WTO and China's Telecom Industry: Problems For Services, Good News For Manufacturers
(6/2/99) The April 3 Zhongguo Zhengquan Bao (China Securities)
discusses the different effects that joining WTO will have on the
telecom service industry and the telecommunication equipment
manufacturing industry. The service industry will likely suffer from
exposure to international competition. Manufacturers will fare better
and even benefit, but still must correct problems to be internationally
competitive.
Telecom Services: Challenge Will Exceed Opportunity
China's telecom service industry is not able to cope with competition
from international service providers. On the one hand, the potential
competitors are very strong. On the other hand, even the biggest
telecom service provider in China is not accustomed to competition
and shrinks from it. The market for services in China is confused.
China Telecom supposedly allows China Unicom to conduct mobile
phone business and wired phone business in some of the cities, and it
permits different networks to be interconnected. But in fact, China
Unicom is crippled by various restrictions on switch-in and its networks
cannot achieve connection. This has kept China Unicom from growing
at a reasonable pace. And China Telecom, which is nominally an
enterprise, is actually a legal entity run by the telecom authorities.
Telecommunication Regulations Do Not Comply With WTO
Requirements
There is not yet a complete telecommunication law in place, but there
are various types of non-transparent department provisions and local
regulations. Nor is the industry ready to publicize in detail the
regulations and standards of telecom facilities, equipment, and service
supply.
For Equipment Manufacturers, Opportunity To Grow
The telecommunications equipment market in China is already open to
foreign companies. The impact of joining WTO on the telecom
equipment industry would be much less than on telecom service, as
little competition will be added to the market. The 8 giants in world
telecom equipment have already entered the China market and have
received national treatment. After China joins WTO, there won't be any
new or stronger competitors.
The telecom equipment industry in China has in fact penetrated the
international market, and joining WTO will provide more opportunity. In
competing with the "8 giants," 5 local companies ( Julong, Datang,
Jinpeng, Zhongxin and Huawei) stand out, and the digital SPC
telephone exchanger they have developed is at an advanced global
standard. The telephone exchangers developed independently by local
companies have taken 60% of the China market. Foreign products will
not gain much competitive advantage in terms of price, even if free of
customs duty after joining WTO, so there won't be much impact on the
telecom equipment industry of China.
In September 1998, Zhongxin Communication Co. beat out more than
30 foreign companies in bidding for a telecommunication project in
Pakistan, winning a US$95 million contract for its digital SPC
telephone exchanger model ZX10, which was developed independently
by the company, with accessories like workshop equipment and
cables. Huawei's products have been sold to 11 countries and regions
including Russia, Bulgaria and Kuwait, and has sold over 100,000 lines
capacity of its C&CO SPC exchanger. Julong has managed to obtain a
network admission license in Russia for its Model 04 exchanger, and
has made market breakthroughs countries like Vietnam, Brazil and
South Africa. Datang entered into agreements with Motorola early in
April 1997 to supply its CDMA-based M30 mobile telecommunication
system. In 1998 Datang launched its IC card chip with full ownership of
relevant intellectual property, and the first CDMA mobile telephone
exchange system developed by the company passed final verification
by the Department of Information Industry on April 13 this year. Xiahua
Electronics has introduced its Xiahua No. 1 mobile phone with
independent intellectual property. Dongfang Communications Co. has
independently developed a mobile phone model, Dongxin EC528,
which has been verified by an authoritative European organization. For
these enterprises, joining WTO would mean removing some obstacles
for penetrating the international market and bring more opportunities for
development.
The manufacturing costs for telecom equipment will be sharply
lowered. Both joint ventures and wholly domestic telecom equipment
manufacturers rely on import sources for large proportions of their
components and parts, which are charged 12% customs duties. After
joining WTO, the import tariff rate will be reduced to around 3%, or
even free of duty; this will bring greater competitive advantages in price
for made-in-China products.
But Domestic Manufacturers Still Have Problems
It has to be admitted that domestic telecom enterprises are still far
behind multinational giants like Motorola, Nokia and Ericsson in
competitive strength. After joining the WTO, a certain degree of shock
can be expected, though not a big shock.
In the first place, domestic enterprises are weak in R&D; enterprises
and products with low technology content will be eliminated. Due to
poor supervision, domestic companies in cooperation with foreign
parties have not acquired the high tech, or have only received the
manufacturing process, while the development and design techniques
have not been transferred. Many joint ventures have not even
established any R&D center, and for lack of ability to digest new
technologies and make innovations, development of new products is
impossible. These types of enterprises will be at substantial risk of
elimination after joining the WTO.
A second issue that should be addressed as soon as possible is that
of efficient economic scale. Of telecom equipment that embodies
independent intellectual property, only SPC exchanging equipment has
obtained a certain economy of scale. Most products such as mobile
phones are just in an early stage of manufacture. Some have just
emerged from the development process, and their performance is still
far below that of internationally recognized brands. These products
have not achieved economies of scale. If this problem is not solved
before joining the WTO, the potential for growth in market share will be
restricted post-accession.
Market share is a third problem: Share for some products may fall to
some extent after government protection is removed. The rapid growth
of domestic telecom enterprises depends on the support of
government. Among the advantages of the telecommunication service
industry, local purchase policies are of great importance. After entering
the WTO, these favorable policies will be eliminated sooner or later.
Learning to grow without government protection is a major issue that
local telecom enterprises must start managing now.
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