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Entry into the forbidden market
by KATHLEEN RICHARDSChina Telecom's dynasty has ended, and the country is negotiating hard to participate in world trade. Is 2001 the year of the foreign service provider?
China's accession to the World Trade Organization (WTO)-if it ever happens-will open up its telecommunications services market to foreign investment and competition. Today, foreign companies are not allowed to invest in, operate, or manage China's fiber-optic communications networks; foreign participation in services is severely restricted. That has not been the case with network equipment, however. Many foreign manufacturers have had success in the Chinese market, especially through joint ventures with domestic partners.
"There's been a big difference as far as supply of equipment versus services," says Christine Keck, director of the Asia Pacific program at the Telecommunications Industry Association (TIA), Arlington, VA. "Foreign manufacturers have been allowed for a long time to build a joint venture or even a wholly foreign-owned enterprise, so the restrictions have not been as heavy on the manufacturing side as they have been on the carrier side."
China has built a world-class telecommunications infrastructure in less than a decade using some of the most advanced optical-networking technology available. The country's dominant carrier, China Telecom, operates the second-largest SDH network in the world, and China is second only to the United States in its DWDM implementation. It is also one of the first developing countries to implement 10-Gbit/sec optical transmission technologies in portions of its network.
"Because they don't have the old legacy infrastructure like countries such as the U.S., China adopts new technology very fast," says Min Yi, analyst for Asia-Pacific optical transport at market researcher RHK Inc. (San Francisco). "They invest a lot of money in their fiber-optic networks. Foreign investors are cutting their market prices to get into the market. And they are establishing a lot of joint ventures in China to produce equipment there rather than import it from outside. The Chinese government has favorable policies toward the Chinese vendors, and if Chinese vendors can provide similar equipment, they will buy from the local companies first. If foreign vendors have a joint venture in China, they are treated as local companies."
China will invest $31.1 billion in telecommunications infrastructure this year, up 49% from $20.9 billion in 1999, according to RHK.
Preparing to compete
While China has relied heavily on foreign technology, it will only lift its ban on foreign investment in its carriers and service providers if it is granted WTO membership. The WTO is a 135-member group of countries that participate in international commerce. China is still in negotiations with several WTO members. Nevertheless, China is reorganizing its telecommunications services infrastructure to promote "efficiencies" and competition in the domestic market.
China Telecom, set up in 1949, was the monopoly carrier in China until 1994, when 10 ministries set up China Unicom, introducing competition into the market in 1995. In 1998, the Ministry of Information Industry (MII) was set up during government reorganization. The MII is now responsible for negotiating and regulating China's telecommunications industry.
In March 1999, China Telecom was reorganized into four entities: a traditional phone company, mobile communications company, satellite communications company, and paging company. In April 1999, MII announced that it would allow other domestic carriers to compete, contingent on its approval. The Table describes the major carriers in the Chinese market. The Ministry of Railway, which initially offered rights-of-way to carriers such as China Unicom, has also been licensed to operate as a carrier.
"China is creating more domestic competition in preparation to compete and stay in the game when the foreign-service providers are allowed into the marketplace," says TIA's Keck. "In its efforts to economically jump back in with the rest of the world and compete, China is betting on information technology and communication as the ticket out of an economically backward state. That's why we've seen 22 million lines, on average, installed in China for such a long time-the equivalent of what U.S. RBOCs used to be when they were a little bit smaller."
China Telecom remains the dominant carrier in China due to its longstanding relationship with government authorities. Both China Telecom and China Unicom are allowed to offer nationwide services, although China Unicom was restricted to offering wireless services until early 1999.
The public network is still largely controlled by China Telecom. It consists of eight horizontal east-to-west trunk lines and eight vertical north-to-south trunk lines forming a meshed optical network. The network covers all 31 provincial capitals (see Figure). According to China's Five-Year Plans, the long-distance transmission network will comprise a fiber-optic trunk cable stretching over 200,000 km, a microwave trunk of 140,000 km, and 40 large-scale satellite earth stations. China Unicom operates a private network, used for communication among the government ministries.
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| China has completed construction of a public fiber-optic backbone network with eight horizontal east-to-west trunk lines and eight vertical north-to-south trunk lines. |
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China has also invested heavily in international optical-cable backbone construction and submarine cables in the last decade. Among these investments are the China-Japan Optical Fiber Submarine Cable (CJOFSC), a China-North Korea terrestrial optical cable, the China-Korea Cable (CKC), a Europe-Asia terrestrial optical cable, a China-Russia terrestrial optical cable, a South Asia terrestrial optical cable, a Southeast Asia-Mediterranean Western Europe Cable (SEA-ME-WE-3), and the China-U.S. Cable Network.
