 possibly adding another 120 Tbit/s soon after. However, demand in this market is growing at over 50% per year and there is a trend for Asian countries to seek their own direct connections to North America. Of the three certain transpacific cable projects mentioned above, only NCP lands in China which has hitherto relied on indirect connections and the aging China-US cable. In this regard, there may well be room for a second China-US cable, especially if it is a private venture competing with the incumbent Chinese telcos.

One of the reasons that there is only one direct connection between China and USA is the attitude of the US Government towards Chinese telecommunication firms operating on American soil. Although there is no outright ban, the regulatory authorities will be required by Congress to scrutinize intensely any Chinese cable initiative seeking to land on the West Coast, even if there is a U.S. company acting as landing party.

The fact that this U.S. landing party is TE SubCom, a supplier of submarine cable systems, adds to the unusual nature of this announcement. TE SubCom's predecessor, Tyco Submarine Systems Ltd., took the decision to become a network operator in 2003, creating the "Tyco Global Network" with disastrous results. Motivated by a collapse in its traditional market, Tyco "turned gamekeeper" and began competing with its customers at a time when the global telecom market was in turmoil due to a delay in rolling out broadband to the masses. The situation is different today with robust demand growth in all markets but TE SubCom's taking an equity stake in this cable system at a time when there is plenty of demand for new cable systems is highly risky and seemingly unwarranted.

​At the very least, this is an example of a system supplier interfering with the process of "natural selection" which operates in the submarine cable industry through the availability of capital. This process ensures that the traditional demand-supply balance of 10-20% utilization of available capacity, which keeps the market stable, is maintained.