What's wrong with Chinese telecoms? After its breakneck transformation in the last 20 years, China is now in the era of lower expectations: flatter growth, smaller margins, fussier investors. Can telco execs and policy-makers make the change?

Telecom Asia, Sept, 2003 by Kaiser Kuo

After its breakneck transformation in the last 20 years, China is now in the era of lower expectations: flatter growth, smaller margins, fussier investors. Can telco execs and policy-makers make the change?

The total transformation of China's telecom sector over the last quarter century has been nothing short of mind-boggling. As anyone who spent any time in China before 1980 can attest, placing a simple local phone call even in one of the more developed cities used to be a frustrating ordeal. As late as the mid-1990s, getting a residential landline installed was a costly proposition, and new customers often had to wait months before service could be switched on by the slothful state-run monopoly.

In 1996, when mobile coverage was limited to big cities, handsets cost more than most urbanites earned in a year and were popularly called dogeda--"big brother big"--after the high-rollers who could afford to wield them.

Fast forward only a few years to 2003, and the telecom landscape has an almost sci-fi quality to it. Mobile phones are utterly ubiquitous, and in the cities it's rare to meet anyone between 16 and 60 who doesn't own one. Many' of them come equipped with bells and whistles undreamed of back when they were called dogeda: high-resolution screens, digital camera ports and MP3 players are commonplace on hand sets that costa fourth of what better cell phones did seven years ago.

Half the new handsets sold are Chinese brands, and you can even buy one 24-7 in certain Shanghai convenience stores. Every corner newsstand sells prepaid mobile phone cards and cut-rate VolP long distance cards. Pagers are a quaint relic of a simpler time. Mobile text messaging has become part of the cultural Landscape, and over 180 billion SMS messages are sent annually.

The SMS craze has created a mobile data market so Lucrative that China's three major Nasdaq-listed Internet portals have ridden it to profitability and skyrocketing stock prices. For a fraction of what it cost five years ago to install a regular phone line, anyone in a major city can get ADSL broadband service and tap into the increasingly diverse content offered along China's 2.4 million kilometers optical trunk.

To date, just about everything has gone right for Chinese telecoms sector. The improvements that the telecom revolution have--brought in quality of life, in increased work efficiency--would be impossible to measure; telecommunications has transformed virtually every facet of Chinese life. China's telecom carriers have built businesses that now generate collective revenues of over $4.5 billions monthly. Three of the four major carrier are now publicly traded, and the fourth, China Netcom, plans a listing within a year.

But look closely at the telecom sector and the cracks ate evident. The telecom industry reflects the larger Chinese economy, both in the drivers for its explosive growth and in the challenges that it now faces in sustaining that growth. The relatively easy part--unleashing the pent-up entrepreneurial energies and consumer aspirations of a billion plus Chinese--is over.

That energy is largely spent; the heady days of boundless growth ore coming quickly to an end. Though they've come a long way, like nearly every other sector of the Chinese economy, China's telecom industry is still struggling to transcend the legacy of its state-owned, command-economy past.

Policy-makers and telco executives will need to demonstrate even greater flexibility and adaptability as the terrain undergoes dramatic shifts.

Subscriber growth continues, but has perceptibly slowed. More significantly, new subscribers are lower-income individuals who ate contributing Less than $10 a month to carrier revenues. And with China's WTO accession, the threat of direct international competition looms: In December 2004, just over a year from now, foreign direct investment of up to 25% in basic telecom services will be legal by the terms of the accord.

Telecom Asia talked to leading sector analysts about what needs fixing China's telecoms if the carriers want to maintain growth and stay competitive in a quickly changing environment.

Wanted: An independent regulator

The US has its FCC, Hong Kong its OFTA and Singapore its IDA: disinterested, professionally-staffed agencies that allocate bandwidth, ensure fair competition, issue licenses, and set standards for networks and equipment. In China, the closest thing is the Ministry of Information Industries (MII), which theoretically performs these same functions but also acts as policy-maker.

Though technically separate from the carriers, MII is still a government ministry, and the government is still the majority shareholder in all five operators, China Telecom, Netcom, China Mobile, Unicom and Railcom. Their governing boards remain heavily staffed with individuals with close MII connections. "Until the government sells down its majority stakes in the telecom carriers, an independent regulator remains an elusive goal," says Duncan Clark of Beijing-based IT and telecom consultancy BDA.