china's telecommunication market for international investors: opportunities, challenges, and...

China’s telecommunication market for international

investors: opportunities, challenges, and strategies

Jane Chang, Xiang Fang, David C. Yen*

Department of Decision Sciences and Management Information Systems, RTF School of Business,

Miami University, Oxford, OH 45056, USA

Abstract

As a result of successful domestic economic reforms combined with a changing international

market that is willing to assist developing countries, China’s economy has grown approximately

10% per year over the past 18 years. This remarkable development has made China the second

largest beneficiary of direct foreign investment, behind only the US. China has by far the largest

developing economy—more than 30% larger than Brazil’s. China’s ranking in the world economy is

expected to continue improving in the coming decades [Ercel B. Courting the dragon. Financial

Executive 2000;16(2): 28–31].

Fueled by this favorable environment of increasing international trade, China’s telecommunications

industry is likewise experiencing the fastest growth in its history. Throughout the 1980s, the telecom

industry achieved substantial double-digit growth, and by the end of 2002, China had the largest

telecommunications market in the world. On November 15, 1999, US and Chinese officials reached a

bilateral agreement on China’s bid for membership in the World Trade Organization (WTO). Upon its

admission to the WTO in 2001, China agreed to make several major reforms (including its strongest

commitment to economic reform in generations) that will result in great opportunities for US investors.

Much research has focused on the implications of China’s membership in the WTO, but little has

been written from the perspective of international investors, specifically the opportunities,

challenges, and suitable strategies for US companies that are currently or will become involved in

China’s telecommunications market. This article attempts to fill this gap, offering suggestions to

international investors who wish to participate in China’s expanding telecommunications market.

q 2004 Elsevier Ltd. All rights reserved.

Keywords: World trade organization (WTO); Telecommunications; Investors; China; International trade; Direct

foreign investment

Technology in Society 27 (2005) 105–121

www.elsevier.com/locate/techsoc

0160-791X/$ - see front matter q 2004 Elsevier Ltd. All rights reserved.

doi:10.1016/j.techsoc.2004.10.002

* Corresponding author. Tel.: C1 513 529 4826; fax: C1 513 529 9689.

E-mail address: [email protected] (D.C. Yen).

http://www.elsevier.com/locate/techsoc

J. Chang et al. / Technology in Society 27 (2005) 105–121106

1. Introduction

China’s economy has grown approximately 10% per year over the past 18 years.

During this same period one of China’s pillar industries, telecommunications, has

experienced the fastest growth in its history. In fact, China is becoming one of the world’s

fastest growing markets for telecommunications services and products. According to a

study by Pieter Bottelier on the impact of World Trade Organization (WTO) membership

on China’s domestic economy [2], China currently has the largest market for pagers and

mobile telephones. In 2003, Pyramid Research indicated that with more than $155 billion

in fixed and wireless capital investment made over the last 5 years (1998–2002), China has

become the world’s single largest infrastructure market. Specifically, more than 1.25

million Chinese cellular telephone subscribers sign up each week. Five years ago, one in

10 Chinese citizens had a cellular telephone; today more than one in three has a cellular

telephone subscription. Five years from now, China’s telecommunications penetration

will be nearly 75%, numbering 950 million fixed and mobile connections—more than

three times the entire population of the United States. Over the next 5 years, China’s fixed

and mobile telecom carriers plan to spend more on network infrastructure than all the

countries of Western Europe combined. Today, China accounts for 20% of spending on

global telecom equipment.

The Sino–US agreement signed in 1999 paved the way for China’s successful entry into

the WTO, which will further accelerate China’s economic development and as a result

create huge demand for telecom products and services. In this bilateral accord, the Chinese

government made a significant concession by agreeing to open China’s telecom market to

the outside world, with a promise to make more efforts to open the telecommunications

service sector as well. For example, China will lift the import tariff restrictions on all

telecom equipment and high-tech equipment by 2005 [3]. This agreement phases out many

restrictions on foreign investment in this sector and will result in the implementation of the

pro-competitive regulatory principles of the WTO Basic Telecom Agreement. Lifting the

import restrictions offers tremendous business opportunities for foreign companies in

China’s vast telecom market.

International telecom enterprises, encouraged by the Chinese government’s promise,

have spent considerable time and money trying to determine the best way into this last and

largest potential telecom market. The amount of foreign investment in the manufacture of

telecommunications equipment in China is already significant. For example, large US and

international manufacturing companies, such as Motorola, Ericsson, Nokia, and Siemens,

currently invest heavily in China. Such foreign investment will continue to grow as China

pursues its desire to become an important export base for a wide range of telecom

products.

Increased foreign investment will undoubtedly bring Western management and

production expertise to China’s telecommunications industry, prompting China to

consider privatizing its state-owned telecommunications enterprises. The hope is that

privatization will intensify competition among, and thus improve the performance of,

China’s telecommunications firms. A study by Samarajiva [4] provides answers to the

question whether telecommunication sector performance would be better improved under

an environment of multiple competing providers or under one with a reformed incumbent.

