The                       
China Democrat
A wholly owned subsidiary of
PUGUA' International Corporation
Shanghai, Peoples Republic of China
ChinaDemocrat@lycos.com

November 1998

By Dr. Li Xiaodong
Resident Scholar at IREX and CSIS

Please direct any questions you may have regarding this paper to Dr. Li Xiaodong at his e-mail address: xli@drc.gov.cn

Rapid telecommunications growth demonstrates the strong momentum of China’s economic development. This growth has attracted multinational telecom companies from around the world and has led international policymakers to examine the characteristics of and prospects for China’s telecommunication market. This paper summarizes recent developments and offers thoughts on the prospects for China’s telecommunications industry. It will then analyze the policy characteristics and trends in China’s telecommunications sector, and give case studies on foreign companies learning to work within this growing market.

1. Recent Developments and Prospects: Telecommunications in China

Since 1978, when China opened to the outside world, it has enjoyed steady and impressive economic growth. In recent years, the world has also observed the continuing progress of China’s telecommunications infrastructure and the enhancement of China’s communications capabilities. As of 1996, China had laid over 130,000km of optical cable line, had the telephone exchanges capacity for 109 million lines and the mobile communications exchanges capacity of 7.16 million lines, had a total of 77.53 million telephones and 6.85 million mobile telephones, resulting in a telephone density of 6.33%, and had 1.04 million toll circuits.

With the inception of China’s Ninth Five-Year Plan (1996-2000), the Ministry of Posts and Telecommunications (MPT) formulated a blueprint for China’s telecommunications development, in which the main goals were to have 635 billion Yuan in construction investment, a 25.6% growth rate of revenue, 300 billion Yuan in P&T turnover revenue, a total trunk length of 150,000-200,000km of optical fiber, an office exchange capacity of 150 million lines, a total telephone network capacity of 170 million lines, 1.05 million mobile channels, 123 million telephone subscribers and 18 million mobile subscribers, a telephone density of 8%, and a data communications network of 800,000 ports.

Although the MPT merged with the Ministry of Electronics Industry (MEI) to form the Ministry of Information Industry (MII) in March 1998, these primary goals remained as targets for the new ministry. During the first half of 1998, China's telecom industry continued to enjoy strong growth. A recent MII report stated that the P&T growth rate was 20% faster that China’s national economy, with the business volume at 11.39 billion Yuan ($13.5 billion USD), and that investment in fixed assets totaled 50.8 billion Yuan ($6.15 billion USD). MII went on to report that there are 18 million mobile phone subscribers, approximately 80 million local phone subscribers, 400,000 Chinanet users, and over 200,000 users of public multimedia information services. In addition to the 312,00 digital data network (DDN) ports and 14,000 internet ports, there is a national phone availability rate of 9.55%, main telephone line availability of 6.4 lines per 100 people, and mobile phone availability of 1.5 units per 100 people.(1)

MII also announced plans to invest 150 billion RMB ($18.137million USD) into telecommunications infrastructure in 1998, in order to achieve its 460 billion RMB ($55.622billion USD) production goal and maintain a 20% growth rate.(2) This high growth rate has been a key factor in China’s rapid economic development. Analysts, domestic and foreign, have given optimistic projections for China’s information industrial development. For example, “The output value of China’s information industry is expected to reach 460 billion in 1998, 1 trillion by the year 2000, and 6 trillion by 2010. China is expected to become the largest market in the world”.(3)

2. Some Policy Characteristics of China’s Telecom Development

There were many factors that led to the expansion of China’s telecommunication development. First among these is the continued increase of market demand. As the income of Chinese households increased, the structure of household consumption changed focus from color televisions, refrigerators, and automatic washing machines in the 1980s, to telephones, personal computers, and automobiles in the 1990s. The second factor to be considered is economic development. Rapid economic development generates a need for broader telecommunication service. However, the most influential factor that led to the development of China’s information industry has been its telecommunications regulatory policy.

