(China) Telecoms: still trying to break the monopoly?
China Media Intelligence
Volume 2, Issue 15
December 23, 2002
China will pass its first full telecoms bill early in the new year and one of its priority tasks will be to consolidate the operating environment of the telecoms sector to enhance competition. The bill comes as the latest stage in the country's long-running process of demonopolization. Following China's entry to the WTO just over a year ago, there were expectations of heightened competition in the telecoms markets with the anticipated influx of foreign companies and capital keen to exploit new opportunities. One year on, China Media Intelligence looks back over 2002 and asks what happened to this expected competition. In this Analysis, we ask what is expected of the telecoms bill and what shape competition is likely to take in the telecoms sector in 2003?
Sections:
Introduction
The new telecoms bill
WTO expectations
Problems for attention in the telecoms sector
Future competition
Conclusion
Introduction
Chinese officials have indicated that the country's first telecoms bill will be passed early in the new year (see China Media Intelligence, Volume 2, Issue 13 (11/11/02)). The bill comes as the latest stage in China's long-running process of demonopolisation that started back in 1994 with the launch of China Unicom, China Telecom's first real competitor. The expectations of the bill are that it will lay down a solid legal basis for the telecoms sector consolidating and confirming the various changes that have taken place in recent years.
China's telecoms demonopolisation can be seen in three broad phases the third of which is just starting. First, from 1994 to 1998 was a period in which the sector saw the introduction of competititon for the first time. Principally this came through the setting up of first China Unicom and later Jitong Communications as direct competitors with China Telecom, the monopoly state telecoms operator.
The second phase, from 1999 to 2001, saw experimentation with market mechanisms and has included the restructuring of China Unicom, the launch of China Netcom and China Railcom as well as the stock market floatations of China Mobile and China Unicom.
The third phase which can be dated roughly back to China's WTO entry a year ago has included the division of China Telecom and part amalgamation with China Netcom earlier this year (see Analysis, China Media Intelligence, Volume 2, Issue 1 (14/1/02)), the recent floatation of China Telecom on overseas stock markets, the introduction of China Unicom's CDMA mobile service and the restructuring of markets in preparation for less segmented competition. This third phase will have as one of its main tasks the reconfiguration of China's telecoms sector into four key players (China Telecom, China Unicom, China Mobile and China Netcom) working across the different sectors of the telecoms industry (mobile, broadband, fixed line, etc.) where currently there is still an unbalanced division of labour.
The new telecoms bill
It is into this third phase of development that the new telecoms bill will insert itself the four broad aims of demonopolisation, equalisation of competitive positions, redistribution of resources and the tightening of market supervision and regulation. It is widely expected to include measures to cover the following:
The setting up of regulatory bodies and structures with a clearer definition of duties and responsibilities
The definition of market entry criteria including for new information technology markets and markets emerging from network convergence possibilities (telecoms, computers, cable television)
The definition of rules and responsibilities in relation to network interconnectivity
The allocation of telecoms resources
The definition of pricing management bodies and procedures
The introduction of cross-subsidy mechanisms to ensure funds are available to develop telecoms services in poorer and more remote areas
The development and management of telecoms infrastructure
Telecoms and information network security
Among these there are two particularly important measures relating to the development of competition and the further demonopolisation of the sector. First, and one of the most urgently awaited measures, will be those tackling problems of interconnectivity. Over the last year interconnectivity between different networks run by different operators has suffered sharply as a result of anti-competitive practices by key players in the sector (see Market Report, China Media Intelligence, Volume 2, Issue 11 (9/9/02)). This has resulted in some customers finding themselves unable to connect using some IP services or mobiles, for instance.
Interconnectivity is crucial for the telecoms industry and the future development and profitability of the sector. Industry estimates put the total value of business resulting from interconnectivity for all the telecoms operators over the last two years at around Rmb100 billion. At the same time, the value of different operators' networks has risen dramatically with interconnectivity. China Telecom's network value is estimated to have risen 1.7 times, China Mobile's by 10 times and China Unicom's by as much as 126 times. This underlines the fundamental economic and commercial importance of interconnectivity that is threatened.
