The Planned Economy of Mobile Phone Manufacturing

A Time Warp in the Telecommunications Industry?

In November 2000, a senior minister at the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) told a meeting of domestic manufacturers: "Although China is now beginning to implement a 'market economy', the mobile phone industry may still be run as a planned economy."

At the same gathering, an official from the General Planning Bureau of the Ministry of Information Industry (MII) explained what this would mean for foreign-invested manufacturers:

a) no new foreign investment will be permitted in China's mobile phone manufacturing industry, either in the form of joint venture or wholly foreign owned enterprises;

b) all existing foreign-invested manufacturers will have to export at least 60% of their output; and

c) all mobile phones manufactured in China will be required to ensure that at least 50% of the total value of their phones comes from locally produced components.

Ringing in the Changes

Clearly, the officials would appear to have overlooked an interesting legislative development at the end of October, which resulted in amendments to China's PRC Wholly Foreign-owned Enterprise Law (中华人民共和国外资企业法) and PRC Sino-foreign Cooperative Joint Venture Law (中华人民共和国中外合作经营企业法). The amended provisions in the two laws were enacted in order to ensure that China would be in compliance with the WTO's Agreement on Trade-Related Investment Measures (TRIMS). The amendments eliminate provisions that set out export requirements for foreign-invested enterprises (FIEs) and relax the previous requirement for FIEs to source the majority of their raw materials from domestic suppliers.

Expectations are that, in March this year, the National People's Congress will introduce similar amendments to the PRC, Policy on Pilot Sino-foreign Foreign Trading Equity Joint Ventures Provisions. Given such changes to China's domestic laws and the requirements under TRIMS, it would seem that certain factions in MOFTEC and the MII may find it very difficult to maintain the traditional policies of the planned economy and to continue to protect domestic manufacturers.

War Chest

In practical terms, government assistance to domestic mobile phone manufacturers will be in the form of an Rmb6 billion fund that has been set aside specifically to assist domestic companies in acquiring competitive technologies. Another sum of Rmb1.4 billion drawn from mobile phone users' subscription fees will also be available to help with domestic manufacturers' development. Furthermore, five percent of all fixed-line installation fees for five consecutive years will be invested to support the research and development of domestic mobile phones.

The Diplomacy of Technology Transfers

Foreign-invested mobile manufacturers, however, appear to be relatively unconcerned by the recent announcements. Industry representatives refer to plans for a similar policy announced two years ago concerning the domination of the local network switches market. In that case, foreign firms reacted to the news by enthusiastically pairing with their domestic rivals to promote greater technology transfer.

More recently, moves by foreign mobile technology manufacturers to set up research centers within China have not only further affirmed their commitment to engage in local technology transfers but will also help to position them in the development of the third generation (3G) mobile standards in China.

In late December 2000, it was announced that China's own 3G standard, TD-SCDMA, is to be developed by the MII's own research institutes in conjunction with a coalition of foreign partners which includes Siemens, Motorola and Nortel. While already recognized by the International Telecommunications Union (ITU) as one of the three international 3G standards, it was conceded at the launch that network equipment for the Chinese standard is still in the planning stages. It is likely then, that foreign manufacturers' prior experience of developing new standards and putting these into service will be in demand.

In the past six months, foreign industry players such as Samsung, Siemens and Motorola have all announced plans to open new research and development (R&D) centers in China. These are being formed with either local government or educational institutes or even, in the case of Motorola's involvement with the China Integrated Circuit Design Center and local Eastern Communications, with their local rivals.

Reality Check for the Planned Economy

Finally, even if Chinese authorities are dissatisfied with the role being played by foreign mobile manufacturers, and are unconvinced by the technology transfer benefits of the R&D centers, the very structure of China's domestic industry may force the old guard into a re-think.

The requirement that 50% of the components used by value must be locally manufactured assumes that local industry will be able to supply the necessary components and in sufficient quantities. For example, all mobile phone manufacturers, foreign and domestic, rely heavily on imported integrated circuit (IC) chips to power their handsets. In fact, the present global shortage of such chips has forced all local manufacturers to cut back severely on their mobile phone production because they are unable to secure the required amounts.

A recently announced huge investment being made by Shanghai authorities to build an IC production industry in that city, touted as a road to greater self-sufficiency for Chinese industries, estimates that it can supply only 25% to 30% of IC chips needed by the PRC information technology industry as a whole by 2005.

In the meantime, foreign companies inside China appear to be doing well in making a case to the Chinese authorities that neither the aspirations nor the present requirements of the local mobile phone industry will be best served by such planned economy prescriptions.