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China's telecommunications race: An attempt by the CCP to achieve technical legitimacy and hold onto power

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China's telecommunications race: An attempt by the CCP to achieve technical legitimacy and hold onto power

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Content CHINA’S TELECOMMUNICATIONS RACE: AN ATTEMPT BY THE CCP TO
ACHIEVE TECHNICAL LEGITIMACY AND HOLD ONTO POWER
Copyright 2004
by
Irena Cronin
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements fro the Degree
MASTER OF ARTS
(EAST ASIAN AREA STUDIES)
December 2004
Irena Cronin
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TABLE OF CONTENTS
ABSTRACT......................................................................................................................iv
1. INTRODUCTION..........................................................................................................1
2. INHERENT CONTRADICTION AND EXPLOITATION............................................ 8
Official “Pillar” of the Economy...............................................................................8
Socialist Market Competition and Control........................................................... 10
Ministerial Rivalries and Policy Change...............................................................13
The Creation of China Unicom.............................................................................14
The Creation of Ji Tong........................................................................................ 15
Rise of the Ministry of Information Industry (Mil)................................................15
Mil Change; Regulation....................................................................................... 16
New Telecom Legislation..................................................................................... 17
Restructuring Plan Scaled Back.......................................................................... 20
Government Control of Price Wars......................................................................20
Government “Infant Company” Protection.......................................................... 21
Phone Production License Restriction.................................................................21
Possibility of Major Telecom Mergers..................................................................22
3. STATE OF THE CHINESE TELECOMMUNICATIONS INDUSTRY.....................24
Technologies; Statistics......................................................................................... 28
Fiber Optics............................................................................................................28
DSL/ADSL.............................................................................................................29
Mobile.................................................................................................................... 30
Xiaolingtong...........................................................................................................31
Third Generation Mobile Technology (3G )......................................................... 33
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iii
Next Generation Network (NGN)......................................................................... 35
Unified Messaging Service (UMS)....................................................................... 36
Companies................................................................................................................. 37
Moody’s Investors Service Opinion.....................................................................39
China Telecom...................................................................................................... 39
China Unicom....................................................................................................... 44
China Mobile..........................................................................................................54
China Netcom....................................................................................................... 57
Ji Tong Network Communications.......................................................................60
China Tietong (Formerly China Railcom)........................................................... 60
External Forces........................................................................................................ 63
Examples...............................................................................................................63
Telecom Equipment-related.................................................................................65
Foreign Shareholding: New Guidelines for Telecom.......................................... 68
China’s Distortion of World Trade Organization (WTO) Commitments............70
4. CONCLUSION..........................................................................................................73
BIBLIOGRAPHY.............................................................................................................75
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iv
ABSTRACT
China’s leadership has centered its legitimacy on economic growth. Telecommunication
revenues, with more than 10 years of high growth, accounted for 4 percent of China's 2003
total gross domestic product, much higher than the proportion of many developed countries.
China currently has the largest number of fixed-line phone users and mobile phone
subscribers in the world, and is the second-largest in terms of Internet users. This thesis
suggests that success in the high-growth telecommunications industry is a method by which
the Chinese Communist Party (CCP) has continued to legitimize its existence, thereby
continuing its control.
This thesis details who the major operators are in China’s telecommunications industry, from
government inception to present-day operations. Additionally, the state of China’s
telecommunications technology is discussed. Finally, the current standing of China’s World
Trade Organization (WTO) commitments to liberalize its telecommunications industry is
assessed.
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1. INTRODUCTION
Globally, the telecommunications industry is one of increasing multi-nationalism and
competitiveness and yet it is one where government control is currently a political necessity
for China. And China, the nation that mixes Communist party rule with market capitalism,
wants to continue to be in the forefront of the telecommunications industry. China currently
has both the largest number of fixed-line phone users and mobile phone subscribers in the
world, and is the second-largest in terms of Internet users.
A constant that can be found as almost a form of Chinese policy is the objective of the
Chinese state to enhance its own control and power. Another constant is to utilize economic
means to this end. This thesis suggests that success in the high-growth telecommunications
industry is a method by which the Chinese Communist Party (CCP) has continued to
legitimize its existence, thereby continuing its control.
How best to achieve technological modernization, for more than a century, has remained at
the center of political deliberation in China. In the nineteenth century, China had its first
major encounter with Western technology and science and found itself fundamentally
challenged.
Zeng Guofan, a Chinese official in the 1850s and 1860s who had become very impressed
with Western-manufactured steamboat and firearm performance, became a big supporter of
the idea of importing Western-made technology for study and use. He was to become part
of a larger movement in China at the time that was called the “yangwu” movement; the idea
was to utilize Western technology and modernization as a tool to limit what was viewed as a
Western imperialist drive. China was to become great again, as well as strong, by way of
Western technology.
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Exploitation of Western technology was to be done without encroaching upon Chinese
values: signified in the aphorism, “Chinese learning for substance and Western learning for
application" (zhongxue wei ti, xixue wei yong, often shortened to “zhongti xiyong” or even “ti-
yong”). In their attempt to separate the “substance” (ti) of Chinese culture from the
“application” (yong) of Western science and technology, these early modernizers “opened a
Pandora’s box of contradicting forces of development, which have continued to confront the
political leadership in China.”1
Economic and political development has always relied heavily on strong communications.
The growth of the importance of technology in communications has increased the
corresponding weight of importance a country must put on technology. In China, the
information and communications industries are growing at three times the rate of the rest of
the global economy. Key sources of productivity improvements and economic growth include
investments in information goods and services.2
China’s “socialist market economy” means utilizing market forces to improve production
efficiency while holding strong to a managed, predominately state-owned economy and
secure authoritarian control over political activity.
Having a free market in telecommunications would bring in much more investment to
stimulate development and improve efficiency. However, a free market would undermine the
state’s control of the economy and the people. Additionally, a free market in
telecommunications would not allow for the central government’s ability to continue to build
up and uphold national enterprises in that sector. Therefore, it is not possible for China to
1 Baark, Erik, Lightning Wires: The Telegraph and China’s Technological Modernization, 1860-1890,
Westport, Ct.: Greenwood Press, 1997, p. 3.
2 Mueller, Milton and Zixiang Tan, China in the Information Age: Telecommunications and the
Dilemmas of Reform, Westport, Conn.: Praeger, 1997, p. 2.
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easily or even willfully follow global trends toward a privatized, liberalized
telecommunications industry. The need to balance control and development is one of
inherent contradiction.
Recently, an official Chinese Communist Party newspaper warned that China's market
economy is seriously chaotic and could undermine future investor and consumer confidence.
The article, "Begin a new battle for rectification and regulation of market economic order,”
dated April 16, 2004, by Chinese Communist Party (CCP) newspaper Renmin Ribao
(People's Daily), was carried by the official Chinese news agency Xinhua (New China News
Agency). A portion of it is below:
Rectification and regulation of the market economic order are concrete expressions of
implementing the important thinking of the “three representations” (in Chinese: san ge
dai biao) on the importance of the Communist Party in modernizing the nation -
representing the demands for the development of advanced social productive forces,
the direction of advanced culture, and the fundamental interests of the greatest
majority of the people; and they are the important responsibilities and tasks of the state
in managing the economy. They conform to the fundamental interests of the greatest
majority of the people, and are not only a major economic issue but also a serious
political issue concerning the overall situation in the socialist modernization drive. It is
necessary to concentrate efforts on rectifying the order in the housing and real estate,
automobiles, building materials, telecommunications, and pricing markets.3
A consolidated, national postal, telephone and telegraph (PTT) is conforms to many of the
political and industrial policy objectives put forth by the CCP. As is the case with other
nations in the embryonic stage of industrial and political development, China requires
national control of the basic telecommunications infrastructure. This is especially true, as in
the case of China, when a nation feels insecure about its government’s sovereignty or
legitimacy.
3 Xinhua News Agency, “Chinese Party Daily Urges Clean Up of ‘Chaotic’ Market Economy,” April 16,
2003.
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However, at the same time, China’s leadership has centered its legitimacy on economic
growth. Increasing multi-nationalism, competitiveness, and information transparency that
arrive with growth could be a catalyst for decentralization, and thus reform. However, this is
not what China is looking for; what is wanted is all the benefits of economic growth, without
the destabilizing features (which might be viewed as benefits as well, but not by China).
In September 2004, China's president, Hu Jintao, replaced Jiang Zemin as the country's
military chief and de facto top leader. This completed the first orderly transfer of power in the
history of China's Communist Party. Hu had become Communist Party chief in 2002 and
president in 2003 and now is in command of the state, the military and the ruling party.
Analysts do not believe that Hu is a “closet liberal." Chinese editors and other journalists
have commented that he has tightened media controls.4 Recently, he led a crackdown on
online discussion; people who had expressed antigovernment views on the Internet were
subsequently jailed.
In a speech delivered in September, Hu categorized Western-style democracy as a "blind
alley"5 for China. Hu’s plan for political change is chiefly concerned with improving
transparency and competitiveness within the single-party system in a bid to make officials
police themselves better. Party officials have said that “he has a tendency to emphasize
relations with South Asian countries and Europe over relations with the United States and
Japan.”6
4 Kahn, Joseph. “Hu Takes Military Reins, Completing Shift in China,’’ New York Times, September 20,
2004.
5 Ibid.
6 Ibid.
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China has been extraordinarily successful in avoiding the generally global economic
slowdown, announcing official growth rates of 8 percent to over 9 percent in the last few
years and increasing exports by 22 percent in 2003.7 Telecom revenues, with more than 10
years of high growth, accounted for 4 percent of China's 2003 total gross domestic product,8
much higher than the proportion of many developed countries.
The Chinese Ministry of the Information Industry (Mil) is working on revenue growth for
telecommunications of 9.2 percent this year, compared with 9.5 percent in 2003.9 Industry
experts say that China is likely to maintain its telecom industry development this year and
the following next few years given enhanced domestic demand resulting from the country's
developing strategies, such as renovation of the old industrial base in northeastern China
and further development of the nation's western regions.1 0
In November 2002, several members of China's business elite were elected to the Chinese
Communist Party's policy-setting Central Committee, including the first private sector
entrepreneur. Among the committee members and alternates were chief executives of state-
owned giants heading up China's “pillar” industries including aviation, oil refining,
telecommunications, manufacturing and finance.1 1
The promotion of business elites was an endeavor by CCP leaders to put into practice Jiang
Zemin's aforementioned "Theory of the Three Representatives” which calls on the
Communist Party to represent not just the working class but also business professionals and
7 Financial Times, Business Daily Update, “Telecom Competition Crucial,” August 6, 2004.
8 Ibid.
9 Ibid.
10 Ibid.
1 1 Yau, Winston and Peggy Sito, “First Entrepreneur Joins Ranks of Ruling Elite,” South China Morning
Post Ltd., November 15, 2002.
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intellectuals.1 2 One of the business leaders in state-owned enterprises who became
alternate members was China Netcom president Xi Guohua.
Serious reform of the Chinese Communist Party would require a major political shake-up
and a weakening of the Communist Party's command of patronage. Choosing between a
new stage of economic development and the politically heavy baggage incurred in the past
half-century is presenting the new “rulers” taking over in Beijing with their biggest challenge.
"China welcomes the world's telecommunications business operators, its equipment
installation businesses, and investors to come to China and invest in the operations of our
telecom sector," said Wu Jichuan, former minister of China's Ministry of Information Industry,
in December 2002.1 3
The Chinese telecom industry made commitments upon entering the World Trade
Organization (WTO) to gradually open up their separate administrative levels and separate
regions. In 2003, China's first year in the WTO, only 14 cities were open, with the areas
open chiefly to value-added and mobile services. There has been insufficient overall scope
and depth of openness, resulting in a lack of sufficient attraction for the majority of foreign
companies to enter China’s telecommunications market.
China's regulator, the Ministry of Information Industry (Mil), very recently reclassified several
international value-added services as basic services; this action has the effect of delaying
until December 2004 the ability of foreign entrants to offer these services, and of requiring
any applicant to have a relatively much higher capitalization of US $250 million, the
1 2 Ibid.
1 3 Financial Times, Global News Wire, “Examination of PRC Telecom Industry, Foreign Investment,”
December 11, 2002.
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requirement that is placed on new basic services providers. Comparatively, the capitalization
level required for entry to value-added services is one-hundredth the capitalization
requirement (at US $2.5 million) of basic service entry.
Additionally, China has until now issued only the "Foreign Investment Telecommunications
Enterprise Regulations," but legal protections must still be formulated in many areas to
increase foreign investors' sense of confidence and security.
The current operational structure and investment characteristics of China's telecom industry
cause major obstacles for both domestic and foreign investors to be able to enter the
market. The present structure of China's telecom industry is basically a state-owned
oligopoly, which has the effect of inherently limiting competition.
The CCP's encouragement for enterprises to "go outside" was supposedly an important
domestic impetus. In the report to the 16th Party Congress in 2002, Jiang Zemin stressed
uniting "bringing in" with "going outside" in order to lift the overall level of opening up to the
outside.1 4 In 2003, Premier Zhu Rongji called for aggressively focusing on the readjustment
of the industrial structure and western region development and stated, "We should
energetically promote IT application, most importantly telecommunications, and use
telecommunications to propel industrialization.”1 5 The telecommunications industry has
grown by at a rate that is three times that of the national economy over the past five years,
developing into an official “pillar” of the Chinese economy.
1 4 Yau, Winston and Peggy Sito, “First Entrepreneur Joins Ranks of Ruling Elite,” South China Morning
Post Ltd., November 15, 2002.
1 5 Financial Times, Business Daily Update, “National Economy Sees Robust Growth in Part 5 Years -
Premier,” March 7, 2003.
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2. INHERENT CONTRADICTION AND EXPLOITATION
Official “Pillar” of the Economy
The Information Industry, most notably telecommunications, has become the largest pillar in
China’s economy, as per an official of the Ministry of Information Industry.1 6 In 2003, China’s
electronic and information industry had overall revenue of 1,880 billion yuan (US $220
billion), the second largest figure in the world. Meanwhile fixed-line and mobile telephone
users together have exceeded 600 million, more than any other country in the world; the
number of Internet users ranks second in the world. China produced 186.4 million mobile
phones, while it exported 90 million of them, said the official.
