Another, Pre-Richard Li "jewel"...and a sobering one at that
Road to Success in China Looms Long and Bumpy
The curtain is lifting a bit on China's telecom scene. It reveals a harsh landscape fraught with commercial and political obstacles. For despite widespread excitement about the potential of China's 1.25 billion population, the business outlook for foreign firms is sobering.
Success for a foreign firm requires long-term commitments, the right political connections and willingness to bend with rules that may change on a whim. It also depends on cooperation with joint venture partners, technology "sharing", and recognition that domestic suppliers can be surprisingly strong competitors with growing support from the government.
Long, slow march onto the Net
China's appeal is widely recognized. Its strong economic growth could make it one of the world's largest economies in the next decade. And telecommunication is one of the engines of its growth. Each year, China adds 30 million to 40 million access lines to its network, roughly the capacity of an RBOC. This expansion consumes $20 billion to $30 billion annually, a sizable chunk of which is for telecom network equipment.
Yet China's penetration rate for basic telephone service, counting both fixed and wireless connections, is still only around 12%. With per-person gross domestic product well below $1,000 per year, few households will soon be able to afford the per-minute rates of using the Internet, much less the access hardware - whether a personal computer, TV set-top box combination, or data-ready wireless phone. So the pace of the Internet's rise in China clearly has an upper limit.
Much of the Net activity talked about in the general media is centered in China's wealthier eastern cities. The latest data from the China Internet Network Information Center show that over 40% of China's 4 million Internet users in July resided in Beijing, Shanghai and the southern province of Guangdong.
China's Internet is far from a mass medium
About 50% of users cite the workplace as their primary access location. Home, including school, is a close second, at 45%. Internet cafes are third.
With three-quarters of China's users between 16-30 years old, the Net is used more for entertainment and academic applications than for business.
Usage is heavily (85%) male and well-educated; 60% have a college education.
Nevertheless, many foreign observers expect China's Net to grow fast. At the high end of estimates, Goldman Sachs believes China's Internet "users", measured as ISP accounts times three, will reach 7.5 million by the end of this year, 16.6 million in 2000, and 80 million in 2003. For perspective, are over 100 million users in the U.S., with only one-quarter of China's population.
Because a computer commands up to a year's pay from a Chinese user, this growth will be enabled by a profusion of new access devices, many based on television sets - of which there are around 250 million in China - and wireless handsets. As the medium becomes more mainstream, demographics will moderate. Usage will spread more uniformly across the country, women and the over-30 population will constitute a larger proportion of users than now, and more users will access the Net from home.
For anything like the Goldman Sachs forecast to come true, China's three national carriers (China Telecom, Unicom, and China Netcom) and multiple provincial carriers have billions of dollars in infrastructure building ahead of them. A voice network that now barely accommodates one-tenth of the nation's population will soon have to leap into the same "IP world" in which U.S. carriers now operate.
Who will build the network
This growing demand for telecom gear is what drove many western vendors to last week's China Telecom 2000 conference in San Francisco. The view that "China is too big to ignore" seems to outweigh any cynicism they have about foreign companies cracking the China market. Recent contract awards reinforce their confidence. Concerns like Nokia, Ericsson and Motorola have won a string of wireless contracts. VocalTec and Clarent, among others, are involved in China's experiments with voice-over-IP services. Lucent, a pioneer with transport sales to China Telecom in 1996, remains aggressive, and Osicom has sold its metro WDM system to Tangshan's local cable company.
Moreover, some western vendors expect two improvements in the immediate future. One is China's eagerness to join the World Trade Organization; a strong obstacle to admission is its stance on foreign participation in the telecom sector. Last week, in fact, trade representatives of the Clinton administration went to China again, trying to negotiate a WTO deal. Another improvement is expected to come from China's need for experienced western vendors to help the country cope with the expected growth in Internet use.
Vendors are advised to be wary, though. The Financial Times reports that China is about to impose quotas on wireless equipment sold by local joint ventures involving Nokia, Ericsson and Motorola, to foster domestic upstarts. If the government can do this in wireless, China's fastest-growing sector, it can do it elsewhere.
Details: China's technology firms have inside track
There are glimmers of hope for foreign participation, though. One is China Netcom, the third national operator, created recently by the Chinese Academy of Social Sciences, the State Administration of Radio, Films and Television (SARFT), the Ministry of Railways and the Shanghai Municipal government. China Netcom will have access to SARFT's 80 million cable television subscribers, the Railway Ministry's extensive telecom backbone, and a U.S.-educated chief executive. The Ministry of Information Industries (MII) has promised stay out of Netcom's way and allow it to compete freely against China Telecom and Unicom. This pledge, combined with Netcom's interest in using public capital markets for funding, will make Netcom a company to watch.
Another favorable sign is that China's operators seem genuinely puzzled over how to adapt their infrastructures to the world of data. Qian Zongjue, a top engineer at the MII's Science and Technology Department, says network-architectural issues, especially the pros and cons of IP over WDM, are important research topics now. And Li Xiaoming, of the Data Communications Department at China Unicom, reports that his company is seeking input on these issues. Western vendors may have a lot to contribute, as China's domestic firms, despite optical advances, seem inexperienced in data switching and routing.
China's telecom market seems certain to retain its seductive appeal to foreign suppliers. But its rewards lie at the end of a long, bumpy road.
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