J. Chang et al. / Technology in Society 27 (2005) 105–121 107

The past experiences of countries such as Sri Lanka support a competition-based strategy.

Based on data from 23 countries, Ros and Banerjee [5] found a positive and statistically

significant relationship between privatization and network expansion in Latin America. In

addition, Bortolotti et al. [6], in a study of the financial and operating performance of 31

national telecommunication companies from 25 countries, indicate that the financial and

operating performance of the companies actually improved after privatization. Finally,

Markhaya and Reberts’ study [7] shows gains in the quality and range of service as a result

of privatization in the telecommunications area.

Although the research shows that privatization is a desirable path for China’s

telecommunications industry, the road to riches is not without potholes. Enchanted by the

promise that China will become one of the world’s most important economies early in this

century, many multinationals are investing there despite nagging concerns about the

continuation of China’s economic boom and uncertainties regarding its political future and

commitment to a market economy. Brownelle Thomas, an international telecommunica-

tions analyst for International Development Corporation noted: “Everyone’s wanted to go

to China, but I haven’t seen anyone in 20 years make money there. with the WTO this

could change. But it’s not going to happen any time fast” [8]. Foreign firms may find a

nominally more open telecom market in China after WTO admission, but a market that

comes with significant regulatory constraints. Navigating an economy in transition has

always demanded greater flexibility and patience on the part of foreign participants, and

China’s telecom sector will be no exception.

This article is written from the perspective of US telecom enterprises. It is organized as

follows. First, it introduces the situation of China’s telecom market. Second, it offers

information about actions taken by the Chinese government to meet market pressure. Then

it analyzes the tremendous opportunities available to US companies after China joined the

WTO as well as the challenges investors could face. In conclusion, the article offers

suggestions such as using a ‘wait, check, and see’ strategy to help companies make

business decisions.

2. Overview of China’s telecommunications industry

2.1. Quick development

Propelled by economic reforms at home and a changing international telecom market

that favors developing countries, China’s telecom industry boomed in the mid-1980s.

During that time, the industry achieved double-digit growth: revenue increased 24% and

public network switching capacity grew 11%. China’s telecom imports reached a peak in

1986, with more than 70 transactions worth billions of dollars. This strong growth was

bolstered by an increasing scale of investment that grew at an astounding rate of 25% per

year during the 1990s [9]. Encouraged by progressive policies in technology transfer, new

technologies and products such as packet switching, digital microwave, and fiber optic

transmission were quickly introduced. Research and development of integrated services

such as digital networks, data communication gateways, and various enhanced services

increased as well.


With the new century, the telecommunications industry in China has continued its

dramatic growth:

†
In 2001, gross demand for telecommunications equipment reached 93.3 billion RMB
(Chinese currency), a 9.1% increase over gross demand in 2000.

†
Installation of telecommunication equipment capacity grew dramatically in 2001, with
newly added mobile switching capacity 50% higher than in 2000.

†
The market size of terminal products was 96.4 billion in 2001, with a market size
growth rate of 21%.

†
As for main equipment products, the demand volume on fixed SPC in 2001 was 60
million lines, which accounted for 115.6% of the demand in 2000. Mobile switching

sales volume was 90 million lines in 2001, a 50% increase from 2000, and sales

increased 50.3%.

†
Construction development of mobile network led to base station growth in quantity and
capacity.

†
Demands on Switch Mode Power Stations (SMPS) kept up with that of wireless
equipment.

†
In 2001, total construction of fiber cable was about the same as 2000; long-distance
fiber cable construction declined because of demand for construction of local access

and relay fiber lines [10].

†
According to a China Internet Network Information Center survey conducted in
December 2003, the number of Internet users in China increased from 0.62 million in

October 1997 to a record 79.50 million in December 2003. By the end of 2003, China

had more than 595,550 websites in the Chinese language and over 340,040 registered

websites under the ‘.cn’ domain [11].

2.2. Competitive pressure

Although it continues to grow, China’s telecom industry faces ongoing challenges from

trends in global economic integration and telecom market internationalization. With the

signing of the Sino–US bilateral agreement in 1999, China’s admission to the WTO in

2001 and the entry of foreign telecom operators into the Chinese market was only a

question of time [12]. Today China’s telecom operating enterprises face not only domestic

competitors but must also pay attention to international markets and competitors. The

industry needs to resolve problems at home: an immature market system, low operational

efficiency, poor operational management, small economic scale, less innovative

achievements, and low profits. At the same time, it must make massive adjustments to

meet the challenges of its admission into the WTO. Some of these challenges are:

†
Telecom service enterprises that have long enjoyed monopoly privileges are far inferior
to world telecom giants eager to enter the Chinese market. Because of their long-

standing monopoly operation, Chinese telecom enterprises are unfamiliar with a

competitive market system and have no clear idea of how to deal with such a market.