a. Preferential Policies

One of China’s most effective policy moves was to allow telecommunication entities to set an initial telephone installation fee to be paid by applicants prior to installation. Although some consumers may feel it was unfair, this decision made it possible for the telecommunication sector to raise financial resources without any cost. Through this fee, China’s telecommunication sector gathered a great deal of capital and poured it into the construction of a telecommunications infrastructure.

b. Demonopolization of Telecommunication Operation and Management

One big change in China’s telecommunication policy was the decision to allow certain companies, that do not fall within the jurisdiction of MPT, and certain private investors, to participate in a limited area of value-added telecommunication operations. Two telecommunication companies, Liantong (China Unicom) and Jitong, were established to compete with the MPT’s monopoly service. Liantong was allowed to expand the dedicated networks of some ministries, such as the Ministry of Railways (MR) and the former Ministry of Electric Power (MEP). It became the second nationwide basic and value added services operator in the local and long distance markets. Jitong, which focused on the domestic information service market, was formed by a consortium of 30 state owned enterprises and research institutes, and was allied with the former Ministry of Electronics Industries (MEI). By the end of 1997, over 2,900 companies throughout the country had been authorized to operate value-added services; 90% of them operating paging services.(4) According to a recent report, China Telecom has opened 800 businesses to the public since September 1, 1998.(5)

c. Decentralization of telecommunication construction policymaking

Most government policymakers in China realize that the expansion of the telecom infrastructure has had a positive effect on national and local economic development. Because both believe this will attract outside investment, central government policymakers enacted a nationwide policy to attract foreign investment, while local policymakers created flexible and elastic investor polices.

d. Encouraging competition in the telecommunication equipment market

In order to attract foreign investment and advanced technology, China has adopted a series of policies to encourage foreign investors to compete in its equipment market. According to the “Guidelines on the Industrial Catalog for Foreign Investment” issued in Oct. 1995, foreign investment is encouraged in the following areas:

• the manufacture of large-scale Integrated Circuits (LSICs)
• the manufacture of 900 MHz digital cellular mobile communication equipment
• the manufacture of digital microwave communications systems and measuring equipment
• the manufacture of asynchronous transfer mode (ATM) switching equipment
• the manufacture of key components for facsimile equipment
• the manufacture of satellite communications terrestrial earth stations (TES), data earth stations (PES), and key components
• the development and production of software, commercial satellite manufacture, satellite payload manufacturing, satellite applications
• the development of new fields such as information and communications networking technology, international economics, scientific, technological information service, etc.

China’s has obtained advanced science and technology from foreign manufacturers, thus making it one of the largest users of foreign capital among developing countries. This has significantly reduced the technology gap between China and developed countries. In the telecom field, the former MPT has established as many as 67 Sino-foreign joint ventures. As of the end of 1997, their products were successfully installed over the country’s SPC telephone network, mobile network, and optical telecom network.(6)

China’s telecommunications will continue to develop in the 21st century. The telecom market in China will continue to be lucrative for the following reasons:

a. The potential customer base means huge demand. Currently, China’s population is 1.2 billion and it is estimated that it will grow at a rate of 17 million annually. Even if China’s telephone density reaches only half of its population, the market will still be vast.

b. The telecom Sector will continue to receive preferential treatment. Even though China’s economic development slowed down in 1998, the telecom market remains robust. To keep up with this momentum and customer demands, the telecom sector will be treated as a priority sector by the government with preferential policy and heavy investment.

c. Recent separation of governmental and enterprise functions. Overlapping governmental sectors and the mixture of governmental functions and enterprise functions in China’s telecom field has seriously hindered its telecom development. During the First Session of the Chinese National People’s Congress (NPC) in March 1998, the government decided to merge the former Ministries of Posts and Telecommunications (MPT) and the Ministry of Electronic Industry (MEI), thus establishing the Ministry of Information Industry (MII). The Ministry of Broadcast, Film and Television, the China Aerospace Industry Corporation, the Informatization Leading Group under the State Council, and the China Aviation Ministry were also brought into MII in order to create better information and network management.

d. Opening more markets to the outside. According to a recent report, MII’s Minister Wu Jichuan said of the telecommunications industry, “China is ready to increase international cooperation in this field”.(7) China has to open its service market, in order to enter the World Trade Organization (WTO). China’s future participation in the global economy will mean that telecom development will have to face serious challenges. How should China deal with this issue and improve its ability to compete? The best resolution could be to learn more about globalization from advanced countries, such as the United States.

