Chinese Telecom Industry

December 11, 2001 was a long awaited day for both local businesses, as well as for foreign investors. It was the day that the Chinese State Council promulgated the Regulations for the Administration of Foreign Invested Telecommunications Enterprises (FITE) which were scheduled to come into effect on the 1st of January 2002. Since it’s accession to the WTO, foreign telecommunications have eyed what is arguably the largest telecommunication’s industry in the world, and growing at a rate of over 20 per cent per annum.

Having said that, Bureaucratic influences have stunted what were once crucial and foreseeable changes in regulation, the effect being cushioned only by government investment into the industry. “We encourage more investment into the telecommunications sector as we are moving into a critical stage since the industry is deepening its reform and telecom equipment is upgrading”, says Xi Guohua of the Ministry of Information Industry (MII).

However, although this quote quite accurately reflects the attitude of the Chinese Government with regard to foreign investment, stringent regulation is a hurdle which is still making it difficult for foreign firms to penetrate the market. As of October 2004, 10 out of the meagre 12 applications made by foreign firms to provide telecom-related services have been pending approval for over 12 months .

Along with these characteristic delays in Government approval (often blamed on red tape-ism) come the problems of stringent regulation. China, according to Amnesty , has one of the top 3 strictest policies with regard to content control in the world. Given that alongside mobiles and fixed line telephones, broadband internet access contributes to the largest portion of revenue for Chinese Telecom providers, content control (especially with regard to violence, pornography and gambling) clearly has greater than negligible effects.

According to the World Bank, to start businesses in China (even for domestic companies) requires the completion of 50% more procedures than anywhere else in Asia, and double the number of procedures for the average of the OECD . And while the Regulations for the FITE’s were a large step in terms of Chinese exposure to foreign investment, investors will face compliance problems to meet the demands of the regulations which require that the principal foreign investor: “have a basic telecommunications operating license in the country where it is registered, ossess the requisite capital and professional personnel for the activities to be undertaken; and have a sound business track record and operating experience in basic services telecom activites. ” Needless to say, the above regulations coupled with burdening registered capital requirements of 2 billion RMB (US$120 mil. ) make it especially difficult for less established foreign firms looking to capitalise on the growing Chinese market, which can be seen by the snail-like pace of foreign investments.

All the above regulations have only led to 12 applications to the MII in over 5 years, out of which, as previously mentioned, only 2 have been approved. However, despite the above rules and regulations, Chinese accession into the World Trade Organisation brings a world of opportunity for well established telecom service providers across the globe. China’s has made a firm commitment to liberalise its telecommunications market, hereby making it accessible to foreign investors.

For example since 1999, China has reduced tariffs on IT products from 13. 5% to 0%. It also phased out any geographic restrictions for mobile services of all sorts. Most importantly however, China committed to “allow 49% foreign investment in all services and will allow 50% foreign ownership for value-added paging services in two years; for mobile services, 49% in five years; and for international and domestic services, 49% in six years” (i. . 2005) . In turn, several foreign companies leapt at this opportunity, moulding joint ventures with Chinese partners. Setting the trend was US based telecommunications giant AT&T, which poured a 25% (or 25 million dollar) stake into the development of Chinese mobile markets as soon as the markets were satisfactorily liberalised , followed by Korea’s SK Telecom pursuing a 49-51% mobile communications venture with China Unicom.

China’s telecommunications market, although unequivocally the largest in the world today, still suffers from bureaucratic pressures as well as relatively rigid compliance standards which constrain it’s potential advancements. However, as the markets liberalise further, foreign telecommunications services providers make no mistake about the potentials of the market, and Chinese are eager to absorb the managerial expertise which have prevented them from penetrating the domestic market as they should have.

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