Once they begin to compete with joint ventures that exploit the foreign partners’ edge

in capital, management, and technology, their deficiencies will become apparent.


†
If China implements its commitment to meeting WTO requirements, import tariffs on
IT and telecommunications equipment should be eliminated by 2005 and telecom

equipment purchases should be based on technology-neutral and non-discriminatory

terms [13]. China’s telecom equipment manufacturers will find themselves at a

disadvantage as their prices are challenged by competitors, and network service carriers

will select equipment vendors based on economic and technology factors that may

favor foreign companies [14].

†
Chinese telecom operators are relatively backward in their management systems and
operating mechanisms, which are not adaptable to post-WTO entry into the competitive

markets. The newly divided enterprises will likely continue their habitual practices

under the intervention of the government.

†
Chinese telecom legislation lags well behind Western standards. Now that it must open
its business to the outside world, the industry does not meet the requirements of the

principle of transparency in the General Agreement on Trade in Services (GATS) and

the WTO. Historically, China has had many departmental and local telecom

regulations, not all of which have been written into law. In the past, Chinese firms

used these regulations to circumvent foreign attempts to invest in the Chinese market.

Even now, China has no formal, national legislation in the telecommunications area.

Consequently, the overall regulatory mechanisms lack a solid legal foundation. Judicial

institutions rarely play a role in regulating or supervising the telecommunications area,

instead depending solely on governmental administration and intervention [13].

A study by Yan [15] revealed that operators protect their interests by leveraging their

individual strengths instead of relying on the establishment of a transparent, regulatory

framework. Undoubtedly, this ‘game without clearly defined rules’ has seriously hindered

any move to deregulate the telecommunications market in China. The regulatory stance

toward market access in the telecommunications industry actually adds another barrier to

implementing the WTO agreements.

There are a number of conflicting opinions about the relative costs and benefits of

admission to the WTO and the opening of markets in the telecommunications services in

general and basic services in particular. The driving force behind fully liberalizing the

telecom industry comes mostly from the internal political desire of China’s current leaders

and from the external pressures of admission to the WTO. The operating philosophy and

working style of China’s organizations have not yet fundamentally changed to

accommodate the implementation of the WTO agreements [13].

Traditionally, the Ministry of Information Industry (MII) has had a deep-rooted and

complex relationship with China Telecom (one of the dominant telecommunication

service providers in China) and other regulated carriers as well as strong influence over

local postal, telephone, and telegraph branches (PTTs). MII holds the power to appoint,

promote, and dismiss key executives and directors at PTTs and at other associated major

telecommunication enterprises including China Telecom. Hence, MII as an organization is

not independent of China’s telecommunication firms. This unique political and

institutional relationship in China poses a specific and major challenge to creating an

independent regulator in the telecommunications industry [13].


3. Preparing for competition

With the rapid expansion of China’s telecom industry, the serious deficiencies of a

centralized government system became apparent, particularly in allocating resources and

responding to the market in a timely manner. Before its reorganization in 1998, China’s

telecommunication industry operated as a hierarchical structure with the State Council at

the top; commissions, ministries, and provincial governments in the middle; and some

2500 post and telecom administrations and enterprises at the provincial, municipal, and

county levels at the base. The former Ministry of Posts and Telecommunications (MPT)

served as the central pillar of this structure, with the authority from the State Council

overseeing and managing the day-to-day operations of this sector [16].

Because information technology develops quickly, and customers expect more choices

and better service, any operations mechanisms must make corresponding adjustment in

order to improve operational efficiency and remain competitive. China’s strict hierarchical

structure could not keep up with the demands of the rapidly developing telecom industry.

In addition, the old structure was an impediment to meeting the challenges of WTO

admission and telecom globalization. Consequently, a series of major reforms were

enacted, aimed at separating administrative and enterprise functions, breaking

monopolies, and protecting competition in China’s telecom industry. These included:

†
The MPT was replaced by MII in 1998 [17].
Since in theory the industry needs a super-ministry to ensure the establishment of one

combined nationwide multimedia network, the MII was established in Beijing in

March 1998. MII is responsible for encouraging the manufacture of information

products, and for the telecommunications and software industries; formulating

sectional programs, policies, and codes; mapping out an overall plan for tele-

communications trunk networks (including local and long-distance telecommunica-

tions networks); managing broadcast and television networks (including radio and

cable television networks), and special-use telecommunications networks for the

military and other national departments. MII is responsible for sectional management

and allocation of resources, avoids duplication of effort in projects, and ensures

information security. Also incorporated into MII are the government functions for

information and network management in the Ministry of Radio, Film and Television;

China Aerospace Industry Corporation; and the China Aviation Industry Corporation.

