Eastern promise - Special Report China And Japan

CommunicationsWeek International, Feb 4, 2002 by Michelle Donegan

"We're looking to know how we can better penetrate China and we're looking for partners," says Ronald Dung, manager of international carrier relations for the Greater China region at Deutsche Telekom Asia, based in Hong Kong. "In the carrier wholesale view. competition brings down price and stimulates traffic. We see double digit growth in the coming few years for wholesale."

The restructuring of China Telecom, which currently has an effective monopoly on fixed-line services in China, will change the landscape of service provision but according to some will not necessarily herald greater competition. China Telecom will be split into two companies with the remit to operate in the north and south of the country: China Telecom South will keep the name and brand; China Telecom North, commonly referred to as the New China Net-com Group, will incorporate competitive operators China Netcom and Jitong Communications.

This means China will have four dominant operators: China Telecom South, the New China Net-com Group, China Mobile and China Unicom. The intention is to make shares in the four companies available to local investors on the domestic stock market. China Rail-com, which had its proposed merger with China Unicom "post-poned" by the State Council in late 2000, and China Satcom will also continue to operate their smaller businesses, but whether they will be able to compete effectively is still open to debate.

Indeed, many in the industry question the Ministry's intent to boost competition with this market reorganization. "I don't think the purpose of the restructure will be pro-competitive," says Fei Li, an analyst with Pyramid Research. "Instead of one monopoly, you'll have smaller monopolies."

But hoping to stimulate more competition among the four operators, the Ministry has stated that it plans to issue four national licenses to these four players so they can each offer a full range of services--fixed and mobile, voice and data--nationwide. "Everyone is supposed to do everything, everywhere. That is the change," says Lewis at Lovells.

But some analysts say that by incorporating China Netcom and Jitong into China Telecom North, the Ministry is effectively stifling any competitive spirit that might have existed in China. China Net-com has been regarded as a strong competitor to China Telecom, with a more Western management mentality. For example, it has recruited executives formerly with management consultants such as McKinsey to its board and other senior positions. Now, the competitor will be folded into the incumbent.

Others say the restructuring was a defensive move and has more to do with bolstering China's own service providers ahead of the WTO agreements that will allow foreign companies to enter the market.

"[The government] wants to get a few strong players in place before the WTO is phased in," says Hui Pan, chief economist and director of the Asia-Pacific region for IGI Consulting, of Boston, Massachusetts. "They want to be sure the local operators are in a strong position. It's a defensive strategy."