China's telecommunication market for international investors opportunities, challenges, and strategi

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 18years.This remarkable development has made China the second largest bene?ciary 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 of?cials 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,speci?cally 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 ?ll this gap,offering suggestions to international investors who wish to participate in China’s expanding telecommunications market.q 2004Elsevier Ltd.All rights reserved.

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

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

doi:10.1016/j.techsoc.2004.10.002

*Corresponding author.Tel.:C 151********;fax:C 151********.

E-mail address:yendc@https://www.360docs.net/doc/1517211179.html, (D.C.Yen).

1.Introduction

China’s economy has grown approximately 10%per year over the past 18years.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 $155billion in ?xed and wireless capital investment made over the last 5years (1998–2002),China has become the world’s single largest infrastructure market.Speci?cally,more than 1.25million Chinese cellular telephone subscribers sign up each week.Five years ago,one in 10Chinese 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 950million ?xed and mobile connections—more than three times the entire population of the United States.Over the next 5years,China’s ?xed 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 1999paved 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 signi?cant 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 signi?cant.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 ?rms.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.

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J.Chang et al./Technology in Society27(2005)105–121107 The past experiences of countries such as Sri Lanka support a competition-based strategy. Based on data from23countries,Ros and Banerjee[5]found a positive and statistically signi?cant relationship between privatization and network expansion in Latin America.In addition,Bortolotti et al.[6],in a study of the?nancial and operating performance of31 national telecommunication companies from25countries,indicate that the?nancial 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 in20years make money there.with the WTO this could change.But it’s not going to happen any time fast”[8].Foreign?rms may?nd a nominally more open telecom market in China after WTO admission,but a market that comes with signi?cant regulatory constraints.Navigating an economy in transition has always demanded greater?exibility 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 increased24%and public network switching capacity grew11%.China’s telecom imports reached a peak in 1986,with more than70transactions worth billions of dollars.This strong growth was bolstered by an increasing scale of investment that grew at an astounding rate of25%per year during the1990s[9].Encouraged by progressive policies in technology transfer,new technologies and products such as packet switching,digital microwave,and?ber 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 93.3billion 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 96.4billion in 2001,with a market size growth rate of 21%.

?As for main equipment products,the demand volume on ?xed SPC in 2001was 60million lines,which accounted for 115.6%of the demand in 2000.Mobile switching sales volume was 90million 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 ?ber cable was about the same as 2000;long-distance ?ber cable construction declined because of demand for construction of local access and relay ?ber lines [10].

?According to a China Internet Network Information Center survey conducted in December 2003,the number of Internet users in China increased from 0.62million in October 1997to a record 79.50million in December 2003.By the end of 2003,China had more than 595,550websites in the Chinese language and over 340,040registered websites under the ‘.cn’domain [11].

https://www.360docs.net/doc/1517211179.html,petitive 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 2001and 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 ef?ciency,poor operational management,small economic scale,less innovative achievements,and low pro?ts.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 de?ciencies will become apparent.

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J.Chang et al./Technology in Society27(2005)105–121109?If China implements its commitment to meeting WTO requirements,import tariffs on IT and telecommunications equipment should be eliminated by2005and telecom equipment purchases should be based on technology-neutral and non-discriminatory terms[13].China’s telecom equipment manufacturers will?nd 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?rms 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 de?ned 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 con?icting opinions about the relative costs and bene?ts 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 in?uence 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?rms.This unique political and institutional relationship in China poses a speci?c 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 de?ciencies 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 2500post 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 ef?ciency 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 ?xed-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 ?xed-line telephone business.

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J.Chang et al./Technology in Society27(2005)105–121111 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.

?In1999,Unicom,the second national carrier,was reorganized.As a result,steps were taken to enable Unicom to effectively challenge the largest carrier,China Telecom.

In1999,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 from22.1to17%.By 2003,China had abrogated its tariff on semiconductors,PCs,computer equipment, telecom equipment,and other high-tech products[19].

?Telecommunications.China would allow a49%investment stake by foreign telecom providers as of the date of WTO admission,with that?gure increasing to50%after2 years.Five years after admission to WTO,China will progressively abrogate area limitations on foreign investment in pagers,mobile phones,and?xed telephone services.China agreed to gradually open its network service to mobile communications within the?rst year after its admission to the WTO,and that service will be fully open at the end of5years.China will open CATV and?ber cable in the third year of WTO membership,with a6-year transition period.

?https://www.360docs.net/doc/1517211179.html,panies 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 Table1.

4.Opportunities for foreign ?rms

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 signi?cantly reform the country’s economy and to provide greater access to its markets.

A close look at the contents of the 1999Sino–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

Table 1

Major reforms and actions taken by the Chinese government

Actions

Time period Characteristics Impacts MII established March 1998Based 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 ?xed-line telephone business Separated the government part

from the business part.Started

market system China Unicom

reorganized

1999Paging 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

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service industry.China has made commitments in the investment,service,technology,and other related?elds as follows[20]:

?Foreign countries are allowed to make direct investment in telecom services and to offer extensive services.

?Foreign investors are allowed to hold49%of the shares in the telecom service sector and50%of shares in value-added service in2years,and in paging service in3years.?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;14other Chinese cities will follow this trend.

?China will remove regional restrictions on paging and value-added services in2years, remove restrictions on mobile telephone in5years,and deregulate Chinese domestic telephone lines in6years.

?Foreign business may select any technology to provide telecom services(see Table2).

Table2

Terms of the Sino–US WTO agreement

Sector Terms Opportunities

All industrial sectors Tariffs will be reduced to an average of9.4%

by2005;quotas phased out progressively

from accession year to2005

Reconsider tradeoff between exporting?n-

ished products to China vs.manufacturing in

China.Bene?t:competitively priced quality

products,such as downstream petrochem-

icals,high-end steel and glass,etc.