MII is also in charge of the State Postal Bureau, founded in March 1998 [18].

†
In the second half of 1998, China took steps nationwide to separate its postal services
from its telecom business in an effort to make these two businesses operate inde-

pendently and to eliminate cross-subsidization.

†
In 1999, the China Posts and Telecom Administration was separated into four distinct
operational entities that now control fixed-line, mobile, paging, and satellite services.

In 1999, China Posts and Telecom Administration, the national principal telecom

enterprise, was divided into four separate entities: China Telecom Group Corp.,

China Mobile Telecom Group Corp., China Satellite Telecom Group Corp., and

China Paging Telecom Group Corp. This means that the new China Telecom is

the only telecom company in China doing fixed-line telephone business.


However, Chinese authorities are also discussing the possibility of dividing China

Telecom into a number of regional companies that would operate in their respective

geographic areas and engage in cross-regional competition.

†
In 1999, Unicom, the second national carrier, was reorganized. As a result, steps were
taken to enable Unicom to effectively challenge the largest carrier, China Telecom.

In 1999, the Paging Group Corp. was separated from China Telecom and the railway

telecom enterprises (originally under the administration of the Ministry of

Railways), and were incorporated into China Unicom. Some important measures

supporting the growth of China Unicom were also adopted. For example, China

Unicom has been granted an exclusive operating license to build nationwide Code

Division Multiple Access (cdma) networks, an advanced wireless system [13].

China helped to pave the way for its admission to the WTO by changing many of its

policies, especially as they relate to the US and other countries that are interested in

China’s telecom industry. These include:

†
Average tariff levels. China agreed to cut its average tariff level from 22.1 to17%. By
2003, China had abrogated its tariff on semiconductors, PCs, computer equipment,

telecom equipment, and other high-tech products [19].

†
Telecommunications. China would allow a 49% investment stake by foreign telecom
providers as of the date of WTO admission, with that figure increasing to 50% after 2

years. Five years after admission to WTO, China will progressively abrogate area

limitations on foreign investment in pagers, mobile phones, and fixed telephone

services. China agreed to gradually open its network service to mobile communications

within the first year after its admission to the WTO, and that service will be fully open

at the end of 5 years. China will open CATV and fiber cable in the third year of WTO

membership, with a 6-year transition period.

†
Internet. Companies from the US and other countries will be allowed to invest in the
Chinese Internet market as content providers.

†
Export subsidies. China will eliminate export subsidies.
†
Distribution. China will allow distribution rights for US and other countries’ exporters.
China’s strategies for the new century include accelerating the establishment of a state-

of-the-art info-communication network, upgrading its product manufacturing and

software industries, further developing the information service industry, and transforming

the government’s role in China’s traditional telecom industry.

Because most industrialized countries already have some form of a telecommunications

law in effect, China is not prepared to meet the requirements of an open market. The MII

has been working on regulations to improve management of the telecommunications

industry, and it is expected that such regulations will ultimately evolve into a Chinese

telecom law. In the meantime, the MII is reviewing and studying other regulations,

policies, and practices, including how to determine telecom charges. As anticipated, a

supervisory institution will be established; a supervisory framework should also be set up

to facilitate implementation of universally accepted standards and to formalize a complete

set of laws and regulations. Those actions are summarized in Table 1.

Table 1

Major reforms and actions taken by the Chinese government

Actions Time period Characteristics Impacts

MII established March 1998 Based on MPT and MEI, man-

ages the telecom and information

sector

Encourage the manufacture

business of information products,

telecom and software industries;

mapped out the overall plan for

telecommunications trunk net-

works, broadcast and television

networks, and special-use tele-

com networks. Allocated

resources rationally, avoided

overlapping projects and ensured

information security

Post and Telecom

Administration

subdivided

1999 Four divisions: China Telecom,

China Mobile Telecom, China

Satellite Telecom, China Paging

Telecom. New China Telecom is

only fixed-line telephone

business

Separated the government part

from the business part. Started

market system

China Unicom

reorganized

1999 Paging Group Corp. incorporated

into China Unicom

Increased competition in the

market

Various policy

changes

1999 Cut tariff levels; allowed more

foreign investment; opened net-

work service; eliminated export

subsidies; allowed distribution

rights

Increased openness and gave

more opportunities to foreign

investors

Supporting laws

and regulations

1999—present Developing regulations that

could evolve into telecom law

Facilitates and protects compe-

tition


4. Opportunities for foreign firms

The accelerating development of the telecom industry and the associated strong

competitive market pressure highlight the overwhelming and as-yet unmet telecom needs

of China’s huge population. Such an environment offers extraordinary opportunities for

foreign investors. China’s desire to join the WTO, and its subsequent membership

represent a major commitment from the government to significantly reform the country’s

economy and to provide greater access to its markets.