In January 2004, the Ministry of Information Industry launched the “Telephone Service in
Each Village” Project, with an aim of speeding up communications development in rural
areas.1 7 Due to uneven economic development in various localities, telecommunications
development is quite uneven in China. Statistics show that while 60 percent to 80 percent of
the citizens in Beijing and Shanghai have a mobile phone, many administrative villages do
not even have one fixed telephone.1 8 Villages that do not have any telephone service have
become even poorer in the last few years. According to Yang Peifang, a general secretary of
Mil, China could also launch a Telephone Service in Every Home Project in the future.1 9
Over twenty years ago, it was still a dream for most Chinese households to communicate via
telephone. Even five years ago it cost several thousand yuan to install a telephone and at
1 6 Xinhua News Agency, Information Industry has Become the Largest Pillar to China’s Economy,”
June 28, 2004.
1 7 Comtex News Network, SinoCast, “China Starts Telephone Service in Each Village Project,” January
14, 2004.
1 8 Ibid.
1 9 Ibid.
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least 10,000 yuan (US $1,209) to buy a mobile phone due to China's limited
telecommunications service. However, it is becoming quite common today for each
20
household to have two fixed telephones.
"The central government has always attached great importance to really make IT a pillar of
our industry," former Ministry of Information Industry head Wu Jichuan said.2 1 He reiterated
Premier Zhu’s call as official policy to use IT technology to restructure traditional
industries. "IT applications will help to improve the capacity and capability of our people." He
claimed his department had led the way of implementing telecom reform faster than China's
other industries and that this in turn was reflected by the rapid growth in China's mobile
telecoms market. "The telecom industry has been the leader in completing the reforms," Wu
said. He said China was in need of a unified, centralized telecom market regulator besides
the Mil but that this would not happen until the market was sufficiently open. Clearly this was
a signal that the Mil as an arm of the government that in turn was led by the CCP would be
in control of the telecom industry for the foreseeable future, since it was up to the leaders of
the CCP whether or not to open up the industry. Wu, who was replaced in March 2003 by
Hebei party secretary Wang Xudong, said Beijing would raise competition in the telecom
industry in an "orderly" way rather than immediately opening the sector.2 2
China, over the last ten years, has transformed from telecom weakling to the largest
telecommunications market in the world. From 1991-2001, it added more than 300 million
20 Xinhua News Agency, “Lives of Chinese People Improve Markedly in Five Years,” March 4, 2003.
2 1 Financial Times, Global News Wire, “Minister W u Jichuan States China Aims to Make IT Sector
‘Pillar’ of Economy,” December 3, 2002.
22 Ibid.
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telephone subscribers - more than half of Asia's total.2 3 One in a hundred people had phone
access in China in 1991, while 30 people per 100 had such access in 2001.2 4
As the mobile operators compete via “illegal” price wars and value-added features, they are
also being challenged by fixed-line providers China Telecom and China Netcom - which lack
mobile licenses but still operate a short-range network called “Xiaolingtong” that allows users
to use a home cordless phone around their hometown but doesn't have intercity roaming
support. With 50 million subscribers across 300 cities,2 5 the intra-city range limitations of the
network don't seem to have retarded its popularity among low-end users looking for a deal.
That, in turn, has compelled the mobile duopoly cut rates to compete for new voice
customers, raising the ire of the Mil and the government because officially set pricing is not
being adhered to.
Socialist Market Competition and Control
In 1994, a new set of telecommunications and information technology initiatives was
approved by China’s State Council. The China United Communication Corporation, or
“China Unicom” for short (Lian Tong), a company backed by the Ministry of Electronics
Industries (MEI) and several other ministries (non-MPT), won the right to establish a second
telecommunications network (one that would operate alongside the Ministry of Posts and
Telecommunications [MPT]-backed China Telecom). Also, another new company under the
wing of the MEI, Ji Tong, was created. These initiatives originated outside of the MPT
monopoly, and as a result, they were viewed by many outside of China as market reforms.
23 Clendenin, Mike, “Information Industry Ministry's W u Gives High Marks to Government Controls on
Market Frenzy,” Electronic Engineering Times, December 9, 2002.
24 Ibid.
25 Financial Times, Business Daily Update, “ Xiaolingtong Foresees Momentum,” July 22, 2004.
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However, China Unicom and Ji Tong were not party aspirations of market reform. A new
order of telecommunications, in terms of law, never materialized. Additionally, the MPT itself
remained the same (until 1998, when it became part of a new ministry - however many
argue that the core has remained exactly the same).
The MPT (regenerated and renamed the Ministry of Information Industry - Mil in 1998) had
been playing multiple, monopolistic roles as a policy maker, an industry regulator, and a
network operator. Official rationales for the MPT’s historical monopoly have included:
• “As an investment and technology intensive industry for infrastructure,
telecommunications needs to be planned, developed, managed, and operated by a
centrally controlled organization, so as to benefit from economies of scale and
scope, and avoid duplicate construction and waste of resources;
• The obligation of universal service can only be met by a government-controlled
entity, not by profit-seeking businesses;
• A strong belief that network ownership and network services should be bundled
together, not separated;
• As telecommunications involve state security and safety, telecom networks should
be operated with high protection and low vulnerability. Therefore, it is sensible to
maintain control and minimize the number of players.”2 6
26 Fan, Xing, Communications and Information in China: Regulatory Issues, Strategic Implications,
Lanham, Md.: University Press of America, 2001, p. 127.
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“MPT’s historical monopoly in Chinese telecommunications has brought about six major
consequences:
1. Uncompetitive prices and installation fees.
2. Price discrimination (e.g., interconnection fees for non-MPT [now Mil] entities).
3. Cross-subsidization to gain sectorial advantages in market competition.
4. Barriers to effective competition, such as the lack of unbundled local access to
China Telecom's networks and monopoly practice in telecom resources allocation.
5. Poor service quality, low productivity, and
6. Slow technology innovation, limited service choice, and weak customer protection.”2 7
Currently, the Mil continues to be responsible for network construction, maintenance,
operations, and regulation. The Mil constantly reiterates that its regulatory and operational
functions should be split off into two parts, one regulatory body that creates and implements
policies and regulations, and the other a commercial organization that deals with market
forces and operates telecom services. However, there has been no concrete sign that this
split between regulatory and commercial interests will ever occur.
As for the China Unicom and Ji Tong initiatives, they should be viewed as a product of the
particular political and economic pressures created by China’s reform process. The catalyst
for this change was a battle over the control of China’s equipment and service markets
between China’s industrial ministries. On one side of this battle was the MPT and on the
other side was the MEI, leading a coalition of other ministries with large stakes in
telecommunications and information technology. The MEI-led coalition succeeded because it
27 Fan, p. 127-128.
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matched its economic interests to the CCP’s ideological and technocratic commitment to
technology industries.
Ministerial Rivalries and Policy Change
From 1949 to 1994, the MPT monopolized the public telecommunications industry.
However, many of China’s ministries, since the 1960s, have constructed their own dedicated
telecommunications networks. The largest of these “private” networks served the People’s
Liberation Army (PLA), the Railway Ministry (MOR), the Ministry of Electric Power (MEP),
and the Ministries of Transportation and Petroleum. Additionally, substantial “private”
networks served the People’s Bank of China and the Ministry of Foreign Trade. Economist
Ding Lu stated in 1992 that “in Shanghai alone, there were 92 dedicated networks run by
different branches of the municipal government and 125 networks run by different national
ministries.”2 8
During this period, the MEI served as China’s major supplier of telecommunications
equipment. The MEI had manufacturing and research and development facilities that dealt
with integrated circuits, computers, software and electrical appliances. The MEI was
supported and sustained by large R&D grants from the central government and the military.
At this time, nearly all of China’s telephones were in government offices and large state
enterprises; as a result, the MPT’s market was a rather limited one and therefore not the
dominant one between the two.
28 Mueller and Tan, p. 46.
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The Creation of China Unicom
The MEI viewed the breakup of the MPT monopoly on public telecommunications as the key
to its long-term continued survival; it devised a coalition of other large, powerful ministries
with dedicated networks to challenge the MPT’s monopoly on public telecommunications
services. In particular, it joined a coalition with the Ministry of Railways (MOR) and the
Ministry of Electric Power Industry (MEP).
In 1992, a joint proposal from the three ministries (MEI, MOR and MEP) was sent to the
State Council, calling for a second national carrier, China United Communication
Corporation, “China Unicom” for short (Lian Tong). As an angle, the three ministries
stressed the fact that there were many remote areas of the country without adequate
telecommunications capacity. Other large network users, investment companies, and local
governments supported this proposal, as they saw competition and reform as beneficial to
their interests.
During 1993, a large debate began: The MPT claimed that telecom liberalization would ruin
existing economies of scale, jeopardize the goal of universal service, and put in question
national security and sovereignty; on the other side, the three ministries pushed the idea of
improved and expanded telecom service in China. Also, they postulated that by limiting
operation of services to Chinese nationals Chinese sovereignty and security would be
protected. In December 1993, the State Council sided with the anti-MPT coalition and on
July 19, 1994, China Unicom was officially inaugurated in Beijing.
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The Creation of Ji Tong
Besides China Unicom, the MEI successfully proposed another new company - Ji Tong - to
link MEI’s equipment manufacturing capabilities to the construction of an information
superhighway in China.
The planned centerpiece of Ji Tong’s business was to be the so-called three “golden”
projects - the Golden Bridge, Golden Customs, and Golden Card. Golden Bridge was a
satellite-based ISDN network that served as a state public economic information network
that linked government agencies, state enterprises, and the public; Golden Bridge resembled
an “internet” connecting all of China’s private data networks. Golden Customs was to be a
specialized data network for the management of trade, tariff collection, import-export
licenses, and exchange settlement. Golden Card was to have provided the infrastructure for
a public credit card system by linking banks, businesses, and consumers with adequate
financial networks. There was much discussion on these “Golden” projects, but none,
beyond Golden Bridge, went past “drawing-board” status.
Rise of the Ministry of Information industry (Mil)
China Telecom’s close affiliation with the MPT led to regulatory distortions. As a result,
China Unicom and its shareholding ministries strongly appealed for regulatory restructuring;
what they called for was a complete functional and organizational separation between China
Telecom and the MPT. Additionally, the increasing development of individual “private”
networks, most notably the cable network of the Ministry of Radio, Film and Television,
raised the government’s concern over “duplicative construction.”2 9
29 Telecommunications in China: Development and Prospects, Jintong Lin, Xiongjian Liang and Yan
W an, Editors, Huntington, N.Y.: Nova Science Publishers, 2001, p. 132.
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The Ministry of Information Industry (Mil), a new ministry created to coordinate development,
was formally established in April 1998. It was created from a merger of the MPT, MEI and
the Network Division of the Ministry of Radio, Film and Television. All networks and IT-
relevant manufacturing industries continue to be subject to the Mil’s regulation.
Mil Change; Regulation
The current consensus among Chinese officials and industry insiders is that Mil regulation of
China’s telecommunications sector is in need of overhaul. In 2002, the telecom industry had
been through some significant changes, such as the separation of the fixed-line
telecommunications monopoly China Telecom into two competing companies. In time, as
competition increased, so have abuses, which the Mil have so far been ineffective at
tackling.3 0
Some of the problems are caused by China Mobile. Mobile users who subscribe to China
Unicom phone service have complained they often have problems connecting calls made to
China Mobile subscribers. Fixed-line operators China Telecom and China Netcom have also
been accused of providing each other with substandard service, and even sabotaging each
other’s networks. Problems in “interconnection” - passing calls from one company to another
- simply didn’t exist a few years ago, when there was just one telecom operator - China
Telecom.3 1
The Mil has much more experience setting prices and targets than fixing disputes; it is also
not an impartial regulator since it is the one who sets the rules up in the first place. The WTO
30 Batson, Andrew, “China Halts Telecom Purchase, But Lets Foreign Deal Proceed,” The Asian Wall
Street Journal, October 1, 2002, p. M3.
3 1 Batson, p. M3.
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has urgently called for an independent regulator in the telecom sector; so far, this important
issue has not been actively addressed.
The current Mil administration took office in March 2003, following China’s national congress
meeting to approve government personnel changes. At that time the incumbent long-serving
minister Wu Jichuan, 65 years old, retired. Mr. Wu opposed opening up the telecom sector
to foreign investment on its WTO entry; he had been a strict believer in central planning and
overly protectionist.3 2 Wang Xudong, a former Communist party chief in northern Hebei
Province with no significant experience in the telecom industry, was appointed as Wu’s
successor.3 3 The expectation at the time of taking office was that Mr. Wang would deal with
the regulatory risk that is a central feature of Chinese business with a much less
conservative hand.3 4 He has yet to prove that he is capable of driving change.
New Telecom Legislation
China's previous Telecommunications Regulation, promulgated in 2000, failed to solve major
problems such as market entry, property rights and interoperatability. Also, this simple
administrative regulation no longer meets the needs of Chinese telecom industry’s changing
situation. The splitting of the former national fixed-line conglomerate China Telecom and the
rise of China Tietong, for example, has fundamentally reshaped the industry. The fact that
the drafting of a telecom law has taken so many years to do is an indication of how difficult
the task has become.
32 Ibid.
33 Dickie, Mure and Richard McGregor, “New Chief for China's Telecoms,” Financial Times, November
27, 2002.
34 Pottinger, Matt, “Beijing Taps an Outsider to Head Telecom Agency,” The Asian Wall Street Journal,
November 27, 2002, p. A4.
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18
Sources close to the Mil said a draft telecom law that addresses some of the industry's
problems was submitted for approval to the State Council, China's cabinet, at the end of
September.3 5 However, the ministry official warned that it would be some time before the
law would take effect, as it requires official support of the National People's Congress,
China's legislature, after it receives the approval from the State Council.
Chen Jinqiao, director of the China Academy of Telecommunications Research under the
Mil, said that existing telecom regulation is no longer compatible with the rapid development
36
of the telecom industry. The industry's operators are intent on increasing their respective
market share. China had more than 600 million telephone users by the end of June this year.
