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Unlocking China's $194B Telecom Market

Robert Clark
News Analysis
Robert Clark
3/27/2017

At China's annual parliament in early March, Premier Li Keqiang called on telcos to "increase bandwidth and cut prices."

Just as he did last year and the year before that.

Even in a one-party state, politicians like to be seen as the consumers' friend.

In truth the continual jawboning on service and prices tells a story about the woeful state of competition. Virtually every one of China's 1.34 billion mobile subscribers and 731 million Internet users is served by just three state-owned networks.

The result is that China's average broadband download speed of 6.3 Mbit/s compares with a global average of 7 Mbit/s. It is behind every country in Asia except India and the Philippines, according to Akamai Technologies Inc. (Nasdaq: AKAM)'s State of the Internet report.

China badly needs more and better network infrastructure to help rev up its economy and meet growth in data traffic. But the government's determination that all infrastructure must remain in state hands means it is never going to catch up. (See China's Telcos at Heart of IIoT Plans .)

Timid attempts at reform have resulted in an under-funded and uncompetitive national cable TV network and the issue of dozens of MVNO licenses. In the two years since official launch, most MVNOs are either bleeding cash or have stopped trading.

Officials are toying with ways of bringing private investors into the game. They have run some small-scale pilots with private broadband operators and are promising to bring big Internet firms onto the share register of China Unicom.

The one thing they haven't tried is opening the $194 billion market to non-Chinese players.

This is in breach of the commitments China made upon entering the WTO in 2001. It promised to allow foreign firms to own up to 49% of a mobile or fixed-line operator by 2007. Instead it has placed in front of them a series of obstacles, such as minimum paid-in capital, to block entry. Even the value-added services (VAS) market, where foreigners were supposedly allowed to own up to 50% of companies, has remained mostly off-limits.

In what was seen as a breakthrough, US telco giant AT&T Inc. (NYSE: T) took a 25% stake in an enterprise-focused joint venture with Shanghai Telecom in 2000. That venture, now branded Unisiti, exists today as a fringe provider of VPN and MPLS services, still confined to Shanghai.

In 2006, with the Beijing Olympics on the horizon, AT&T's then-group president Forest Miller called on Beijing to "ease the barriers for entry."

But the only change since is that the issues have widened. It's no longer about only basic and VAS telecom services, but also cloud and data centers. Just last week, 50 US firms wrote to the Chinese ambassador calling for a more open cloud services market.

One mystery is that foreign telcos have never pushed hard for WTO compliance in the way that other industries have. US and European telcos have never felt shy about lobbying their own governments. Perhaps trade diplomats didn't believe telecom was as important as other industries, like the automotive and financial sectors, or perhaps they gave it up as a lost cause.


For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.


In any case, Chinese operators don't face any of the same restrictions when they cross the Pacific.

In contrast with foreign telcos, which cannot deploy in China and can serve enterprise services only with a local partner, China Mobile International is effortlessly scaling up its global reach and services. It has ten existing or planned points of presence in the US, where it has the right to serve its customers directly.

Chinese firms are starting to own infrastructure in foreign markets, too. Last year a Chinese ISP, Dr Peng, acquired a small California-based telco, Giggle Fiber, for $15 million. Dr Peng isn't allowed to compete directly against China Telecom Corp. Ltd. (NYSE: CHA) but can compete against AT&T and Verizon Communications Inc. (NYSE: VZ).

Now that the global trade game is being upended, this history matters. President Donald Trump has talked plenty about China's alleged unfair trade practices. And when it comes to telecom services, he's actually right. China hasn't met its WTO commitments at all.

It's not just Trump. There's no shortage of trade professionals who also believe that China is getting the better of trade and investment relations with the rest of the world, even as it positions itself as the leading free trade advocate.

These issues will be near the top of the agenda when Trump goes head to head with Xi Jinping, China's president, during a US-China summit in Florida early next month.