A close look at the contents of the 1999 Sino–US agreement may help explain why

China’s WTO membership was seen by world trade experts as a critical step for allowing

foreign companies to establish long-term roots in China. By joining the trade agreement,

China agreed to lift many of the trade barriers it maintained, and it received similar

treatment from other countries, making China a huge potential market for multinational

telecom operators. Foreign investors have already begun to review their strategies for

setting up joint ventures or wholly foreign-owned enterprises, which offer exciting

opportunities for US and other foreign companies.

According to the mass media, China and the US have reached some important

agreements (not all of them published by the Chinese government) on opening the telecom


service industry. China has made commitments in the investment, service, technology, and

other related fields as follows [20]:

†

Tab

Ter

Sec

All

sec

Tra

trib

Tel

cat

Com

Inte

me

Sou

Foreign countries are allowed to make direct investment in telecom services and to

offer extensive services.

†
Foreign investors are allowed to hold 49% of the shares in the telecom service sector
and 50% of shares in value-added service in 2 years, and in paging service in 3 years.

†
The main telecom channels in the cities of Beijing, Shanghai, and Guangzhou (which
account for three-quarters of Chinese domestic telecom communications) will be open

to all service providers; 14 other Chinese cities will follow this trend.

†
China will remove regional restrictions on paging and value-added services in 2 years,
remove restrictions on mobile telephone in 5 years, and deregulate Chinese domestic

telephone lines in 6 years.

†
Foreign business may select any technology to provide telecom services (see
Table 2).

le 2

ms of the Sino–US WTO agreement

tor Terms Opportunities

industrial

tors

Tariffs will be reduced to an average of 9.4%

by 2005; quotas phased out progressively

from accession year to 2005

Reconsider tradeoff between exporting fin-

ished products to China vs. manufacturing in

China. Benefit: competitively priced quality

products, such as downstream petrochem-

icals, high-end steel and glass, etc.

de and dis-

ution

Trade and distribution rights will open

progressively over 3 years from accession.

Joint ventures allowed in initial years, with

WFOEs in 2003

Can acquire distribution control through a

single, wholly owned nationwide network.

Holding companies may be first to be granted

trading and import rights. The risks of Free

Trade Zone companies doing domestic trade

are diminishing

ecommuni-

ions

Geographical restrictions phased out: 2 years

for paging and value-added services, 5 years

for mobile services, 6 years for domestic

wired-line services. Beijing, Shanghai and

Guangzhou will be opened first. 9% foreign

ownership in all services by 2006. 50% for

value-added paging services 2 years from

accession. For ICPs: 30% on accession, 49%

in 1 year, and 50% in 2 years. Investment in

ISPs phased in over 6 years

Capture a piece of the wireless telecom

market (est. value US $45 billion) by 2003.

Mobile phone users growing from 36 million

to 200 million by 2010. Note: rates may drop

to levels of developed countries. ISPs and

Internet content providers can access Internet

users’ market ready for double-digit growth

from est. 10 million users in 2000

puter/

rnet equip-

nt

Tariffs dropped by 2005 Expanded exports to China as computer

market experiences hyper growth supported

by Internet development. Other options

include producing in China and acquiring

from competing Chinese companies. Com-

petition from Chinese as well as foreign

companies will intensify

rce: [12].


Since late 1999, China has gradually opened such fields as telecom equipment

manufacturing, technological imports, and technological cooperation, to wholly foreign-

owned enterprises. Only since its admission to the WTO, however, has China begun to

open its service sector to foreign investors. According to market information related to

telecom products and services in China since 2000, China’s huge potential markets offer

great opportunities for international telecom product producers and service providers. In

February 2004, there were 11.23 million new landline phone users in China, over 50% of

whom were farmers, making a total of 281.08 million landline phone users. In addition,

13.62 million new cellphone users subscribed to cellular services, raising the total of

cellphone users to 290.30 million—a huge increase but still a small number compared to

the 1.3 billion residents of China. Information about telephone subscriptions and use is

shown in Table 3.

In 2003, China’s telecom business revenue grew to 461.0 billion RMB, a 13.9%

increase over 2002. That same year, the total number of telephone subscribers in China

was 531.9 million, while the number of Internet users passed 79.5 million. With an annual

increase rate of 23.3%, the amount of optical fiber communication lines has reached 2.71

million kilometers (see Table 4).

It is interesting to note that the landline telephone penetration rate (i.e. number of

telephones per 100 residents) increased from 7.04 in 1997 to 21.2 in 2003. This number is

expected to increase. The penetration rate for mobile phones has grown from 1.07 in 1997

to 20.9 in 2003.

In December 2003, the Internet user population in China reached 79.5 million over its

population size of 59.1 million in January 2003. During the same time period, the total

number of websites in China grew from 371,600 to 595,500. The total number of computer

hosts increased from 20.8 million to 30.9 million.

