Chapter 3 Telecommunications Development in China
3.2 The Evolution of China’s Telecommunications Industry
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Such a step is expected to generate renewed demand for foreign equipment suppliers, and lead to the issuance of third generation, 3G licenses. More specifically, these developments are expected to create new opportunities for manufacturers of mobile, data, and optical communications equipment.15 In 2009, The MIIT formally issued 3G mobile phone licenses to three mobile operators, a move that is expected to lead to billions of dollars being invested in building new networks: China Mobile was awarded a license for TD-SCDMA, the domestically-developed 3G standard; China Telecom and China Unicom received licenses for the U.S.-developed CDMA2000 and Europe's WCDMA, respectively. The MIIT also issued 23 regulations on the requirements of 3G network operation, covering such aspects as market competition, consumer rights, subscriber information security, telecommunication charges
management and facility building. It is estimated the 3G mobile phone sales would top RMB 300 billion and the network investment would lead to RMB 2 trillion in private-sector investment during the period of 2009 to 2011.
3.2 The Evolution of China’s Telecommunications Industry Development
Noam (1994) sets the stage with a multistage evolutionary model of public telecommunications networks and argues that the evolution of networks is driven by the dynamics of group information and their transformation into politically based redistribution. Initially, network expansion in the first phase makes economic and technical considerations; next is due to political imperatives; the success of full services provision actually undermines the foundation of its exclusivity in the third phase; the final stage is the
15 http://www.buyusa.gov/china/en
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consolidation of various national sub-networks into global operators.
In terms of the evolution of networks, it is a logical progression and can be separated:
The cost-sharing network. Expansion is based on the fixed costs and increasing the value of interconnectivity;
The redistributory network. The network grows trough politically mandated transfers among subscribers;
The pluralistic network. The uniformity of the network breaks apart because the interests of its numerous participants cannot be settled;
The global network. Various domestic subnetworks satisfy
internationally and form networks that transcend territorial constrains.
Harwit (2008) stated that when the new Communist Chinese government was established on 1 November 1949, the telecommunications industry had been ravaged by years of war. The country with a population of over 500 million had some 310,000 phone lines. Liang and Zhu (1994) researched that the First Five-Year Plan (1953~1957) was one of steady economic growth and telecommunications expanded rapidly. The telecommunications development generally matched the growth of the national economy. China’s
telecommunications density experienced a fast growth due to a small starting base. Investment in telecommunications averaged 0.55% of total state
investment annually. However, the growth rate of teledensity16 was stagnated about 5~6% from the 1950s to 1970s compared with 0.05% in 1949 and 0.13%
in 1957. More than 90% of counties had no telecommunications facilities in the
16 Teledensity means the number of landline telephones in use for every 100 individuals living within an area. A teledensity greater than 100 means there are more telephones than people. In low-income countries in Asia, teledensity stands at 1.36 (Ben and Giriji, 1998).
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coastal provinces (Shahid, Tang and Liu, 2007). Table 2 summarizes the main additions to facilities and equipment of this period.
Table 2 Telecommunication Capacity Growth during the First-Five Year Plan
Capacity Growth (%) Facility
4,946 11 Telegraph circuits
4,684 24 Long-distance telephone circuits
647,000 64 Urban telephone exchange capacity (lines) 326,000 327 Rural telephone exchange capacity (lines) Source: Adapted from Liang & Zhu (1994).
During the period of 1953 to 1970, telecommunications did not grow steadily; only 0.8% (RMB 360 million) of total national investment went to the postal and telecommunications services because of various political and economic reasons, and insufficient funds. China’s Great Leap Forward campaign included many irrational moves toward more local control and resources to cause the enormous wastes in material and human resources as the state investment went down in the post and telecommunication sector in absolute terms was further reduced to RMB 137.2 million which was 0.5% of the total national investment (Liu, 1988). In the Second Five-Year Plan
(1958~1962), the total investment in this industry was RMB 1.37 billion due to national security consideration. However, total national investment in
telecommunications industry reached 1.4% (Tang and Lee, 2003).
From the 1950s to the early 1980s, the telecommunications development in China was very slow because it was not a major priority during the
command economy period while the Cultural Revolution brought chaos to nearly all parts of China’s political and economic system (Ding, 2005). The
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government did not put effort into extending the telecommunications network and the number of subscribers grew as Figure 2 shows.
Figure 2 Number of Telephone Subscribers (1949~1975) Source: Adapted from Harwit (2008).
