BEIJING-China agreed in its negotiations with the United States for entry to the World Trade Organization (WTO) that foreign operators would be allowed a maximum 49-percent stake in mobile telephone joint ventures by 2005. The European Union is aiming for a foreign majority of 51 percent, but China is unlikely to give in.
On 15 November last year, U.S. Trade Representative Charlene Barshefsky and China’s Minister of Foreign Trade and Economic Cooperation Shi Guangsheng signed a landmark agreement. China agreed to a string of tariff reductions on U.S. export products, and the United States agreed to China’s membership in the WTO. The text of the agreement has been kept under wraps until the Office of the United States Trade Representative publicly released it on 14 March.
The agreement, which relates to analog and digital cellular services, stipulates that “starting no later than January 1, 2001, foreign service suppliers will be permitted to establish joint-venture enterprises without quantitative restrictions in the cities of Shanghai, Guangzhou and Beijing. Foreign investment in the joint ventures shall be no more than 25 percent.”
In effect, this would mean that foreign participation would be exactly 25 percent, as this is the minimum allowed under relevant Chinese laws.
The agreement between China and the United States continues, “Starting no later than January 1, 2003, the areas will be expanded to include Chengdu, Chongqing, Dalian, Fuzhou, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Shenzhen, Xiamen, Xian, Taiyuan and Wuhan, and foreign investment shall be no more than 33 percent. Starting no later than January 1, 2005, there will be no geographic restriction and foreign investment shall be no more than 49 percent.”
The same restrictions apply to domestic and international voice services, but phase-in is delayed by a few years. For value-added services, such as electronic mail and voice mail, foreign investment may be up to 50 percent of the capital of the joint venture.
To reap the benefits of this agreement, the U.S. Congress will have to grant China permanent normal trade relations (PNTR). A vote in the House is expected by the end of May, followed by the Senate in early June. Passage is not assured, as the Democrats in the House are deeply divided. If Congress votes not to grant China PNTR, it will not stop China from becoming a member of the WTO. The country would likely invoke its right of “nonapplication” of WTO benefits to the United States under Article XIII of the WTO, leaving the Europeans and Japanese to reap the benefits of China’s market opening measures.
The EU position
Before being allowed into the WTO, China as of mid-April still had to sign bilateral agreements with the European Union (EU), Costa Rica, Ecuador, Guatemala, Latvia, Mexico and Switzerland. Three negotiation rounds with the European Union this year failed to establish an agreement. Although the EU, as well as Chinese officials, refuse to detail the areas of disagreement, it is known that the EU wants at least a 51-percent foreign ownership majority of mobile phone operators.
The EU is unlikely to get what it wants. The Chinese will likely give in on tariff reductions on certain products the EU deems important, such as Scotch whiskey or French wines. The Chinese government, however, is unwilling to give to the Europeans what it refused to give to the Americans concerning foreign participation in mobile phone operators.
The realities
Does a foreign ownership percentage of 49 percent or 51 percent really make a difference? Probably not. The only way to make a joint venture work is to have a good understanding between the Chinese and foreign partners. Having a 51-percent majority may allow a foreign partner to impose its decisions on the board of directors, but if the Chinese partner does not like them, it has ample ways to sabotage them.
The only two possible mobile partners for foreign companies are China Telecom and China Unicom. The former holds around 88 percent of the mobile phone market; the latter 12 percent. Staffed by increasingly business-savvy bureaucrats, the carriers will not lend themselves to dictation by foreign companies. They will, however, be susceptible to a strategy of preserving or expanding market share and obtaining maximum profitability, the same ultimate objectives of foreign operators.
Through the acquisition of shares in China Telecom’s listed vehicle, China Telecom (Hong Kong), which operates mobile phone networks in six Chinese provinces, a very limited foreign participation is already possible.