For this reason, the telecoms bill will also be seen as a test of the MII's resolve to deal with some of the nittier problems facing the sector. Interconnectivity is crucial for maintaining and enhancing confidence in the MII's policy of opening up the telecoms sector to market competition and breaking down the power of the former China Telecom monopoly. This is important both for the future of the domestic operators, but as WTO agreements gradually take effect, it is also of fundamental importance for encouraging foreign investment in the sector. What analysts will be looking for will be some kind of strict demarcation of rights and responsibilities but perhaps more importantly also some kind of effective watchdog mechanism capable of ensuring fairplay.
The second important measure here is that relating to cross-subsidy and support for telecoms developments in poorer and remote areas. The development of China's telecoms sector has been entirely driven by investment and development of markets in the large cities and the more developed eastern coastal provinces. China's rural areas and western provinces are increasingly falling behind in the telecoms race (see Market Report, China Media Intelligence, Volume 1, Issue 13 (5/11/01) and Market Report, China Media Intelligence, Volume 1, Issue 6 (10/ 5/01)).
What is more, as the sector becomes increasingly driven by market mechanisms and competition there is little incentive on the part of telecoms operators to put in the large investment required to bring poorer and remote areas up to scratch, particularly since the projected revenues would also be low. For this reason, the telecoms bill is expected to include the setting up of a universal service fund aimed at financing the extension of at least the basic services throughout the country.
It is not yet clear how precisely this will work. However, there seem to be two main possibilities. One possibility would be to levy a set charge across all the operators which would be pooled into the universal service fund. The other, perhaps fairer, option would be to levy charges proportionate to the amount of business enjoyed by the operators. Effectively this would amount to a small percentage of all call charges being allocated to the fund. What remains to be seen is precisely which system of charging will be adopted and then what the mechanism of redistribution will be. However, clearly the universal service fund will be a measure aimed at softening the more brutal effects of heightened market competition in the sector.
WTO expectations
The telecoms bill comes about partly as a result of China's WTO entry at this time last year. Prior to WTO accession and immediately afterwards there was a general climate of expectation in various sectors of China's media industries including the telecoms sector. The expectation was that China would suddenly be overrun by the large international telecoms companies seeking to stake their claim to a piece of the world's largest developing telecoms market.
Indeed with the total number of telecoms subscribers breaking the 400 million barrier by the end of October and the number of mobile subscribers exceding 200 million by the end of November, official figures have shown both China's mobile and fixed line markets to be the largest in the world. What is more the market was worth some Rmb33.34 billion in the first ten months of this year marking 15.44 percent growth on the same period last year.
However, despite the ever growing Chinese market, the much expected flood of foreign companies and capital has largely failed to arrive. Of course most of the key players from Nortel, Cisco, Toshiba and Motorola to Ericsson, Siemens and Nokia, were already in China in the first place. However, most Chinese sources attribute this dramatic non-arrival to the global downturn in the telecoms and IT industries. This has certainly contributed to the situation but it is also nonetheless true that global players who have been cutting back elsewhere have sought to invest, where possible, in China, probably the only major expanding telecoms market in the world.
The telecoms law, nonetheless, was at least partly conceptualised as part of China's response to the expected sea-change following WTO entry. The authorities have been keen to do two things: a) to ensure that there is the proper legal basis for all regulation of the telecoms sector prior to having to open up further to foreign competition and b) to streamline and consolidate the key Chinese players so that they are working efficiently and competitively ready to take on the perceived strength of that competition.
However, there is another aspect to this WTO expectation. The expected competition was seen by many in the sector as not only a potential threat but also as an opportunity and a stimulus to change. In fact, the division of China Telecom earlier this year could be seen in this light. The move was planned to streamline China Telecoms operations, enhance and introduce new forms of competition between the new China Telecom and China Netcom and to act as one of the first major steps on the road to having four key cross-sector players capable of matching up to internatinal competition.