Mobile phone users make up the majority, surpassing fixed line telephone users, reaching
over 300 million. Ministry figures indicated that China Mobile maintained its leading share
over the entire subscriber base, including both mobile and fixed-line users, with a market
share of 37.0 percent, with China Telecom commanding 30.7 percent by the end of June this
year. China Netcom had a 16.2 percent share, China Unicom came in at 14.5 percent, and
China Tietong had a share of 1.6 percent.3 7
"We need a more profound telecom law to better supervise the market and protect the
interest of both telecom operators and subscribers," Chen said.3 8 Issues such as universal
service, government supervision and subscribers' obligations and rights, according to the
source, have already been included in the draft telecom law. Additionally, Su Jinsheng,
director of the Telecommunications and Administrative Bureau, said that the Mil is currently
35 Financial Times, Business Daily Update, “Telecom Competition Crucial,” August 6, 2004.
36 Financial Times, Business Daily Update, “Steps to Become a Global Player,” August 4, 2004.
37 Ibid.
3 8 ik ;,!
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19
constructing a supervision system set to oversee telecom operator interoperability. "The
39
system is scheduled to be built later this year or early next year," he said.
While supposedly setting principles to spur growth of the crucial telecom sector, the draft
telecom law reportedly4 0 keeps a tight control on the number of new operators allowed to
enter the market, which seriously puts the success of market reform at risk. Without the
ability of more operators to enter the market, effective competition is impossible. Currently, in
China, the free market mechanism does not have a role to play in pricing telecom services
and monopolies continue to prevail. Even if the draft telecom law is passed, it appears
market reform will be minimal.
Currently, the State holds a majority share in all the telecom operators. In the three listed
operators - China Mobile, China Unicom and China Telecom - more than 70 percent of the
shares are non-private.4 1 In the past decade, China's mobile service pricing has never been
officially adjusted although its subscriber base keeps growing. Last year China Mobile
garnered 35.5 billion yuan (US $4.3 billion) in net profit, raising its net profit rate to 22
percent4 2 - an incredible figure in comparison to other domestic monopolistic sectors.
If more competitors were allowed to enter the telecom market and competition intensified, it
would be possible for State operators to incur losses - which would make the Mil, the drafter
of the telecom law, incur great political fallout.
In addition to dealing with the issues of interoperability and limiting market entry (which could
be utilized as a way to narrowly define WTO concessions), the draft telecom law is expected
39 Financial Times, Business Daily Update, “Telecom Competition Crucial,” August 6, 2004.
40 Ibid.
4 1 Ibid.
42 Ibid.
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20
to deal with universal telecom provision services, and aid the convergence of telecom,
broadcasting and Internet networks.
Restructuring Plan Scaled Back
The central government has recently scaled back a sweeping restructuring plan of state
departments, which has led to a delay in setting up a new telecom commission.4 3 The
leadership continues to have plans to establish a number of new ministries, including a US-
style food and drug administration, but the proposed commissions on agriculture, telecom,
energy and transportation were not approved as there was a lack of agreement on the scope
of their responsibilities.
Government Control of Price Wars
Mil, in an effort to prevent price wars among telecom operators, reiterated in an official
circular sent to operators in July that it would step up efforts to enhance telecom industry
supervision.4 4 According to the circular, telecom operators are required to inspect all of their
subsidiaries to prevent price wars. Meanwhile, they are to submit the report of their self
inspections to the Mil after the process is done till December 1.4 5
Chen Jinqiao, director of the China Academy of Telecommunications Research under the
Mil, stated that he believes competition in the domestic telecom market has already taken
shape and there is no need for price wars. "Operators should turn to services, network
upgrades as well as innovations to seek new growth areas," he said.4 6 It is apparent that the
43 AFX News Limited, “China to Scale Back Government Restructuring Plan, Delay Telecom
Commission," February 24, 2003.
44 Financial Times, Business Daily Update, “Ministry Battles Telecom Price W ars,” July 5, 2004.
45 Ibid.
46 |Ki^
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21
Chinese socialist market definition of competition is vastly different than the capitalist free-
market definition of competition.
Government “Infant Company” Protection
Each of China’s telecom operators is state-owned; it is important to note China’s goal in the
run-up to WTO accession had been to liberalize, not privatize, its telecom industry in the
hopes that these enterprises would be better equipped to compete with foreign companies.
For example, prior to July 1, 2002, when China eliminated the installation fee for fixed line
phones and network connection fees for mobile phones, the government allowed China
Unicom and China Tietong to charge fees that were 10 percent to 20 percent lower than the
government-fixed rates that applied to all other carriers. The government felt such a double
standard was justified to allow these two carriers time and capability to grow and thus to
become stronger competitors with China Telecom before the entry of foreign competition.4 7
Phone Production License Restriction
The Mil announced in July 2003 that mobile phone makers that lease their production
licenses will be under severe punishment.4 8 Ail cell phone handset manufacturers that want
industry access must submit applications to the Mil Telecom Equipment Certification Center
before their products reach China Telecommunication Technology Labs (CTTL), the
authorized test center by Mil. According to CTTL test results, it will be decided whether
handsets are qualified for market entry. Applicants are required to fill out an additional form
47 Farris and Stocks.
48 Financial Times Information, SinoCast China IT Watch, “Mil to Grip Tighter On Licenses for Cell
Phone Makers," July 22, 2003.
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22
when they submit their applications to the Mil for purposes of outlining the applicants’
design, production and sales status.
In China, there are 32 companies that are making phones or equipment for GSM services,
including 17 that are fully Chinese. Foreign companies have strict targets provided by the Mil
on local content. Xiamen was the first Chinese company to make mobile phones; other
Chinese companies that have joined the thriving market in the past year or so include China
Kejian, Eastern Communication, Fenghua Bodao, Haier, Konka, Nanfang High-Tech, TCL,
Xiaxin Electronics and Zhongxing Telecom Equipment.
Possibility of Major Telecom Mergers
The State Council, China's cabinet, is thinking of merging the country's four
telecommunications carriers at parent level in order to resolve its long-delayed third-
generation (3G) mobile-licensing program, the South China Morning Post reported, sourcing
two senior executives from separate mainland operators.4 9 The promise that all four telecom
operators would receive a 3G license was made by former Mil minister Wu Jichuan more
than two years ago.
It was reported that both the State Council and the State-owned Assets Supervision and
Administration Commission (SASAC) of the Mil - the ultimate controlling shareholders of
China's four telecom groups - had under review a plan to merge China Netcom with China
Mobile and China Telecom with China Unicom.
49 AFX News Limited, "China State Council Reviewing Plan to Merge Four Telecoms Carriers,” July 6,
2004.
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23
Executives at China Mobile say they have not been informed of the proposal. The executives
said the government was convinced the merger plan could resolve the 3G license problem
as only two mobile licenses would be needed instead of four; SASAC wanted to avoid too
much competition among the operators, they said.5 0
"The four carriers are owned by SASAC, if four 3G licenses were issued and all four build
their 3G networks, it will not only create investment overlapping but too much competition,"
one executive said. Again, the Chinese socialist market definition of competition is vastly
different than the capitalist free-market definition of competition.
Other industry sources said chances of such a telecom merger materializing were split down
the middle as some government officials object to it because they believe the industry should
become more competitive and argue that China Telecom's monopoly was broken up just two
years ago.5 1
The industry sources say that the plan was initially brought in by Zhang Chunjiang, the head
of China Netcom, which is aiming to launch an IPO in Hong Kong. The proposed merger
would benefit greatly China Netcom - the smallest player - as it would quickly become cash
rich as a result and an instantly strong industry player.
Analysts have said that moves by the government to merge China’s four telecom operators
into two groups would ruin investor confidence in the Chinese market and “fly in the face of
the country's pledge to reform state-owned enterprises.”5 2 Additionally, with units of three of
50 Ibid.
5 1 Agence France Presse, “China Reviewing Plan to Merge Four to Six Telecoms Carriers: Report,”
July 6, 2004.
52 Jackson, Allison. “China Plan to Merge Telecom Carriers Would Shatter Investor Confidence,” AFX
News Limited, July 6, 2004.
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24
the four state-owned operators listed abroad, the merger “would also be a gross violation of
minority shareholders' rights and could be interpreted as political favoritism.”5 3
"It throws a considerable amount of fear, uncertainty and doubt into the minds of investors
when they see these kinds of government... moves take place," according to David Wolf,
managing director and head of digital practice at global communications group Burson-
Marsteller in Beijing.5 4 In addition to the merger facing huge challenges, it would also
contradict “what makes good sense anywhere in the world where you have got a market
economy,” Wolf said.5 5
During his recent visit to China in July 2004, US Commerce Secretary Don Evans stressed
“the Chinese government's interference in the economy as one of reasons Washington
refuses to recognize China as a market economy.”5 6 Duncan Clark, managing director of
telecoms consultancy BDA, said he thought investors would be against the merger because
“it would force China Mobile to absorb an overpriced fixed line carrier, China Netcom,” which
he portrayed as the "ugly duckling" of the four operators. Additionally, “the move could also
be seen as political favoritism because China Netcom head Zhang Chunjiang, who is
believed to have put forward the idea, is a former vice minister of the Mil,” he said.5 7
3. STATE OF THE CHINESE TELECOMMUNICATIONS INDUSTRY
As of the end of 2003, China's telecommunications industry ranked thirteenth in the world,
according to an annual report released by the Chinese Ministry of Information
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
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Industry.5 8 Currently, China boasts the world's largest number of subscribers for both fixed-
line telephones and mobile phones, accounting for one fifth of the world’s total. It also has
the second largest number of Internet service subscribers world-wide.
According to the statistics published by the Mil, “from January 2000 to May 2004, the total
fixed-line telephone subscribers in China grew by 167 percent from 108.8 million to 290.4
million, while the fixed-line telephone penetration rate increased from 8.23 percent to 21.2
percent. During the same time period, the total number of mobile phone subscribers
increased by almost 600 percent from 43.2 million to 300.6 million, while the mobile phone
penetration rate grew from 2.99 percent to 20.9 percent. At the same time, the total number
of Internet service subscribers in China increased by 25 times, from 2.2 million to 53.22
million, including 18.75 million enjoying broadband Internet access, of which 13.51 million
choose ADSL, or asymmetrical digital subscriber line service.”5 9
In the last five years, China's telecom revenue has had a compound annual growth rate of
over 22 percent, with the completion of the world's largest fixed telephone and mobile phone
networks.6 0
An official with the Mil said that from 1998 to 2002, the percentage of added value of the
telecom industry in the Gross Domestic Product (GDP) had grown from 1.5 percent to 2.7
58 Financial Times, SinoCast China Business, “Mil Releases Report on Telecommunications
Industries,” February 4, 2004.
59 Market Wire, “China-Asia Stocks.com - Reports on China’s Telecommunication Market,” June 22,
2004.
60 Xinhua News Agency, “China's Telecommunication Service Revenue Yearly Grows Over 22 Percent
During 1998-2002,” October 29, 2003.
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26
percent.6 1 In 2003, China's telecom service revenue totaled 531.3 billion yuan (US $64.0
62
billion), up 16 percent year-on-year
China had 27.65 million new fixed-line subscribers in the first five months of this year.
However, only 24 percent of these new subscribers were from rural areas. Currently,
telephone density in rural areas is only 13 pe'rcent, compared with the national overall
average of 23.7 percent. At the end of 2003, urban fixed-line users made up 65.1 percent of
the total fixed-line users of which rural users made up 35 percent; by the end of May 2004,
however, the proportion of urban telephone users increased to 67 percent, and rural users
fell to 34.3 percent.6 3 According to the “Telephone Service in Each Village” project blueprint,
China is planning to connect 95 percent of the nation's almost 40,000 villages in rural areas
by the end of 2005.6 4
Fixed-asset investment in 2004 in China's telecom sector is expected to decrease to 210
billion yuan from last year's 221.5 billion, due to an anticipated “halving” in Xiaolingtong
services investment, according to a State Information Center (SIC) industry report.6 5 The
report said Xiaolingtong investment, the limited mobile service offered at low cost, is
expected to fall to 8 billion yuan this year (a 50 percent decrease from last year’s level), with
the government expected to issue 3G licenses to all four telecom operators as soon as early
2005, opening up the mobile market to the two fixed-line operators. The SIC also believes
that China will become the world's largest DSL market this year.
6 1 Ibid.
62 Market Wire, “China-Asia Stocks.com - Reports on China’s Telecommunication Market,” June 22,
2004.
63 Asia Pulse, “China’s Telecom Market Steady in H 1: Report,” August 5, 2004.
64 Ibid.
65 AFX News Limited, “China 2004 Telecom Investment Seen Slowing to 210 Bln Yuan,” May 25, 2004.
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China expected to produce 170 million mobile handsets in 2004, including 90 to 100 million
units for export, the SIC report added. China's mobile handset output rose 54.5 percent last
year to 186.4 million units last year, according to figures from the Mil.6 6 The SIC forecast for
new mobile subscribers is 60 million and is more optimistic than the Mil's estimate of 52
million, a 17.1 percent decrease over last year, amid a gradually saturating market.6 7
While mobile phone service is currently still retaining its role as the telecom’s largest
contributor to revenue, the rapidly-growing IP (Internet Protocol) call service is replacing
some traditional long-distance calls. In the first six months, domestic telephone users made
5.5 billion minutes of IP calls, an increase of 44.5 percent from the same period last year.6 8
In the meantime, the Mil launched the second stage of 3G communication field testing in
February 2004 which involved all four telecom operators. According to the Mil's schedule,
the EU-backed WCDMA standard was the first to be tested, then the CDMA2000 standard in
April and China's own TD-SCDMA standard after May. The second stage of testing was
69
completed in September.
In addition, research and development on NGN (Next Generation Network) has made some
progress. NGN’s superior soft switch technology, which was proposed by several telecom
operators for usage, will be applied in a trial test some time in the next few months.7 0
In April 2004, the Mil put forth an announcement meant to curtail the high-growth SMS (short
message service) market; the SMS market was growing at such a tremendous rate that the
6 6 Ibid.
