BEIJING-China’s two telecom operators-big brother China Telecom and little brother China Unicom-soon will face the competitive onslaught of foreign heavyweights such as AT&T, Deutsche Telekom and WorldCom.
After China joins the World Trade Organization (WTO), expected some time during the first half of the year, the country will start opening up its telecom services sector. Until now, foreign telecom suppliers were allowed to set up manufacturing ventures with Chinese partners or even fully owned Chinese subsidiaries, but the operating sector remained strictly off limits.
Immediately after China’s accession to the WTO, foreign operators will be allowed to own a 49-percent interest in network joint ventures and increase their interest to 50 percent after two years.
The Chinese Ministry of Information Industry (MII), headed by Minister Wu Jichuan, has vigorously tried to block foreign participation in network operations. However, on 15 November, 1999, President Jiang Zemin and Premier Zhu Rongji overruled the ministry when they gave the go-ahead to sign the Sino-U.S. agreement with U.S. Trade Representative Charlene Barshefsky. After years of waiting in the wings, foreign operators finally are allowed to march through the open door.
Some foreign operators already have tried a back-door approach by circumventing the ban through China-China-foreign (CCF) projects with China Unicom, whereby foreign telecom operators invested in Sino-foreign joint ventures, which in turn injected funds into a Unicom project. When the MII realized what was happening, it closed the loophole and tried to force China Unicom to wind down all CCF-projects.
Since last October, China Unicom has been bogged down in negotiations with its foreign partners, which are demanding higher compensation payments to dissolve the ventures. Those partners may now be tempted to settle for less in hopes of re-investing in the sector once China joins the WTO.
CDMA rollout
Meanwhile, China Unicom will roll out its CDMA network. Designated by MII as the sole company authorized to be in the CDMA business, Unicom received bids from 12 suppliers. Five or six will be chosen in January.
China Unicom launched commercial service of part of the network, with equipment from Samsung, 1 January. The 2-million-line network is expected to be operational by mid-2000 and will be expanded to a capacity of 10 million subscribers by year-end, covering 160 cities across the country. The total value of the contracts could exceed US$16 billion, but Unicom is nearly broke and an initial public offering (IPO) has been delayed twice pending a final resolution of the CCF contracts. Unicom had planned to raise US$1.3 billion in capital on the Hong Kong stock market and on the U.S. Nasdaq.
In the meantime, the company must rely on credit, and foreign suppliers will be happy to comply.
Foreign CDMA suppliers with production joint ventures in China will have preference, giving Nortel, Motorola and Lucent a competitive edge. Two Chinese companies, Datang Telecom and Zhongxing Telecom, also plan to start production of CDMA equipment.
GSM network joint ventures
Foreign operators in the coming months will scramble to set up the first joint ventures with both China Telecom and Unicom in an attempt to get the upper hand on the competition. Unfortunately, both Chinese operators are ill-prepared. Unicom is short of cash pending its IPO, while China Telecom no doubt will set up joint ventures with several foreign operators, leading to internal competition that could tear the company apart.
Another casualty of China’s WTO entry will be domestic mobile handset producers. The MII had prepared an ambitious program to support the domestic industry to allow it to grab back part of the handset market, which is almost completely monopolized by foreign suppliers. Blatantly subsidizing the local industry no longer will be permitted under WTO rules.
Chinese operators and telecom suppliers face a revolutionary shake-up.