From January to December 2003, the number of website names registered with the ‘.cn’

domain increased from nearly 180,000 to over 340,040. In addition, the total bandwidth of

leased international connections grew from 9380 million to 27,216 million during the

same time period.

Meanwhile, reform of China’s information communications has also accelerated. The

monopoly in all telecom fields—basic telecommunications, value-added telecommunica-

tions, and info-communications—has been broken and replaced with a market

competition mechanism. It is predicted that China’s info-communication industry will

grow more than 20% over the next 5 years, and the telecom market will double its

current scale in 5 years [21].

Table 3

Landline and mobile phone users (end of February of 2004) (unit: millions)

Phone type New users Total users

Landline phone 11.22 281.08

Mobile phone 13.63 290.30

Source: [30].

Table 4

Telecom data, 2003

Item Total Growth rate (%)

Telecom revenue 461.0 billion RMB 13.9

Internet user 79.5 million 34.5

Optical fiber line 2.71 million kilometers 23.3

Source: [31].


In addition, China moved closer to a solid legal framework for foreign investment. For

example, one of the most striking efforts was a new rule defining telecom business areas

and outlining the role of foreign investors. Basic telecom services, such as fixed lines,

satellite, and mobile networks, however, are still off-limits [22].

As part of its preparation for WTO membership, the Chinese government learned more

about foreign telecom operators. In 2000, China gave the go-ahead for AT&T, the largest

US telecom operator, to set up a US $25 million broadband Internet joint venture in

Shanghai. The joint venture was a historic step designed to further open the nation’s tightly

controlled telecommunications market to foreign competition [23]. Chinese government

regulators also indicated support for a plan to develop a mobile phone network using

wireless technology by Qualcomm. Taken together, these two deals indicate the first

glimmerings of the long-awaited opening of the giant Chinese telecommunication sector.

For US communications companies, ranging from Sprint to Lucent, the opening of trade in

China represents a potentially huge boost to the bottom line.

5. Challenges facing foreign investors

5.1. Future challenges

Foreign phone and infrastructure companies have spent considerable time and money

in the past decade trying to increase their market shares in China. Tapping the Chinese

market undoubtedly represents a tremendous opportunity for foreign firms. Many large

telecom companies, including Motorola and Siemens, have entered China’s telecom

market and subsequently have increased their investment. For example, in 2000 Motorola

(China) Electronics increased its investment in China by US $1.9 billion, boosting its total

investment in the country to US $3.4 billion, making Motorola the foreign firm with the

largest investment in China. Motorola, Nokia, and Ericsson remain the top three

companies in China’s cellphone market, with market shares of 31.9, 29.4, and 21.4%,

respectively, followed by Siemens (7.3%), Phillips (3.5%), and Toshiba (3.3%). The

remaining 3.2% is held by other firms [24].

US companies that want to enter the Chinese market should note that no foreign firm in

20 years has made a profit there [25]. Although China has taken major steps in the right

direction, it still has a long way to go before it proves to be fertile ground for generating

actual profits. Although admission to the WTO prompted changes in many of China’s

policies, it will not happen overnight. It is imperative that American companies analyze


the challenges they will face in China’s telecom market. Some of these challenges are

discussed briefly below.

†
Although the Chinese government agreed (as part of its membership in WTO) to allow
foreign investors to hold up 50% equity ownership, there is no clarification as to what

these percentages mean. Do they refer to value-added services, wireless paging and

mobile services, data communications services, Internet, or basic telecommunications

services? Because implementation and enforcement of WTO rules are years away,

foreign investors may have to deal with many policy constraints and contextual

problems before they can compete successfully in the Chinese market. WTO

membership has not ‘magically’ opened China’s long-closed telecom door.

†
The Chinese telecom service sector, which has become more liberal in recent years, has
been particularly difficult for US companies to operate in and follow. In the past, China

banned foreign investment in the telecom business by citing concerns that their

domestic telecom operators could not compete effectively against foreign competitors.

However, in 1999 China promised to open many new industries to foreign investors

after its admission into the WTO.

†
It appears that China is not ready to give up many of its own domestic rules. The
government has imposed strict content censorship rules on its Internet sector, which

could make for a rocky adjustment for companies like AT&T, which are interested in

providing data services. The government has also challenged the right of foreign

companies to register Chinese-language domain names—a move to undermine

VeriSign subsidiary Network Solutions’ (NSI) still-strong influence over the ‘.com,’

‘.net’ and ‘.org’ domain registration process. NSI has received hundreds of thousands

of domain applications using Chinese characters [13].

†
The total number of Chinese mobile phone subscribers is estimated to reach 70 million,
with a penetration rate of just 4.5% of the population [13]. Wireless telecommunica-

tions will take the form of complicated partnerships; however, such partnerships will be

with government-controlled giants, such as China Mobile, China Unicom, or smaller

regional players. Such partnerships will be difficult for US and other foreign companies

to navigate, even if they become legalized and more common.