6 7
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28
Mil had not had a chance to sufficiently control it to their satisfaction. Other “regulatory”
measures include strengthening the administration on mobile phone radioactivity, frequency
occupation and mobile phone licenses.7 1
In terms of raising capital for telecom growth, the favored method has been to spin off
operations of selected provinces and to sell a minority stake through an initial public offering.
With this method, investors have very little to no influence on a company’s group strategy or
on terms of future asset sales from the parent to listed subsidiary.7 2 However, the listed arms
of China Telecom, China Unicom, China Netcom and China Mobile have been buying
provincial networks from their unlisted parent company to increase their market width and
breath; in many instances capital for such acquisitions was raised by way of issuing
company bonds.
Technologies; Statistics
Fiber Optics
China had a total of 2.25 million kilometers of telecom fiber optic cable lines by the end of
2003, an increase of 42 percent over last year. China's push to broadband is behind the
large demand for fiber optics. Fiber optic lines laid down in China are predicted to reach 16
million kilometers by 2005, up from 6.6 million in 1999, a growth rate of over 140 percent.7 3
China's domestic fiber production is expected to have a compound annual growth of 27
percent, increased to 16.4 million fiber kilometers in 2005 from 5.8 million fiber kilometers in
2000. Additionally, China is predicted to purchase at least 16 million fiber kilometers from
7 1 Ibid.
72 Dickie, Mure, “IPO Loses Its Ring of Confidence: Telecoms,” Financial Times, December 12, 2002.
73 Broadband Business Report, “New Rules Create Opportunities in China," PBI Media, LLC,
December 17, 2002.
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29
offshore sources through 2005. China currently has more than 200 fiber-optic cable
manufacturers.7 4
China Telecom's fiber optic cables increased 87,000 kilometers last year to more than 1.1
million kilometers. China Netcom's fiber optic cable lines increased by 20,000 kilometers in
2003 to more than 630,000 kilometers, while China Unicorn's fiber optic cable lines
increased by 160,000 kilometers to more than 540,000 kilometers. China Tietong had total
optical lines of about 80,000 kilometers by the end of last year.7 5
Outside of China, in August 2004, China Telecom increased its transmission capacity to
North America by 208 percent after closing a 30G-submarine-cable deal with FLAG, or
Fiber-optic Link Around the Globe. In addition to last year's acquisition of 17.7G submarine
cables, China Telecom is now the largest in the world in terms of global fiber optic cable
lines. China Telecom also has plans to augment its Asia-Europe communications by building
a cross-border fiber-optic cable in north China, according to a July deal between China
Telecom and Russia Telecom.7 6
DSUADSL
Internet users in China grew to 87 million by June 2004, an increase of 28 percent over last
June’s rate, mainly as a result of the fast growth in broadband services, the China Internet
Network Information Center (CNNIC), a government-affiliated organization, said in its latest
research report.7 7 The growth is being advanced by the “expanding and improving
74 AFX News Limited, “China Mobile Tops Mainland Operators in 2002 with 36.7 Percent Share of
Operating Revenue,” April 7, 2003.
75 Financial Times, Business Daily Update, “China’s Internet Users Hot 87M in End-June,” July 21,
2004.
76 Asia Pulse, “China Telecom Triples Transmission Capacity to North America,” August 24, 2004.
77 Financial Times, SinoCast China Business, “China Netcom Competes with China Telecom for
Broadband Market,” May 18, 2004.
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30
broadband services" provided by China Telecom and China Netcom, it said. The two
operators over the past year have invested millions of dollars towards networks upgrades to
provide broadband Internet access service through ADSL (asymmetric digital subscriber
line) networks. According to CNNIC, China is the fastest growing broadband market in the
world with 18.75 million users by the end of May this year, with China Telecom capturing 10
78
million of those users and China Netcom the balance.
Mobile
In 1981, China began offering mobile telecommunication services when the 150MHz cellular
system became operational. However, the service only “took off’ when the city of
Guangzhou launched the first analog 900 MHz TACS system in November 1987.7 9
The number of mobile phone subscribers recently passed 300 million, but the mobile
penetration rate is just a little over 20 percent and officials are predicting more than 360
million subscribers by 2005.8 0 In the space of eight years, China's mobile subscriber
population has grown to be the largest in the world, accounting for about 30 percent of the
world's mobile users. China's mobile subscriber growth will begin to decelerate as
penetration rates of 40 to 50 percent, in the wealthy southern and eastern regions are
already high (sometimes as high as 60 to 80 percent, as in the case of both Beijing and
Shanghai), and rural populations are expected to be slower adopters. Regardless, the fact
is that the Chinese mobile market has now achieved a size that carries leverage on the
global telecom scale as it is now number one in mobile subscribers in the world.8 1
78 Ibid.
79 Telecommunications in China: Development and Prospects, Jintong Lin, Xiongjian Liang and Yan
Wan, Editors, Huntington, N.Y.: Nova Science Publishers, 2001, p. 109.
80 Dickie.
8 1 Chan, Paul, “ A Wireless Juggernaut that Can't Be Ignored; A Big Part of the Future of Global Mobile
Communications is Being Written in China,” The Business Times Singapore, November 18, 2002.
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31
Regarding mobile standards, over 230 million subscribers are currently using GSM phones,
but China has yet to prescribe to a single standard. Qualcomm recently agreed to license its
CDMA technology to two Chinese manufacturers, of which only China Unicom has
developed a network.8 2 China Unicom has 21 million subscribers for its CDMA network as of
February 2004 vs. 75 million subscribers for its GSM network (by comparison, China Mobile
has over 150 million GSM users).
Xiaolingtong
Xiaolingtong is a short-range network that allows users to use a home cordless phone
around their hometown but doesn't support intercity roaming. Many experts and insiders
believe that although it is a transitional technology, Xiaolingtong has many attractive
advantages when competing with wireless services such as GSM and CDMA. Xiaolingtong,
also called the “Little Smart," is built into existing fixed-line networks and attracts users with
low per-minute rates, one-way charges and cheap monthly fees.
Since Mil regulators gave Xiaolingtong operators China Telecom and China Netcom a free
rein to service China last year, the service has undergone a large expansion. Xiaolingtong
subscribers reached 35.5 million last year, and 50 million as of April 2004.8 3 The market
brought in 16.1 billion yuan (US $1.9 billion) of revenues last year, with equipment makers
benefiting greatly from the development including UTStarcom, ZTE Corporation and Lucent
Technologies Qingdao.
With its comparatively low telecommunication fees, Xiaolingtong is currently changing the
market share balance of mobile telecommunications. The communication fee for
82 Farris and Stocks.
83 Financial Times, Business Daily Update, “ Xiaolingtong Foresees Momentum,” July 22, 2004.
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Xiaolingtong in Beijing, for example, is set at 0.11 yuan (1.3 US cents) per minute, compared
to 0.40 yuan (4.8 US cents) per minute for China Mobile's GSM GotOne service.8 4
Telecommunications pricing for the second generation of mobile telecommunications
(including GSM and CDMA) is no longer adaptive to the market, however, Mil regulators
continue to set and enforce official government pricing.
"Xiaolingtong continues to be a key revenue driver for both China Telecom and China
Netcom," said Wu Ying, chief executive officer and chairman of UTStarcom China.8 5
"Despite its tremendous subscriber growth rate to date, we believe that the market demand
for the service is still very strong, as only 4 percent of the population currently subscribe to
Xiaolingtong service," Wu added. China Telecom recently signed an agreement of US $80
million with Lucent Technology for its Xiaolingtong equipment.8 6
Xiaolingtong subscribers are expected to surpass 100 million mark by the end of 2007.8 7
Industry experts believe what is most significant for Xiaolingtong’s progress is the timing of
the issuance of 3G licenses and how 3G-based services are developed. The widely-held
speculation is that the Chinese government will assign 3G licenses next year. As the
development of 3G should be gradual, at first mainly targeting high-end customers, there
should still be room for Xiaolingtong. Si Furong, managing director of China Telecom,
believes “there is still market potential for the development of Xiaolingtong as it meets the
demand of low-end customers.”8 8
87
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
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China's telecom operators are testing short messaging service (SMS) between Xiaolingtong
phones and mobile phones. A round of network testing involving China Mobile, China
Telecom and China Netcom was completed in June 2004, involving Shanghai municipality,
and Hebei, Jilin and Jiangsu Provinces.8 9
Third Generation Mobile Technology (3G)
Wang Jianzhang, director of the Ministry of Information Industry, continues to affirm that the
central government will maintain its cautious attitude on the issuance of 3G licenses. "We
are actively conducting experiments to work out which license issuance plan is the best,"
Wang said. “China is in the best position to find out what suits the nation best, given that all
of the world's leading technologies, equipment and terminals are currently being tested in
China,” he said.9 0
China is likely to see the co-existence of three 3G standard European-based WCDMA
(Wideband Code Division Multiple Access), US-based CDMA 2000 and homegrown TD-
SCDMA (Time Division Synchronous Code Division Multiple Access).
Based on current market expectations, China Mobile, the world's biggest carrier in terms of
subscribers, will build a 3G system on the WCDMA standard, which is based on the GSM
technology popular in Europe. China Unicom is anticipated to build a system based on the
CDMA 2000 standard developed by Qualcomm Inc. of the United States. Regarding the
domestically-produced TD-SCDMA system, all five domestic telecom operators are currently
holding network trial tests based on that system. Insiders are also expecting that both major
89 Financial Times, InfoProd, “SMS Testing in China Between Little Smart and Mobile Phones,” July 11,
2004.
90 Financial Times, Business Daily Update, “Steps to Become a Global Player,” August 4, 2004.
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34
fixed-line operators - China Telecom and China Netcom - will get 3G licenses, as will the two
91
existing mobile operators, China Mobile and China Unicom.
“More than 70 percent of Chinese mobile phone users are expected to subscribe to third
generation telecommunication services in 2010, five years after 3G licenses are expected to
be officially issued,” a senior official of the Ministry of Information Industry said at an IT forum
in Shanghai in April 2004.9 2 "The 3G service will boost a trillion yuan market in five years
from its issuance," Chen Jinqiao, director of the Institute of Telecommunication Policy under
the Mil, said.9 3 The Chinese 3G handset user population is expected to number between
351 million and 437 million in 2010.9 4
Chen thinks that 3G technologies will open up a 360 billion yuan market for mobile
operators, and a 660 billion yuan market for telecommunication equipment providers and
handset makers. 3G technologies permit users to exchange both voice and data much more
quickly in comparison to current mobile phone technologies, with the new technologies
making it possible for users to hold video conferences, watch TV and watch movies via their
handsets.
"No single carrier is expected to occupy more than 50 percent of the market in the 3G era,"
said Chen.9 5 China Mobile currently occupies 70 percent of China's mobile communication
market by subscriber population with China Unicom having the rest, according to Beijing-
based CCID Consulting Co Ltd, a research arm authorized by the Mil.9 6
9 1 Financial Times, Business Daily Update, “Market Key Factor in 3G License Release,” June 2, 2004.
92 Financial Times, Business Daily Update, “Trillion Yuan 3G Market Projected,” April 30, 2004.
93 Ibid.
94 Ibid.
9 5 Ik iW
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Next Generation Network (NGN)
Lei Zhenzhou, professor of China Academy of Telecommunications Research of the Ministry
of Information Industry (Mil), has said that “the start of NGN in China would be postponed to
2005 and 2006, and the construction in large scale would be delayed to 2010.” 9 7 Lei further
stated that China's NGN and 3G were both developing without major conflict, with both
expecting to provide next-generation service or new broadband service.
However, according to officials and experts at a Global NGN 2004 Summit in Beijing, China
should speed up its development of NGN in order to become the world's leader in new
technology. "The overall future of the NGN is still not clear, but it also means a historic
opportunity for China and it should research industrial policies, regulatory policies,
technologies, and business applications and then it will gain the advantage of being a first
mover," said Xi Guohua, vice-minister for the information industry, in a speech to the
delegates of the conference.9 8
According to a definition by the International Telecommunication Union, the major difference
between NGN and the current telecom network is that the latter “is based on circuit
switching, while NGN is based on packet switching. While the current telecom network
provides data and voice services on different networks, NGN is able to provide different
services on the same network with a much higher quality of service.”9 9 China has started test
trials of China Next Generation Internet (CNGI), as a step in the development of NGN.1 0 0
97 Financial Times, SinoCast China Business, “China’s NGN to Appear in 2005 and 2006,” March 31,
2004.
98 Financial Times, Business Daily Update, “Summit Suggests Faster Development of NG N,” May 17,
2004.
99 Ibid.
100 Ibid.
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The industry needs new technologies and NGN is providing such an opportunity. Telecom
revenues accounted for 4 percent of China's 2003 total gross domestic product,1 0 1 much
higher than the proportion of many developed countries, and it will be quite difficult for the
industry to maintain the high growth it has had over the past few years.
China Telecom, facing growing telecom competition from mobile operators and China
Netcom, is predicted to play an active role in developing and using new technologies. Over
the past three years, the number of China Mobile's subscribers has risen by 46 percent,
while China Telecom's subscribers only grew 21 percent.1 0 2 In the first quarter of 2004,
China Telecom even had a first-time decline in its fixed line business. Its total telecom
market share also decreased to less than 30 percent, also for the first time in its history.1 0 3
Over the past two years, China Telecom, which has been working to lift its performance, has
conducted two phases of NGN trials. However, as many issues are yet to be solved, it will
still take years for NGN to become thoroughly operational.
Unified Messaging Service (UMS)
China’s fixed-line telephone operators are promoting a call-forwarding service called unified
messaging service (UMS) which is designed to bypass mobile phone charges. China
currently has a "two-way" mobile service charging system, instead of a "caller pays" scheme.
UMS is expected to attract a subscriber base that tends to receive a large volume of
unwanted incoming calls every day, said Wang Jing, an analyst with Analysis Consulting.1 0 4
The smallest fixed-line operator, China Tietong, has already started UMS in Beijing.
Subscribers of the service can get a single eight-digit telephone number, with the ability to
1 0 1 Ibid.
102 Ibid.
103 Ibid.
104 Financial Times, Business Daily Update, “Call-forwarding Service Set to be New Growth Area,”
March 23, 2004.