3. U.S. Telecommunications Policy: Increasing Competition

a. Ending Monopoly Status

Until the end of the World War II, US telecom policy was based upon the premise that telecom systems were natural monopolies.(8) Since that time, this status has gradually changed. In the 1970s, when economic deregulation became a popular issue, telecom industry monopolies came under closer scrutiny. Previously, the national spotlight had been on industries such as airlines and trucking, which were under close government regulation. Although the telecom industry differed in many respects, it was natural for the focus of deregulation to shift to this sector because, in the last decade, global competition had become important to economic development. Telecommunications was chosen by the US government because of the belief that competition would foster a maximum contribution to the industry and the ordinary consumer in the form of better services. Today this policy’s thrust, wherever feasible, has been to rely on competition and deregulation. The telephone lines have become similar to the power lines because any equipment meeting the technical standards for interconnection can be attached. The reasons for these changes are:(9)

• Technological change
• The convergence of computers and telecommunications
• New entrants and vendors
• The large number of users
• Deregulation
• Global competition

b. Application and Enforcement of Competitive Policy

The US relies on three major statutes to enforce competition,: the Sherman Anti-Trust Act of 1890 which focuses on price fixing, collusive practices, and monopolization; the Clayton Act of 1914 which deals with tying arrangements and other vertical restraints, price discrimination and mergers and acquisitions; and the Federal Trade Commission Act of 1914 which focuses on unfair methods of competition. In addition, the Hart-Scott-Rodino Antitrust Act mandates that all mergers and similar arrangements are subject to pre-merger notification and review by regulators.(10)

The introduction of market competition followed a protracted anti-trust suit against AT&T, which resulted in the landmark 1982 Modified Final Judgement by the Department of Justice (DOJ). This forced AT&T’s divestiture in 1984, and influenced a major reorganization of the telecom industry, separating local and long distance markets. AT&T was broken into seven Regional Bell Operating Companies (RBOCs), with regional local monopolies, and was restricted to the long distance market.

Davidson explains, “In contrast with other nations, the US devotes vast resources to legal and regulatory proceedings that move attention away from broader policy issues and towards more specific economic and legal minutia”.(11) The Telecommunication Act of 1996 has theoretically opened local, long distance, international, and cable markets to competition and has removed most of the cross-media service restrictions. Currently, the US is the most stringent anti-trust regime in the world with formal legislation restricting numerous forms of commercial activity deemed anti-competitive.

c. The Chief Policy Principles for Promoting Competition

The chief policy principles for promoting competition are as follow:(12)

• Competition should be relied upon wherever feasible. Competition is, after all, the normal approach in the United States. It drives prices toward marginal costs and spurs efficiencies and innovation.
• “Regulated competition” should be avoided because the full benefits of competition are not obtained when the government closely supervises the process. All too often players are handicapped in order to preserve competitors instead of promoting all-out competition.
• The subsidies existing in the system should be eliminated or largely reduced. A competitive system that maintains substantial subsides is giving off false economic signals, which attracts entrants that are not necessarily more efficient and undercut the services being used for the subsidy. Such a system skews use at both ends and discourages overuse at the local level.
• Because maintenance of universal service is still a national goal, it is important to target subsidies to those that need them in a way that does not skew the competitive picture.

4. Foreign Companies’ Strategies in China’s Telecommunications

China’s rapid telecommunications growth has attracted many overseas companies, including AT&T, Motorola, Rescan, NEC, Northern Telecom, Siemens, Alcatel, Fujitsu, and Nokia. From staff interviews and magazine and newspaper articles, it can be determined that many of these companies have been successful in China.

There are many ways foreign companies try to influence their governments in order to increase profitability in China:

A. Government Support

1.) Improving Relations with China

Improving foreign relations with China is a vital first step in developing better trade relations between China and its trading partners. The Sino-American relationship, due to efforts on both sides, has shown great improvement in the past several years.

