Free Trade with "Chinese Characteristics"
By Eric Ransdell, Thu Dec 13 00:00:00 GMT 2001

As 2001 enters its final days, the Year of the Rat will go down as one of the banner years of modern Chinese history.

In July, China won its decades-long struggle to hold the Olympic games in Beijing in 2008. In October, more than 21 heads of state gathered in Shanghai when China hosted its first Asia-Pacific Economic Conference (APEC) - an event that will be primarily remembered for the sight of George W. Bush in a pair of polka-dot Tang Dynasty pajamas. Again in October, China's much-maligned men's soccer team qualified for the World Cup for the first time in the nation's history. And overall, despite a worldwide recession, the Chinese economy remains on track for a stunning 7.4 percent growth rate.

But in this annus mirabalis the Middle Kingdom's crowning achievement is its accession to the World Trade Organization (WTO). Though it lacked the fanfare and fireworks of the APEC summit and didn't send millions of red flag-waving Chinese into the streets like the Olympic announcement or the World Cup qualifier, WTO has the potential to transform a country whose velocity of economic change went into hyper-drive in the 1990s and shows no signs of slowing down.

Some commentators have compared the significance of China signing the world trade agreement to that of Deng Xiaoping launching the country on the path of capitalist reform with his 1978 announcement of China's "Open Door" policy. In effect, WTO represents the next logical step.

Under WTO China will liberalize almost every sector of its economy, from automobile manufacturing to healthcare to insurance and banking. Instead of the Byzantine laws, rules and restrictions that have vexed foreign companies for more than two decades, these reforms will be accompanied by new regulations designed to create a much more level playing field for both foreign and domestic competitors.

"Just as Deng Xiaopeng set the country on course for 'Capitalism with Chinese characteristics', you might think of WTO as 'Free Trade with Chinese characteristics'," says Arthur Wang, founder of 698 Capital, a Hong Kong-based venture capital firm."In the short-term its effects won't be as profound as those of the North American Free Trade Agreement or European Union, but compared to the situation that has prevailed for the last two decades, it's a true watershed both for China and the global economy."

Nowhere will WTO's effects be felt more sharply than in the wireless sector. With 135 million mobile phone subscribers at the end of this year, China finally surpassed the United States as the world's number one wireless marketplace. Though the figures aren't in for 2001, last year the country's wireless industry was worth more than $37 billion. And for the next five years the government's Ministry of Information Industry (MII) is predicting a 20 percent growth rate for wireless.

Though China's wireless industry has already been experiencing exponential growth rates similar to those of Silicon Valley in the late 1990s, wireless has remained one of the most the tightly regulated of all Chinese markets. WTO promises to change that by opening the market to both foreign companies and domestic players previously denied access under the old monopoly system.

The WTO agreement covers three telecommunications categories - Value-Added Services, which includes everything from paging to wireless content providers; Mobile Services, which includes wireless operators and manufacturers of wireless equipment; and Domestic and International Fixed Wireline Services. China will implement the WTO agreement through a process that will be phased in over time and geographical distribution.

In the realm of Value-Added Services, for example, foreign ownership was completely barred under the old regulations. Under the WTO agreement, which commenced December 11, foreign companies will now be able to take a 30 percent stake in joint ventures with mainland partners in the cities of Beijing, Shanghai and Guangzhou.

In 2003 that figure will rise to 49 percent foreign ownership and 14 additional cities will be added to the list. By the year 2004, foreign companies will be able to own 50 percent of Value-Added Services companies with no geographic restrictions. In Mobile Services and Fixed Wireline, the percentage stops at 49 percent in 2005 and 2008 respectively.

Another long march

While the changes WTO will bring about are revolutionary (even in the Chinese sense of the word) no one is expecting the wireless market to be transformed overnight. "The biggest fallacy is that the WTO will totally open up China," says Jason Chan, president for new business of Shanghai Cellstar International Trading Co, China's leading distributor of mobile handsets."The Chinese are very conservative and they like to play things step by step. This is not like going into any other well-developed country where you can set up an office or a factory and go in and launch your business. China still has a lot of restrictions and other barriers that have to change."