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receive calls using different methods such as fixed-line telephones, mobile phones or
Xiaolingtong phones as they wish. Subscribers to the service can also keep the original
numbers of their mobile phones, and fixed-line phones. UMS can also combine fax, e-mail
and voice-mail and SMS (short messaging service). The user cost is 50 yuan (US $6.03) for
a subscription and then 20 yuan (US $2.41) per month for the service. China Tietong said
the service is aimed at both individual and corporate customers.1 0 5 In June 2004, China
Netcom's Beijing division also launched a similar UMS service. The operator is charging 25
yuan (US $3.01) per month for the service.
China Tietong so far only has a few thousand UMS subscribers in Beijing, mainly due to
Tietong’s “lackluster marketing campaign,” according to Wang. “With Netcom launching the
service, UMS is likely to see a significant take-up,” he said. "Though the UMS charges are
only 25 yuan per month, that is already a significant amount for fixed-line operators...
launching UMS incurs little cost for operators, unlike a large-scale telephone network build
out,” the analyst said.1 0 6
Companies
Analysts say that in the upcoming few years China's telecom market will experience a new
round of consolidation and acquisitions as the nation's telecom operators make increasingly
greater efforts to win a larger market share.1 0 7 According to the Mil, market shares occupied
by the country's five major telecom operators last year were: China Mobile 37 percent; China
Telecom 30.7 percent; China Netcom 16.2 percent; China Unicom 14.5 percent; and China
105 Ibid.
106 Ibid.
107
Financial Times, Business Daily Update, “Major Operators Active in Grabbing Larger Market
Share," March 24, 2004.
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Tietong 1.6 percent.1 0 8 China Mobile and China Unicom, the country's duopoly mobile
operators, stated in January that they would work to further enhance their business through
partnerships with telecom-related service providers and equipment makers.1 0 9 China Unicom
is the country's second-largest mobile operator and the only one which has both GSM
(global system for mobile communications) and CDMA (code division multiple access)
networks.
Wang Jianzhou, China Unicorn’s chairman and president, expected that competition within
the mobile business will be “extremely intense.” "For China Unicom, we will watch closely on
the development of the market and adjust our strategies accordingly," he said.1 1 0 Company
figures indicate that as of February 2004, it had recruited 75 million GSM subscribers and 21
million CDMA subscribers.
China Unicom introduced a new solution connecting both GSM and CDMA networks this
year. With two chips in one handset - one SIM card and one UIM card, users are able to
automatically transfer between GSM and CDMA networks. The service was launched in 15
major cities, including Beijing, Shanghai and Guangzhou.
As for China Telecom and China Netcom, both have promised to continue to increase
investment on Xiaolingtong phone service as an effective way to counter the wireless
market.
110 Ibid.
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Moody’s Investors Service Opinion
In March 2004, Moody's Investors Service said in a study that “China's four
telecommunication groups all offer sound operating and financial profiles.”1 1 1 Moody's said
that China Telecom, China Mobile, China Netcom and China Unicom all “derive their support
from solid market positions, positive growth outlooks, conservative financial policies and a
supportive regulatory framework.” Of the four major telecom companies, currently only China
Mobile (Hong Kong) Limited is rated by Moody's, with a Baal result. According to Moody’s,
the other three unrated companies also “exhibit sound credit profiles.” Furthermore, the
report points to the “ongoing growth potential of China's telecom market, which remains
relatively immature and is developing with amazing speed." Both fixed-line and mobile phone
penetration in China is now over 20 percent.
However, it was unveiled in early September 2004 by Chinese analysts that China Netcom
was carrying massive debts of 70 billion yuan against shareholders' equity of 43 billion
112
yuan. Moody’s has not released a subsequent report taking this new information into
account.
China Telecom
In 1994, MPT’s telecom operating arm, the Directorate General of Telecommunications
(DGT) was given the corporate name, “China Telecom,” in reaction to the creation of China
Unicom (discussed below). However, China Telecom is not yet a truly “corporatized” entity.
Though officially designated as a national business operator for public telecom services,
1 1 1 Financial Times, Business Daily Update, “Moody’s Gives 4 Telecoms Firms Thumbs Up,” March 10,
2004.
1 12 Chan, Nicole. “Massive Debts Revealed at Netcom,” South China Morning Post, September, 8,
2004.
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China Telecom is not fully independent of Mil, as its major decisions regarding finance,
investment, planning, and personnel are still under the ministry's control.
Another interesting fact is that, except for providing some technical guidance and operating
coordination, China Telecom does not have operational or managerial leadership for
provincial and local telecom carriers (PTAs). PTAs act as provincial and local “Mils” in
making local policies and regulations, and in operating local telecom and postal services.
They are under the dual control of provincial authorities and Mil.1 1 3
China Telecom’s fixed line network is still the largest in the country and still recognized as
having a de-facto monopoly on all fixed-line network services.
By the end of 1998, China Telecom held 94.5 percent of the entire mobile telephone market,
with China Unicom garnering the rest. As of June 2004, China Mobile (spun off from China
Telecom) had 70 percent of total mobile subscribers, with China Unicom carrying the 30
percent balance.
Data Telecommunication Services
In the 1960s, China began research and development of data telecommunication equipment.
During the mid-1970s, leased or dedicated data telecommunication lines were utilized by a
small number of end-users, and starting in the 1980s, data telecommunication services were
offered to the public. Development of both data telecommunication networks and services
has greatly accelerated since 1990. Currently, public data telecommunication services are
provided by China Telecom through its public switched telephone network (PSTN), public
113 Fan, pp. 129-130.
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telex network, public VSAT system, China public packet switched telephone network
(Chinapac) and public digital data network (ChinaDNN), and ChinaNet.1 1 4
China Telecom’s Divestiture (1999) and Split (2002)
In 1999, in response to China Telecom’s continuing monopolization of the industry, the
government split China Telecom’s operations into four companies - one each for fixed-line
(now China Telecom), mobile (now China Mobile), paging (rolled into China Unicom) and
satellite services (now China Satellite).
So far these reforms have had their biggest impact in the mobile market. The mobile market
has gone from nothing a decade ago to a current level of over 300 million subscribers,
making it the world's largest. China Mobile and China Unicom, both listed in Hong Kong, are
transparent at least by Chinese standards and have been competing for customers.
In May 2002, again to break up China Telecom’s continued monopolization, the government
split what remained of China Telecom, this time geographically. One company, China
Netcom, inherited China Telecom’s telephone networks in ten northern and western
provinces and as well as inheriting two other carriers - Ji Tong and the original China
Netcom.1 1 5 The other company retained the China Telecom name and got the other 21
provinces, including the wealthiest in the South and East. Additionally, in 2002, Mil initially
insisted that China Telecom lower its access charges that had already dropped to less than
a third of 1997 prices.1 1 6 The concept was that these two should be allowed to invade each
114 Telecommunications in China: Development and Prospects, Jintong Lin, Xiongjian Liang and Yan
Wan, Editors, Huntington, N.Y.: Nova Science Publishers, 2001, p. 115.
115 Hou, Mingjuan, “Era of China Netcom Expected to Start,” China Daily, July 31, 2002.
116 Hachigian, Nina, “China’s Cyber-Strategy,” Foreign Affairs, Vol. 80, No. 2, March/April 2001.
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other's areas, giving consumers some real options. However, what happened was not yet
quite the "orderly competition" that the government claimed it was working towards. “Bizarre
tales are emerging of the opponents sawing cables, smashing equipment, and beating up
their rival's staff.”1 1 7
Current Operating Performance
China Telecom had a 2003 net profit of 24.69 billion yuan (US $2.98 billion), up 153 percent
from the previous year. Revenue for 2003 was 118.5 billion yuan (US $ 14.2 billion), an
increase of 8.1 percent over last year.1 1 8
"The low-end wireless service known as Xiaolingtong and broadband services are the major
driving forces for the company's growth last year," said Zhang Bing with CITIC Securities.1 1 9
“The two factors will continue to play a significant part in sustaining its growth this year,” he
said. China Telecom’s fixed-line subscribers increased 22 percent to 118 million as of the
end of 2003 and it has recorded 18.4 million subscribers for its Xiaolingtong so far.
Meanwhile, its broadband subscribers stood at 5.6 million as of the end of 2003,
representing a 200 percent increase when compared to last year,1 2 0 and ballooned to 10
million as of May 2004.
China Telecom would like a mobile license from the country's telecom regulator to enable
itself to offer a full range of telecommunication services. In an effort to compete with China
Mobile and China Unicom over the last two years, China Telecom and its rival China Netcom
1 17 The Economist, “Dialing the Markets,” October 29, 2002.
1 18 Financial Times, Business Daily Update, “ Telecom Firms Face Fierce Rivalry,” April 1, 2004.
119 Ibid.
120 Ibid.
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have so far spent billions of dollars in developing and rolling out their Xiaolingtong and
broadband networks.
Buying of Ten Telecom Networks
In September 2004, the listed arm of China Telecom acquired ten telecom networks in China
from its parent state-owned China Telecommunications Corporation for 27.8 billion yuan, or
US $3.4 billion. It paid US $1 billion in cash, with the remaining USD $2.4 billion to be paid
over a period of 10 years to the state-owned China Telecommunications Corp. for the
acquisition.1 2 1 For the purposes of purchasing the assets, China Telecom completed its
global placement of H shares in May 2004, raising US $1.7 billion from the international
192
capital market.
This was the second largest acquisition made by China Telecom since its listing in
November 2002. At the end of 2003, the company completed the acquisition of six provincial
networks from its parent for US $5.55 billion in cash.
The telecom assets it purchased this time covered fixed-line, Internet service, data service
and network leasing businesses. The 10 networks, covering Hubei, Hunan, Hainan,
Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia and Xinjiang, had a total debt of about
40 billion yuan, or US $4.8 billion by the end of last year.1 2 3 The networks have a total of
42.9 million subscribers, with an average of a 96 percent of market share. In 2003, fixed-line
subscription and broadband use in the 10 provinces grew 18.3 percent and 198.2 percent,
respectively, when compared to last year. Following the acquisition, the geographic
1 2 1 Comtex News Network, SinoCast China IT Watch, “China Telecom Corp. Plans Overall Listing in
June,” April 20, 2004.
122 Financial Times, SinoCast China Business, “China Telecom Finishes Placement,” May 25, 2004.
123 Comtex News Network, SinoCast China IT Watch, “China Telecom Corp. Plans Overall Listing in
June,” April 20, 2004.
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coverage of the company's operations has expanded to 20 provinces and its subscribers
now number 160 million.1 2 4
"The purchase of new networks will help China Telecom Ltd to further widen its business
range as well as grab more market share from fierce domestic competition," said Dai
Chunrong, an analyst from China Securities.1 2 5
Such acquisitions have become common practice for China Telecom, China Mobile and
China Unicom, which have each made initial public offerings of their parents' most profitable
provincial networks. Each company has also purchased less profitable networks from parent
companies.
China Unicom
China United Communication Corporation (Lian Tong), or China Unicom for short, China’s
second largest carrier after China Telecom, was originally established in July 1994.
Shareholders of this new company included three ministries (non-MPT) and 13 large
Chinese state-owned corporations, with RMB one billion yuan (US $120 million) registered
for startup capital. The government’s initial goals for China Unicom were the following:
• “Interconnect various dedicated networks to provide public telephone services (10
percent local and long-distance service, 30 percent wireless mobile services by
2000) and data and value-added services to MPT unserved and underserved areas;
124 China Daily, “China Telecom Announces Purchase Plan,” April 14, 2004.
125 Ibid.
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• Initiate competition against MPT, so as to achieve better economic efficiency in the
use of telecom resources and to speed up telecom infrastructure and services
development;
• Stimulate and enhance investment in the telecom industry from domestic and
126
international sources.”
Unicom was seriously held back by MPT’s continued oversight and interconnection controls
despite being heralded as the platform for duopolistic competition with MPT-China Telecom.
MPT was empowered to act as a judge (regulator) who also set the rules; the success of
Unicom was clearly not in MPT’s best interests.
Expectations had been that Unicom would soon bring about competition, lower prices, and
better services to China’s telecom market. However, Unicorn's performance turned out well
below these expectations. Unicom was at a great disadvantage when compared to China
Telecom. In the mid-1999, Unicorn’s fixed line exchange capacity was a just a little more
than 200,000 lines, with approximately 30,000 subscribers, compared to China Telecom's
140 million lines and 100 million plus subscribers. Additionally, Unicom had about 15,000
kilometers of fiber optic cable installed while China Telecom’s long-distance fiber-optic cable
system was more than 200,000 kilometers in length. Regarding the mobile front, Unicom
was also nowhere near comparison to China Telecom. As of June 1999, Unicom had
installed approximately 3 million lines of its GMS mobile capacity with over 2000 base
stations and had about 2.5 million subscribers for its GSM services and 3.4 million for paging
services. China Telecom had installed approximately 45 million lines of mobile network
capacity with more than 32,000 base stations. China Telecom’s mobile subscription reached
32 million and 42 million for cellular and paging services.
126 Fan, p. 131.
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Lacking good comparison with China Telecom in fixed-line and mobile capacity, Unicom had
an extremely difficult time growing. Also - externally, it faced huge obstacles set by MPT
(Mil post-1998); internally, it suffered from infighting both inside its core and among its major
shareholders/stakeholders. Unicom suffered mainly from:
• “Weak structural and organizational integrity. Unicom was hit by its seeming
blessing of a complex combination of stakeholders. Lack of coordination and
conflicts of political and economic interests among the interested parties appeared
as undermining forces, while expected deployment of excessive capacity and spare
facilities of dedicated networks operated by Unicorn’s major shareholders proved
costly and problematic. Interface between Unicom headquarters in Beijing and its
local branches was weak, or in some cases mismanaged. Unicorn’s integrity issue
was partially evidenced by its frequent top management reshuffles.
• Political Impact. Policy decisions by the top leadership concerning Unicom were
often influenced by individual officials and various government organizations, which
may have had little sense in economic and financial terms. A vague and often
contradictory regulatory framework dictated that Unicom and MPT/MII had to
approach policy issues through the channels of lobbying, bargaining, and
negotiating, not through formalized administrative or legal procedures.
