DECEMBER 1 , 2000 VOL. 26 NO. 47 | SEARCH ASIAWEEK
Beijing's mobile market is in play, and global companies are vying for a piece of the action. But the Chinese will call the shots
By ALLEN T. CHENG Beijing
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The most expensive stretch of real estate in Chengdu, Sichuan province, is Taishan Avenue. No, this is not the residential area of party bigwigs and business fat cats, but a commercial district featuring more than 300 mobile-phone shops. For all the modern veneer of this high-tech center dubbed "Telecom Street" the atmosphere at Taishan Avenue is decidedly last millennium, resembling that of a medieval bazaar. On any given day, the area is milling with tens of thousands of shoppers looking to buy cellphones. To attract the hordes, some stores post comely young sales clerks outside; others blare sales promotions over loudspeakers. Some even put on free dance shows. Fan Yu, a 22-year-old elementary-school teacher, revels in the raucous, carnival-like din. She has just spent her entire monthly salary of 1,800 renminbi ($217) on a Motorola handset. "All my friends have one, and I want one too," she gushes.
No wonder foreign telecom players both service providers and equipment makers are salivating over China's wireless market. Fan is suffering from peer-group pressure, China-style, and so are tens of millions of other Chinese who have gone nuts for mobile phones. In 1997, China had fewer than 20 million handsets; this year, with 78 million cellphones, it has eclipsed Japan as the second-largest market in the world. China is expected to top 100 million and surpass the U.S. as No.1 by the end of 2001. Experts predict China will have up to 250 million subscribers by 2004. Lured by such figures, foreign companies are lining up to sign deals. Beijing's pending entry into the World Trade Organization should help break the market open further. But China is littered with stories of foreign businesses that were defeated by stiff tariffs and bureaucratic red tape. Will multinational phone companies be next?
They hope not. AT&T has already signed a memorandum of understanding over a joint venture to form an Internet broadband network in Shanghai. Vodafone recently spent $2.5 billion buying a 2% stake in China Mobile, one of two local cellphone operators. France Telecom, Siemens/Deutsche Telekom and Telecom Italia are wooing China Unicom, the other local player. Waiting in the wings are companies like Australia's Telstra and Hong Kong's Pacific Century CyberWorks.
Despite the gold rush, there are some doubts as to whether foreign firms can make money off China's mobile market. Some experts predict that China will do what it has done successfully in the past with other sectors: use its huge market to lure foreign partners; use their capital and technology to build up the domestic industry; then pit the local companies against the foreigners. Peter Lovelock, a director at Beijing-based consultancy MadeforChina, thinks China will remain a difficult environment for foreign firms even after the WTO accession."[The government] wants to band foreign corporate groups with local players, with local players controlling the majority stakes," he says. "By doing so, it will build its own global giants."
That is precisely how Beijing-based computer maker Legend has come to rule China's PC market first by cooperating with the likes of Microsoft and Intel to learn the technology, and then turning the table on competitors such as IBM. During Legend's rise in the 1990s, foreign brands that had previously dominated the scene were rendered less competitive by tariffs that made imports roughly 30% more expensive than domestic models. "The global giants, people like AT&T, are going to have a lot of obstacles," says Regis Kwong, head of unified messaging provider Asia Connect. "Even though the mobile-services area is now open to foreigners, the government isn't going to allow them to come in and take over."
In the handset market, foreign makers like Motorola, Nokia and Ericsson are well established and, as yet, dominant. They collectively command about 90% of the business (market leader Motorola alone makes up 30%). But local companies like appliance-maker Haier have jumped into the game and are busy playing catch-up. Throw in the fact that handsets may one day be given away free as the market matures, and the future of the global brands looks less assured. They may not face immediate extinction, but they certainly face slimmed-down profits.