Trade and dis-tribution Trade and distribution rights will open

progressively over3years from accession.

Joint ventures allowed in initial years,with

WFOEs in2003

Can acquire distribution control through a

single,wholly owned nationwide network.

Holding companies may be?rst to be granted

trading and import rights.The risks of Free

Trade Zone companies doing domestic trade

are diminishing

Telecommuni-cations Geographical restrictions phased out:2years

for paging and value-added services,5years

for mobile services,6years for domestic

wired-line services.Beijing,Shanghai and

Guangzhou will be opened?rst.9%foreign

ownership in all services by2006.50%for

value-added paging services2years from

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

in1year,and50%in2years.Investment in

ISPs phased in over6years

Capture a piece of the wireless telecom

market(est.value US$45billion)by2003.

Mobile phone users growing from36million

to200million by2010.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.10million users in2000

Computer/ Internet equip-ment Tariffs dropped by2005Expanded exports to China as computer

market experiences hyper growth supported

by Internet development.Other options

include producing in China and acquiring

from competing Chinese https://www.360docs.net/doc/1517211179.html,-

petition from Chinese as well as foreign

companies will intensify

Source:[12].

J.Chang et al./Technology in Society27(2005)105–121113

Since late 1999,China has gradually opened such ?elds 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 11.23million new landline phone users in China,over 50%of whom were farmers,making a total of 281.08million landline phone users.In addition,13.62million new cellphone users subscribed to cellular services,raising the total of cellphone users to 290.30million—a huge increase but still a small number compared to the 1.3billion residents of https://www.360docs.net/doc/1517211179.html,rmation about telephone subscriptions and use is shown in Table 3.

In 2003,China’s telecom business revenue grew to 461.0billion RMB,a 13.9%increase over 2002.That same year,the total number of telephone subscribers in China was 531.9million,while the number of Internet users passed 79.5million.With an annual increase rate of 23.3%,the amount of optical ?ber communication lines has reached 2.71million kilometers (see Table 4).

It is interesting to note that the landline telephone penetration rate (i.e.number of telephones per 100residents)increased from 7.04in 1997to 21.2in 2003.This number is expected to increase.The penetration rate for mobile phones has grown from 1.07in 1997to 20.9in 2003.

In December 2003,the Internet user population in China reached 79.5million over its population size of 59.1million in January 2003.During the same time period,the total number of websites in China grew from 371,600to 595,500.The total number of computer hosts increased from 20.8million to 30.9million.

From January to December 2003,the number of website names registered with the ‘.cn’domain increased from nearly 180,000to over 340,040.In addition,the total bandwidth of leased international connections grew from 9380million to 27,216million during the same time period.

Meanwhile,reform of China’s information communications has also accelerated.The monopoly in all telecom ?elds—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 5years,and the telecom market will double its current scale in 5years [21].

Table 3

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

Phone type

New users Total users Landline phone

11.22281.08Mobile phone

13.63290.30

Source:[30].J.Chang et al./Technology in Society 27(2005)105–121

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J.Chang et al./Technology in Society27(2005)105–121115 Table4

Telecom data,2003

Item Total Growth rate(%)

Telecom revenue461.0billion RMB13.9

Internet user79.5million34.5

Optical?ber line 2.71million kilometers23.3

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 de?ning telecom business areas and outlining the role of foreign investors.Basic telecom services,such as?xed 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.In2000,China gave the go-ahead for AT&T,the largest US telecom operator,to set up a US$25million 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?rst 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?rms.Many large telecom companies,including Motorola and Siemens,have entered China’s telecom market and subsequently have increased their investment.For example,in2000Motorola (China)Electronics increased its investment in China by US$1.9billion,boosting its total investment in the country to US$3.4billion,making Motorola the foreign?rm with the largest investment in China.Motorola,Nokia,and Ericsson remain the top three companies in China’s cellphone market,with market shares of31.9,29.4,and21.4%, respectively,followed by Siemens(7.3%),Phillips(3.5%),and Toshiba(3.3%).The remaining3.2%is held by other?rms[24].

US companies that want to enter the Chinese market should note that no foreign?rm in 20years has made a pro?t 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 pro?ts.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 brie?y 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 clari?cation 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 dif?cult 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 1999China 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 in?uence 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 70million,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 dif?cult 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 ?rms 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 ?nally attained the long-awaited WTO admission.The challenges are summarized in Table 5.

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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 ?rms,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 ?xed-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 pro?ts 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 con?dence,necessary support,and ?rm 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 ?rst 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.

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 dif?cult 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

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An example of a company that heeded this advice is Ericsson,the Swedish telecom company which,only 3years after entering China’s telecom market,acquired 40%of the cellular handset market worth $4billion in 1998[27].Ericsson learned many lessons from its ?rst-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 pro?ts 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 ?nd 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 bene?cial 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 ?rst 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 pro?tability 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.

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6.Conclusion

It is estimated that by 2005China’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 https://www.360docs.net/doc/1517211179.html,petition 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 bene?t by a decision to go slowly and analyze the Chinese market carefully instead of simply jumping into this new ?eld.They need to realize that although this huge market will undoubtedly generate prosperous economic activities and enormous pro?t for quick movers,problems such as con?icts of interest between institutions and business entities will create strong and resistant ‘?rewalls’to the implementation of new policies,bringing with them numerous challenges for foreign investors.The business environment will become increasingly competitive,so US investment ?rms 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 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 pro?tability,as

the market is so turbulent

Study the market before entering

Being the ?rst 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

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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 af?liates 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-?edged operations later when regulations are clearer.

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Jane Chang received an MBA degree with a concentration in MIS on May2001from 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 over100articles 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).