*USAToday. China's next revolution? [on China Telecom]
06/29/99- Updated 09:38 PM ET
By Paul Wiseman, USA TODAY
BEIJING - During a trip to Italy last
summer, Fang Hongyi stopped to have
his picture taken in front of a copy of
Michelangelo's statue of David.
The snapshot was self-consciously
symbolic. Like David, Fang is taking
aim at an oversized opponent. His
Goliath is China Telecom, the
state-owned monolith that controls
nearly 100% of China's telephone
market and is widely reviled for high
rates, slow service and ruthless
determination to crush anyone who
dares challenge its dominance.
"Phone charges are very high, and this
has obstructed the development of
China's information industry," says
Fang, a senior engineer with China's Administration of Radio, Film and
Television who is trying to stitch more than 2,000 local cable TV
operators into an alternative national phone service. "I see this as a crime
committed by China Telecom against the Chinese people."
Fighting words, to be sure. But plenty of people in China agree that the
time has come to loosen China Telecom's grip on local phone service,
long-distance operations and Internet access. The reformers - led by
Chinese Premier Zhu Rongji - have started what could be a revolution in
China's huge and growing telecommunications market. But their efforts to
promote competition face fierce resistance from China Telecom and its
patrons at China's powerful Ministry of Information Industries. "The
fighting is far from over," Fang says.
U.S. phone companies such as AT&T and BellSouth are watching the
bureaucratic tussle closely. "It's coming," says Wei-Chou Su, vice
president with BellSouth here. "All these forces are pushing to crack the
monopoly."
The past few months, Chinese leaders have:
Announced plans to break China Telecom into four separate companies
- an effort based in part on the 1984 breakup of AT&T's monopoly in the
USA.
Agreed to provide financial and management assistance to China
Unicom, a puny, poorly run company the government established in 1994
in a half-hearted attempt to give China Telecom some competition.
Approved another government-owned telecommunications operator to
compete with China Telecom and Unicom. The third player is backed by
the Chinese Academy of Sciences, Ministry of Railways, Shanghai city
government and Fang's radio, film and television administration.
Outlined plans to dismantle some of the barriers that have kept foreign
phone companies from establishing anything more than a token presence in
China.
Forced China Telecom to dramatically reduce charges for telephone
installation and long-distance calls.
A big prize
The stakes are huge. China already is No. 3 in the world in mobile phones,
No. 2 in fixed-line phones and No. 1 in pagers. Every month, nearly 1.3
million Chinese acquire regular telephones, and an additional 1.2 million
buy mobile phones. "China's fixed and mobile subscriber additions in
1998 alone are equivalent to building two entire Indian telecom networks,"
notes BDA China, a telecommunications consulting firm.
China Telecom's revenue surged 36% last year to $29 billion - a figure
that would make it No. 35 on the Fortune 500 list of big U.S. companies,
just behind Motorola. The government reaps the windfall: China Telecom
is its second-biggest source of revenue after its monopoly in tobacco.
Overseeing the rapid expansion of China's telephone network is Wu
Jichuan, the powerful minister of information industries and former head of
China Telecom. Wu gets credit for building a modern phone system. China
had fewer than 12 million local telephone subscribers in 1992; by the end
of this year, it is expected to have more than 100 million. But Wu has
guarded China Telecom's turf jealously, using his clout to stifle China
Unicom and essentially barring foreign firms from the market.
Without genuine competition, China Telecom has charged monopoly rates.
Getting a telephone installed in Beijing could have cost more than $600
until March 1, when reformers forced China Telecom to slash installation
fees to $120. Even after a 19% cut March 1, long-distance calls from
China to the USA are about $1.80 a minute, more than double
USA-to-China calls. The charges are hefty in a country where per-capita
income is less than $100 a month.
China's leaders worry that high costs are crippling the country's efforts to
enter the information age. "The tariffs are outrageous," Su of BellSouth
says. "This is dragging the economy. The benefits are not trickling down."
"You can't go on this way forever," says Ross O'Brien,
telecommunications analyst at Pyramid Research in Hong Kong.
China Telecom has acted more like a government bureaucracy than a
service business in dealing with its customers. "They have a Big Brother
attitude toward you, a patronizing attitude," says China Telecom customer
Wu Haiyang, 28, a marketing executive from Beijing. "Their service is
so-so, and their fees are too high."
Government officials sometimes intervene on China Telecom's behalf,
stopping China Unicom or other competitors from getting any edge in the
marketplace. Last month, for instance, China Unicom offered 50%
discounts on its mobile phone services in the central city of Wuhan. The
day after the promotion began, a local government agency declared it
illegal.
Lots of skepticism
Many experts are skeptical of the recent government moves designed to
break China Telecom's stranglehold over the telephone business. Although
China Unicom is getting much-needed help, a 1998 government
reorganization put it under the jurisdiction of Minister Wu. Skeptics
wonder whether Unicom can get a fair shake: "Is he a real doctor who's
been sent in - or Kevorkian?" asks Duncan Clark, partner at BDA China,
referring to the practitioner of assisted suicide.
The evidence hasn't been encouraging. Foreign companies are banned
from investing in Chinese telecommunications companies. But some,
including Sprint, had been getting around the ban with a complicated
maneuver that involved setting up joint ventures. Using the loophole, they
invested $1.4 billion in China Unicom. Last year, Minister Wu declared
the tactic "irregular" - "the nice way of saying illegal," BellSouth's Su says -
narrowing Unicom's access to capital. It's unclear whether the foreign
investors will recover their money.
China also appears to be having second thoughts about plans announced
by Premier Zhu Rongji to let foreign companies invest in Chinese
telecommunications ventures. Zhu's offer was part of China's effort to gain
membership in the World Trade Organization. But WTO negotiations have
been suspended since NATO's accidental bombing of the Chinese
embassy in Belgrade May 7, and the offer might be off the table. "I'm not
sure China will ever knowingly open the gates to this lush land to
foreigners," Clark says.
But many analysts say the government's recent moves toward opening the
market show that Wu is losing a power struggle with the reform-minded
Zhu. Wu's departure has been rumored for months. But he's still there.
Hope for competition
Optimists predict that splitting China Telecom into the four units -
fixed-line phone service, mobile telecommunications, paging services and
satellite telecommunications - eventually will force them into new
businesses that will compete with each other. But there's no guarantee.
"It's like chopping a sausage into four pieces: It's still a sausage," Clark
says.
Meanwhile, China's consumers are getting impatient waiting for
full-fledged competition to arrive. "It's much slower than I imagined,"
marketing executive Wu Haiyang says. "There has been too much sound
of thunder. But we have not see any raindrops."
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