China Telecom

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China Telecom

33, Er Long Lu, Xicheng District
Beijing 100032
China
Telephone: (86) 10-6602-7043
Fax: (86) 10-6602-7254
Web site:http://www.ctl000.com

Established: 1994
Employees: 500,000
Sales: US$21.9 billion (2001)
NAIC: 513310 Telecommunications Networks, Wired; 513322 Telecommunications Carriers, Cellular Telephone

China Telecom dominates China’s largest fixed-line telephone services with 95 percent of the services for 1.2 billion people in 31 provinces. In addition to these 165 million fixed-line accounts, China Telecom has the world’s largest wireless market, with about 120 million subscribers, and a history of poor service. Effective May 16, 2002, China Telecom is separated into China Netcom Communication Group Corporation in the North and China Telecom Corporation in territories in the West and South to generate competition and greater efficiency. The northern operations cover ten provinces, and merged with former rivals Netcom and Jitong Communications. The southern and western operations include 21 provinces that comprise China Telecom.

China Telecom operations consist of four major components: fixed-line telephony, which is basic telephone service; Internet telephony, a category of hardware and software required to transmit Internet submissions over phone lines; VPN (virtual private network), a network system construed to submit data using telephony technology; and CDMA (code division multiple access), the technology behind cell-phone usage.

China is considered to be the last gold mine of telecommunications because of its vast and rapidly growing market. Xinhua News Agency reports that the total assets of China’s telecommunications sector topped 1 trillion yuan (US $120 billion) at the end of 2001. Investment in fixed assets (tangible property used in the operation of a business) for the industry came to 243 billion yuan (US $29.2 billion). The number of telephone users in China increased by 94 million in 2001 after the installation fee was removed, resulting in a total of 145 million mobile-phone users—the largest number of any country in the world—and 179 million fixed-telephone subscribers, the second highest worldwide.

Company Beginnings and Overview

China Telecom got its start in 1994 as an independent company, owning and controlling all public telecommunications, including mobile, fixed-line, and postal services. It was heavily regulated and influenced by the Ministry of Posts and Telecommunications (MPT).

By 1998, 1.2 billion people in China relied on telecommunications services. A countrywide modernization effort meant more focus on this sector of the economy was necessary. The people needed improved services and better quality telecommunications services. These two points were foremost in the minds of China Telecom executives when they attended the country’s PT/Expo telecommunications show in October of that year.

China Telecom planned to invest US$18 billion in telecommunications services that year and the next, with 80 percent slated for public telecom infrastructure. Business was good, with revenues for the first three quarters of 1998 at US$20 billion. Subscribers totaled 104.4 million and the number was going up rapidly. More than 20.8 million new customers joined in 1998, including 7.7 million cellular-phone customers. By contrast, China Telecom’s only competitor, China Unicom, had only 1 million customers at that time.

Company director Ni Yifeng had plans to increase the number of telephone exchanges by 20 million lines each year. Part of the company’s goal was to enhance the nationwide transmission network as well, as the actual number of telephone users for the year 2000 turned out to be more than twice the projected number. The company also wanted to develop products for VPNs (virtual private networks—private networks that are built atop a public network); frame relays (an interface used for WANs—wide area networks); Internet; and ISDN (integrated service digital network) lines.

To get help with these plans China Telecom called on an old ally, Nippon Telegraph and Telephone Corporation (NTT) for help, requesting management lessons as well as technical assistance. The relationship between NTT and the Chinese government dated back to 1980.

Telecom Restructuring 1998

In March 1998, the government had passed a telecommunications law that changed the regulatory structure and allowed more competition in the industry. China wished to enter the World Trade Organization (WTO). However, entry into the WTO required proof of a competitive atmosphere and a demonstrated customer-centered market environment. Up to this point, China’s telecom industry was dominated by China Telecom, which was a mammoth entity.

At this same time, a competitor, China United Telecommunications Corporation (China Unicom), tried to gain a foothold in the industry. However, the MPT (Ministry of Posts and Telecommunications) used its power and China Telecom used its dominance to successfully prevent China Unicom from becoming a significant competitor. China Unicom struggled to create new business, but its lack of government backing and a substantial customer base limited its ability to grow and compete.

