Monopoly Ends, Duopoly Begins

Officials at China Netcom have been swift to allay the fears of both domestic and foreign telecom suppliers by saying that the newly established holding entity would honour the existing contractual obligations of the former incumbent. However, when local China Netcom officials are approached on the subject, their comments are less reassuring. According to one China Netcom employee, it may be up to the provincial branches of the Group to amend some existing supply contracts. The official suggests that as the municipal or provincial branches are independent legal entities they are able to negotiate contractual terms with suppliers as appropriate. In fact, the new China Netcom entities have the same prerogative as the former China Telecom branches.

Division of Assets

Under the restructuring, China Telecom retains control of operations in 21 southern and northwestern provinces and municipalities. This encompasses China's wealthiest areas, including Shanghai and the provinces of Guangdong, Jiangsu, Zhejiang and Fujian; and some of the remote and lowest per capita income regions including Anhui, Jiangxi, Qinghai, Tibet and Xinjiang.

The new China Netcom Group, a combination of Jitong Communications, China Netcom Corporation and China Telecom's northern branches will operate in China's 10 predominantly middle-income northern cities and provinces: Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia, Liaoning, Jilin, Helongjiang, Henan, and Shandong.

The new China Telecom Corporation is still entitled to retain the goodwill and intangible assets of the former China Telecom, and more importantly, hold 70% of the national trunk transmission network assets owned by the former company. China Netcom Group will hold the remaining 30% of the trunk network. China Telecom's assets (estimated at Rmb600 billion in 2000) will be divided between the new China Telecom and China Netcom in the ratio of about 2:1.

Business Strategy

China Mobile is reputedly the largest wireless carrier in China, and the largest telecom operator overall, with a market share of around 36.6%. China Telecom, formerly the dominant player, is now the second largest telecom carrier in China with a 33.8% market share. China Netcom ranks third, and its market share has risen to 17.2%.

Since the restructuring, both companies are competing via long distance and data services using internet-based technology. It is likely that they will introduce value-added services, which have been available to China's mobile subscribers for some time. China Telecom is at a disadvantage having lost its mobile telephone operations. In order to maintain the balance of telecom power in China, the new entity will be lobbying hard for a mobile licence.

Broadband Future

After the split, China Telecom stated its business objectives would include faster development of broadband internet access services in addition to its voice and data businesses. Meanwhile, Netcom Group has stated that the company will undergo a multi-billion dollar fundraising plan and significant investment in network upgrades, signalling a turning point in efforts to reform the country's fixed line telephone industry. Both China Telecom and China Netcom plan to invest heavily in new software and equipment and to market more sophisticated services.

Outstanding Issues

A number of crucial details concerning the restructuring remain unresolved. For example, if the new companies do not allow competitors to access their networks, or if they deny access to the "last mile" - a monopoly will have merely been replaced by a duopoly. Further, if fixed-line telephone companies cannot win licences to build mobile-phone networks, China Mobile and China Unicom will retain a similar duopoly.

China Telecom and China Netcom are expected to compete in long-distance and data services on a cross-provincial basis irrespective of territorial boundaries. Reportedly, the State Council is working on fee schedules that allow price undercutting for traditional long-distance services in a competitor's territory. This might be good news for consumers in the long run. Up to now, the big shake up has not had a big impact in certain parts of the country. Some phone users in Shandong province claim that their phone bill still bears the China Telecom logo and that China Netcom has not come calling yet.

Meanwhile, the future of China Netcom Corp., China Netcom Group's subsidiary, and its foreign shareholders is also the subject of speculation. Observers have suggested that foreign interests in China Netcom Corp. may have to be divested. When the group company eventually attempts a stock exchange listing of its own there may be pressure to integrate its subsidiary's assets in addition to other corporate structuring issues.

Although the break up of the old China Telecom is a major development, the restructure of its telecom industry will only start to bring benefits to users and foreign suppliers once there is greater access to networks, fixed tariffs have been reduced or abolished, and ownership rules are relaxed.

By Nancy Leigh
Baker & McKenzie, Hong Kong