One idea that has gained traction is the principle of reciprocity. If the other party fails to meet its market commitments, it loses reciprocal rights until it complies. US Commerce Secretary Wilbur Ross has reportedly embraced this concept.

It's not a fix for every problem, but after 15 years of zero progress it's probably time for a fresh approach.

It may even help deliver the faster speeds and lower prices that Chinese consumers desperately crave.

— Robert Clark, contributing editor, special to Light Reading

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R Clark
R Clark
3/30/2017 | 9:01:16 PM
Re: BRILLIANT
Dennis, good question: how does a free market economy cope with a competitor who flouts the rules?  That's one reason why people are talking about applying a reciprocity rule.

The services sector is quite clearcut - China hasn't met its WTO commitments and foreign governments should be seriously thinking about whether they should allow market entry to telecom and cloud companies from China.

The equipment sector is complicated but basically China is using the Snowden revelations as pretext for protectionism.  It definitely requires some sort of nuanced approach -- not much cause for optimisim.
brooks7
brooks7
3/29/2017 | 11:25:19 AM
Re: BRILLIANT
 

Well, given there are only a handful of big ones and only 1 in the US (Cisco) then it is pretty clear.  And by big, I mean $20B+ in revenue.  Cute little firms like Ciena or Juniper are too small.  If the rest of them merged (call it Adtran + Juniper + Calix + Ciena + Infinera + [need some wireless stuff]) maybe you have something.

seven

 
mendyk
mendyk
3/29/2017 | 11:14:33 AM
Re: BRILLIANT
This is where things get a little sticky. Should Western governments intervene to preserve technology suppliers? If so, which ones should they support? How does that kind of intervention fit into an ostensibly free-market economy? There's a lot of nuance here, and right now nuance is in very short supply.
brooks7
brooks7
3/29/2017 | 10:02:22 AM
Re: BRILLIANT
 

Dennis,

 

My point was this has been going on for a couple of decades and getting more and more pervasive.  It is intentional and not going to change.  The entire comm and comm equipment market is being done internally over time to keep Western Companies out.  It is a smart move from a spying and hacking standpoint.  So it is a lot bigger than $194B.  Call it $300B and that is why the Chinese PLA was heavily involved in Huawei.  When they are the only comm equipment vendor left, then China will control all the command and control infrastructure of every country.  No wars, because their will be no way to fight.  It is a great long term strategy.

seven

 
R Clark
R Clark
3/28/2017 | 9:44:43 PM
Re: BRILLIANT
Standards-based protectionism has never really gone away. Now China uses security standards to screen out foreign firms or force them to open up their source code.

Trade issues are complicated, though. Who knew? So far no sign of any new thinking on the part of US administration. Just random complaints.
mendyk
mendyk
3/28/2017 | 5:42:49 PM
Re: BRILLIANT
Right -- and today, Huawei is for the most part barred from the US market. But the focus of the article is on lack of operator competition, which is where most of that $194 billion comes from.
brooks7
brooks7
3/28/2017 | 3:55:21 PM
Re: BRILLIANT
 

It is a bit more than that.  The Chinese have slowly shutting outsiders out of the equipment market as well.  If you go back to my old employer AFC, we were shut out in 1998 for a 1 year period because our equipment required more certifications.  When we got that done, our products had been duplicated to the point where there were mixed systems of our cards with copied cards.  If you want confirmation of this go back to the reason for AFCs stock drop at the time of the Q2 1998 conference call.

The initial point of Huawei was to be able to make equipment and get western vendors out of the network.

seven

 

 
mendyk
mendyk
3/28/2017 | 3:13:12 PM
Re: BRILLIANT
The main issues here center on the willingness to allow foreign investment in telecom providers. So it's a "trade" issue, but not the kind that the current administration is concerned with, which is more about imports/exports than about allowing multinationals to exploit other markets.
rgrutza600
rgrutza600
3/28/2017 | 9:59:36 AM
BRILLIANT
This is exactly the type of issue President Trump is attempting to rectify.  Free trade has been one way, until now.
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