The first item on the restructuring list was to break down the powerful ministry alliance between the MPT and China Telecom. The government absorbed the MPT into the Ministry of Information Industry (Mil). This new body was given the responsibility of governing all telecommunications operators. It was also assigned the task of establishing telecommunications policy, freeing up the market, and assisting with the planning for the prospective WTO bid. In being given responsibility for all telecommunications operators, it was hoped that the Mil would be forced to govern fairly, separate government from business, and promote competition.

While China Telecom made plans for the future, the government was hard at work influencing these plans. In early December 1998 the government announced it was considering breaking up the China Telecom monopoly by breaking up the company itself. The Mil submitted plans to China’s Cabinet that proposed breaking up the company either along geographical lines or by services. Another possibility on the horizon was to privatize the company, although recent new rules restricting foreign company involvement into China suggested this would not be a viable solution.

On December 17, 1998, the Mil announced breakup plans would be put on hold. The government ruled that operation of foreign companies in China was illegal, so the Mil had to compensate the foreign companies for their loss of business.

The Mil had submitted a plan that broke China Telecom into smaller companies along business lines, but the State Council had rejected that plan. The Council instructed the Mil to come up with a plan that fostered more competition. In response, the Mil first separated the postal services into their own entity, then began breaking up China Telecom.

The First Breakup: 1999

Much speculation surrounded the proposed breakup plans at the end of 1998, but the Mil refused to divulge its intentions. “The main idea is to separate the government function from the business function and to let the enterprises enter a market economy,” said Cheng Guanghui, then spokesperson for the Mil, without further elaboration.

The breaking up of the company finally began in 1999 and took more than two years to complete. China Telecom was offering essentially four services at this point: fixed-telephone lines, mobile communications, paging, and satellite transmissions. Each of these parts was broken into separate companies. While waiting for the government’s breakup decisions, the company forged ahead with company growth.

Plans for investing in 12 provinces were designed to boost China Telecom’s presence in the Western provinces. One official deemed the investments “important because of their political significance.” China Telecom also purchased ATM (asynchronous transfer mode that allows dynamic allocation of bandwidth) network equipment to carry digital data. In May 1999, China Telecom’s paging division, Guoxin Paging, was handed over to China Unicom. Guoxin Paging had an annual revenue of US$1 billion. Once absorbed into China Unicom, it boosted the company’s share of the paging market to 80 percent.

In 2000, the mobile operations were spun into a separate company called China Mobile, and soon became the second largest mobile network in the world. By the end of 2000, China Mobile served 78 percent of China’s mobile subscribers. The Satellite division also became its own company called ChinaSat. In May, the newly revamped China Telecom once again began operations with 98 percent of all fixed-line subscribers. However, by the end of 2000, this number had dropped to 95 percent.

Emerging Competitors

The desire for increased competition did not end with the breakup of China Telecom. China Unicom was still struggling to emerge despite being the recipient of China Telecom’s paging business. As the sole holder of operational licenses in China, the company forged ahead and offered an initial public offering (IPO) of US$6.9 billion in June 2000. It was permitted to charge 10 to 20 percent less in mobile fees than its only competitor, China Mobile.

Company Perspectives:

We should always manage the entrusted businesses on behalf of our clients wholeheartedly and commit ourselves to making success for our customers through our untiring efforts.

China Railway Telecom, or Railcom, which offered all telecom services except mobile, first established a national fixed-line network that spanned 120,000 km. In March 2001, it gained permission to offer rates 10 to 20 percent cheaper than China Telecom. However, in June of the same year, a connection agreement allowing both companies to offer nationwide services was signed.

China Netcom, which had data, VOIP (voice over Internet protocol), and Internet operations, was considered to be a future competitor to China Telecom and held the fastest fiber-optic network in the country. As data services were more in demand, the company’s responsiveness to the market positioned them as a potential major player.

By June 2001, the seven licensed public telecom operators included China Telecom and its two break-off companies (China Mobile and ChinaSat), China Unicom, Jitong (data and Internet operations), China Netcom, and China Railway Telecom.

Competitive Fee Reductions

The reduction of fees was a common practice during this time of restructuring. In June 1999, Mll had awarded China Telecom, Unicom, Jitong, and Netcom the licenses to offer IP telephony services for 50 percent less for long-distance and international calls. For other reasons as well, China Telecom was merely moderately profitable by 2000, with only 11 of 31 regional branches reporting profits. Part of this was due to its employee structure; when mobile, satellite, and paging operations were divested, the employees stayed with the fixed-line operations.

