JP/18/TELCO1

China, the world's largest telecommunications market

Huawei Technologies Co. Ltd, China's largest producer of telecommunications equipment, invited journalists from India, Malaysia and Indonesia, including Vincent Lingga from The Jakarta Post, to observe its operations in Beijing, Shanghai and Shenzhen from Oct. 17 to Oct. 22.

The visit also coincided with PT/Wireless & Networks Comm China 2005, considered Asia's biggest industry event in Asia, and a series of workshops on the telecom industry in Beijing. The following is Mr. Lingga's report:

Theoretically, differences in countries' wages should be reflected in differences in their productivity levels and that any misalignment will be corrected over time.

However, this economic theory will not likely apply in China, with its population of 1.3 billion, at least within the foreseeable future, as the country will still be able to out- compete other developing economies in the manufacturing of almost anything that is labor-intensive.

Millions of people are still moving from the countryside to the cities. According to China's National Bureau of Statistics estimate, from 150 to 200 million surplus rural workers are adrift between the villages and the cities.

This huge pool of surplus labor explains why China's wages have been rising less quickly than productivity and why the country will remain a highly competitive factory of the world for some time.

It could take at least two decades for them to be absorbed by industry and, as this process takes place, it will continue to subdue wage growth and global inflation, further strengthening China's important role as a factory of the world and a huge market.

China, however, does not stop at labor-intensive manufacturing; a factory of the world. It is rapidly turning its manufacturing leadership into technological strength, as the astonishing growth in its information and communication technology (ICT) has shown.

China's early decision to deregulate the ICT sector and break up the state telecommunications monopoly into four competing firms has now turned the country into the world's largest telecom market.

China's 1.3 billion-population may overstate its true consumer demand -- it is still classified as a poor country in terms of gross domestic product (GDP), which totaled US$1.65 trillion last year.

However, measured on purchasing power parity (PPP), China's economy stood as the second-largest in the world, after the United States, with a per capita income of $5,600 last year.

China's rapidly growing middle class, generated by an annual economic expansion of over 9 percent, has been snapping up consumer electronics, mobile phones and other sophisticated telecom gadgets, including third-generation (3G) wireless phone devices.

The latest annual reports of China's National Bureau of Statistics showed that fixed-line phone penetration in China last year reached 25 percent (of total population) and mobile penetration 27 percent (GSM and Code Division Multiple Access).

The number of Internet users exceeded 100 million and broadband subscribers 45 million.

Telecoms operators

Telecom operators in China are entirely domestic and comprise two big fixed-line operators with nationwide licenses (China Telecom and China Netcom), two small players (China Satcom and China Railcom) and two mobile carriers (China Unicom and China Mobile).

China Mobile operated a GSM network with 222 million subscribers as of last year and China Unicom also offers both GSM and CDMA with 84 million and 28 million subscribers, respectively, as of last year.

However, foreign ITC equipment vendors are well entrenched in China thanks to the opening early on the domestic market to foreign competition.

According to a study report released last March by the International Finance Corporation, the World Bank's private- sector arm, such foreign equipment manufacturers as Motorola, Nokia, Intel, IBM and Dell are among the largest foreign investors in China and the largest exporters from China.

A recent survey on China made by the Organization for Economic Cooperation and Development (OECD) showered great praise on China's bold reforms over the past 25 years, which have allowed market forces a much bigger role in the economy and opened up its market wide to foreign competition and investment.

Over the past decade alone, China has restructured or closed thousands of state companies every year with millions of workers thrown out of jobs each year.

After two decades of reforms and privatization, only about a third of China's economy is still directly controlled by the government through state companies concentrated in key sectors as utilities.

The biggest positive impact of this open market competition can easily be noted in the industry of ITC equipment, which links the Internet, telephone systems and computer databases together.

"Right from the outset, the domestic market has been opened wide to international competition," Ms. Zhang Qi, a director- general at the Information and Communications Ministry, noted at a seminar in Beijing recently.

The manufacture of such high-tech products as telecom- equipment also has greatly been bolstered by multinational companies, which moved their research and development (R&D) activities to China.

China and India have been the most favored destinations for transnational companies moving their R&D centers overseas, the United Nations Conference on Trade and Development (UNCTAD) said in its latest annual Investment Report issued last month.

In China alone, the number of foreign R&D units increased from zero to 700 over the past 10 years, the UNCTAD report added.

For example, giant telecom company Motorola set up its R&D center in Beijing and Lucent technologies in Nanjing.

Even though domestic ITC equipment makers emerged from the shadow of foreign market leaders, they have won significant shares in important segments within both domestic and international markets.

Domestic makers have now gained about 50 percent of the mobile handset market, which was previously dominated completely by foreign vendors.

Huawei, China's largest telecom equipment manufacturer, held almost 45 percent of the ADSL market, while state-owned ZTE and Harbour Networks, two other domestic makers, held 16 percent and 9 percent, respectively.

Moreover, Huawei and ZTE have developed mature 3G products and are set to win a significant portion of operators' capital investment in 3G networks.

Fully supported by the Chinese government, which wants to see Chinese companies have global competitiveness, domestic vendors have steadily improved and expanded their research and development work and established partnerships with foreign suppliers.

Take for example, Lenovo's recent US$1.25 billion purchase of IBM's PC business in cash and stocks. TCL, China's second-largest handset maker, set up a joint venture with Alcatel in 2004 in the handset business, while Huawei tied up with 3Com in 2003.

Software industry

The software industry also has grown rapidly along with the telecom equipment industry. The IFC report estimated the Chinese software industry at almost $20 billion in 2003, growing at an annual rate of over 25 percent.

Currently, Japan and the United States dominate the software market, as Chinese companies still work to qualify for international standards

China's software exports, including software outsourcing, were estimated at $3.2 billion in 2004, up from $2 billion in 2003 and a mere $250 million in 1999. The rapid expansion of software outsourcing in China is the result of government support, the shifting of foreign companies' R & D centers to China.

Unlike India, where large Indian companies dominate the software outsourcing market, foreign firms moving their own software development operations to China, represent key drivers in China's outsourcing market.

These developments will, however, greatly benefit China because expertise developed at these centers will eventually diffuse into the Chinese market, thereby improving the capabilities of Chinese software outsourcing firms.

Even though Indian and Western companies have been expanding in China, Japan will likely remain China's largest software export market for the foreseeable future due to the geographic proximity of the two countries, low-cost labor in China and cultural or linguistic reasons.