• Management Team. Unicorn’s management team consisted primarily of former
government officials and electronic engineers, with no solid background or capability
in telecommunications. They were short of expertise and experience in network
development and operations. This leadership defect created management problems
and flaws in business plans and strategies.
• Resources Scarcity. Unlike what it anticipated, Unicom was short of financial,
technical, managerial, and human resources. The company was operating with its
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hands tied behind its back by limited resources, particularly, funding and working
capital.
• Distribution and sales channel. MPT-China Telecom had an extensive network of
distribution and sales across China, while Unicom had very limited and separated
distribution and sales outlets to meet its ambitious plan for various services and a
broad geographic coverage.”1 2 7
Unicom was in need of billions of dollars for startup and development; because of its
shortage of funding, Unicom relied a great deal on foreign investment through an inventive
China-China-Foreign (CCF) scheme. It worked as follows: Unicom would form a joint
venture (investment company) with one or more Chinese domestic entities; this JV would
then negotiate a contract for Unicom project investment with one or more foreign firms. In
this way, 70-80 percent of the operation revenues (including installation fees, equipment
depreciation, and after-tax profits) would go back to the CCF for investment payoffs. The
terms of benefits, always on a case-to-case basis, were generally extended over a 12-15
year period. Dependent on their shares of the investment, foreign partners were promised a
return of 15-18 percent or higher if revenues were generated as a result of service provisions
or other operations. The CCF scheme was successful to a point, as Unicom raised almost
70 percent of its capital from foreign sources in this way.
There were two hurdling points with this scheme: first, the CCF JV had to successfully put
into operation a complex mechanism of holding different parties together, and second,
foreign investors usually had very little access to the information about network management
and operations - something definitely essential to understanding how their financial bet was
going. Unicom successfully reasoned that the CCF scheme did not violate the Chinese
1 27 Fan, pp. 136-137.
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policy of not allowing foreign direct investment in network equity ownership. However, delays
in project construction, low managerial efficiency, and unclear profitability prospects hurt
both Unicom and their foreign investors.1 2 8
Unicorn’s growth was slow and minimal - by 1999, its telecom revenue was about US $2
billion (6 percent of China’s total), with its mobile market share approximately 10 percent of
China's total. The emergence of Mil was an unknown to Unicom: the new ministry might
give Unicom a better playing field to compete with China Telecom or on the other hand, it
might allow China Telecom to acquire it. Mil came out on the side of providing Unicom with
a somewhat more even playing field.
In May 1999, the State Council issued a document putting forth policy measures that
provided Unicom with much needed support. The announced policy measures included:
1. “Guo Xin, China Telecom’s national paging company was transferred to Unicom.
The company had 40 million subscribers and US $180 million of profits in 1998,
with 1999 assets of US $1.6 billion.
2. Unicom was granted the exclusive rights to build and operate a nationwide CDMA
network. The four-city CDMA trial operations (with a combined capacity of
140,000 lines and over 60,000 subscribers) and the assets of China Great Wall
Mobile Communications (a China Telecom-Military joint venture) were officially
turned over to Unicom. In February 2000, Unicom signed a framework
agreement with Qualcomm, which allows Unicom to deploy narrow-band IS-95
CDMA technology through paying Qualcomm intellectual property rights royalties.
128 Fan, pp. 137-138.
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The agreement also gives authorization to the licensed Chinese equipment
manufacturers to make CDMA equipment.
3. Unicom, jointly with three Chinese operators (China Telecom, Ji Tong and China
Netcom) was given official authorization to invest US $300-400 million for IP-base
telephony services development. Unicom was permitted to expand its services to
virtually all possible area, including local, long-distance and international
telephony, radio paging, GSM and CDMA wireless mobile, IP-telephony, and data
communications. Up until July 1, 2002, the Chinese government allowed Unicom
(along with China Tietong) to discount its rates for telephony services by 10-20
percent. It also required no obligation from Unicom to provide universal services
in rural and remote areas.
4. Management Support: a number of MPT/MII key officials were relocated to
Unicom to take leading positions. They include former MPT Vice Minister Yang
Xianzu, Mil Data Communications Bureau Director Liu Yunjie, Mil Planning
department Director Wang Jianzhou, and Shi Cuiming, Head of China Telecom
(HK). This new management team pushed for a corporate management
restructuring which included acquisition of previously dispersed subsidiaries for a
higher degree of centralized management, stock options for company employees,
and hiring of three external board members who are consulted for important
decision making and are charged to chair corporate auditing and staff
compensation matters.
5. Under the State Council’s approval, Unicom went for an initial public offering (IPO)
in Hong Kong and New York in June 2000. Unicorn’s share listing raised more
than US $5.65 billion for the company’s much-needed capital for development.
The central government also allocated RMB 5 billion in cash (US $620 million) to
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support Unicom. Furthermore, China Development Bank signed a lending
agreement with Unicom to provide long-term commercial loans amounting up to
RMB 10 billion yuan (US $1.2 billion).”1 2 9
These policy measures were considered important because they signaled the Chinese
government’s intended efforts to restructure the country’s telecommunications industry. The
restructuring was viewed as an attempt by the government to inject competition into the
industry; it was not truly successful - in May 2002, China Telecom was split into two different
companies to achieve the same purpose. (See section "China Telecom’s Divestiture [1999]
and Split [2002]” for more details)
Following China Telecom’s divesture in 1999, the intention was that China Unicom would
operate Guo Xin, China Telecom's paging networks. China Unicom is still running Guo Xin;
however, in 2003 China Unicorn’s listed arm sold it to its parent company to avoid having
Guo Xin’s bad performance on their financial statements. China Unicom is increasingly
becoming a competitor of China Mobile, and currently holds a 30 percent share of China’s
mobile phone market.
Successful Initial Public Offering
As mentioned above, China Unicom raised $5.65 billion in an initial public offering in June
2000. The parent company, Unicom Group, is 79 percent-owned by China's Ministry of
Finance and 21 percent by 15 state-owned corporations. Unicom Group, in turn, owns 77.5
percent of China Unicom, often called “China Unicom Listco” or just “Listco.” Listco is the
1 29 Fan, pp. 139-142.
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company that was “IPOed” on the Hong Kong and New York stock exchanges in June 2000.
Following the IPO, public shareholders own approximately 21 percent of Listco.1 3 0
CDMA Development Progress
China Unicom has bought mobile, landline and other equipment from a wide range of the
world's leading GSM suppliers, all of which have had some presence in Unicorn's GSM
network: Ericsson, Lucent, Motorola, Nokia, Nortel, Siemens, among others.
Beyond GSM, earlier in 2002, China Unicom decided to spend billions (US) on a second
mobile network, using US-backed code division multiple access (CDMA) technology from
Qualcomm. Unicorn’s CDMA network, which was supposed to provide high-end services and
perhaps a bridge to 3G, had initially set an ambitious target of 7 million subscribers by the
end of the 2002. However, it took until June 2002 to reach the first 1 million users, and until
mid-August 2002 to reach 2 million. To try to make up for the low demand at the time,
Unicom aggressively discounted in some markets to the point of nearly giving away
phones.1 3 1 As of February 2004, China Unicom had 21 million CDMA subscribers.
In 2002, China Unicom awarded orders to upgrade China’s CDMA technology totaling more
than US $1 billion to Lucent Technologies, Nortel Networks and Motorola, announced on the
eve of Chinese president Jiang Zemin's visit to the United States.1 3 2
130 Burkitt-Gray, Alan, “The Revolution in China's Telecommunications,” Global Telecoms Business,
No. 57, Mar. 2001, pp. 14-15.
1 3 1 Dolven, p. 42.
1 32 McNulty, Sheila and Jonathan Moules, “North American Telecoms in Dollars 1Bn Deal with China
Unicom," Financial Times, October 22, 2002.
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Acquisition of Provincial Networks by “Listco”
In November 2002, China Unicom said it would pay HK $4.5 billion (US $577 million) to
acquire nine additional provincial networks from its unlisted parent company. Unicom
already provided mobile services in 12 of China’s wealthiest coastal provinces, with its
parent company China Unicom Group covering the rest. The deal expanded the listed
company’s geographical coverage, allowing it to capture growth in the less-mature provincial
markets. Unicorn’s larger rival, China Mobile, had announced a similar acquisition six
months prior.1 3 3 Current cellular penetration in Unicorn’s less-mature provincial markets
averages approximately 10 percent, compared with 21 percent in all areas where Unicom
currently operates.
Current Operating Performance
China Unicorn’s 2003 net profit decreased by 8.3 percent, caused by write-downs and a loss
on the sale of its Guo Xin paging business to its state-owned parent company. The
company's 2003 profit fell to 4.22 billion yuan (US $510 million) from a restated 4.6 billion
yuan (US $554 million) in 2002. The 2003 figure included a 663 million yuan (US $ 79.8
million) loss on its paging business and charges of 560 million yuan (US $ 67.4 million) due
to a write-down of paging assets. Analysts view the sale of its paging business as a great
positive as “it enables the company to get rid of a big loss-making burden and help it
concentrate on expanding its mobile phone business.”1 3 4 2003 annual revenue increased to
67.6 billion yuan (US $8.1 billion) from 40.6 billion yuan (US $4.8 billion) last year. The 2003
revenue performance was greatly attributed to Unicorn’s fast mobile business growth, which
alone increased 88.1 percent to 59.75 billion yuan (US $7.1 billion). The 2003 mobile
revenue figure includes business generated by Unicorn’s 2003 acquisitions of nine additional
133 Bolande.
134 Financial Times, Business Daily Update, “Telecom Firms Face Fierce Rivalry,” April 1, 2004.
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provincial operators in China; a pro forma income statement, that would have provided pre
acquisition and post-acquisition comparisons, was not available for analysis.
China Unicorn’s CDMA system had 21 million subscribers at the end of February 2004, well
behind the 75 million users of its GSM network and the over 150 GSM million subscribers for
Unicorn’s chief rival, China Mobile. China Unicom became the world's second-largest CDMA
operator by the end of last year, after US-based Verizon Wireless which has a total of 36
million CDMA users.1 3 5 To attract more subscribers, the company plans to further provide
value-added services based on its CDMA 1X networks.
To differentiate its services in the country, China Unicom launched its "World Wind" phone
service, which works on both GSM and CDMA mobile networks in China and also operates
in other countries, in August 2004 in 15 major cities. The dual-mode “World Wind” phone
service features a handset that supports both GSM and CDMA networks and enables users
to automatically transfer from GSM and CDMA networks. China Unicom is the only telecom
operator in China that runs both GSM and CDMA networks. Analysts said the dual-mode
solution is expected to be a “powerful revenue generator this year”1 3 6 as the Chinese
Government is unlikely to release 3G licenses until next year.
In another development, China Unicom projected that spending on new networks and other
capital equipment would decline slightly to 19.35 billion yuan (US $2.33 billion) in 2004
compared with 19.76 billion yuan (US $2.38 billion) in 2003. China Unicom acquired nine
provincial networks from its State-owned parent at the beginning of 2003, and another nine
networks in January 2004, giving it geographic coverage across nearly all of China.
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54
China Mobile
China Mobile was established in July 1999 as a state-owned company to operate China
Telecom's mobile communications assets. China Mobile currently has registered capital of
137
51.8 billion yuan, assets of over 320 billion yuan and 120,800 employees. As of February
2004, China Mobile had more than 150 million subscribers, making it the world’s largest
mobile operator.
China Mobile had a 2003 net profit of 35.5 billion yuan (US $4.3 billion), an increase of 9
percent over last year. Its 2003 net profit rate of was a glowing 22 percent. Revenue from
new business came in at 16.2 billion yuan (US $1.95 billion), an increase of 85.5 percent
over last year - among which, its short messaging service (SMS) business grew by 134
percent to 9.9 billion yuan (US $1.19 billion).1 3 8
Some competition comes from China Unicom, whose CDMA network began to gain
momentum since the second half of last year, and from Xiaolingtong services run separately
by both China Telecom and China Netcom.
About 80 percent of China’s 1.3 billion people still do not own mobile phones. Many of those,
most particularly in the country's rural areas, are too poor to buy handsets and enjoy mobile
telecommunication services. China Mobile has said that it will “intensify their marketing to
lure more low-end subscribers.”1 3 9 Also, the company has stated that capital expenditure for
137 Financial Times, Business Daily Update, “ Telecom Firms Face Fierce Rivalry,” April 1, 2004.
138 Ibid.
139
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55
2004 will essentially remain flat at US $5.8 billion;1 4 0 expenditure last year was US $6 billion,
compared to US $5.6 billion in 2002.
According to China Mobile officers, within three years, the company plans for mobile phone
subscribers in the west to account for 23 percent of its nationwide network.1 4 1 Currrently,
users from western China account for 10 percent of the operator's subscriber base. China
Mobile’s deputy managing director Li Yue said that China Mobile’s “financing and
subsequent heavy capital investment plan was done to support the Government's aim to
eliminate the ‘digital divide’ between the eastern and western regions.”1 4 2 Over the last three
years, China Mobile has invested 76 billion yuan to upgrade its network infrastructure in the
western region.1 4 3 Mil statistics show a gap in access to telecom services between the
wealthy eastern region cities and the poor, mostly under-developed western region cities;
the mobile phone penetration rate in the east is currently in over 20 percent, while the rate
for the west is only 7 percent.1 4 4
China Mobile and China Unicom Rivalry
“The intense battle for supremacy between China Mobile and China Unicom is set to
continue unabated, as the world's biggest phone market further develops,” according to
Chen Jinqiao, director of the China Academy of Telecommunications Research under Mil.
"As the market becomes even larger and more open, we have no doubt that competition
among the country's duopoly of mobile carriers will become increasingly ferocious," Chen
140 Ibid.
1 4 1 Ibid.
142 Ibid.
143 Ibid.
144 Ibid.
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56
said.1 4 5 More mergers and acquisitions, non-Mil authorized price cuts, and integration and
consolidation moves are forthcoming as the competitors try to ensure their future success.