Several of China Telecom’s subsidiaries also ran schools, hotels, shops, and other businesses, which added up to high-company operating costs. In May of 2000, the company’s IPO plans hit another snag when investors opted for the competitor, China Unicom, over China Telecom. By the end of 2000, it became obvious that China Telecom’s monopoly was slowly being chiseled away by discounts awarded to other telecoms and its own inefficiencies.

The MII also reduced fixed-line and IP telephone charges (including Internet connection fees) by more than 50 percent in January 2001. China Telecom still had 95 percent of the market and was more seriously undermined by this move than other MII changes. The company lost about US$3.6 billion that year.

China Telecom Embraces High-Tech Opportunities

The year 2000 brought new changes in telecommunications regulations. Designed to clarify some vague definitions, the rules were welcomed by telecom operators. Foreign companies showed interest even though no specifics were included for their involvement. The basic tenet of the rules was to allow the telecoms to focus on upgrading services rather than to continue to engage in price wars.

This meant that China Telecom could forge ahead with more plans to upgrade services and engage in technical progress as well. In October of that year they teamed with Hutchinson Global Crossing, a Hong Kong-based network operator to create the Shenzhen-Hong Kong fiber-optic transmission system (SDH). The SDH extended China Telecom’s fiber-optics offerings to a total of 80 kilometers from Guangzhou to the border of Hong Kong, and made a direct connection to the system found there.

Four months later, China Telecom began 2001 with a shaky start when an undersea cable broke, leaving China’s Internet users with no connections for ten days in February. However, the company forged ahead with more technology dreams—specifically, broadband plans. Broadband networks not only allowed more data to transmit but could run video and voice signals through at the same time.

Physically, broadband meant elimination of copper cables that were notorious for inefficient transmissions. Having broadband technology could mean more business opportunity for China Telecom as evidenced in their US$101 million deal with Canada-based Nortel Networks to construct a 15,000-kilometer network. By providing high-speed devices such as ISDN (integrated service digital network) through this network, the company could switch China’s 22.5 million Internet users from dialup to digital. China Telecom estimated that by 2005, they would have 20 million broadband users.

China Telecom remained dominant in its position at this time, despite the earlier divestment of several of its businesses. Their Internet (data communications) branch, ChinaNet, was the leading data center and Internet access provider in China. Fixed-line telephony still accounted for 90 percent of consumers’ needs; however, increased demand for more technology and better service began to put pressure on China Telecom.

Key Dates:

1994:: China Telecom and China Unicom are established as independent, non-government-backed companies.
1997:: China Telecom’s network becomes the world’s second largest fixed-line telephone network, with more than 100 million lines.
1998:: The government forms the regulatory Ministry of Information Industry (MII); and postal services are separated from China Telecom and absorbed into the MII
1999:: The government begins to restructure China Telecom into four separate companies; and China Unicom is granted an exclusive permit for Internet and ISP (Internet service provider) services.
2000:: As part of restructuring, China Mobile and China Satcom are spun off as separate companies; fixed-line competitor China Railways Communications Limited (Railcom) is established; and telephone users in China surpass the 200 million mark.
2001:: China becomes a member of the World Trade Organization (WTO).
2002:: China Telecom is reorganized into China Netcom Communication Group Corporation in the Northern provinces and China Telecom Corporation in the Southern provinces.

Dreams of an IPO

In December 2000, China Telecom had begun to prepare for an initial public offering to raise US$10 to US$15 billion on the New York and Hong Kong stock exchanges. Scheduled for July 2001, it was to be one of Asia’s biggest IPOs. Merrill Lynch and Morgan Stanley were hired to underwrite the IPO. However, in May of that year, the company placed all its plans on hold indefinitely. The investment climate was bad, and global interest in telecom stocks was down. Industry analysts also blamed China Telecom’s reform process, which was supposed to have been completed by then.

The reform program was planned to prepare China Telecom for an overseas listing, which would involve major structural reform to be completed by March 2001 when the company went public. However, by May 2001, the plan had still not been approved. Discouraged about their future when the reforms had not materialized, some employees jumped to better-paid jobs at China Mobile and China Unicom later in the year.

The reform program consisted of returning the company to its core business of telecom operations. The company was to rid itself of all activities not directly related to telecom operations, laying off 200,000 workers in the process and focusing on the parts of the company that were profitable.

