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nChina Telecommunication Industry Case Study

nIntroduction

nThe Chinese government implemented regulatory control in its telecommunication industry before implementing reforms. Telecommunication industry in the country was characterized by higher prices, lack of competition and alternative services. In China, prior to 1970, telecommunication industry in the country was primarily utilized for administrative and semi-military purposes. Subsequently, the telecommunication industry in China featured management inefficiency, low investment capital and poor technology (Park, JungKun, Yang, and Xinran, 5). However, from 1980s, the government of China realized the importance of developing the telecommunication industry aiming to boost economic growth in the future and to promote the living standards of its people. In this respect, the Chinese government introduced reforms aiming to facilitate change in the telecommunication industry (Kshetri, Nir, and Maggie, 1). The privatization and deregulation of the Chinese telecom market has increased consumer welfare. This has been accomplished through decreased prices, increased service, and an increased variety of service plans.

nBackground

nIn the 1990s, the telecommunication industry in China was characterized by the state-run monopoly system. Nonetheless, in 1998, the Ministry of Post and Telecommunication in China introduced regulatory reforms that would allow for the privatization of the telecommunication market (Pearson, 2). During this monopoly era, the MPT was responsible for operations, regulations and planning of the telecommunication industry. Due to the MPT monopoly, the industry was characterized with the provision of low quality but very expensive services, including transmission of data, mobile services and fixed lines (Yu, Liangchun, Sanford and Qing, 2).

nAn attempt to improve the telecommunication industry forced other government ministries related to the MPT, including the Ministry of Railways, the Ministry of Electronic Power (MEP) and the Ministry of Electronic Industry (MEI) urged the State Council to establish or allow other rival companies to provide services in this sector (Liangchun, Berg, and Guo, p. 2). The government established the China Unicom under direct control of the Ministry of Post and Telecommunication. However, the State Council realized the need for domestic competition in 1992 (Pearson, 6).

nIn 1994, the government of China formed Jitong Communication Corporation as another company that offered Internet services. In this regard, the establishment of China Unicom and Jitong show the commitment of the Chinese government to increase competition in the telecommunication industry (Zhang, 10). Furthermore, the government of China has initiated many structural reforms aiming to improve competition in the telecommunication industry (Park, JungKun, Yang, and Xinran, 7). In addition, after the introduction of Jitong Communication Corporation and China Unicom, the exclusive state-monopoly in telecommunication industry in China was changed (Yonggui, and Lo, 14).

nMonopoly

nThe government authority was designed under three levels of administrative and geographical structure aiming to regulate local telecommunication industry (Yonggui, and Lo, 17). Additionally, the MPT had set its units at the local level known as Post and Telecommunications Administrations (PTAs). The PTAs were formed at municipal and provincial levels. Similarly, Post and Telecommunication Bureaus (PTBS) were created at Prefectural levels, where municipal or provisional PTAs administered them (Yu, Liangchun, Sanford and Qing, 3).

nTherefore, local governments and the central MPT simultaneously administered municipal or provisional PTAs through dual leadership system. Local governments were able to make direct investments and development plans because the MPT had decentralized financial responsibility and decision-making abilities (Kshetri, Nir, and Maggie, 5). Unfortunately, this scheme was aimed at safeguarding the hierarchical structure in China rather than transforming the telecommunication industry to be efficient and improvement of quality. The majority of revenue collected by the MPT from the telecommunication services was then shared among the PTAs but the MPT retained a huge proportion of it. Additionally, monopolized authority between the PTAs and the MPT characterized the revenue distribution in the telecommunication industry (Pearson, 8).

nReforms in the Telecommunication Sector

nIn 1998, the Chinese government established the Ministry of Information Industry, which was a regulatory agency in the country. In addition, the government was committed to restructure the telecommunication markets (Wang, Hing-Po Lo, and Yongheng, 1). The Chinese government introduced reforms in this sector because of external demands. For instance, after the country became a member of the World Trade Organization it allowed foreign investors in telecommunication industry. Furthermore, in order to facilitate domestic competition, the government introduced administrative restructuring Kshetri, Nir and Maggie, 4). Consequently, some industrial ministries were integrated or abolished aiming to reorganize bureaucratic structure that produced. In this respect, the government designed a new regulatory agency, the Ministry of Information Industry (MII) (Pearson, 3).

nThe Chinese government did not allow foreign investors to provide telecommunication services in the country. However, after it became a member of the WTO, it had to open its telecommunication markets to other worldwide players (Mu and Lee, 3). Similarly, the Chinese government ratified the Basic Telecommunication Agreement (BTA) (Yan, 4). Under the provisions of the BTA, the government of China had to immediately open the telecommunication services to other international investment companies (Pearson, 5). Furthermore, it had to stipulate the highest level of ownership of international firms within a period of six years (Wang, Hing-Po Lo, and Yongheng, 2).

