Essay: revolutions in telecommunication policies

2. Literature Review

There is intensive literature about revolutions in telecommunication policies (Gao & Lyytinen, 2000; Loo, 2004; Zhang 2002; Harwit, 1998). And there is some literature on the performance of major players before the significant reform in 2008 (Yu L. et al, 2004; Yu and Tan, 2005; Fu & Lv, 2005 ). Some particular papers compare the productivity of Chinese telecommunication industry with other developing countries (Liao and Gonz�lez,2009; Gao and Rafiq, 2009). There are also literature analysing Chinese telecommunication industry in association with China’s entering WTO and foreign investment (Chang J. et al, 2005; Xu, 2002; Zhang, 2001). But there is a gap since the most recent reform in 2008, during which six major players were merged into three, and 3G licenses were issued to China Telecom, China Mobile and China Unicom. The industry has entered the era of full service competition, which means all three companies can compete in FTN, mobile services and internet data communication. This situation has never happened before and there are few researches focusing on it. The future trend in 3G era is still not clear. In order to better understand the current competition situation, it is essential to review the history of Chinese telecommunication development.

3.1 History of Chinese Telecommunication Development

3.1.1 Stage 1 Pre-1994

In 1949, the Minister of Post & Telecommunication (MPT) was established. Until 1994, MPT enjoyed exclusive monopoly in offering public telecommunications services. China Telecom was the only operator, which was under direct control of MPT. Therefore the market was pure monopoly and there was no competition. Consumers had to pay high installation fees and wait for a long time to have a fix-line telephone due to poor service and low efficiency. The price of mobile phones, which were called “Big Brother” at that time, was extremly high and so was the communication charge. There were less than 700,000 mobile phone subscribers in China (Yu & Tan, 2005). And the phone penetration was only 3.2% (MPT, 1997).

3.1.2 Stage 2 1994-1999

By the 1990s, the central government came to realize that the liberalization of the telecommunications industry was inevitable (Holman, 1994). In 1994, the government broke the monopoly of the MPT by establishing new state-owned enterprises. China United Telecommunications (China Unicom) was set up to foster domestic competition. It is a joint venture of the Ministry of Electronics and Information (MEI), Ministry of Railways (MOR) and Ministry of Electrical Power (MEP). However there was hardly real competition because China Telecom still controlled the only public Fixed Telephone Network (FTN) in China and all funding and personnel of China Telecom came directly from the MPT. China Unicom was at a serious competitive disadvantage, and was mainly restricted to the mobile sector (Yan & Pitt, 1999). It is not surprising that the market share of China Unicom in the mobile phone service was less than 2% by the end of 1997 (China Daily 15 January 1999). And the revenue of China Unicom is less than 1% of China Telecom’s. In 1996, Jitong Network Communications Company (Jitong), originally set up to oversee the Golden Bridge Project, became the third telecommunications operator in China.

At the end of 20th centry, Chinse governement became increasingly eager to enter the World Trade Organization. However one of the main problems is the reluctance to open its rapid growing and lucrative sectors to foreign investment, including banking, insurance and telecommunication. China would not be able to join WTO if it keeps its door of telecommunicatin closed (Johnson et al, 1999). The first significant reform happened in March 1998, the MPT and the MEI were merged to form the Ministry of Information Industry (MII), which oversees the telecommunications, multimedia, broadcasting, satellites and the Internet of China. As opposed to MPT’s negative attitude towards China Unicom, MII did huge contribution to the rapid growth of China Unicom. MII derived Guoxin Paging from China Telecom, which was a very profitable business with total assets of RMB 13 billion (GBP 1.3 billion), to merge with China Unicom. This restructure laid the ground for the public listing of China Unicom in the following year. China Netcom was established as the fourth commercial operator in this restructuring.

The monopoly position of China Telecom was boken and the competitive market first emerged. It is the beginning of rapid expension of mobile telecommunication market.

3.1.3 Stage 3 1999-2002

In order to encourage domestic competition and enhance efficiency, another major restructuring was carried out in mid-1999. The mobile business and satellite communication were taken away from China Telecom, forming the China Mobile Communications Group (China Mobile) and China Satellite Communications Group (China Satellite) respectively. China Railway Communications Corporation (China Railcom) was also set up to be China’s seventh major telecommunications carrier.

China Mobile, which concerntrates on the mobile communication market, benefit from the leading position of China Telecom and fast growing demand. Its subscribers grows remarkably from RMB 38 million to 138 million from 1999 to 2002. China telecom’s market power was significantly weakened by losing its mobile business. At the same time ,China Unicom was granted an exclusie license of CDMA (Coding Division Multiple Access), making it the only operator which runs both GSM and CDMA network in the world. However this change brough opportutnities as well as challenges, because it takes more capital and workforce to run two network, and it faced the dangerous of cannibalization. Although China Unicom tried to differenciate CDMA with GSM by its higher-end service, the CDMA network was not fully developed under the shadow of GSM.

To further break the monopoly of China Telecom, which still had about 80% of the FTN market, the MII announced another round of organizational restructuring in 2002. China Telecom was reorganized geographically. It retained only 70% of its backbone network in South China. The other 30% of the network was handed over to the new China Netcom Group, formed by the merging of China Netcom and Jitong. This reform resolves the criticism that the liberalization of the telecommunications sector never touched on the FTNs (Zhang, 2001). By the end of 2002, there are 6 major operators: China Telecom (FTN and internet communication), China Unicom (FTN, Mobile and internet communication), China Mobile (mobile service), China Netcom (internet communication), China Railcom (FTN and internet communication), and China Satellite (satellite communication). This structure ensures that there are at least two competitors in each major field of telecommunication service. The situation of competition is initially established.