Beginning with Chinese President Jiang Zemin’s visit to the United States last year, and US president Clinton’s reciprocal visit to China this summer, Sino-US relations have improved and advanced. As a result, American companies have been given access to many more business opportunities. This can be seen by the $1.7 billion in new investment deals that have been signed in fields such as telecommunications, aviation, chemicals, vehicles, electronics and energy.(13) Motorola and Lucent signed China Telecom projects worth $300 million on June 23 and Motorola won the contracts valued at US$ 210 million, for production of equipment for Globe System’s Mobile communication (GSM) base station.(14) As the second largest US investor in China with over $1 billion compiled capital, Motorola has recently moved its North Asia headquarter to Beijing, and has developed a new investment plan, with a commitment of $2.5 billion by the decade’s end, more than anywhere else outside the United States.(15)

Many US companies have contributed a great deal in order to improve the relationship between China and the United States. Nevertheless, some companies still worry that Sino-US ties are tenuous, and want to detach themselves from the fate of a bilateral relationship.(16) In fact, contracted US investment in China has been falling since 1995. Compared to other international investment, US investment in China remains small.(17) However, according to a recent survey, most US investors in China have shown a profit and some firms have already recouped their initial investment.

2). Reducing Trade Barriers

Clearly, trade barriers will hinder foreign telecom product sales in China. In the wake of Tiananmen Square, most industrialized countries imposed punitive economic sanctions on China, such as the closing of soft loans opportunities. Subsequently, recognizing China’s telecom market as one of the most lucrative in the world, many industrialized countries lifted their sanctions. Although Japan and Europe had lifted their sanctions by the early 1990s, the United States had not changed its policy, and continued sanctions restricting US business in China. In addition, these sanctions penalized US firms competing with Japanese and European firms in China.(18)

US restrictions on technology exports are a barrier to telecom business in China.(19) Because of national security considerations, the US government forbids the export to China of certain types of telecom equipment, including advanced technology equipment such as integrated services digital network (ISDN). However, the Japanese and European governments have actively supported yellow zone license applications in the Coordinating Committee for Multilateral Export Controls (COCOM). The COCOM, an institution that coordinates the export policies of the US and its allies toward communist countries, granted Great Britain approval to sell optical fiber cables and equipment to China in 1986. In contrast, US companies often have difficulties getting their applications approved by the State Department.(20) It wasn’t until April 4, 1994, that the Clinton Administration decided to relax the licensing requirement on the export of nearly all-civilian telecom equipment and computers to all countries except North Korea. This regulatory change certainly helps US telecom firms become more competitive in the international market, which includes China.

3). End the Annual MFN Debate

The annual Most-Favored Nation (MFN) status renewal creates periodic uncertainties for US business in China because renewal affects the export and investment climate in China. As a result of this, it may not be realistic to ask US companies to form longer and more stable strategic development in China’s telecommunications market. According to a recent survey of US firms in China, aside from two that have invested over $1 billion, none have invested over $300 million and this includes multinational US companies.(21) The MFN debate may be one of the reasons that US investment in China is so small.

4). Support or Subsidize Investment in China’s Telecom Market

Today, as multinational corporations from Europe, America, Japan, and Canada participate in China’s telecommunications market, foreign companies are faced with ample competition. To participate more effectively, some Japanese, Canadian and European companies have lobbied their governments to support their business interests in China by supplying loans to the Chinese government. With these loans, the Chinese government has the needed resources to purchase their equipment. For example, the Japanese government promised a $5.29 billion loan package to China in August 1989. In return, China used part of the loan to purchase 620,000-line Japanese SPC PBXs for its nine provinces. Moreover, Japan has established the Overseas Economic Cooperation Fund (OECF) as a major loan supplier to China.(22) Also, in August 1989, the Canadian government approved a loan of $84 million to finance a Northern Telecom project, which provided digital switching equipment to four provinces in China. As a result, Northern Telecom possessed a prospect share of China’s digital switching market. Besides its strong government support, Northern Telecom has obtained assistance from the Canadian International Development Agency.(23)