nFurthermore, the Basic Telecommunication Agreement stipulated that following foreign investors entry in a country, they could make investments of about 50 percent of value-added services. However, in a period of five to six years, foreign firms could take nearly 49 percent of ownership in the fixed-line and mobile services (Wang, Hing-Po Lo, and Yongheng, 14). According to the terms of the BTA, the Chinese government was required to implement fair and transparent criteria in terms of licensing services and the establishment of an autonomous body that regulated the telecommunication industry (Yan, 5).

nIn this respect, the government of China experienced huge challenges in its implementation of global standards in the telecommunication sector. Additionally, after becoming a member of the World Trade Organization, many foreign telecommunications giants were willing to invest in the country (Zhang, 11).

nComparison of the Telecommunication reforms

nThe former regime in the telecommunication industry in China was led through the Ministry of Post and telecommunication (MPT). However, after the introduction of reforms, the new regulatory included the State-Owned Asset Supervision and Administration Commission (SASAC), National Development and Reform Commission (NDRC) and MII (Peilei, 12). Relative to the former regimes that involved a single actor, the new regulatory regime involves many state actors (Pearson, 10). Therefore, the level of transparency was likely to be high. On the other hand, these regulatory agencies such as the MII are significantly constrained (Wang, Hing-Po Lo, and Yongheng, 14). The Chinese government has also introduced a well-designed state-led market structure. There is also a robust state ownership.

nThe state commitment to initiate regulatory reforms can be demonstrated by establishment of a regulatory institution – the MII. The main responsibility of this institution was to monitor and facilitate fair competition among service carriers in telecommunication sector (Kshetri, Nir, and Maggie, 10). Although, the regulator is determined to provide fair competition, it has experienced huge challenges due to poor coordination in the state organizations and internal structure of governance (Liangchun, Berg, and Guo, p. 17). Most notably, although the MII is mandated to provide fair competition in China, it collaborates with two state institutions to make decisions, which include the SASAC and the NDRC (Wang, Hing-Po Lo, and Yongheng, 13).

nCompetition

nReforms in telecommunication sector in China replaced the Ministry of Post and Telecommunication with the Ministry of Information and Industry. The MII changed the market structure so that monopoly in the telecommunication sectors could no longer exist (Pearson, 9). Prior to introduction of reforms, China Telecom was the only firm that provided these services, there was no competition (Kshetri, Nir, and Maggie, 8).

nHowever, after the establishment of the new law, the Chinese government integrated the Ministry of Electronic Industry (MEI) and the MPT forming the Ministry of Information Industry (MII), which promotes fair competition in the Chinese market of telecommunication (Mu and Lee, 49). Most importantly, the Ministry of information and Industry has a supervisory role to ensure and encourage fair competition in the market and provide guidance in drafting the majority of rules and policies such as market competition and service fees (Yan, 5). China Telecom enjoyed a monopoly in the market, but after the entry of the international players, the market competition in this sector changed. Therefore, the government had to increase its efforts to restructure the industry in order to foster competition among the key players (Kshetri, Nir, and Maggie, 9). Competition has led to establishment of competitive prices and provision of quality services among the key players in the country.

nChina Mobile LTD

nChina Mobile was formerly known as China Telecom. China Mobile is a firm that provides cellular phone services to more than six provinces in China. Initially its main investors were China Telecommunication Corp under the Ministry of Information Industry. It was established in 1998 after the China Telecom was split into four companies. Its shares are listed in Hong Kong and on the New York Stock Exchange (Pearson, 2).

nPresently, it enjoys about 65 percent of the total subscribers in China. In addition, China Mobile is only second to Vodafone with regard to subscriber base in the world. In the People’s Republic of China, it owns many communication companies (Mu and Lee, 12). By the year 2000, China Mobile had more than 75 million subscribers and recorded net profit margins of $ 2.17 billion. By 2000, it was the only telecommunication company in China to use global system for mobile communication (GSM) technology. The firm was able to create competitive prices for the firm, which attracted many subscribers (Yonggui, and Lo, 15).

