Eastern promise - Special Report China And Japan

CommunicationsWeek International, Feb 4, 2002 by Michelle Donegan

China represents a huge opportunity for service providers and vendors, and for many is a vital part of global strategy. Michelle Donegan explores the path to market entry following China's accession to the WTO.

After years of raising barriers to the outside world, China has become one of the most talked about markets in telecoms circles. The country's accession to the World Trade Organization (WTO) last December has become a good news story among the gloom, representing an investment opportunity--potentially a substantial one--for telecoms equipment suppliers and service providers in the United States, Europe and Asia.

According to Pyramid Research Inc., of Cambridge, Massachusetts, in the next few years, China will become one of the top three telecoms markets along with the United States and Japan (see graphs, p. 13). According to the research company, it's already the largest mobile market in the world and by 2006 will far outstrip other nations with almost 500 million mobile subscribers. It will become the second largest Internet market in 2003; and it will be the third largest broadband market in 2006.

It's not hard to see from these predictions why China is causing so much excitement among operators and vendors from other countries. But it's not the whole story. Even with an annual average growth rate of 23% projected for the communications industry in China from 2001 to 2005, and with the county's accession to the WTO, entering the telecoms market and operating a profitable business there will likely not be any easier than it has been in the past.

Last year, Vodafone plc, of Newbury, England, wrote down its investment in China Mobile, in which it has a 2.2% stake, by [pounds sterling]300 million. And analysts and other operators at last month's China Telecom 2002 conference in Honolulu, Hawaii, pointed out that although AT&T has invested millions of dollars in the country in recent years, progress has been slow (see CWI, 21 January 2002, p.4).

The signs are that gaining a foothold over the next few years will be equally tough. For one thing, the Ministry of Information Industry (MII) has just mandated the break-up of government-owned monopoly China Telecom, radically changing the structure of the service provider market This kind of sweeping change brings major uncertainties for newcomers as well as those already present in the market and has left experts split over whether it will really herald a new period of competition in China.

Changing investment rules

Perhaps the most significant change, seemingly in favor of competition, is that upon joining the WTO, China lifted the total ban on direct foreign investment in Chinese telecoms service providers. There is now a phased schedule for foreign investment in fixed-line and mobile operators, starting with an ownership cap of 25% this year for mobile investment and 30% for value-added services. Ownership in fixed-line companies will not be permitted until 2005 (see table, above fight).

But even here, things might not be straightforward. The MII has stipulated that ownership will be restricted to companies with "adequate" access to capital, potentially giving it scope to change the boundaries, although that would dearly cause stirrings among WTO members.

"There are more ambiguous standards [to come], and it's not clear who will meet foreign investor qualifications," says Robert Lewis, a partner with international law firm Lovells, based in Beijing. "They've pulled some of the decision-making process behind the curtains."

The measures now look unlikely to be as stringent as those mooted at the end of last year: At that time, leaked documents suggested the MII was proposing that foreign companies would need to have revenues of at least $10 billion and to have had a representative office in China for at least three years, greatly reducing the number of companies that would qualify to invest in service providers.

Even so, it won't be a case of western companies rushing in. "The bottom line is that the deck is stacked in favor of the Chinese party and MII," says Lewis. "Basically, opportunities are limited."

For suppliers of equipment, business is potentially lucrative, but competition with Chinese manufacturers and other western companies is fierce. "To succeed in China is to succeed in large volumes, says Robert Mao, chief executive of Nortel China. But, he adds: "The manufacturing industry is so open it's brutal."

For the most part, equipment suppliers feel the market can't do anything but grow in the coming years, particularly given that the Chinese government has put so much emphasis on the communications industry as a significant factor for overall economic growth.

"For suppliers, it's the market to be in, as much for having a base in the Asia-Pacific region as being in the Chinese market," says Dan Margo, trade development manager for the China Britain Business Council, based in London. "The general feedback [from equipment makers] is that there is business there to be won. And companies I liaise with who are out there ask, 'Why weren't we here before?'"