China: more haste, less speed? China, despite WTO accession, still remains as inscrutable as ever

Telecommunications International, March, 2003 by Stephen McClelland

China watchers in the telecom sector will not be short of work for some time yet. Continuing changes in the world's largest mobile market and second largest fixed-line market look like making life interesting but as complicated as ever according to expert opinion at the PTC 2003 and China Tech 2003 conferences in Hawaii.

Chinese telecom was in a process of transition anyway as a result of WTO agreements that were inked at the end of 2001. Following these, China's largest fixed-line operator has been split into two main groups -- China Telecom (covering the south of the country) and China Netcom (covering the north). But elsewhere, key changes signal debatable implications.

China has been preoccupied by political reordering for some months as a new generation of party officials take office and long-standing structures are given a makeover. The makeover extends to the key ministry in the telecom space, the Ministry of Information Infrastructure (MII), which sees a change at its helm. Minister Wu leaves office in March 2003 to be replaced by Wang Xudong. China watchers perceive Wang as a long-standing party bureaucrat and, although versed in technology as an engineer from previous experience in the Ministry of Electronics Industry, essentially an outsider in MII politics. Wu, on the other hand, was widely regarded as being resistant to regulatory reform and unnecessarily favouring China's incumbent players -- in particular, the old China Telecom.

Wang's appointment is greeted with enthusiasm in some quarters, though this may simply be the result of frustrated groups welcoming any sign of change. There is no doubt, however, that Wang's appointment is a deliberate move by China's rulers to bring structure and reform to the telecom marketplace. But 'structure' and 'reform' may mean different things to different people, and Wang's own stint may be a temporary one.

Market idiosyncrasies

Change would now be welcome if it signals predictability and transparency. But transparency is at a premium in the Chinese market where technically 'illegal' services are nevertheless permitted. One prominent example is the Little Smart wireless access service offered by China Telecom and China Netcom. Little Smart is based on Japan's PHS technology and has been an astounding success with ten million subscribers to date who like its low tariffs (equivalent to fixed line) even though roaming is limited or non-existent, and where subscriber mobility is restricted.

Little Smart has managed to generate heat with China's cellular players who point out that the fixed-line players are not licensed to offer mobile services. It was also controversial in that one time it was held to occupy spectrum intended for future 3G use. Little Smart is widely interpreted as an intention by the incumbent fixed-line players to enter the mobile market at full strength sometime in the future. Consumers will continue to play the numbers. Because of the billing split between calling and called parties, many cellular subscribers note the phone number from the CLI (call line identification) of incoming calls and then reply on fixed lines, Little Smart or payphones.

Against this, there is the backdrop of significant market changes. China's enormous market size (there were 200 million mobile subscribers at the end of last year, representing a 55 per cent year-on-year growth) obscures growing problems. Revenue per user remains low by international standards and is falling by around 13 per cent at the last year-an-year count. Slimming margins are making operators more aggressive and the Chinese market has seen an unprecedented bout of handset giveaways to lure customers.

3G issues

What about 3G? Given the change of MII leadership, licensing could be another year away. Little is likely to happen before Wu leaves office, say market watchers. And it could be months beyond that before the new team feels confident enough to pronounce. China's driving telecom policy will continue to be what is called 'orderly competition', an often-heard phrase in the Chinese telecom market, widely interpreted to be a rejection of the free markets (and market mayhem) seen in other countries. But questions of how such order is to be achieved continue to overhang the marketplace; in particular, a clarification on the standards that will be adopted in the longer term and, amongst other issues, the ultimate destination of China's own development, TD-SCDMA, which is reportedly ready for commercial deployment if given the go-ahead. China remains the only country where decision makers could apt for W-CDMA, cdma2000 or TD-SCDMA as a commercial standard -- a confusion that helps no one. But China's experts remain par ticularly tight-lipped on this issue. In 2G, GSM heavily outnumbers the more recently launched rival, CDMA, but observers say that China Unicom, running both technologies, is making a concerted attempt to provide CDMA as a premium service to heavy users. But if China Telecam and China Netcom are allowed into the 3G telecom space when the licensing round finally gets underway, there are predictions of market problems as margins thin to non-existent in the face of overcrowding. And this is without pressure from a rapidly-developing Wi-Fi market using unlicensed spectrum and, anecdotally, a hip addition to the noodle shops in China's big cities.