nHowever, in order to reduce dominance in the market, the Ministry of Information Industry allocated the mobile phone licenses to other firms. China Mobile provides mobile telecommunication services in Hainan, Henan, Fujian, Jiangsu, Zhejiang and Guangdong provinces. It also provides wireless Internet services and wireless data. Research by Kshetri, Nir, and Maggie indicates that in 2001, it was the largest firm in the world in terms of global system for mobile communication (GSM) technology, with over 90 SMS Centers. The firm also had plans to provide GPRS systems. The firm has also initiated revenue-sharing strategy known as Monternet (Kshetri, Nir, and Maggie, 7). The strategy is a regulatory initiative where the firm provides value-added data services. In this regard, it has entered into partnership with other players aiming to establish a variety of services for cellular subscribers (Yan, 6).

nChina Unicom LTD

nThe Chinese Ministry of Railways, the Ministry of Electric Power and Ministry of Electronics (MEI) in 1994 formed the China Unicom in order to avoid the monopoly of China Telecom. China United Telecommunication Corporation (Unicom Group) owns the firm (Bhattasali, 3). It provides various services such as in Internet, data, satellite, paging and long distance businesses. It also provides wireless data services through wireless application protocol (WAP) technologies to cellular and paging subscribers (Wang, Hing-Po Lo, and Yongheng, 5).

nFurthermore, through the public switched telephone network (PSTN), it offers international and domestic long-distance services to its customers. Similarly, via Packet-switched network, it provides Internet protocol (IP) services (Mu and Lee, 12). China Unicom also provides 3G (third generation) services to its mobile communication.

nIn terms of data services, the firm has expanded its business to offer services such as virtual private network, (VPN) services, and asynchronous transfer mode (ATM). The firm uses international broadband transmission services such as synchronous digital hierarchy (SDH) (Wang, Hing-Po Lo, and Yongheng, 3). Due to adoption of advanced technology and efficient business strategy, the firm recorded $ 2862 million in its income. In addition, the firm realized net income of $390 million, which represented an increase of 285 percent. In 2002, China Unicom was the only company in China that provided complete telecommunication services. In 2003, it had more than 40 000 employees and occupied approximately a quarter of the entire market shares (Kshetri, Nir, and Maggie, 10). Moreover, the company is providing its services at competitive prices. Furthermore, it has started to upgrade and extend its services and mobile networks in order to improve quality in China.

nChina Mobile Communication Development

nAfter the introduction of reforms, the Chinese market in mobile communication has recorded significant improvement. There are two main mobile operators, which include China Unicom and China Mobile (Yonggui, and Lo, 18). Furthermore, China has recorded a significant number of subscribers, which by 2006, there were more than 461 million.Research has indicated than by March 2007, the number of mobile phones subscribers in China was more than 480 million (Wang, Hing-Po Lo, and Yongheng, 7).

nResearch by Pearson investigated the local communication length of mobile phones and fixed telephone for a period between January and March 2007. The study noted that there was 36 percent increase in market share from the use of mobile telephone communication as compared to fixed phone communication that decreased by 6.1 percent during the same period (Pearson, 10). Due to this increase, the Chinese government recorded 40 percent of its business revenues (Peilei, 13).

nMarket Structure in China

nIn 1999, the government created China Mobile from China Telecom. Since that period, the government has allowed only two operators, i.e. China Unicom and China Mobile in the mobile communication market. China Mobile recorded huge business revenue as compared to China Unicom (Pearson, 11). For instance, China Mobile recorded three consecutive increases in 2003, 2004 and 2005, which were 171.9 billion Yuan, 203.99 billion Yuan and 243.041 billion Yuan respectively. However, the China Unicom recorded 66.7 billion, 70.74 billion and 72.89 billion Yuan during the same period. Following the development of the CDMA Data service in 2001 by China Unicom, its business income has realized increase in profit margins. However, the business income between the China Mobile and China Unicom mobile operators is in the ratio of 3:1 (Kshetri, Nir, and Maggie, 9). Moreover, the government revenues increased. For instance, in 1985, the government revenue was 2 billion Yuan as compared to 11 billion Yuan, 120 billion Yuan and 210 billion Yuan in 1990, 1996 and 2004 respectively.

nMoreover, in terms of subscribers, China Mobile enjoys many more subscribers in the country as compared to China Unicom. For instance, in 2005, China Mobile had more than 246 million subscribers as compared to 127 million subscribers of China Unicom in the same year. In this respect, China Mobile has a dominant position in the country compared to China Unicom (Mu and Lee, 12). The CDMA network and the GSM network of China Mobile are not at the same level with China Mobile. Furthermore, China Mobile has an attractive client brand and enterprise brand relative to that of China Unicom.