China Mobile, which has more than 50 million subscribers, and China Unicom, with 20 million, are former state-owned enterprises. Yet they are among the most profitable mobile-phone companies in the world. Do they have an advantage over foreign companies? They may be private, but the links to the government are still evident. In Chengdu, for example, an AK47-toting People's Liberation Army soldier still stands guard at the entrance of China Mobile's administrative offices. "Foreign companies can't possibly get the local support that we already have," says Yang Yibing, deputy general manager of Unicom International in Hong Kong. "We aren't afraid of foreign companies. It's not a matter of whether they want to come. It's a matter of if they dare to come."
They certainly dare to. But what are their chances of making money? "Service operators have always made good money in China," says MadeforChina's Lovelock. "There are plenty of incentives for foreign players coming in, and these guys are prepared to spend billions of dollars." Kwong argues that the rate of return on their billions will be minuscule. Even today, with just two mobile operators, the gross charge is a mere 5 cents a minute, with average monthly bills of just $20. "That's not much," says Kwong. "Yes, there is still room for growth in mobile, but how many more operators can the market accommodate? The margins just aren't there."
So where is the money? Kwong says value-added mobile services extras like e-mail and weather reports that parties other than the phone company can provide to cellphone users is where foreign investors can get a quicker return on their investments. "We can't slug it out there with the big boys investing in mobile networks," he says. "But we can here in this market segment." That might be precisely China's strategy keep the basic phone services for itself and leave the less valuable niche markets for foreigners though admittedly, in a market as large as China's, a niche segment can still be pretty lucrative.
Besides money, a further incentive for foreign companies to enter China's mobile turf war is the WTO. China's expected entry into the body should, theoretically at least, allow for a more level playing field and protect overseas players from the vagaries of Chinese government policy. It should go some way toward nullifying one of Beijing's most potent weapons: tariffs. Under the agreements, import duties on telecom equipment are to be cut from as high as 35% to 5%-10%. Foreigners will also be able to own up to 25% in Chinese mobile-phone companies and up to 49% three years after the accession.
In preparation for the WTO entry, Motorola is doubling its total investments in China to $3.4 billion including $700 million to boost handset production and $1.2 billion to build a semiconductor plant. Even more valuable to China is the transfer of technology that occurs in joint-venture deals. Chinese companies are especially eager to acquire technology related to third-generation (3G) mobile phones. Global players have been vying against each other to develop an industry standard the two main competing platforms are W-CDMA and CDMA2000 and China is expected to announce which standard it will use by the end of next year.
On this front, Siemens has gone further than its rivals by helping develop a 3G standard specifically for China. The TD-SCDMA, as it is called, is the fruit of cooperation between Siemens and Chinese government scientists. In addition to footing the R&D bill estimated to be more than $100 million Siemens has helped persuade the International Telecommunications Union to accept TD-SCDMA as the third international 3G standard. "Siemens is very smart," says Meng Fanchen, a principal at management consulting firm AT Kearney in Shanghai. "It will gain politically because of this."
An even bigger winner is China itself. Flush with capital and technology, it is now well on its way to developing a robust mobile industry that can take on the foreigners. There is no guarantee that the playing field will become truly level once China joins the WTO: Beijing may well find a way around the agreements. Indeed, with Wu Jichuan, a nationalistic-minded conservative, heading the Ministry of Information Industry, which controls information-technology matters in China, Beijing will likely give away as little of the mobile-phone pie as possible to outsiders.
For the time being, though, foreign investors remain upbeat about post-accession China. Beijing is just sitting back and enjoying the attention as global mobile-phone makers and service providers come knocking on the door bearing gifts of money and expertise. It's just hard for foreign companies not to think of China as 1.3 billion pairs of ears just waiting to be glued to their cellphones. "In the Asia Pacific, China and India are the two hottest areas that we want to invest in," says Cadol Cheung, director of strategic investment for chipmaker Intel.
All these global maneuverings are, of course, beyond Chengdu schoolteacher Fan Yu, who is just happy that she has bought her first cellphone. Asked about the prospect of greater competition among mobile companies, she says: "If it means saving me money and making my life easier, then I'm all for it. Besides, anything new, anything trendy that's what I want." Motorola, Vodafone, AT&T and others would be more than happy to cater to her wishes. Just don't be surprised if, a few years down the line, the handset she is using bears a Chinese brandname.
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