For some, then, the failure of this international competition to emerge in quite the way expected has been blamed for what is seen as slow progress in the implementation of telecoms reform. Some critics in the sector have even taken issue with the division of China Telecom as a waste of time and resources, because, without the added stimulus of international competition, many of the old systemic problems have not yet been ironed out.
To be fair, such criticism reveals an inordinate lack of patience and probably also some degree of overestimation of what WTO entry and enhanced international competition would look like. Nonetheless the criticisms highlight some of the remaining problems that need addressing in the sector.
Further problems for attention in the telecoms sector
One of the key expectations of international competition has always been that it would stimulate lumbering Chinese state-controlled enterprises into sleak streamlined efficient business machines. A key feature of such a transition is to be the transformation of semi- chaotic Chinese management practices and this is something that the north-south China Telecom split has yet to fully address.
These problematic management practices include the following key contradictions:
Between central and local level decision making - for instance market-oriented planning and strategy formulated at the central level of the corporate group may be only partially implemented at the local level. There are countless instances of such practices from the failure to modernise old-fashioned management procedures at local levels to the local implementation of marketing strategies independent of central company policy. Many of the problems of interconnectivity could also be put down to such causes.
Between central and local implementation of pricing strategies - pricing strategies are
formulated at the central level either according to broad company planning and policy or in compliance with government imposed regulations. However, it is common in China to find reductions, special introductory offers and subsidised services at the local level implemented on the volition of local company officials. This has been most commonly seen in relation to heightened local level competition - for instance between mobile operators and China Telecom's PHS services or more recently between Unicom CDMA vendors and China Mobile.
Another area of concern for many in the industry relates to the financing of the sector. Particularly in relation to investment in development, many players would like to see the sector opened up properly to private funds. The Ministry of Information Industries (MII) would point to recent stock market floatations - China Telecom's Hong Kong and New York floatation and China Unicom's recent Shanghai IPO - as continuing steps in the introduction of private capital into the sector. However, critics say that more than this is needed. What they are looking for is the ability for private companies or individuals to invest directly in telecoms projects and telecoms operations.
There are indications that sooner or later this will happen. A special working group of the State Council, for instance, published a report in August this year proposing a number of possible solutions to the question of private investment. However, they have yet to be implemented. What is needed, however, is patience. In fact, rather than exasperation at the lack of expected international competition, the critics in the industry should perhaps be grateful for the way things have turned out. It was never going to be easy to turn around overnight enterprises as large and established as China Telecom. The changes will eventually come one way or another, but from a Chinese point of view it may be a distinctive plus to have time on your side.
Future competition
So what then is the likely trajectory of competition in the telecoms sector? What are likely to be the key growth areas for the market in the year to come?
First on the list is broadband. There are already more than 2.5 million broadband subscribers in China. Among the various forms of broadband provision ADSL is so far also proving the most successful currently claiming about 1 million of those subscribers. What is more industry analysts suggest that this should rise to 2 million by the end of 2003. The sector is already starting to see enhanced competition and with high stakes and more players coming on board (such as Railcom, Satcom etc.) this competition is going to heighten over the coming year.
The key players, including China Telecom and China Netcom, are investing in the development of both technologies and services as they increasingly see the potential for the sector. Indeed, industry analysts have even suggested that consumers could benefit from some stiff pricing rivalry or even price wars in the near future as competition hots up.
Another sector in danger of price wars is IP telephony. This sector has already seen tough competition this year and has been one of the key victims of interconnectivity problems. However, as call quality constantly improves and prices remain lower than conventional fixed line calls, the potential for the sector is huge. Indeed IDC recently predicted growth in the Asia Pacific IP telephony market (excluding Japan) from US$1 billion this year to US$14.3 billion by 2006 with the large portion of this growth attributed to the Chinese market.