nCompetitive Price in Mobile Communication Market

nSince 2001, China mobile communication industry has experienced stiff competition in terms of tariff package. Tariff package in telecommunication refers to open contract between a subscribers and service provider. A tariff package highlights the terms and conditions of offering the services to the public, including charges, fees and rates. The Ministry of Information Industry approved the tariff package for mobile phones in China in 2001 (Jiang, Malik, and Shou, 9). Therefore, the approval triggered competition between the two leading firms, i.e. China Unicom and China Mobile. Consequently, customers have experienced benefits from the tariff packages in China relative to before the introduction of this program (Pearson, 15). The two leading operators have introduced different strategies aiming to win many subscribers. For instance, there have been promotional activities and introduction of different types of preferential activities such as incentive programs, monthly receiving calls and quasi unilateral-charging. Reforms of mobile fees in this sector illustrate that the mobile phone tariff has been fully changed from regulations of the government to market pricing (Wang, Hing-Po Lo, and Yongheng, 12). In addition, the Ministry of Information Industry has allocated the rights of pricing to mobile communication operators in China.

nQuality of Products

nChina Mobile and China Unicom use similar telecommunication technology. However, some differences in terms of strategies of advertising, the communication quality and convenience of services create product differentiation between the two firms. Therefore, these factors create buyers’ subjective differences. For instance, China Mobile is the leading operator in the country. In this respect, its network coverage is approximately 99 percent of the major cities across the nation (Kshetri, Nir, and Maggie, 8). In addition, it has stable communication quality; hence it is able to attract customers who usually require roaming services.

nIn terms of advertising, China Mobile promotes different products and brands such as Easy Own, M-zone and GoTone that are designed to meet the needs of different customers. On the other hand, China Unicom promotes faster growth of each business through the strategy known as Brand Integrated Resource (BIR) (Pearson, 13).

nThe operators are willing to accomplish a short-term growth of market share via pricing strategy and advertising (Pearson, 14). In this respect, the firm intends to attract new customers by offering services and products at lower cost aiming to gain market shares. Through advertising, the firm aims to promote its customers’ loyalty in order to prevent other firms from stealing away their customers (Pearson, 15). Non-dominant firms use marketing strategy and promote their investments in advertising aiming to take advantage of the asymmetric price policy. On the other hand, dominant operators require enhancing their advertising investments in order to sell their products and offer services at higher prices as compared to their competitors (Wang, Hing-Po Lo, and Yongheng, 9). However, research has indicated that operators in the Chinese mobile communication market do not increase their investment in terms of research and development. Instead, they have increased their advertisement investments hence they have ignored research on customers’ needs (Peilei, 14).

nEntry barriers in China telecommunication Industry

nMany new operators who aim to enter the Chinese telecommunication industry experiences some challenges because the government decides who can operate in the usable spectrum of frequencies (Mu and Lee, 12). Furthermore, due to the huge fixed cost of communication technology development and research as well as basic network construction it is difficult for new companies to enter in the mobile communication market. Moreover, the economies of scale of this industry act a huge entry barrier. Most notably, research indicates that one of the main barriers of mobile communication market in China is the practices of the government that strictly control license system for mobile communication accessibility (Kshetri, Nir, and Maggie, 12). Therefore, foreign companies experience huge challenges to enter and establish competitive threats to well-established companies in China.

nOptional Services and Products

nPersonal Handy-Phone System forms one of the main substitutes of mobile communication in China. Personal Handy-Phone System refers to a mobile network system function in 1900 MHz in China. They have substituted the use of mobile phones in Chinese market. They also designed to cater for the needs of customers in the urban centers because of dense population. To some degree, the personal handy-phone system affects mobile phone volumes in the local telephone business. In 2007, the government recorded approximately 91 million personal handy-phone system (PHS) subscribers (Wang, Hing-Po Lo, and Yongheng, 11). The numbers accounts for nearly 24 percent of the sum of the subscribers of mobile phones. In the field of long distance telephone calls IP phone services are the main substitute of mobile phones. In 2002, the Ministry of Information Industry recorded the growth rate of 69.5 percent and 196 percent of IP phone services in International Calls and domestic long distance telephone calls respectively. Similarly, international calls and domestic long distance telephone call services experienced a growth rate of 18 percent and 41 percent, respectively (Jiang, Malik, and Shou, 11).

nForeign participation in Telecommunication industry in China

nPrior to ratification of World Trade Organization (WTO), the economic policy of Chinese government offered protection to domestic telecommunication companies. The government only approved foreign equipment vendors to invest in China. In addition, worldwide telecommunication carriers were restricted from entering the market. However, the government only allowed investments on technology transfer (Pearson, 14). Park, JungKun, Yang, and Xinran argue that or foreign investors wishing to enter the Chinese telecommunication market, they must find a partner in China whom they form a Joint Venture with (Park, JungKun, Yang, and Xinran, 23).