Figure 2 China Telecommunication market structure at the end of 2002

3.1.4 Stage 4 2008-present

On May 23rd, 2008, MII was renamed Ministry of Industry and Information Technology (MIIT). In order to make full use of the telecommunication resource and encourage healthy competition in telecommunication markets, six operators were merged into three. China Mobile and China Railcom were merged into the new China Mobile. The GSM-net of China Unicom and China Netcom were merged into the new China Unicom. The CDMA-net of China Unicom, China Satellite and China Telecom were merged into the new China Telecom. They are allowed to offer the full range of FTN, mobile, Internet communication and other basic telecommunications services and are given three 3G (the third generation technologies) licenses, which were predicted to increase the competition within telecommunication industry substantially. This policy was drastically different from the previous policy under which most operators could offer either mobile or fixed-line services. Thus, China Telecom, China Mobile and China Unicom become the three major operators in Chinese telecommunication market.

3.2 Chinese characteristics compared with other countries

Liao C. and Gonzalez D.B. (2009) analyzed the operational efficiency of mobile operators in Brazil, Russia, India and China by using three indicators: revenue per employee, revenue per total asset and revenue per capital expenditure. Common market characteristics among these four markets are low penetration rates for mobile, Internet, and fixed-line services, no 3G licenses were issued in any of these four markets until 2007, and Brazil, Russia and India only privatized their telecommunications sectors in the 1990s.

From the figure above, we can see that China Mobile and China Unicom rank before the operators in Russia and India, but lag behind those in Brazil, especially in the indicator of revenue per employee, which means the productivity per employee remains to be improved. But China Unicom has the highest revenue per capital expenditure among the 10 operators, twice higher than its domestic competitor China Mobile. However these figures are based on revenue rather than profit or operating profit margins, therefore the costs efficiency are neglected.

Loo(2004) offers a framework to analyse the telecommunication industry in China. He argues that the telecommunications reforms in China are best understood as the result of a balance of state concerns, foreign influence and market forces. These three forces were present throughout the study period but their relative strengths have clearly changed over time. In the future state concerns may become less and less important, and foreign pressure and market demand may exert greater influence the pattern of Chinese telecommunication industry.

Different from other developing countries, China did not resort to liberalization or privatization to solve its financing problems in the period of rapid network expansion (Zhang, 2002). The Chinese government insists that its intervention in setting standards for operators accelerates the realization of network externalities and reduces technological or economic uncertainty (Yu & Tan, 2005). China managed to finance telecommunication infrastructure by granting preferntial policies, such as the “three 90%s”, charging the end user a high “installation fee” and allowing surcharges to guarantee profit. The three 90%s include: 90% of profit can be retained by the service provider (as opposed to 55% tax rate in other industries), 90% foreign exchange earning is tax-free and 90% of investment from central government can considered as un-repayable loans (Wu & Zhang, 1992). And customers who have paid the installation fee don’t have the right to enjoy dividends. Foreign investment is strictly controlled and investors could only contribute money and technology, but have little influence in decision making.

3.3 Influence from WTO and Anti-Monopoly Law

China’s urgency of entering the World Trade Organisation is an essential force driving the revolution in telecommunication industry. Before the membership was formally achieved in Dec. 2001, Chinese government introduces five more companies to break the monopoly of China Telecom, and allows foreign investment with a limit percentage. After its WTO accession, China made the commitment of allowing foreign investment of 49% with no geographic restrictions in both mobile and fixed-line telecommunication services within six years of WTO accession (Paul et al, 2001). Zhang (2001) states that WTO norms have impact on China’s telecommunications regulation reform even before China’s joining the WTO. However to what extent can the door of telecommunications be open to international market will largely depend on the regulations of the government. Xu (2002) argues that privatisation should be on the top agenda of the government. Foreign direct investment is one of the most important resource to sustain the impressive growth. However the officials from telecom industry insist that openning door to foreign investors is like inviting wolves into the backyard, the immatured industy may be taken over by those powerful and aggressive invaders. And national security is also a top concern of the government. Therefore how to make the most of foreign capital and technology and remain its control over telecommunications operation is a complicated balance for the contral government. The government is taking steps to allow foreign companies to play a greater role in fostering a more efficient communication network, which can be seen in China Unicom’s joint venture with SK Telecom, the largest mobile carrier in South Korea, and the Spanish telecommunications operator Telef�nica. Li (2009) discusses the effect of PRC’s new anti-monopoly law on telecommunications industry. She draws the conclusion that the recent reform in 2008 is against the free market competition theories and the Chinese WTO commitment. The anti-monopoly law is unlikely to foster competition in China’s telecom industry. A competition law is needed to facilitate the efficiency of the industry.

The most recent reform in 2008 merged the six operators into three. A competitive situation of triopoly emerges. How are the three big state-owned campanies performing after the reform? What are their different strategies towards to 3G era? Should the market be more open? Those are the questions unresolved by literature, therefore are the main focus of this research. In order to answer these questions, financial data, market performance statistics and customer satisfation data are collected and analysed.