Afterwards it became a priority because China recognizes it as an advance agent must take precedence in economic development. State and local authorities furnish the necessary foreign exchange to support the importation of equipment and technology. Since the Sixth Five-Year Plan (1980~1985), a number of telecommunications projects have been completed to extend capacities and services. Besides, a variety of means were used to raise funds for industry development. It was accounted for only 31% compared with 50% of investment from individual enterprises, while foreign investment has remained negligible (Liang and Zhu, 1994). Since 1980 the growth rate of teledensity has generally been slower than the growth rate of GNP per capita.
Telecommunications industry has developed both in capacity and operational efficiency. Both of them were required to meet the rising demand for services for China’s opening and reforms. As Figure 3 and Figure 4 shows the China’s teledensity and the number of telephone subscribers indicates, respectively.
0.22 0.35
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Before mid-1980 the telecommunications development has been very slow steadily and mainly took place after 1980s (Ding, 2005 and ITU).
Figure 3 China’s Teledensity (1952~2003)
Source: Telecommunications Infrastructure and Regional Economic Development in
China (Ding, 2005)
Over the 1980s and into the next decade, central government changed its mind about the role of telecommunications industry issued policies and
directives to ensure telecommunications industry would see rapid growth for economic development. A number of preferential policies designed to
encourage investment were promoted. A key step was to introduce “Three 90 percent policy” as played a vital role in propelling the telecommunications sector’s take off. Many directives came during this period to spur
telecommunications growth including structural reorganization. Before 1990, the provincial offices took direct orders from the MPT. Following that year, the branches received autonomy accounting for their performance (Eric, 2008).
(Year) (Number of telephone per 100)
(Year) (Number of telephone per 100)
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Many policies taken together were quite successful. In this period, the telecommunications sectors saw its share in national total fixed investment assume an upward trend, increasing from 0.74% in 1985 to more than 7.0% in 2001 (Ding, 2005).
Figure 4 China’s Telephone Subscribers (1978~2005) Source: ITU World Telecommunication/ICT Indicators Database.
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Table 3 Telecommunications Statistics in China (2003~2006)
Item 2003 2004 2005 2006
Main telephone lines (million) 262.7 311.8 350.4 367.8 Main telephone lines per 100
inhabitants
21.1 24.1 27.0 28.1
Mobile service subscribers (million)
270.0 334.8 393.4 461.1
Mobile service subscribers per 100 inhabitants
21.0 25.9 30.3 35.3
Public telephones (million) 15.6 22.2 26.8 29.6
Public telephones per 1,000 inhabitants
12.2 17.1 20.6 22.6
Internet subscribers (million) 79.5 94.0 111.0 137.0 Internet subscribers per 100
inhabitants
6.2 7.2 8.5 10.5
Broadband subscribers (million) .. .. .. 50.85
Broadband subscribers per 100 inhabitants
.. .. .. 3.85
Source: ITU, World Telecommunication Development Report; ITU online information ( www.itu.int/ ITU-D/ict/statistics); National Bureau of Statistics, China Statistical Yearbook
China's telecommunications has continued to grow during the overview period, and prices have been further liberalized. Penetration rates of fixed line services increased from 17.5 lines per 100 persons in 2002 to 28.1 lines in 2006; the corresponding figures for mobile telephones were 16.1 and 35.3, respectively. There has also been a significant increase in the use of Internet services. Overall, telecommunications services prices fell by about 53% during the period of 2002 to 2006. Meanwhile, the average charge rate per minute
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(ARPU/MOU)17 of China Mobile was reduced by 60% (see Table 3).18
China had six nationwide basic telecommunications service providers and about 22,000 providers of value-added services. Of the six basic providers, China Telecom and China Netcom accounted for 62% and 33% of the market, respectively, for fixed-line services at end 2006; the mobile service providers are China Mobile and China Unicom (with about one third of the market in 2006). The State remains the majority owner of all the basic
telecommunication service providers19; however, private participation and foreign investment has been allowed gradually. Four companies (China Mobile, China Netcom, China Telecom and China Unicom) have been listed in different stock exchanges. Foreign investment is around 25% in China Mobile, 25% in China Netcom, 22% in China Unicom, and 17% in China Telecom (see Table 4).
Table 5 shows the growth in telecommunications investment versus overall GDP growth from the beginning of the reform to 2006. As indicated, the fastest growth in telecommunication investment came in the year 1985 to 1994.