†
Without concrete evidence of Chinese regulations that support competition, companies
have little incentive to expand their investments in China. Even if such regulations were

in place, the long-term outlook for US and other foreign companies could remain

uncertain unless transparency improves. As Zhang and Peng [13] indicated, an internal

institutional environment and regulatory stance will play a critical role in implementing

WTO policies in China. The local institutional regulatory stance toward market access

by foreign firms may remain conservative, resistant, and hostile. North [26] explains:

“When there is a radical change in the formal rules that makes them inconsistent with

the existing informal constraints, there is always an unresolved tension between them

which will eventually lead to long-run political instability.” The recent exit of Regional

Bell Operating Companies from China illustrates this point. The companies, which

converged on China with enthusiasm in the early 1990s, have now virtually departed,

empty-handed, even as the country finally attained the long-awaited WTO admission.

The challenges are summarized in Table 5.

Table 5

Challenges to foreign investors

Challenges Ways to meet the challenges

Not clear exactly how the Chinese government will

make the concessions. Many policy constraints

Negotiate with the Chinese government to make

percentages and time frame clearer

Telecom services sector is a difficult to enter Negotiate with Chinese government to relieve its

security concerns

Strict censorship rules on the Chinese Internet sector Negotiate with Chinese government to change more

rules

Complicated partnerships with government-con-

trolled giants

Better communication to increase understanding and

more patience as we wait for further changes

Absence of pro-competition regulations Study the government’s rules with an emphasis on

the importance of those regulations to negotiating

with the Chinese government to push its decisions

and actions


Considering the factors cited above, many American companies may conclude that

China’s admission to the WTO did not produce major changes in the telecom sector.

Having lost the political battle to keep foreigners out, Chinese domestic carriers will

continue to mount strong resistance. The lack of ‘rules of engagement’ between competing

carriers creates numerous hidden regulatory barriers. Also, to win an entry into China’s

telecom markets, US and other foreign investors need to engage the state firms, such as

China Telecom and Unicom, which are unlikely to behave like Western companies in

China’s present cultural and political environment. Consequently, it is safe to say that the

50% foreign-ownership ceiling set in the Sino–US agreement may be too high for foreign

carriers to consider, especially for core services such as fixed-line and mobile service.

5.2. Suggestions for foreign investors

Multinationals that do not consider exploring China’s vast telecom market with its

emerging consumer base could miss a tremendous growth opportunity. It is true, however,

that multinationals that invest large sums of money seeking to build long-term penetration

in China should not neglect to achieve profits in the short term as well. In a volatile market

such as China’s, sustainable long-term positions are built on a series of successful short-

term moves that help establish brand recognition, attract local talent, and secure the

confidence, necessary support, and firm commitment of the parent company. Without

positive short-term successes, long-term expansion can be negatively affected.

Therefore, before entering China, it is helpful for US and other foreign investors to take

the time to study customers in China’s telecom market and learn the characteristics of the

potential target market, such as buying methods and habits. This is important in any market,

but perhaps more so in China, where local market knowledge is not always intuitive or

obvious. Although some companies believe that the first mover obtains a competitive

advantage, early movers in China’s telecom market have not necessarily succeeded in that

unstable economy with its rigid regulations. Rather, companies that take a wait-and-see

approach, research the market, and learn from early movers tend to succeed.


An example of a company that heeded this advice is Ericsson, the Swedish telecom

company which, only 3 years after entering China’s telecom market, acquired 40% of the

cellular handset market worth $4 billion in 1998 [27]. Ericsson learned many lessons from

its first-mover predecessors, including Siemens, and Ericsson did not enter the market until

the Chinese government had somewhat relaxed the regulatory environment. This example

shows how companies can plan for success by making smart short-term moves that help

establish new rules for the game. Also, knowing that short-term goals should be given

more importance, US and other foreign companies need to focus on important success

factors, such as managerial capability, critical mass scale, effective distribution channels,

and product portfolios in order to achieve short-term profits in China. Such short-term

successes may eventually translate to company longevity in the market.

From the long-term perspective, since China may become the world’s strongest

economy in the next millennium, it is worth investing in this huge potential market. Given

the characteristics of the Chinese market, such as the absence of clear regulations and the

shortage of trained personnel, corporate managers may find themselves confronting

sudden shifts in markets and institutions resulting from changes in government regulations

and the speedy process of economic reform. This can have varying impacts on individual

organizations depending on their size.

However, there are some steps foreign companies can take to reduce the risks in a long-

term market:

†
It will pay to take a serious second look at investment plans, making sure to set realistic
earnings projections and allowing for possible future instability.

†
Foreign companies could diversify their investment strategy within China by
maintaining a broad portfolio of investments in different sectors of the economy and

different levels of the Chinese government.

