POST-WTO REGULATION OF
The accession of China to the World Trade Organization (WTO) has created threats and opportunities for business enterprises, both Chinese and non-Chinese. Non-Chinese telecommunications firms have long viewed China's membership in the WTO as an opportunity to wrest open the world's largest and fastest growing telecommunications market1 [see Exhibit 1]. In this industry note, we review China's commitments under its WTO accession accord and discuss how China's non-compliance is barring foreign entry into the market. We also analyse the risk of having a central, state-dominated telecoms regulator meddle in the affairs of supposedly independent players, such as China Unicom.
The 2004 Chinese mobile communication service sector generated 202.6 billion RMB in revenues, an annual increase of 13%, and accounted for 42.6% of aggregate telecoms income (for further details on the mobile market, see Appendix A); fixed local phone call service generated RMB149.74 billion in 2004, up 9.6% from the previous year, accounting for 31.5% of revenues, while the long distance phone call service generated RMB91.4 billion, up 14.7% from the previous year and accounting for 19.2%2. Mobile subscriber penetration is only at 23%, while fixed-line penetration is 17%3. Most revenue is shared between four major state-owned companies: China Mobile Communications Corp. and China United Telecommunications Corp. are mobile network operators, while China Telecommunications Corp. and China Netcom Corp. provide fixed line services;4 all four providers have listed units abroad.5
CHINA'S TELECOMMUNICATIONS SECTOR:
BOOM OR BUST?
A comparative glance at other markets underscores why foreign players are so keen on getting into the Chinese telecoms market. The IDC forecasts that worldwide wireless ¡§will continue to grow¡Kdriven by the human desire to communicate?sup class="case_ref">6 and estimates that there are some 1.7 billion active wireless subscribers in the world. However, IDC ominously adds that some countries will reach almost full penetration levels by 2010. Merrill Lynch estimates a current US mobile penetration rate of 65% for 2005.7 Japan already has a mobile penetration of 87% while Hong Kong reaches 95%8. Fixed-line growth prospects follow a similar trend. The US recently passed 90% fixed-line penetration. Its penetration rate of a second fixed line at 26% exceeds China's first line penetration rate by 35%. US figures are similar to those of other mature markets like the UK, Germany and France.9
While none of the larger fixed line telephony operators such as NTT, SBC, Deutsche Telecom, Bell Atlantic, France Telecom and BT have been able to substantially expand their subscriber base over the past decade, China Telecom has tripled its base since 1997 when it had 70.3 million subscribers. The carrier dominates in worldwide subscriber rankings since it overtook NTT in 1996?7.10 According to Bain, a strategy consulting firm, size and market share is a prelude to significant profitability.
Although overall market growth has been tapering off in the past several years, growth from one year to another is still exceptionally strong. Since China's larger cities have already been enjoying various telecom services, carriers have had to scramble for customers in small and medium cities in order to maintain growth rates.11 Most forecasts indicate that while the growth rate will decline into the single digit range, it will nonetheless stay above the growth average for mature markets for perhaps the next 10?5 years [see Appendix B for further details on the fixed-line market].