While the nation’s GDP grew an average annual pace of about 20% over this period, investment in telecommunications rose at nearly triple rate with an annual increase of some 55% (Harwit, 2008). The average growth rate of teledensity from 1988 to 1991 doubled the rate of GDP growth and accelerated above 30% after 1992. Throughout the 1990s the growth rate of telephone lines consistently exceeded that of GDP, on average three to four times higher.
17 Average Revenue Per Subscriber (sometimes average revenue per unit) usually abbreviated to ARPU is a measure used primarily by consumer communications and networking companies, it is the total revenue divided by the number of subscribers.
18 Annual Report of China Mobile (Hong Kong) Ltd (2006).
19 These assets are held by the State-owned Assets Supervision and Administration Commission (SASAC) on behalf of the country, despite the Regulations on Telecommunications (issued in 2000), which stipulate the separation of the Government from the business of providing telecommunication services.
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China now is the world’s largest telephone subscriber base. Currently its service revenue alone, equipment sales not included, accounts for
approximately 2.52 percent of China’s total GDP in 2002 (Ding and Haynes, 2004).
Harwit stated (2008) China’s telecommunications revolution proved by nearly all measures a dramatic success. Telecommunications policy making reached the top of government’s agenda because it was recognized that the government to manage the rapid economic development; the government strongly believe that it was central to security and sovereignty; finally, it is important to provide the source of revenues be used to fund network deployment because of strategic financial reasons (Laperrouza, 2006). In terms of the lack of importance given to telecommunications in the developing countries especially in China before the early 1980s, telecommunications services were regarded as a “luxury” in china an often subject to cuts during hard time; the economic development discourse in china was set up in terms of primary and secondary sectors and as a result service sectors including telecommunications received marginal attention (Harwit, 2008).
Prior to its WTO accession, China’s policy protected the national emerging telecom industry. Only foreign equipment vendors were allowed to invest in China with the conditions on technology transfer. International telecom carriers were banned from accessing the market. As part of the WTO commitments, the Chinese government is opening gradually the carriers market to foreign investors. There are some geographical limits to this opening but they will be progressively relaxed. In 2005 foreign investors will be allowed to invest up to 50% in Internet services, up to 49% in the mobile sector and up to 25% in
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fixed-line basic services in some particular cities.20 Regarding the provisions on the administration of telecommunications enterprises with foreign
investment, the government has promulgated the Decree of the State Council of the People's Republic China No.333 in 2001 and No.534 in 2008
respectively.21
Table 4 Basic Telecommunications Service Providers
Service Providers Fixed-line service China Telecom, China Netcom, China
Unicom, China TieTong Mobile telephone service China Mobile, China Unicom
Data China Telecom, China Mobile, China Netcom, China Unicom, China Satellite, China TieTong (formerly China Railcom)
IP telephony China Telecom, China Mobile, China Netcom, China Unicom, China Satellite, China TieTong Satellite service China Satellite
Source: Ministry of Industry and Information Technology (http://www.miit.gov.cn)
Since more investment was attracted to the telecommunications sector and given the rapid pace of technological change in recent decades, according to the government statistics the number of fixed line urban and rural
subscribers increased nearly from 5.3 million and 1.4 million in 1990 to 251 million and 116 million in 2006 respectively. By July 2001 the number of China’s mobile phone subscribers grew rapidly reached 120.6 million,
surpassing that of the U.S. and making China the world’s largest mobile phone
20 http://en.wikipedia.org/wiki/Telecommunications_industry_in_China
21http://www.fdi.gov.cn/pub/FDI_EN/Laws/InvestmentDirection/GuidanceforSpecificIndustries/
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market because the technological advances had led to a rapid fall in the cost contributed to the exploding demand for mobile phone. In March 2002, China overtook the U.S. as the world’s largest fixed line telephone network in terms of capacity and subscriber base, with 190 million fixed line subscribers. Annual growth rate of telephone penetration were around 9% and 30% in the 1980s and 1990s, respectively. China’s total telephone customer base in 2003 was 85 times that of 1985 and 145 times that of 1978 (Ding, 2005).
Figure 5 Growth Rate of GDP and Teledensity (1975~2002) Source: GDP and Teledensity Growth in China (Ding, 2005).