Some analysts, such as Mr. Lin Sun, believe that the lack of government financial support is one of the main reasons for weak sales of US products in China’s telecom market. (24) In an interview, Mr. Fan Xing, a research fellow specializing in telecommunications at the Center for Strategic & International Studies (CSIS), said: “Unlike Japanese, Canadian and European companies whose governments offer China large concessionaire loans to pay for the purchase of telecom equipment, US firms have had very limited access in obtaining government concessionaire financing, because China is not eligible under the Foreign Assistance Act to receive financial assistance.”

B. Corporate Strategies

External:

1). Maintaining Good Relationships

One challenge that foreign vendors supplying telecom products to China’s market often face, is the issue of determining who in the Chinese government has the power to decide, and who can make the final decision. “Your attention”, as Mr. Erdener Kaynak pointed out several years ago, “should be particularly given to two groups of people who play important roles in accepting or rejecting foreign products. The first group consists of general managers and chief engineers working with the Ministry of Post & Telecommunication (MPT), local Post & Telecommunication Administrations (PTAs), and other telecom-related enterprises. Responsible persons at foreign trade offices or departments who make decisions on purchases of foreign goods and technologies should be included in this group. The second group is staff personnel from local Chinese regulatory agencies, planning organizations, and administrative bureaucracies who retain certain jurisdiction over the flow of commodities and technologies”.(25)

The Chinese government underwent restructuring during the first session of the 9th National People’s Congress in March of 1998. The Ministry of Posts and Telecommunications (MPT) and the Ministry of Electronic Industry (MEI) was merged to form a new Ministry---MII. MII now includes the government functions of information and network management of the former Ministry of Broadcast, Film and Television, China Aerospace Industry Corporation, and China Aviation Industry Corporation. Mr. Wu Jichuan, the former Minister of Posts and Telecommunications, has been appointed as the Minister of Information Industry. Mr. Peter B. Lamontagne, president of Pharos International, pointed out “those foreign companies that have established relationships with Minister Wu will continue to benefit from these connections.”(26) According to a recent report, the former Informatization Leading Group Office of the State Council, an organization playing an important role in China’s telecommunications, also was merged with MII, to become MII’s Information Promotion Department. Many foreign companies have focused on MII and are paying more attention to establishing good relationships with key persons in this changed situation.

2). Obtaining Local Government Support

Many telecommunications projects are implemented on the provincial or municipal level, therefore, it is important to obtain local government support in areas such as policy and finance. Many companies have recognized this and have lobbied the local government to support them in their bids for projects. One example is the Japanese manufacturer NEC’s agreement with the Tianjin municipal government. Since this agreement needed to be approved by the Chinese central government, the NEC persuaded the Tianjin municipal government to use its political influence to gain the needed approval.(27)

Some common methods of obtaining local government support are: localizing the types of products, using the local work force and materials, transferring advanced technologies and management skills, and using production suited to the conditions of the China domestic market.

Because one of the important targets of China’s reform and modernization is to enhance the standard of living, the Chinese government has had to seek more employment opportunities and supply more quality products. If foreign investors localize their technology and manufacturing, they would be welcomed by local governments, and be more likely to receive their support.

3). Influencing Policy Making

Another way to excel in China’s telecom market is to influence China’s policy making. For example, a company could have an affect on policy-makers by co-sponsoring an international telecom seminar with those Chinese government agencies involved in the formulation of telecom policy. They can introduce their regulations and exchange ideas on telecom issues. By participating in this type of constructive action, Chinese policy makers can obtain more information about telecom development and direction around the world as well as learn more about international trends such as opening, deregulation, and the promotion of competition.

At times, the effort to influence policymaking has been quite aggressive. One case that merits discussion is the negotiation process between the Chinese Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and the US Trade Representative Office (USTR). The USTR pressured MOFTEC into agreeing to open the value-added telecom service market to US telecom companies and investors in the near future, in exchange for an agreement that would rid China of US sanctions. The opening of China’s domestic telecom market is a contentious topic in negotiations for China’s entrance to the General Agreement of Tariff and Trade (GATT) and the World Trade Organization (WTO). Some countries want to force China to open its telecom service business to their companies.