Another part of China Telecom’s IPO process was an application for a mobile license. Unfortunately, the Mll announced in March 2001, that it would not grant another mobile license that year. China Telecom wanted the government to expedite its breakup plans, as the delay was holding back the company’s desire for a successful initial public offering (IPO). The company had originally wanted to list on the Hong Kong and U.S. markets and raise US$8 to US$10 billion in 2001. These plans were put on hold when talk of another restructure began. China Telecom needed government approval to list. When China Telecom went public it would be the first telecom company in China to go public and to list funds in an international market.

Expanded Internet Services

Formerly only the northern-based Jitong was offering Internet access besides ChinaNet. By June 2001, China Netcom, China Unicom, and China Railway all began to enter the Internet market. Independent providers began to spring up as well. And network upgrades allowed cable providers to offer Internet services for the first time. Contributing to the growing competitive landscape were the Mll’s goals of fostering competition by becoming a more independent entity.

In an effort to compete with these newcomers and their lower rates, China Telecom cut its Internet Protocol (IP, meaning long-distance connections made using Internet technology, not to be confused with Internet access) fees by 50 percent in March 2001. The company had already increased charges for its fixed-line operations by about 60 percent the year before, possibly contributing for the loss of customers to less expensive operators.

Other preemptive moves by China Telecom included waiving installation fees and giving gifts to new subscribers. The new policies confirmed that China Telecom could no longer deny the looming competition ahead.

Price Wars Continue

The price wars of early 2001 were only the start of the emerging competitive telecom market. By now, China Telecom was still the dominating player but the others were becoming increasingly competitive.

One such company was China Railcom, the country’s second-biggest fixed-line telecom operator that was established at the end of 2000. It initiated price wars by setting rates at half the rate that China Telecom charged, and targeted completion of a long-distance call network by June, mere months after the company was established.

China Telecom had to face yet another new obstacle, the loss of its monopoly on Internet bandwidth. China Unicom was awarded permits to build and operate its own international landing station, allowing the company to use undersea cable operations without having to negotiate prices with China Telecom. Local start-up ISPs could work with China Unicom as well, continuing to chisel away at China Telecom’s dominance.

However, China Telecom continued to prosper and grow. In 2001, the company’s number of digital communications increased by 17.61 million units over 2000, for a total of 33.22 million units, and an increase of 31.6 percent over 2000. The total browsing time of Internet users reached 143 billion minutes, an increase of 140.3 percent over 2000. China Telecom’s total digital communication income in 2001 came to 9.65 billion yuan (US $1.17 billion).

Restructuring Redux 2002

China’s entry into the World Trade Organization (WTO) triggered more change for China Telecom, which still held 95 percent of the market and was considered a monopoly. Because of the WTO pressures, another restructuring was on the horizon.

In the summer of 2001, the Chinese government began to plan another breakup of China Telecom. In December, the government approved a plan to split the company into two separate companies. One would take the ten Northern provinces, and the other the Southern provinces. The northern group would combine with two smaller companies to form a new company called China Netcom. The southern half would remain China Telecom, with 21 provinces.

Much later than initially planned, on May 16, 2002, the split became official when the Northern provinces became China Netcom Communication Group Corporation, and the Southern and Western provinces became China Telecom Corporation. These two regional companies, divided by the Yellow River, would be allowed to build more networks and to compete with each other, although this would likely take years as the local phone services would not immediately overlap.

The newly structured China Telecom would retain 70 percent of its long-distance network, with the remaining network handed over to China Netcom. “Reform is the direction and competition is the goal,” stated Wu Jichuan, head of China’s Ministry of Information Industry (Mil) during a ceremony honoring the split. Minister Wu, as reported in the Reuters Business Report for May 16, 2002, further noted that the goal in dividing China Telecom, which had a longstanding reputation for poor service and high prices, was to “break the monopoly and improve the quality of telecom services.”

Competition was further enhanced by plans to issue both new companies wireless operating licenses. Next on the drawing board were plans for an expected US$3 to US$5 billion initial public offering (IPO) by China Telecom in Hong Kong and New York later in 2002. As of May 2002, the telecom market in China was shared by China Telecom Corporation, China Netcom Communication Group Corporation, China Mobile, China Unicom, China Satcom, and China Railcom.

It is hoped that China Telecom can step up to real competition. On December 11, 2001, when China joined the World Trade Organization, it promised, as a condition of membership, to allow foreigners to own up to 50 percent of telecoms ventures in China after two years, and 49 percent of mobile-phone companies after five years. Telecommunications investors are unlikely to pass the opportunity for a parcel of this last gold mine.