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Telecommunications Companies Poised to Enter Chinese Market

February 2000
By Michelle L. Hankins

Prospect of a vast untapped customer base triggers communications industry gold rush.

As China's great wall of trade barriers crumbles, telecommunications companies are positioning themselves to take advantage of the major emerging market in Asia. The promise of increased competition and fewer Chinese government impediments to trade could result in a dramatic shift in the focus of telecommunications marketing and is already changing the way companies operate in the region.

Foreign telecommunications companies are in awe of the prospect of access to the Chinese market. With low penetration numbers, a huge customer base looms from the nation of nearly 1.3 billion people. China's acceptance into the World Trade Organization (WTO) and the bilateral agreements with the United States promise long-term and profound effects on how China structures its overall economy, industry experts say. If the country promotes faster, more stable growth opportunities, companies will be able to inject the needed foreign capital into the Asian market.

Today in China, telecommunications networks and user bases are concentrated predominantly in major cities. Experts suggest that only 15 percent of the country's population has basic telecommunications services, compared to the near full penetration of the U.S. market. As a relatively new arena for telecommunications, China's market has been radically different from traditional Western markets. Many deterrents have halted companies or even driven them away from investing in the nation.

However, mobile telecommunications have flourished in China, offering many advantages over landline networks, including faster installation and lower cost to construct such networks. China has taken great steps toward adopting wireless communications; yet, landline networks are not being abandoned altogether.

The advent of data communications capabilities in China could make that nation a major addition to the global electronic commerce market. One forecast by The Yankee Group, Boston, suggests that Internet users in the Asia-Pacific region will total more than 374 million by the end of 2005, more than 9.5 times the number of users calculated by the end of 1998. About 40 million people are expected to be online in China alone by 2001, but by 2005, the nation could surpass the United States as the world leader in number of Internet users.

A White House summary of the bilateral U.S./China WTO agreement indicates that access to China's telecommunications sector will now be expanded, allowing 49 percent foreign equity participation in value-added and paging services in the first year after accession to the WTO and 50 percent ownership in the second year. According to the agreement, China will allow competitive practices such as cost-based pricing, interconnection rights and independent regulatory authority. The nation has agreed to allow foreign suppliers to choose the technology they use to provide telecommunications services. Geographic restrictions for various services will be phased out, and the markets for telecommunications services in key cities will open immediately upon accession. The key cities are Beijing, Shanghai and Guangzhou, which represent 75 percent of all domestic traffic. China will also eliminate tariffs on computers and telecommunications equipment, semiconductors and other high-technology products. Quotas for top U.S. priorities such as fiber optic cable will be eliminated, and other quotas will be phased out by 2005. In addition, China has agreed to liberalize Internet services at the same rate as other key telecommunications services, and the nation will allow telecommunications services via satellite.

Already, American companies are prospecting for business in the future Chinese market. A new joint venture company was formed late last year by Global Crossing Limited, Hamilton, Bermuda; Softbank Corporation, Tokyo; and Microsoft, Redmond, Washington, called Asia Global Crossing. Another company that is committed to the Asian region is Motorola Incorporated, Schaumburg, Illinois. No stranger to China, the company has invested in the Chinese telecommunications market since the late 1980s.

Asia Global Crossing will provide advanced network-based telecommunications services in Asia. The company is planning an undersea network called East Asia Crossing that will connect Japan, China, Singapore, Hong Kong, Taiwan, South Korea, Malaysia and the Philippines. The technology includes high-capacity city rings and terrestrial systems linked through East Asia Crossing and trans-Pacific cable to the Americas and Europe to provide World Wide Web hosting, and electronic and telephony services.

Claimed by company officials to be the first Pan-Asian telecommunications company, Asia Global Crossing intends to provide identical services to every customer in the Asian region under its coverage. Before, services varied from nation to nation because individual governments owned and dominated communications infra-structure, making international calling more difficult.

Nearly 17,700 kilometers (11,000 miles) of cable will be laid as part of East Asia Crossing. According to Asia Global Crossing Chief Executive Officer Jack Scanlon, phase one of construction, totaling 10,200 kilometers (6,320 miles) will begin early this year with the northern ring serving greater China, Taiwan, South Korea, Hong Kong and Japan--roughly 80 percent of the Asian market. The work will be completed by mid-2001. The second phase of the network's construction will include Singapore and Malaysia, providing 7,500 kilometers (4,650 miles) of cable and will be completed by 2002.

"Today, there is a tremendous lack of international capacity to serve Internet growth between Asia and the rest of the world," Scanlon says. "East Asia Crossing solves that problem by bringing in low-cost bandwidth."