0 10 20 30 40 50 60
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 20
01 (Year) (Growth rate)
GDP growth Teledensity growth
0 10 20 30 40 50 60
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 20
01 (Year) (Growth rate)
GDP growth Teledensity growth
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Table 5 Fixed-Asset Investment in Telecommunications as Percent of GDP Year Investment
(billion)
GDP (billion) Investment as percent of GDP
Source: Adapted from Harwit (2008).
In addition, the Internet development in China on the past few years can also be highlighted. The size of netizens in China has continued to display the trend of rapid development. By the end of June, 2008, the amount of netizens in China had reached 253 million. The amount of netizens in the United States was 218 million by the end of 2007. Estimated by the growth speed of netizens in the United States in recent years, the amount of netizens in the United States would not surpass 230 million by the end of June 2008. Therefore, the size of netizens in China has leaped to the first place in the world, increasing
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by 91 million from the same period last year. In the first half of 2008, the net increase amount of netizens in China was 43 million. By the end of June 2008, the Internet penetration rate in China had reached 19.1%. At present, only less than 1/5 of the Chinese residents are netizens. This penetration rate is slightly lower than the average Internet penetration rate in the world, 21.1% (see Figure 6).22
Figure 6 Growth of Netizens and Internet Penetration Rate in China Source: China Internet Network Information Center (2008)
Although the growth of China’s telecommunications market in general is faster than most other regions in the world, the momentum of growth itself is slowing down. In 2005, the six Chinese telecom carriers, China Telecom, China Netcom, China Mobile, China Unicom, China Tietong and China Satellite, made an aggregated investment of US$24.4 billion in telecom industry, down 4.7% compared with that in 2004. This is because:23
22 China Internet Network Information Center (2008), “Statistical Survey Report on the Internet Development in China”.
23 “China: Wireless Telecommunications”, U.S. Commercial Service, 2006.
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The Chinese telecom carriers have already built the world’s largest well-equipped wire-line and wireless networks and the demand for expanding network coverage is not as imperative as five years ago;
The mobile carriers and fixed line carriers who wish to obtain 3G licenses restrained from increasing investments in their existing networks so as to reserve funds for initial 3G deployment once they receive 3G licenses, though the Chinese government did not issue 3G licenses in 2005;
The discussion among the Chinese government agencies on possible industry restructuring also made the carriers reluctant to increase investment in telecom infrastructure;
The carriers were in the process to transform themselves from infrastructure builders to service providers. They focused much of their attention on developing new and value-added services;
All the carriers centralized their procurement to beat down equipment price.
Regarding the assessment of telecommunications market, it is a summary measure of concentration such as the widely adopted Herfindahl-Hirschmann index (HHI) which is a coefficient of market concentration index. This index is defined according to the number of firms in the industry, with the share of each firm weighted by itself; while the concentration ratio places a weight of 1 on the share of the largest n firms and zero on the share of the other firms, this index places a weight equal to the share on the share of the firm. As a result, the index is able to incorporate information on all firms rather than just the largest
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n firms.24 The value of 0 (perfect competition) ~ 10,000 (perfect monopoly) is taken. In addition, Fair Trade Commission presupposes that market structure is not highly oligopolistic if HHI after corporate merger is less than 1,000, and that market structure is not oligopolistic if HHI after corporate merger is over 1,000 and less than 1,800.
However, there are several important issues about telecommunications structure needed to be explored.
First, in spite of the restructuring in 2002, the overall competition in telecommunications market is still weak. The market share of China Mobile increased from 36.74% in 2002 to 48.87% in 2007, but China Telecom and China Netcom decreased 9% and 5% respectively.
Second, the definition of the competition index, and the effect of regulation and privatization are different. The HHI index is used as the competition variable and an indicator of market structure. As we can find the imbalance of market structure particularly the China Telecom North-South split in 2002. The HHI index shows the market trend is still towards monopolization (see Table 6).
Table 6 Market Share for China’s Telecom Operators
Operator (%) 2003 2004 2005 2006 2007
China Mobile 37 39.19 41.82 44 49.03
Chin Unicom 14.6 13.99 13.42 14.54 13.8
China Telecom 31.6 29.65 28.37 27 24.54
China Netcom 15.3 16.96 15.05 13.41 11.54
China TieTong/ Satellite 1.5 0.21 1.34 1.05 1.09 Source: Author’s calculation based on data from various sources.
24 Sawyer, M. C. (1991), “Economics of Industries and Firms: Theories, Evidence and Policy”, London: Routledge.
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