China’s new MII has planned to gradually open its telecom service market to the outside world. Addressing an Asia-Pacific Economic Co-operation (APEC) ministerial meeting on telecommunications and information industry in June 1998, Minister Wu said, “China is ready to increase international cooperation in these fields”.(28) China’s decision to increase cooperation can be mainly attributed to rapidly increasing customer demands.

Internal:

1). Early Entry

To many foreign companies, China is considered the key place for telecom investment. This stems from the belief that a country with a large landmass and 1.2 billion consumers has the potential to become the largest telecom market in the world. At the same time, China’s economy in the last 20 years has led it to become the world’s most rapidly developing nation. China has continued to invest great sums of money in telecommunications, which is regarded as a preferential development sector. The result has been that the Chinese have greater purchasing power, therefore, it is not difficult to understand why foreign companies are so anxious to enter China.

Foreign companies, such as France’s Alcatel of Belgium, Canada’s Northern Telecom, Sweden’s Ericsson, and Japan’s NEC, all made early entrances into China’s telecom market. “Their early entry”, as CSIS’s Fan Xing has pointed out “has assisted them in acquiring better strategic competitive positions, reflected by market share, profitability, and technological dominance." Fan Xing explains that companies surely pay a high price for postponing entry into the China market. The advantages of early entry are include the creation of:

• Economies of scale
• Higher productivity at lower costs due to learning and experience
• Brand-name recognition and preference
• Lower-cost access to financial capital and raw materials
• Advanced distribution channels

With the exception of AT&T and Motorola, many US companies, entered Mainland China comparatively late. Although AT&T opened its first representative office in Beijing in 1985,(29) and Motorola began to invest in China in 1986,(30) others, such as MCI, Sprint, and NYNEX entered the Chinese market much later. MCI began providing international long-distance connections in July 1991, Sprint opened a representative office in Beijing in 1991, and NYNEX did not make the decision to enter the mainland until 1993.(31) Currently, AT&T and Motorola are the most successful US companies in China’s telecom market because these long-established firms enjoy hundreds of millions of dollars in annual sales of equipment manufactured at their Chinese plants.

2). Long-term Thinking

With Asia’s economy in tatters and the threat of a domestic slowdown, some believe China needs the US more than ever. According to the Dow Jones Newswire, while the total US-China trade is the equivalent of 8.3% of China’s economic output, it is only 0.9% of America’s. Furthermore, a full one-third of all Chinese exports arrive in the US, while only 3% of US exports reach China. Mainland exports to the US are equal to 6.9% of its GDP, but US exports to China are valued at just 0.2% of America’s annual output. With Asia in an economic downturn, the US was China’s largest source of foreign investment in 1998.(32)

Presently, it is important for foreign businessmen to identify the practical opportunities and potential market in China. China is presenting a picture of tremendous opportunities in telecommunications and the forthcoming opening of its service market. It is, therefore, necessary to establish a long-term and stable strategy in order to gain success. IBM has recently signed a Java agreement with MII. “This is an agreement with which associated investments would likely serve IBM well over the long-term.” Ross Warner, an analyst at Beijing-based China Research Corp., said “It’s more a long-term move than a short-term move… from the long-term, strategic point of view, making the right move to try to invest and position themselves to take advantage of the future growth in e-commerce solution here in China”.(33)

3). Flexible Pricing

With the entry of an increasing number of players, competition in China’s telecom market has been intensified and extended. When visiting any foreign company in Beijing, it has become common to hear complaints that serious competition has resulted in a reduction of profits. As a result of this competition, many companies have applied a flexible pricing strategy. Some companies have even used aggressive pricing strategies, such as dumping. A recent case is the competition in China’s fiber optic’s market. In order to restrain the development of China’s emerging fiber optic’s industry, many foreign manufacturers and suppliers have dumped huge amounts of fiber optic’s products into China. For the first sixth months of 1998, the price of fiber optics dropped 30%, and is likely to continue to drop. China Online indicates that over 70% of the fiber optics used in China are now imported, and in 1997, China spent over $200 million importing fiber optical products. By the year 2001, experts predict this figure will double. It is key for both, foreign and Chinese domestic companies to take up shares in the telecom market as soon as possible, in order to get more benefits in the near future.

