Telecom industry in china

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Kent E. Neupert, Clara Chak, Henry Fu, Lui Sai Lung, Alex Ng, Polly Poon, and Ken Yeung prepared this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a management situation. The authors may have disguised certain names or identifying information to protect confidentiality. Copyright © 1999 Kent E.Neupert

INTRODUCTION
With the transformation of the Chinese economy from a planned to a more marketoriented economy, in 1998 the telecommunications industry in China had come to be characterized by rapid growth in investment and improvements in technology and service quality. The total turnover of telecommunications had been developing on an exponential curve, reaching RMB163.37 billion (US$19.75billion) in 1997, increasing 15 times from RMB10.95 billion (US$1.32 billion) in 1990.1 (See Exhibit 4.1. ) While the number of subscribers to both fixed-line and cellular telecommunications services in China had grown substantially in the last five years, penetration rates remained

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relatively low compared to other Asian and international markets. With the development of traditional services andthe enlarging of network size, many new value-added services, such as email, facsimile store and forward, and Internet service, were being introduced to and welcomed by subscribers, resulting in a high growth rate (see Exhibit 4.2). All these developments indicated a tremendous potential for further development in telecommunications in China.

INDUSTRY STRUCTURE
In China's telecommunicationsindustry there were essentially two markets or relationships - the first between equipment suppliers (most of them foreign investors) and service providers, the second between service providers and end-users (nearly monopolized by China Telecom).2 The Appendix contains a glossary of terms relating to the industry.

EXHIBIT 4.1:

Developing trend in total turnover of telecommunications in China, 1990-1997(in billion RMB).

1990

1991

1992

1993

1994

1995

1996

1997

Total turnover

10.95

13.41

20.05

33.85

52.69

87.33

120.88

163.37

Source: Liang, X., Zhang, X., and Yang, X., “The development of telecommunications in China”, IEEE Communications Magazine, November 1998, pp. 54-8.

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EXHIBIT 4.2: The development of new value-added services, 1994-1997

Service

Subscribers (,000) 19941995 28.0 17.0 5.932 2.495 0.132 0.495 7 ----------1996 56.4 51.4 9.888 1.987 0.113 1.217 34 --------1997 84.6 111.7 14.726 2.247 0.216 2.914 159.803 3.084 0.319

Annual growth rate (%) 115.1 156.3 151.4 27.5 27.9 142.6 377.8 ---------

Packet switching DDN Email EDI Videotex

8.5 -----2.329 1.083 -----

Facsimile ----storage transfer Internet Frame relay N-ISDN ----------------

Source: See Exhibit4.1.

Equipment Suppliers More than 90 percent of telecommunications equipment in China was imported over the past decade, and about 80 percent of the market share of major telecommunications products was occupied by foreign companies.3 The market for products in this industry sector had been comprehensively developed, and China was home to no fewer than 16 foreign-invested manufacturers ofdigital switching or synchronous digital hierarchy (SDH) transmission equipment.4 As a result, competition was intense between the players who supplied the Ministry of Posts and Telecommunications (MPT), the provincial and municipal posts and telecommunications authorities (PTAs and PTBs), Unicom, and other private network operators.

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EXHIBIT 4.3: Switching equipment shipped by vendors, 1993-1997(millions of lines) 1993 Chinese suppliers Foreing suppliers Total 0.8 10.3 11.1 1994 1.2 18.3 19.5 1995 3 19 22 1996 5 19 24 1997 7.3 10.4 17.7

Source: “Who needs competition,” Business China, October 1998, pp. 4-5.

Although much progress had been made in the last few years, China's own development in telecommunications equipment lagged behind the more advanced international level. China had...
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