The IP marketplace, however, is an increasingly crowded one. Currently it includes China Unicom's 17910 and 17911 services, China Telecom's 17900 and 17901 services, China Mobile's 17950 and 17951 services, China Netcom's 17930, Jitong's 17920 and other local services such as Beijing Communications' (a subsidiary of China Netcom) 17908 service. With so many players margins are going to continue to be slim and price wars are likely but potential profits are also considerable.
Related to IP telephony is also the increasingly open public telephony sector. Here the monopoly of China Telecom has really been broken down with the MII earlier this year approving China Netcom and China Unicom to operate long distance public service trials. At the same time China Unicom and China Mobile have been authorised to trial mobile public telephony. Indeed China Unicom is already offering mobile services on public transport in Shanghai. This really is a sector with continued growth potential that is opening up from being a monopoly to the involvement of multiple players.
Another sector of increasing competition is the mobile data market, led by short messaging services (SMS) (see Market Report, China Media Intelligence, Volume 2, Issue 6 (6/5/ 02)). This sector is particularly important at present because of the growing competition between China Unicom's CDMA services, with the increasing number of 2.5G CDMA1X services, and China Mobile's GPRS services (see Market Report, China Media Intelligence, Volume 2, Issue 13 (11/11/02)). Competition in this sector is not simply for the immediate profits to be found in SMS and perhaps soon MMS (multimedia messaging) but also for the 3G future.
What is distinctive about this sector of competition, however, is that at present the battle is restricted to the two key players. While the other telecoms operators are denied mobile operating licences the competition will not go beyond China Unicom and China Mobile. However, that is not to say the competition may not be intense. Indeed, the CDMA/GPRS confrontation has already seen a host of competitive marketing strategies being employed from free handsets to reduced sign up fees and service charges. What is more, mobile services have similarly suffered from interconnectivity problems.
Furthermore, when it comes to SMS, we see the increasing involvement of non-sector players in the market, chiefly internet content providers such as the leading portals. SMS already starts to open up the telecoms market to broader involvement and as MMS takes off this will be even more the case.
Finally, there will continue to be strong competition for the core corporate sector. Large business clients are the most sought after by telecoms operators for any of their services from fixed line to mobile and broadband. The importance of corporate clients is two-fold. First of all they provide regular, dependable income and offer good profit margins because of the volume of and nature of the business. Second, however, corporate clients also offer telecoms companies to offer the full range of their services including broadband, virtual private networks (VPN), wireless VPN, IP telephony and so on. In this way, large corporate clients are also important for the development of new and improved services that may one day also be available to smaller customers.
Conclusion
In conclusion, there are just a few points worth highlighting. First of all the areas of competition outlined above that are emerging from the market result from a combination of factors, chiefly consumer demand and technology. It is also, of course, important and relevant that there are a suitable number of players able to offer the services and in the case of IP telephony and public telephony the growing number of players is the result of direct government action to break up previous monopolies. However, one of the biggest growth areas, in the whole telecoms sector at present is in SMS where the competition, however, intense it may be, is restricted to two key players.
What this draws to our attention is the still fragmentary and distorted nature of competition in different parts of the telecoms sector. In each arena it is different players or different combinations of players that are competing. The nature of that competition is also uneven within one arena - perhaps the best example is in relation to localised price wars for instance or the localised distribution of PHS services.
Another important point to remember is that change of the scale required to restructure an industry as large and complex as the Chinese telecoms industry cannot be achieved overnight. It may be eight years since the process of demonopolisation started but it has to be said that the bulk of that process has occured in the latter half of those eight years and is now proceding apace.
However, it also has to be remembered that to some degree notions such as 'demonopolisation' and full 'marketisation' of the telecoms sector are simply conceptual tools that point in certain directions. Demonopolisation can be achieved through the opening up of sectors to more players, true enough. However, if we recall that the MII is aiming towards a telecoms sector divided between four key major cross-service players, it has already pretty much decided who those players will be and how they will compete, then we are reminded that telecoms sectors are rarely areas of pure free market competition.
Indeed, although the new telecoms bill is intended to help the process of demonopolisation, it should also be seen as part of the process of tighter regulation with centrally defined players and criteria for competition.
CMI
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