Business to Business connections:

1). Memorandum of Understanding

Signing a memorandum of understanding (MOU) with current and potential Chinese operators has become a popular business practice among multinational corporations. The past few years have seen MOUs signed between MPT and companies such as AT&T, NTT, and Hong Kong Telecom. Recently, IBM has signed a MOU with MII to promote the use of the Sun Microsystems-developed programming language among mainland software developers. “This is the latest in a series of joint agreements between IBM and MII”, said Zhang Qi, director-general of Department of Electronic Information Products under MII and a former MEI official, “The MOU between IBM and MII remains significant because it addresses anticipated future growth in e-commerce on the mainland and aims to increase the number of mainland developers using Java. This form reinforce MII’s commitment to use Java”.(34)

2). Joint Ventures

In order to build up market share, many western telecom firms have entered into joint ventures with Chinese counterparts. As Fan Xing of CSIS has pointed out, foreign investors can gain a competitive advantage in China by doing the following:

• Gaining wide access to China’s domestic market
• Establishing economies of scale
• Using local resources such as marketing expertise, distribution network, cost-cutting propensity, tax incentives, and financing support
• Establishing timely business adjustments to market and policy changes

China welcomes this kind of cooperation because many joint ventures have been very successful. Alcatel BTM and the former MPT jointly established Shanghai Bell Telephone Manufacturing Co., which has not only taken up the domestic market, but also exports its products to North Korea, Vietnam, and Russia. NEC and Siemens’ partnerships with the former MPT to set up local production companies, have also guaranteed their places in China’s long-term network plan.

3). Nurturing the Chinese Partner

Sometimes foreign companies’ make short-term sacrifices in the hopes of gaining long term benefits from improved relations with China, which is shown in the following example:

On June 6, 1997, Cable & Wireless (C&W) and China Telecom, the operating branch of the former MPT, announced an agreement in which C&W would sell 5.5% of its stake in Hong Kong Telecommunications (HKT) to China telecom for approximately $1.2 million. The arrangement outlined that during the next six to eighteen months C&W would transfer half of its remaining 53.5% interest in HKT to China Telecom and, in exchange, would receive 25-30% in China telecom (Hong Kong) (CTHK), a holding company that was founded in early 1997. Up to 20 Chinese provincial Posts and Telecommunications Administrations (PTAs) could acquire or swap equity in CTHK.

What C&W had given up, however, was quite concrete: HKT had accounted for the majority of C&W’s revenues. C&W’s press release about the deal reflects the political and financial benefits it hopes to gain: “To further strengthen its relationship with China and to enhance shareholder value, Cable & Wireless has prepared a transfer to China Telecom (Hong Kong), which will allow C&W to penetrate the China market.”(35) “This cooperation,” as Mr. Kin Yu, Senior Manager of External Affairs of C&W has stated, “ was successful”.

4). “FCC” or “CCF” Model

Since their establishment, foreign companies have viewed China’s trade restrictions as a barrier that needs to be removed. The areas prohibited from foreign investment by the Chinese government are as follows:

• the operation and management of post and telecommunication services, radio stations, and television stations at any level;
• the production, publication, distribution of radio and television programs;
• the construction of telecommunications projects that jeopardize the safety and effectiveness of military installations.

Although the Chinese government has promised to improve conditions needed to open its markets to foreign business, foreign companies are impatient. They have made efforts to break trade barriers by lobbying, imposing political pressure, and maneuvering to get rid of restrictions.