A recent action for China Mobile, the world's largest mobile phone operator by subscribers,
was to purchase the 10 remaining provincial networks and assets and two subsidiaries from
its parent, China Mobile Group. The US $4.1 billion purchase was completed last July.1 4 6
The provincial networks and assets were located in the Inner Mongolia, Ningxia Hui and
Xinjiang Uygur autonomous regions, and in the provinces of Jilin, Heilongjiang, Guizhou,
Yunnan, Gansu and Qinghai. The 10 provincial networks had 24.5 million subscribers,
accounting for an average of 64 percent of the total market share across the areas. Analysts
say “with the emerging saturation and stable growth of the coastal market, the northeastern
and western regions offer huge potential for the company.”1 4 7 Earlier, in November 2002,
China Mobile finished financing - a sell-out US $966 million bond issue - to complete its US
$8.6 billion acquisition of eight provincial networks.
To compete with Unicorn's CDMA 1X networks, China Mobile plans to upgrade its current
GPRS or general packet radio service networks to the more advanced “enhanced data rates
for global evolution" (EDGE) system.1 4 8 EDGE is faster (at 2.75G) than GPRS (2.5G), but
slower than 3G wideband CDMA (WCDMA) technology. China Mobile's GPRS service has a
downloading speed of about 40 kilobytes per second (kbps), while Unicorn's CDMA 1X
service has a speed between 50 and 97 kbps. Due to the faster speed, Unicorn’s CDMA 1X
offers richer mobile wireless data applications when compared to China Mobile’s GPRS
system. As a result, China Mobile's GPRS service has grown at a slow pace since being
launched in 2002.
145 Financial Times, Business Daily Update, “Telecom Rivals’ Battle Continues,” July 15, 2004.
146 Ibid.
1 47 i u : - j
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Some analysts believe EDGE’s faster speed will help China Mobile grow its wireless data
business.1 4 9 Unicorn's CDMA 1X networks, in its second phase of construction, will provide a
downloading speed of 144 kbps once completed, compared to EDGE which is expected to
provide a downloading speed of 150 kbps. As a result, EDGE should enable users to enjoy
better laptop browsing, Internet streaming and video streaming on mobile phones. According
to equipment providers, the EDGE upgrade from GPRS will require a small incremental
investment for switchers. Therefore, the upgrade is expected to result in purchase orders for
network equipment, which may include orders to telecom equipment vendors such as
150
Ericsson, Nokia, Siemens and Nortel.
China Netcom
China Netcom was established in August 1999 by the State Administration of Radio, Film
and Television, the Ministry of Railways and the Shanghai municipal government to operate
broadband networks. It closed its first round of private equity financing in February 2001,
raising US $325 million from News Corp. Digital Ventures and Goldman Sachs Private
Equity, among others.
China Netcom has four major product lines: 1) Corporate data, offering Internet-protocol
virtual private networks and data centers for corporate customers; 2) Voice over internet-
protocol telephony, offering corporate IP VPNs. Netcom offers co-branded, pre-paid, and
post-paid phone cards for IP telephony; 3) Wholesale business, selling bandwidth to China
Mobile and to many ISPs; and 4) Broadband access, providing direct internet access.1 5 1
1 49 Ibid.
1 50 Ibid.
1 5 1 Global Telecoms Business, “ Wiring China for Its Economic Explosion,” No. 63, Feb./Mar. 2002, pp.
26-28.
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58
Asia Global Crossing Deal
In 2002, China Netcom Corp. (Hong Kong), the SAR arm of China's third-largest telecom
carrier, joined with Newbridge Capital and Softbank Asia Infrastructure Fund to create a new
firm with US $270 million in equity and bank loans to take over the Asia Global Crossing's
business operations.
"This is the first cross-border acquisition of the telecom business by a Chinese company...it
is an important demonstration of China's desire to participate in global businesses," said
152
Salomon Smith Barney director David Putnam, the consortium’s financial adviser.
The three-party consortium acquired Asia Global Crossing's East Asia Crossing assets and
its operations - an 18,740-kilometre undersea cable, linking Hong Kong, Taiwan, South
Korea, Singapore, the Philippines and Malaysia.
China Netcom Initial Public Offering
In July 2004, China Netcom, the second largest fixed-line telecom carrier in China after
China Telecom, submitted initial public offering (IPO) applications to Hong Kong and
American stock exchanges. The expectation was that the company would launch a public
offering for US $1.5 billion in October 2004.1 5 3
However, it is likely China Netcom will postpone its initial public offering (IPO), insiders and
industry experts say.1 5 4 "What investors are looking to is China Netcom's business
1 52 Hui, Yuk-min and Ben Kwok, “China Netcom Buys Asia Global Crossing Assets; Three-way Venture
Creates a Group with Access to US$ 270m to Take Over the Network's Business Operations,” South
China Morning Post, November 19, 2002.
153 Financial Times, SinoCast China Financial Watch, “Timing for China Netcom IPO Remains
Unknown,” August 17, 2004.
154 Financial Times, Business Daily Update, “Netcom IPO May Be Further Postponed," July 2, 2004.
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59
performance instead of just business models," said an expert from the China Academy of
Telecommunications Research under the Mil, who declined to be named.1 5 5 "It is not the
right timing for the company to get listed before the company has substantially improved its
business performance," he told China Daily. "Currently, there are not many selling points for
China Netcom in comparison with other telecom operators such as China Telecom and
China Mobile," he said.
Recently, China Netcom was brought into the spotlight as PCCW Ltd, the largest
communications provider in Hong Kong, announced that its negotiation to sell half its fixed-
line telecom business to China Netcom has yet to be completed. In May, PCCW first stated
that it would sell its stake to China Netcom for as much as HK $30 billion (US $3.85
billion).1 5 6 It was reported that China Netcom hoped to combine PCCW's Hong Kong network
with its own network in southern Guangdong province before listing.1 5 7
High Debt Level
Some analysts have very recently stated that Netcom's current financial and operating
situation does not seem too positive and expressed concern that a public offering by China
Netcom might resemble China Telecom’s “dismal listing” two years ago.1 5 8 The debt levels of
China Netcom were more than twice the size of China Telecom at the end of last year,
according to the analysts.
156 Shu-Ching, Jean Chen. “PCC W Aims at Southern China,” Daily Deal, August 27, 2004.
157 Ibid.
158 Chan, Nicole. “Massive Debts Revealed at Netcom," South China Morning Post, September, 8,
2004.
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One analyst said that Netcom was carrying “massive debts of 70 billion yuan in December
last year against shareholders' equity of 43 billion yuan.”1 5 9 Operationally, Netcom had a net
loss of 11 billion yuan in 2003 after a 25 billion yuan write-off of fixed assets. 2003 revenues
were 59 billion yuan. In 2002, the company had a net profit of six billion yuan on revenue of
48 billion yuan.
Ji Tong Network Communications
Established in 1994 by the Ministry of Electronic Industries, Ji Tong primarily provided
Internet protocol telephone and broadband network services. It also ran the China Golden
Bridge Information Network, one of the few enterprises authorized to offer commercial
Internet networking to Internet service providers. It was rolled into China Netcom in May
2002. (See the “Socialist Market Competition and Control” section for more detail on Ji
Tong.)
China Tietong (Formerly China Railcom)
China Railcom was established by the Ministry of Railways in 1999. In late 2001, it was
reported that Railcom had put into operation Asia’s largest fiber optic network, connecting
Beijing, Shanghai and Guangzhou.1 6 0
Among some 70 Chinese government and business organizations that operated their own
dedicated networks, the Ministry of Railways and its serving enterprises had been in control
of an extensive communications network system with a total comprehensive capacity next to
that of China Telecom. This system runs through all the Chinese cities except Lhasa and
Haikou. By 1998, the railway networks had a total of 120,000 kilometers of communication
169 Ibid.
160 Farris and Stocks.
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lines, with a switching capacity of 1.5 million lines; about 60 percent of their network capacity
is currently unused. China Unicom had targeted the railway industry’s extensive
communications infrastructure and its spare network capacity unsuccessfully for years,
followed by unsuccessful endeavors in 2002 by China Netcom.
China Railcom attracted the attention of the telecom industry in January 2004 when it
separated from the Ministry of Railways. This marked the beginning of China Railcom's
operations as a telecom operator in the domestic market under the regulation of Mil. One of
the first actions Mil took was to erase China Railcom’s debt of 2.38 billion yuan (US $286
million) debt.1 6 1 In July 2004, China Railcom changed its name to China Tietong.
China Tietong's revenue is expected to surpass 10 billion yuan (US $1.2 billion) this year
and its subscriber base is anticipated to reach 11 million by the end of this year.1 6 2 According
to the board chairman, China Tietong is targeting 30 percent growth in revenue on an
annualized basis, with plans to double its profits year-over-year.1 6 3 China Tietong plans to
become a strong telecom operator in the next three to five years. To realize its target,
company sources said that it was going to invest up to 9 billion yuan (US $1.08 billion) and
raise 3 billion yuan (US $360 million) to in an effort to upgrade its infrastructure this year.1 6 4
China Tietong’s chairman has said that in the upcoming three years, the company is going to
expand its telecom business by way of purchasing and merging with other telecom
1 6 1 Financial Times, Business Daily Update, “China Tietong to be Officially Launched in Early August,”
July 23, 2004.
162 Ibid.
163 Ibid.
164 Ibid.
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62
companies.1 6 5 As big Chinese state-owned companies spin off telecom business areas,
China Tietong is planning to take advantage of the opportunity to purchase these units.
The latest government figures indicate that China Tietong accounts for only about 1.6
percent of the total market share, a tiny figure compared to China Telecom's 30.7 percent
and China Netcom's 16.2 percent. China Tietong has registered capital of 10.3 billion yuan
(US $1.2 billion) and a 70,000-strong workforce. Its main fields of operation are currently in
fixed telecommunications networks such as fixed-line telephones, domestic and international
long distance calls, IP phones, data transmission, the Internet and other value-added
telecom services.
"Despite the new name and new image, China Tietong is confronted with great challenges in
the harsh market competition brought about by an increasingly open market," said Zeng
Jianqiu, a professor at Beijing University of Post and Telecommunications. "Malpractices
such as price wars and problems concerning interoperability between telecom operators will
put great pressure on China Tietong," he added.1 6 6 He held that China Tietong “should still
take advantage of its railway networks and work out practical strategies while competing with
China Telecom and China Netcom. Another means of expansion could be through seeking
cooperation with other major telecom operators.” China Tietong has plans to raise funds via
an IPO, but details of this have yet to be worked out, said sources close to company.1 6 7
165 Financial Times Information, SinoCast China IT Watch, “China Railcom Makes it Bigger Through
Purchases,” July 20, 2004.
166 Ibid.
167 Financial Times, Business Daily Update, “ Tietong Plans Public Offering,” August 23, 2004.
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63
External Forces
Examples
Below are some examples of foreign companies that have done business with China's
telecom operators:
AT&T
In 1999, AT&T became the first foreign company in decades to take a stake in a mainland
China communications company. AT&T and Shanghai Telecom (STC) and Shanghai
Information Investment Inc. (Sll), through a $25 million investment, formed a joint venture to
provide broadband IP value-added services to the enterprise sector. STC ownership was 60
percent of the company, with AT&T taking a 25 percent stake and Sll 15 percent. One of the
main benefits of the deal for AT&T was to have an actual stake in network infrastructure; this
was notable because AT&T had already handled major amounts of international traffic
entering China.1 6 8
Motorola
In October 2002, Motorola signed a series of contracts worth over one billion dollars with cell
phone operator China Unicom to install and upgrade mobile wireless systems in
China. Motorola won a US $446 million dollar contract to build and install CDMA (Code
Division Multiple Access) technology systems in Beijing and 10 Chinese provinces.1 6 9
1 68 W eber, Toby, “ The Great Wall Comes Down,” Telephony, Vol. 239, No. 24, Dec. 11, 2000, p. 10-11.
169 Harmsen, Peter. “Chinese President Jiang Zemin Arrives in Chicago,” Agence France Presse,
October 22, 2002.
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64
France Telecom
China Telecom and France Telecom signed a deal in June 2004 on the establishment of a
joint research and development center in Beijing as a first step of towards continued
cooperation. Both parties agreed to contribute 20 million euros towards the center. The
center will be utilized for testing new technology and facilities, developing new businesses
and application integration, cooperation in equipment procurement in order to reduce costs,
and personnel exchanges.1 7 0
Alcatel
In August 2004, Alcatel Shanghai Bell (ASB), a subsidiary of Alcatel of France, signed an
agreement to lay down a million digital subscriber lines (DSLs) for China Telecom. ASB won
40 percent of the overall bid, thus becoming the leading supplier, and will lay 1.3 million
DSLs in southern China. The deal's worth was not disclosed. ASB will supply its services to
China Telecom's subsidiaries in 15 provinces and municipalities across southern regions
including Shanghai, Zhejiang, Fujian, Guangdong and Guangxi.1 7 1
China Wireless Communications
China Wireless Communications, a US company, signed an agreement with China Netcom
in March 2004. China Netcom, according to the agreement, will provide high quality
broadband width to China Wireless. China Wireless will be able to utilize China Netcom's
170 Financial Times, Business Daily Update, “Chinese and French Telecom Giants Ink R&D Deal,” June
22, 2004.
1 7 1 China Daily, Global News Wire, “ASB Strikes Broadband Deal with China Telecom,” August 20,
2004.
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65
Metropolitan Access Network in Beijing, allowing it to greatly expand its existing service area
172
and the number of potential customers it may serve.
In January 2004, Japanese telecoms operator NTT set up its first wholly-owned subsidiary in
China.1 7 3 In February 2004, the Mil gave official approval for the joint venture by China
Unicom and SK Telecom of South Korea.1 7 4
Foreign involvement in Chinese telecom services, up until the new WTO guidelines
(discussed in the section "Foreign Shareholding: New Guidelines for Telecom”) was a very
risky proposition to foreign businesses; legality of signed-off contracts was constantly
questioned by the Chinese state. Foreign businesses had an easier time forming telecom
equipment-related joint ventures.