†
It is good idea for companies to appoint a sophisticated governmental relations
manager. Since regulatory restrictions, lack of transparency, and corruption make

entering and penetrating the Chinese market a daunting challenge, building mutually

beneficial relationships with the government will help foreign companies gain a

foothold in the restricted markets and learn how to adjust their companies’ strategies in

a timely manner.

†
Foreign companies should invest heavily in local communities and in projects of
general interest to the country in order to build deep roots that can withstand change.

Motorola, for example, established in China its first manufacturing research laboratory

outside the US Motorola sponsored a symposium on environmental protection,

provided scholarships to students, built labs at universities, and donated money to

primary schools in rural areas [28].

These suggestions and applications to US and other foreign investors are summarized

in Table 6.

In sum, companies that have invested in China’s telecom market should take steps to

increase their short-term profitability and decrease their long-term risks. For companies

that have not approached China, a ‘wait, check, and see’ strategy is more likely to pay off

than a ‘full speed ahead’ approach into this still-unstable market.

Table 6

Suggestions for foreign investors

Time period Advice Implications to investors

Short term Should not emphasize potential

huge future return only and

neglect short-term profitability, as

the market is so turbulent

Study the market before entering

Being the first mover does not

guarantee competitive advantage

Study early movers

Respond to the market quickly

Pay attention to factors such as

managerial capability, critical

mass scale, effective distribution

channels, and product portfolio

Long term May confront sudden shifts in

markets and institutions

Take a serious second look at

investment plans

Should take steps to reduce risks Set realistic earnings projections

Appoint a sophisticated govern-

ment relationship manager

Invest heavily in local commu-

nities and projects of broad inter-

est to the country


6. Conclusion

It is estimated that by 2005 China’s GDP growth, its investment growth, and its import

volume will increase by 1.53, 1.75, and 25.8%, respectively [3]. Undoubtedly, as the most

populous country in the world, China will offer huge business opportunities to domestic

and foreign companies.

As it moves into the new century, the Chinese government has taken some important

steps to meet the almost-daily changes in competition and to prepare for the opening of its

telecom industry. Competition among the three major domestic groups, China Mobile,

China Telecom, and China Telecommunications Broadcast Satellite Corporation

(ChinaSat) indicates that China’s telecom industry is much more open than it was before

admission to the WTO [29]. In addition, the examples set by foreign telecom companies

such as Motorola, Nokia, and Ericsson will only add more vigorous competition to the

industry.

However, American enterprises that view China as the last and biggest telecom market

would benefit by a decision to go slowly and analyze the Chinese market carefully instead

of simply jumping into this new field. They need to realize that although this huge market

will undoubtedly generate prosperous economic activities and enormous profit for quick

movers, problems such as conflicts of interest between institutions and business entities

will create strong and resistant ‘firewalls’ to the implementation of new policies, bringing

with them numerous challenges for foreign investors. The business environment will

become increasingly competitive, so US investment firms must be prepared for an

evolution of Chinese laws and practices as China strives to implement its commitments to

the WTO agreement. Therefore, a conservative attitude and patient understanding of


the complexities of Chinese culture and governmental issues will pay off more quickly for

American enterprises.

Companies that have or expect to have operations in China’s telecom industry need to

re-think their China market strategy. Existing US enterprises currently manufacturing in

China need to consider whether they should continue to manufacture or import goods from

affiliates in the region. Newcomers to China need to assess whether they can afford to wait

until the market is fully open. Foreign investors must consider whether an interim solution

is called for at present or to convert to full-fledged operations later when regulations are

clearer.

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http://www.mii.gov.cn/mii/hyzw/tongji/tongjifenxi200312.htm






















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tongjifenxi200312.htm

Jane Chang received an MBA degree with a concentration in MIS on May 2001 from Miami University at

Oxford, Ohio and is currently working as an information consultant and systems analyst. Her research interests

include customer relationship management, Internet, and electronic commerce.

Xiang Fang is an assistant professor at the Department of Decision Sciences and Management Information

Systems (MIS) in Miami University, Oxford, Ohio. He received his PhD in MIS from the University of Kentucky.

His research interests include Website design, e-commerce, and MIS education.

David C. Yen is Professor of Management Information Systems and Chair of the Department of Decision

Sciences and Management Information Systems at Miami University. He received a PhD in MIS and a Master of

Sciences degree in Computer Science from the University of Nebraska. Professor Yen is active in research. He

has published three books and over 100 articles which have appeared in Communications of the ACM, Decision

Support Systems, Information and Management, International Journal of Information Management, Information

Sciences, Journal of Computer Information Systems, Interfaces, Telematics and Informatics, Computer Standards

and Interfaces, Information Society, and Internet Research among others. He was also a co-recipient of a number

of grants, among them grants from the Cleveland Foundation (1987–1988), GE Foundation (1989), and Microsoft

Foundation (1996–1997).












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