nGrowth and Development of Chinese Telecommunication Industry

nIn 2000, the telecommunication industry in China recorded an increase of approximately in terms of subscribers. For instance, the number of telephone lines increased to nearly 180 million lines (Yonggui, and Lo, 17). In terms of investments, telecommunication industry recorded 26 percent of the industrial investment in 2000 to arrive at 214 billion. In this respect, China was the second biggest telephone network across the world in 2000 (Pearson, 13). During the same period, the country had more than 1 million kilometers of fiber-optic cables. The customers in telephone industry were nearly 230 million, where the number of mobile phone users was about 85 million, while fixed telephone lines had 145 million customers (Jiang, Malik, and Shou, 11).

nResearch indicated that telecommunication industry in China contributed to 350 billion Yuan in 2000.China Unicom and China Mobile generated approximately 25 billion Yuan and 111.6 billion Yuan in that year (Jiang, Malik, and Shou, 9). The Internet services also recorded an increase of 6.1 million new subscribers. Furthermore, the mobile communication capacity increased by 49 million to 130 million. In terms of long-distance circuit, the industry recorded an increase of 1.4 million circuits, hence reaching 3.4 million (Jiang, Malik, and Shou, 14). The connection of Fiber optic cables in China has increased to more than 1.25 million kilometers.

nMany mobile manufacturers have established mobile handset manufacturing in China. In 2000, reports indicate that mobile phone handsets manufacturers recorded total sales of nearly 405 million units across the world (Liangchun, Berg, and Guo, p. 15). The telecommunication industry is one of the biggest in the world. Consequently, the Chinese government collects 46 percent of its total revenue from the telecommunication industry in the country (Peilei, 14). Additionally, China has the highest volume of shipment in the Pacific-Asian region.

nMobile Market in China

nBy 2001, China was second largest mobile telecommunication market in the world with approximately 100 million subscribers. In the previous year, China had overtaken Japan as the leading mobile phone market in the Pacific-Asia region. Since that period, China has been recording 86 percent of mobile subscription every year. As compared to fixed telephone, cell phone, business produces higher profits (Pearson, 13). For instance, reports in 2000 indicated that more than half of the incomes in telecommunication came from mobile phones exceeding the total incomes from paging and long-distance business and local fixed-line phones. In particular, in 2001, China Mobile controlled approximately three quarters of the total mobile users with approximately 76 million users. However, China Unicom enjoyed nearly one quarter of the mobile market with 25 million users (Yan, 9).

nResearch by Jiang, Malik, and Shou indicates that the telecommunication sector in China recorded a growth rate of approximately 20 percent for five consecutive years from 1997 to 2002 (Jiang, Malik, and Shou, 12). Due to high rates of telecommunication growth in China, the country’s economy was growing at the fastest rates across the world during that period. In both mobile and fixed-line operators, there were more than $ 25 billion investments in the country in terms of network infrastructure over the past decade. In this respect, Chinese investment in telecommunications exceeds that of all western European combines (Park, JungKun, Yang, and Xinran, 11). Since China is the most populous nation on earth, with an approximate population of 1.3 billion it has the biggest mobile and fixed-line network with regard to both the number of subscribers and network capacity.

nWhen the telecommunication industry in China was controlled by the state, there were only 10 percent of Chinese citizens who had access to telephones. However, after implementation of reforms, 70 percent of Chinese have access to fixed telephone (Jiang, Malik, and Shou, 12). In addition, China records about 1.25 million cellular subscriptions every week. A study by Yan projected that in three years’ time, China will have approximately 950 million mobile and fixed subscriptions, which is three times more than the total population in the US (Yan, 13).

nConclusion

nThe privatization and deregulation of the Chinese telecom market have increased consumer welfare. This has been accomplished through decreased prices, increased service, and an increased variety of service plans. Government regulation allowed for competition between the market players (Yonggui, and Lo, 15). Consequently, telecommunication firms have introduced tariffs that provide for lower cost. In addition, the industry has introduced quality products for their customers. Furthermore, optional services and products have been established to cater for the needs of the customers (Yan, 11). Prior to the establishment of the Ministry of Information Industry, the government of China created regulations, policies that did not encourage competition among service providers while customers could not access affordable and quality services. However, after the introduction of reforms both the customers and operators have benefited (Peilei, 15). The new changes produced a good atmosphere that supported businesses and encouraged investors. Government revenues are expected to increase, leading to a higher rate of economic growth.

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