China Unicom has been particularly receptive to foreign investment and has partnered with foreign companies to build telecom networks. This type of partnership has been termed as “edgeball” by some observers, because it involves sailing in uncertain regulatory waters or “gray areas”. Recently, foreign companies have considered the Unicom model of a “FCC”(Foreign-Chinese-Chinese) or “CCF”(Chinese-Chinese-Foreign) structured joint venture, as a way to circumvent trade barriers. In this model, a foreign company forms a joint venture with a subsidiary to contract with Unicom to construct a network, and then turn the network over to Unicom to operate. Under this arrangement, a revenue-sharing agreement is used to ensure that the foreign partner recoups the initial investment. The joint venture typically forms a joint management team, which has considerable influence over the operation of the network. In this system foreign firms are not explicitly violating Chinese regulations concerning telecommunications service because they have only a limited role in management and operation of the joint venture.

Conclusion:

China’s telecom development has very good future prospects, but the road is filled with challenges. One of the greatest challenges China faces, is the need to successfully adapt to the new globalized economy. By introducing competition, China will be able to enhance its competitive ability, customers will obtain better services, and foreign investment will increase. Thus, competition is necessary to promote China’s telecom development. For foreign companies involved in China’s telecom market, I think they may achieve more success than ever, if they are prepared to produce “ products superior in quality, performance, and functions;…willing to share state-of-the-art technology;…are competitive in price and service;…build up trust, develop relationships;…regard and emphasize supplies of equipment and services as delivery of value to the customers”, as Mr. Fan Xing pointed out.

Foot Notes:

(1) www.chinaonline.com
(2) www.chinaonline.com
(3) www.china-embassy.org/cgi-bin/press.pl?
(4) Jichuan, Wu. “Developing a Telecommunications Industry with Chinese Characters” speech delivered by Minister Wu Jichuan, Ministry of Posts and Telecommunications of the PRC, at Texas A&M on Dec 4 1997, located at: www.china-embassy.org/cgi-bin/press.pl?telspeech.
(5) www.mii.gov.cn/news980914.htm#2
(6) Jichuan, Wu. Located at: www.china-embassy.org/cgi-bin/press.pl?telspeech.
(7) China Daily July 10, 1998
(8) Wellenious, Bjorn, Peter A. Stern, Timothy E. Nulty and Richard D. Stern. “Restructuring and Managing the Telecommunications Sector,” A World Bank Symposium, The World Bank, Washington, DC, 1997: 11.
(9) Ibid., p.11.
(10) Entman, R. and C. Fireston. “Strategic Alliances and Telecommunications” A Report of the 9th Annual Aspen Institute Conference on Telecommunications Policy, Aspen, Colorado, August 7-11, 1995: p.5.
(11) Davidson, W.H., R. Hubert, and E. St Croix. “Telecommunications Infrastructure Policy and Performance: A Global Perspective” Center for Telecommunications Management, University of South Carolina, January 6, 1993: p.7.
(12) Wellenius, Bjorn et al: p.80.
(13) www.chinaonline.com
(14) www.chinaonline.com
(15) www.chinaonline.com
(16) Gilley, Bruce. “Ending Dollar Diplomacy in China Has Benefits” The Asia Wall Street Journal July 13, 1998.
(17) www.chinaonline.com
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(24) Sun, Lin. May 26, 1990.
(25) Erdener, Kaynak. “How Chinese Buyers Rate Foreign Supplies” Industrial Market Management 18 (1989): p.193.
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(28) China Daily July 19, 1998.
(29) Warwich, William. “A Review of AT&T’s Business History in China” Telecommunication Policy April 1994: p.274.
(30) Elegant, Simon. “Motorola Seeks a Second Chance in the Chinese Market it Once Dominated” Far Eastern Economic Review September 3, 1998: p.11.
(31) Chismar, William G., Meheroo Jussawalla, and Marcellus S. Snow. “US Provision of Telecommunications Goods and Services in the PRC: Chinese Policies and American Strategies” Telecommunications Policy 20(6), 1996: p.463.
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(33) www.cow.com
(34) www.cw.com.hk
(35) ITC

Li's residency in Washington, DC was co-sponsored by the International Communications Studies Program of the Center for Strategic & International Studies. The IREX portion of Dr. Li's residency and the symposium were made possible with the generous support of the Starr Foundation.

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