No foreign investors
As China acts quickly to become a communications giant, it is slow to allow outside investment in its infrastructure. The government mandate against foreign investment in domestic carriers was put to the test last year. Looking for more investment, China Unicom signed 44 contracts with an estimated total value of $1.4 billion with foreign investors in 1998 under the guise of a "China-China-Foreign" venture. Many of the investors were powerhouse foreign carriers such as AT&T, WorldCom, France Telecom, NTT, Korean Telecom, Daewoo, and Teleglobe. The government vetoed the foreign investments. Before China Unicom went public this year, it had to cancel the contracts, settle with its investors, and pay the associated penalties. |
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Even companies in Hong Kong-now part of China-are treated as foreign investors. As the market opens, however, these companies are well positioned to operate networks in China. HiNet Holdings Ltd., based in Hong Kong, is one such company working to become a gateway between China and the outside world by providing communications infrastructure facilities and value-added services. HiNet is building a fiber-optic backbone in China, with plans to have completed 30,000 km of fiber-optic network this year. The network's central backbone is from Guangzhou to Wuhan to Beijing, a length of approximately 6,000 km. The coastal core will run from Guangzhou to Fuzhou to Shanghai, a length of about 6,000 km. The southern gateway, which is already completed, is 18,000 km. Citic-Pacific, the Hong Kong arm of Chinese company China International Trust and Investment Co., recently bought a fiber-optic network from the People's Republic of China Army.
"A lot of the companies in Hong Kong are getting ready to compete in the China market," says Dr. Hui Pan, chief economist and director of the Asia-Pacific program at Information Gatekeepers Inc. (IGI) in Boston. "The companies are probably talking about it, and building infrastructure is allowed, but today they probably have to hand over the ownership, maybe act as an integrator, then hand the operation over to the local operator and then maybe take some equity position. But even owning equity positions is not very clear."
WTO membership = liberalization
Many foreign carriers have already looked into investing in the Chinese telecommunications market. China's entry into the WTO would provide legal protection for outsiders doing telecommunications business in China.Many other reforms hinge on whether China ascends to the WTO. For example, China has committed to the Basic Telecommunications Agreement (BTA), which requires a country to liberalize its telecommunications services sector. At the time that a country signs on, it provides a schedule of when it will either corporatize or privatize its monopoly carrier and identifies additional licenses that it will issue. It will also give a schedule of how and when that all happens. China is in the process of working out this schedule in Geneva.
In addition, China has committed to the Reference Paper, a fairly short document that commits a country to developing or creating an independent regulatory authority, cost-based pricing, interconnection rights, and technology neutrality in the service providers' choice of technologies.
Upon joining the WTO, China has also agreed to phase out all geographic restrictions for domestic wireline services by 2006. It will immediately open its key telecommunications services corridor-which runs between Beijing, Shanghai, and Guangzhou and represents approximately 75% of all domestic traffic-to all services.
China will allow 49% investment in all services upon its accession. The country will then grant up to 50% foreign ownership for value-added services in two years and paging in three years. China will also eliminate import tariffs on all telecom equipment by 2005.
"China's accession agreement outlines the way that foreign-service providers will be allowed to start providing services and the extent to which they'll be tapped out-the upper and lower limits of what they're allowed to offer," says Keck.
"It is the investment that matters. If domestic carriers take the foreign carriers' name, it will be difficult in China," says RHK's Yi. "If you get a foreign carrier involved in your optical network, you'll provide better service, so domestic carriers will compete on their services."
Importantly for U.S.-based companies, the U.S. Senate voted to grant China Permanent Normal Trade Relations (PNTR) status in September, ending a 20-year annual review of China's trade status with the United States. This action will allow U.S. companies to benefit fully from China's WTO commitments and compete in the country's domestic market.
Domestic competition in China has had an impact on service pricing. "Because of the introduction of competition in the marketplace from China Unicom, the telephone installation price has been greatly reduced in the last two years," says IGI's Pan. "Today, it costs no more than $100, about 1,000 yuan, when before it cost 5,000 yuan to install a phone. A lot of people install telephones. There is high installation but low usage. The local rate is tariffed, so there is no flat rate, it is billed by the minutes, and that puts some limitations on usage of the Internet. People don't want to use their phones as freely in the U.S."
Last year, according to RHK research, 20 billion long-distance calls were made inside China. Total revenue for all communications traffic-voice and data-reached $37.5 billion (U.S.). This year, China Telecom, now one of seven national carriers, reported $15.15 billion in revenue for the first eight months of this year, about a 20% increase from the same period last year. The whole telecom industry in China reported $25.7 billion in revenue for the January through August 2000 period, up 21.6% from 1999, according to MII.
Internet traffic is also growing, although the number of Websites with Chinese content is still very limited. Currently, there are six Internet backbone providers in China-ChinaNet (China Telecom), China GBN (Ji Tong), UniNet (China Unicom), CNCNet (China Netcom, not yet running), CERNet (Ministry of Education), and CSTNet (Chinese Academy of Sciences). Only ChinaNet and China GBN currently provide bandwidth to third-party Internet service providers (ISPs), according to IGI. Almost every ISP in China routes some portion of its traffic over ChinaNet. At the beginning of this year, there were more than 400 ISPs, reports IGI. "The distribution of ISPs is very uneven across the different provinces," says Pan. "Beijing, Shanghai, and Guangdong are home to 50% of the ISPs."