Scanlon notes that the Softbank/ Microsoft involvement in the joint venture is good business. "The future growth of software products depends on the growth of the global Internet," he says. "They realize that their products can't grow unless the bandwidth problems in Asia are solved."

Predictions that software will no longer be sold through traditional methods, but will be sold instead via the Internet, are encouraging companies like Softbank and Microsoft to reach as much of the global market as possible. Allowing software to be purchased online will benefit companies further by eliminating the problem of software piracy that has been so common in Asia (SIGNAL, June 1999, page 27).

Scanlon asserts that voice communications in China will be dominated by wireless systems, with most telephone calls being placed via mobile telephones. Broadband applications such as the Internet will employ fixed-line systems for data communications.

With China's WTO commitment to begin opening their markets, the Chinese telecommunications market will begin to mirror the U.S. market when AT&T was deregulated, Scanlon says. The deregulation in the United States resulted in increased growth, heavy competition, greater choice for consumers and lower cost for services. But, Scanlon notes, similar changes may come slower in China than they did in the United States. Liberalization in the telecommunications market in Asia will start in the north and then spread to the south, Scanlon adds.

Companies want a shot at market share and longevity, but without full confidence in the rule of law in China, entrepreneurs may be wary. Also, the different business culture in China and the lack of financial resources from an Asian equivalent to Wall Street will slow immediate change. "China can't be a member of the world [economic community] unless it liberalizes, and it's inevitably going to happen," Scanlon says. Businesses must adopt a long-term view of China, focusing on building partnerships for the future.

When other companies were driven out of China by political events such as the Tienanmen Square crackdown, Motorola remained. More than 10,000 people work for Motorola in China, and the company has developed substantial local talent in the nation, educating internal staff at a Motorola university.

The company is one of the largest investors in the nation, according to Simon Leung, vice president and general manager for Motorola, network solutions sector, Asia-Pacific, customer solutions group. The company's focus has been on manufacturing. Motorola has concentrated on designing and manufacturing handsets for mobile communications. The company also focuses on infrastructure for the wireless market, building base stations for mobile communications.

Leung notes that a local presence is important to investment in China. This cost-saving measure will be crucial in the new competitive Chinese market. Motorola has close to 20 design centers throughout China, Leung says. The centers mainly deal with the design related to handsets, semiconductors and infrastructure. Current initiatives include making a palm-pilot-like device that is a mobile telephone as well and is capable of recognizing and communicating in Chinese.

Last October, Motorola established a mobile communications network research and development center in Chengdu, China. The center is the second to be set up by the company in the nation. Its first facility is in Leshan City. Efforts at the Chengdu site will examine network software used within the company's mobile communications business in southwest China.

To keep up with the number of subscribers in China, Motorola is adding new base stations and switching capacity. In a recent award of six contracts totaling $228 million, Motorola will expand its global system for mobile communications networks in China. This expansion will increase capacity to accommodate an additional 2.35 million cellular subscribers by mid-2000.

"When China opens up the communications market to allow foreign operators to come in and goes from a monopoly situation to a very open type of market, the tariffs come down and it will stimulate a lot more growth in mobile markets. The entire market will become bigger, so whoever has the right infrastructure and the right direction in China will really benefit," Leung says. "You will see a lot of companies start to position," he says.

While company leaders are excited about the new opportunities of the emerging markets, they know the door to the nation's market will not open overnight. Richard Brecher, assistant director, international trade relations, Motorola, looks more toward long-term effects such as faster and increased growth, a better interpretation of the law, and the adoption of international trade practices. Lower tariffs and the phase-out of nontariff barriers to trade will increase opportunities for foreign companies to sell, invest and operate in China.

Historically, trade has been conducted through a Chinese intermediary--an enterprise that has trading rights, according to Brecher. He suggests that this will change and that the Chinese have agreed to expand trading rights through a regulation process that is more in line with modern international trade practices. Permitting direct trade will cut costs for foreign companies.

The opening of China's telecommunications market will benefit operators as well as equipment suppliers, Brecher says. "The infusion of foreign investment and new operators and the competition that comes from new operators will accelerate both the development of the industry and also accelerate the introduction of new technologies." Brecher believes that the changes will bring greater rationality into China's economic culture, and that is critical for the nation's long-term sustainable economic growth.

For a company with more than 10 percent of its global revenues earned in China, the opening of the nation's telecommunications market is a happy ending to a story of long-term commitment to investment in the nation's market. Today, China represents the single largest market for Motorola outside the United States.

The Chinese market is no longer a myth, Brecher relates. "It is one of the largest and fastest growing markets in the world."