Telecom Equipment-related
In an analysis of the Chinese market published in February 2001, Salomon Smith Barney
had estimated that 350 million people in China could at the time afford mobile services -
"Even if we are wrong by 100 million, China's addressable mobile market is almost as large
as the US population."1 7 5 Current figures put China’s mobile subscribers at 300 million, the
largest in the world. According to a Morgan Stanley Dean Witter report, IT products already
accounted for 29 percent of Chinese exports to the U.S. in 2000 and it was expected that
China would increase its role as a production base for the U.S. and the rest of the world.1 7 6
172 PR Newswire, “China Wireless Announces Cooperation With China Netcom Beijing Company to
Deploy Broadband Capabilities,” March 8, 2004.
173 Comtex News Network, SinoCast, “Overseas Interests Edge to Chinese Value-added Telecoms
Market,” February 12, 2004.
174 Ibid.
175 Burkitt-Gray, p. 10.
1 7 6 iu;^i
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Chinese telecom equipment vendors, such as Huawei and ZTE, are greatly benefiting from
an aggressive drive into overseas markets and market share gains in China. "The
companies continue to win share from foreign vendors in key product lines at home," said
Dongming Zhang, Research Director for BDA Advisors, "and exports are growing strongly
with Huawei's sales overseas in 2003 topping $1 billion, or 27 percent of total revenues.
International vendors underestimate the impact Huawei and ZTE may have on the global 3G
market."1 7 7
Major Western manufacturers now have factories in China, built for the most part to satisfy
the rising Chinese market - but ultimately dually-ready to supply the world outside China.
The official Xinhua news agency quoted China's vice president Li Xiangping as saying that
Ericsson plans to double its investment in Chinese production in five years. Ericsson, whose
factories in China are joint ventures with local operations, sold six million mobile phones in
China in 2003.
Nokia has seven joint ventures that manufacture handsets and equipment for the Chinese
market and has already invested over US $1 billion in China. Motorola has spent over US
$450 million on a factory in Tianjin to make mobile handsets and infrastructure, plus over US
$1.45 billion on a semiconductor factory in the same vicinity.
On October 10, 2004, TCL and Alcatel Mobile Phones Limited (TAMP), a new global
handset company was jointly set up by TCL Communication Technology Holdings Limited
(TCL Communication) and Alcatel.1 7 8 TCL is a consumer electronics product manufacturer
based in China. TAMP's sales volume of mobile phones is expected to reach 20 million
177 Business Wire, “BDA China Forecasts Flat Capex for China Telecom Industry,” March 22, 2004.
178 Xinhua News Agency, “TCL, Alcatel Joint Venture Starts Operation,” October 10, 2004.
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67
annually, which would make it the largest producer of mobile phones in China, and the
seventh largest in the world.1 7 9 TCL Communication holds a 55-percent equity stake in
TAMP, while Alcatel owns the remaining 45 percent.
Motorola, Intel and Cisco Systems signed major equipment deals in January 2004 with
China Telecommunications, China Mobile, and Legend Group. The three Chinese firms
signed contracts to buy equipment worth more than US $2.0 billion from the three US
firms.1 8 0
Siemens
Siemens has mobile phone factories in Shanghai, among other cities. From the year 2000
on, Siemens had a total of US $1 billion budgeted towards Chinese production over an
181
ensuing five-year period. In July 2004, Siemens took control of a telecommunications
equipment manufacturing joint venture in China, increasing its stake in the company to 67
percent from 40 percent.1 8 2 The German telecoms and engineering conglomerate said it
plans, over the next year, to increase production capacity at the joint venture, which mainly
produces switching equipment, and to triple the number of research and development staff
to more than 300. The joint venture used to just focus on making switching systems and will
now move into other areas, such as broadband and data services equipment, and next
generation network equipment. China Telecom and China Netcom make up around 90
percent of the joint venture’s business, said Gao Junfeng, senior vice president of the joint
183
venture. Revenue last year was 1.7 billion yuan. However, its profit level in 2003 was only
180 AFX News Limited, “Motorola, Intel, Cisco Set to Sign Major Deals with Chinese Firms,” January 12,
2004.
1 8 1 Burkitt-Gray, p. 10.
182 Financial Times, Business Daily Update, “Siemens Raises China Telecom JV Stake to 67 percent
from 40 percent,” July 30, 2004.
183 Ibid.
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68
in the tens of millions of yuan, which was slightly higher than it was in 2002. Although the
venture planned an increase in both profit and revenue of over 10 percent this year, Gao
conceded that it would be difficult to reach those targets.
Foreign Shareholding: New Guidelines for Telecom
The following is a summary of China's telecom commitments in its bilateral agreements with
the U.S. and E.U., which form the backbone of China’s WTO Protocol:
• “Value-added services - foreign service suppliers will be able to provide the following
services; electronic mail, voice mail, online information and database retrieval,
electronic data interchange, enhanced/value-added facsimile services, code and
protocol conversion, online information and data processing, and paging services.
Foreign service suppliers may currently hold up to 30 percent foreign equity share in
a provider of value-added services (this follows China’s accession), a 49 percent
share after one year, and a 50 percent share after two years;
• Mobile voice and data services - foreign service suppliers will be able to provide all
cellular and personal communications services. Foreign services suppliers may
currently hold a 25 percent foreign equity share in suppliers of these services in the
first year after the China’s accession, a 35 percent share after one year, and a 49
percent share after three years;
• Domestic and international services - foreign service suppliers will be able to provide
domestic and international voice, packet-switched data transmission services,
circuit-switched data transmission services and facsimile services. Foreign service
suppliers may hold a 25 percent foreign equity share in domestic suppliers three
years after the China’s accession, a 35 percent share after five years, and a 49
percent share after six years;
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69
• Leasing capacity - China will open up its leasing market three years following its
accession, allowing foreign firms to lease and resell capacity from Chinese
operators for both domestic and international traffic; and
• Phasing out geographic restrictions - geographic restrictions will remain in place
following China's accession, with foreign service suppliers limited to providing
services in and between Beijing, Shanghai and Guangzhou. However, traffic
between these cities represents the vast majority of telecom services in China.
Furthermore, these restrictions will be phased out gradually over a period of 3 to 5
years, depending on the type of service.’’1 8 4
In short, ultimately, the regulations state that the total capital contribution ratio of foreign
investors in a foreign-invested telecommunications enterprise that provides basic services
(except radio paging services) cannot exceed 49 percent. For value-added services
(including the radio paging services included in basic services) foreign equity cannot exceed
50 percent.
FOREIGN EQUITY TIME FRAME FOR TELECOMS
Value-added services and paging services
30 percent post December 11, 2001
49 percent by December 11, 2002
50 percent by December 11, 2003
Basic telecoms - mobile voice and data services
25 percent post December 11, 2001
35 percent by December 11, 2002
49 percent by December 11, 2004
Basic telecoms - domestic and international services
25 percent by December 11, 2004
35 percent by December 11, 2006
49 percent by December 11, 2007_________________________________________________
Source: Leigh, Nancy, “Technology Prospers Linder Chin,” International Financial Law Review, Vol. 21,
No. 7, July 2002, p. 49-50.
184 Farris and Stocks, pp. 56-60.
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China’s Distortion of World Trade Organization (WTO) Commitments
70
In February 2004, one of the most powerful and influential entities in U.S. commerce insisted
that the Office of the U.S. Trade Representative (USTR) should “get tough with member
nations of the World Trade Organization (WTO) who are not living up to the telecom
agreements they signed when they joined the WTO.”1 8 5 The United States Council for
International Business (USCIB) sent a “stinging” report to the USTR citing China and others
“as failing to live up to various WTO telecom-related agreements they had entered into.”1 8 6
The agreements in question include the WTO Basic Telecoms Agreement, the General
Agreement on Trade in Services (GATS) Telecommunications Annex, and the GATS
schedule of commitments on valued-added services.
China's WTO commitments to liberalize telecommunications services became effective upon
its WTO accession on December 11, 2001. Commitments include a six-year schedule for
“phasing in” direct foreign participation in value-added network services and basic
telecommunications. China also agreed to be bound by the obligations in a WTO "Reference
Paper" to establish “an independent, impartial regulatory authority and a pro-competitive
regulatory regime.”1 8 7
"USCIB recognizes and appreciates the positive steps China has taken to implement its
WTO commitments," USCIB President Thomas Niles told the USTR.1 8 8 "However, China's
overly narrow interpretation of market access opportunities for foreign participants and a lack
of an independent regulator have negatively impacted market opportunities for U.S.
telecommunications companies contrary to China's WTO commitments," Niles added.
185 Telecom Policy Report, “UST Urged to Press China, EU Compliance on Telecom," PBI Media, LLC
February 4, 2004.
186 Ibid.
187 Ibid.
1 8 8
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Niles commented that USCIB's members were particularly concerned by China's
"unreasonably high capitalization requirements for basic services, which greatly limit market
access." China's telecom regulator, the Mil, recently reclassified several international value-
added services as basic services. This action “has the undesirable effects of both delaying
until December 2004 the ability of foreign entrants to offer these services, and of subjecting
any would-be entrant to the excessively high capitalization requirements placed on new
basic services providers.”1 8 9 A basic services license, when available in late 2004 for
application by foreign invested joint ventures, will have a US $250 million capitalization
requirement, or 100 times the capitalization requirement for value-added service
licensees.1 9 0
"The regulator has construed the meaning of value-added services in its WTO commitment
schedule so narrowly that any meaningful offerings, such as Internet Protocol-virtual private
191
network (IP-VPN) services demanded by global enterprises, are excluded," Niles said. Not
only are foreign investors precluded from offering basic telecom services until December
2004, but they are also only allowed to do so in partnership with a domestic basic services
operator.
“Interested parties must be provided a reasonable period for review and comment on the
Mil's regulations and decisions as required by China's accession documents,” Niles said.1 9 2
This is a crucial point taking into account that "virtually no notice was given, and no
comments invited, before the Mil's recently revised Telecom Catalog went into effect," he
said.
189
190
Ibid.
Ibid.
Ibid.
Ibid.
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72
"Mil continues to process applications very slowly for the few foreign-invested
telecommunications enterprises that have attempted to satisfy Mil’s licensing requirements.
In the 3rd year of the country's WTO membership, not a single application for a license to
provide value-added services has made it through Mil's licensing process,” USTR said.1 9 3
Additionally, USTR said that the U.S. “repeatedly had encouraged China to create an
independent regulator and had raised other concerns, in part through bilateral meetings.”
China is very far from realizing its so-called "Reference Paper Section 5" commitment to
establish an independent telecom industry regulator. The Chinese government owns and
controls all the major telecom industry operators, and the government, in the form of the Mil,
still retains its dual roles as protector of state enterprise operators and as industry regulator.
The US has won some concessions from China, including the abandonment, at least for
now, of a controversial standard for wireless data transmission. China concluded this year's
Joint Commission on Commerce and Trade with an agreement to "suspend indefinitely" its
imposition of WAPI, a domestically-developed standard only used in China for wireless local
area networks. Earlier, China was adamant that foreign companies must follow the WAPI
standard after June 1, 2004, causing ample anger and resentment among foreign
companies such as Intel Corp., which in turn threatened to stop selling its Centrino wireless
chips in China.1 9 4 China also agreed to an official attitude of neutrality regarding 3G
standards. This had the effect of lessening anxieties that TD-SCDMA, another domestically-
developed standard only used in China, would be utilized as a requirement for production of
the country’s next-generation mobile phone equipment.1 9 5
193 Ibid.
194
AFX News Limited, “US Announces Series of Agreements with China to Cool Trade Row,” April 22,
2004.
195 Ibid.
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73
4. CONCLUSION
Globally, the telecommunications industry is experiencing increasing multi-nationalism and
competitiveness, but currently, in China, it is an industry where government control is
politically necessary.
The postulation of this thesis was that success in the high-growth telecommunications
industry is a method by which the Chinese Communist Party (CCP) has continued to
legitimize its existence, thereby continuing its control. As a major and official “pillar” of the
Chinese economy, the Chinese telecommunications industry has been singled out by the
CCP to be an important tool for China’s economic expansion and the continued goodwill of
its citizens towards the government. As one senior government official put it, "we in the
government think we missed a lot of the industrial revolution. And we don't want to miss this
revolution."1 9 6 Additionally, the telecommunications industry has been essential to the CCP
in realizing its desire for China to retake its proper world standing as a modern, advanced,
powerful nation, and thus, highly instrumental as a method for legitimizing the CCP and the
Chinese government.
The detail presented in this thesis of the major operators in China’s telecommunications
industry, including crucial background information regarding government machinations and
plans for the future of its telecommunication operators, has been constructive in proving the
thesis. This thesis presents a novel contribution to the field of China’s telecommunications
industry. Prior to this thesis, consolidated historical and up-to-date information on China’s
telecommunications industry had been difficult to find in the public domain.
1 96 Hachigian, Nina, “China’s Cyber-Strategy,” Foreign Affairs, Vol. 80, No. 2, March/April 2001.
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74
Based on China’s current handling of its WTO commitments, it is probable that China will try
to continue to distort its obligations. This will cause further and continuing problems with its
partners, which will endure unless and until China either feels threatened or actually
experiences the effects of strong political and economic negative ramifications as a result of
instituting its anti-WTO policies.
In addition, the role of the foreign media in broadcasting China’s WTO transgressions as a
shaming mechanism has not usually been successful, since China has had a history of
acting independently of world opinion. The apparent contradiction of China’s aspirations - to
be a major power in the global economic scheme without having to follow the globally
recognized “rules” - is one that most probably will not be solved in the near future. It is
probable that, regardless of China's unwillingness to play by the rules, other countries will
continue to try to enter the Chinese market. The Chinese market, most notably the
telecommunications market, is one that presents enticing opportunities just by virtue of
China’s large population and the current stage of the telecommunications industry. China’s
prospects in achieving its international goals, even given its self-imposed, as well as external
constraints, thus remain bright in the mid-term.
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75
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Creator Cronin, Irena (author)

Core Title China's telecommunications race: An attempt by the CCP to achieve technical legitimacy and hold onto power

School Graduate School

Degree Master of Arts

Degree Program East Asian Area Studies

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag history, Asia, Australia and Oceania,OAI-PMH Harvest,political science, general

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