In the realm of Value-Added Services, one of the most formidable is the copyright issue. Take ringing tones as an example. Some Chinese companies in the wireless content space go to the trouble of licensing them. Others don't bother. "The big foreign content players such as Sony or Hello Kitty are very concerned about piracy and there's currently no clear law on copyright violation," says Chan. "So the hope is that not only will WTO bring in these players, but it will also force the government to form a workable [copyright] policy and a good controlling body to oversee its implementation. That way everybody can play fairly."

With outstanding issues ranging from the granting of licenses to the theoretical boundaries of foreign ownership yet to be hammered out, Duncan Clark, founder of BDA, a Beijing-based wireless consulting firm, also isn't sure if the foreigners are about to come rushing in.

"Britain's Vodaphone paid $2.5 billion for 2.2 percent of China Mobile (the country's largest mobile operator) and for that they received no board representation and no voting rights," says Clark, "That's a pretty steep price of entry. So I wouldn't say the doors are being flung open - they've cracked the door, but there's still a lot of bars across it and you can't really see what's inside."

But with a user base that's expected to grow to 350 million by the year 2005, according to Sweden's Ericsson Corporation, China is a tough market to ignore. Particularly in the face of a global economic downturn. "What I've seen so far is a pickup of interest from foreign players wanting to come in to China," says Nick Zhang, CEO of Shanghai-based Linktone, one of the country's leading MSPs. "We've had a lot of inquiries and discussions with foreign companies. Some are media players that want to add a wireless extension to their offerings, and some are content players wanting to offer their content to the single largest mobile market in the world."

Preparing for battle

For its part, China is trying to toughen up its domestic telecom players to face what the government is portraying as a total onslaught of foreign competition. Beijing has already initiated an AT&T like breakup of the monolithic China Telecom and smaller players such as China Unicom and China Netcom are being reorganized to offer a full range of services from wireless to IP to fixed line similar to America's Baby Bells.

"The China telecommunications industry is getting ready for WTO," says Vincent Fu, a senior telecom analyst with International Data Corporation in Beijing. "Before WTO, none of the smaller players could compete with China Telecom. Now with the reorganization their competitive capabilities are enhanced and they're looking much better than before."

It's not only happening at the operator level, but throughout the wireless industry. Two years ago China had no domestic handset manufacturers. Today the country has more than 20 (a few of which are operating without official approval) and they have already grabbed 17 percent of the market. Not only that, but they have completely reorganized the channel by leapfrogging distributors and going directly to retailers.

It's these kinds of shakeups where WTO will have the most far-reaching effects. One aspect of WTO that particularly terrifies those outside China's borders is that of technology transfer. China's handset makers, for example, currently assemble phones whose components are made primarily in Korea and Taiwan. But as Korean and Taiwan have both proven, it's only a matter of time before the local companies learn to do it themselves.

Where all this gets really interesting is in the realm of 3G.So far, the Chinese government has moved cautiously as it determines which standard it will settle upon. But there is little doubt the MII sees 3G as the future for China's wireless industry. As WTO allows more foreign investors into China, it also means more technology transfers to mainland manufacturers. As a result, Chinese companies will have newfound access to the most advanced wireless technologies available.

"WTO isn't just about foreigners coming in," explains Kenneth Leung, chairman of Irwin Capital Ltd., a Hong Kong-based venture fund consulting and investment firm."The rules cut both ways. WTO also means that local firms can now export without the restrictions that have been levied upon Chinese exports in the past."

In fact, in early December China formally notified WTO director-general Mike Moore that it intends to become a signatory to the Information Technology Agreement, an affiliate organization whose 57 member nations have agreed to remove import duties on information technology.

A tsunami of foreign investment sweeping into China? A wave of Chinese-made wireless products flooding the world's marketplaces? With WTO in it earliest stages, don't expect it to happen overnight. But as the song says - People get ready.

Eric Ransdell is the former Silicon Valley Bureau Chief for US News and World Report magazine. Now living in Shanghai, he covers mobile technology in Asia.