China`s telecom strategy hampered by trade restrictions
By STEPHEN N. BROWN
President Clinton`s scheduled visit to China this spring gives both governments another opportunity to discuss China`s entry into the World Trade Organization (wto), a contentious issue because the United States is seeking several concessions. The American position is articulated by Congressman Richard Gephardt (d-mo), who says, "China`s entry into the wto can provide enormous benefits to the United States by subjecting China to international rules and enforcement. But the question is, what exactly will China agree to? China has had a sweetheart deal up until this point. [It isn`t] interested in giving that up. China wants to be able to maintain its protectionist policies for as long as possible. While China enjoys virtually unfettered access to our market, our farmers, workers, and businesses see their products and services often blocked from entering the Chinese market."
Several months ago, the Chinese government smoothed the way for wto entry by announcing its intent to sign the International Technology Agreement, which eliminates tariffs on information technology imported to China. This is a significant step because the import market looms large for the world`s telecommunications equipment manufacturers. Killen Associates predicts that within five years, China`s expenditures on information technology will nearly triple to $71 billion annually. By the year 2000, the number of cellular subscribers will exceed 20 million, and the public-switched telephone network`s capacity will exceed 170 million lines.
These impressive growth statistics signal a bonanza for companies fortunate enough to sell their equipment in China. For example, Finland-based Nokia expects its sales of wireless equipment in China to reach $700 million in 1998. Many companies, such as Motorola, at&t, and Nortel, have major stakes in China. But the private sector has not instigated China`s telecommunications boom. It is the direct result of the government`s ninth five-year plan, which calls for huge expansion of the telecommunications sector. For the time being, free trade in telecommunications is a comfortable fit with domestic policy.
However, the Chinese government`s bow to free trade in telecommunications was offset by a strategic move to protect domestic manufacturers of electronics products. According to Electronic Engineering Times, the Ministry of Electronics Industry (mei), joined by the Ministry of Posts and Telecommunications (mpt), is planning to draft China-specific performance and design standards for electronics products sold in that nation. The mei`s apparent goal is to change China`s economic role from being a manufacturer of yesterday`s high-tech products to being a center for leading-edge technology.
This policy could easily migrate to telecommunications because the mpt is already involved in setting technical specifications for digital telephones. Nation-specific standards raise the possibility that any product not meeting them would be barred from the country. This risk will cause any company to think twice before resisting the mei`s initiative, especially if competitors comply with the standards and walt¥their way to more orders and higher profits. It may be more than coincidence that at about the same time the standards story was breaking, Nokia announced that it would establish a research and development facility in Beijing. The company`s executive vice president Sari Baldauf said the facility "illustrates our commitment to being a leading telecommunications company in China." The company added that the facility would "apply...the latest technology to products and solutions for the Chinese market"--a clear sign of the mpt`s persuasiveness and the power of China`s huge market.
Push to be technology center
China`s push to be a technology center stems from a concern that foreign- supplied technology would be secondhand or outdated instead of the best. Therefore, the nation`s infrastructure and economy as a whole would be second-class and vulnerable to technological advances elsewhere. The mei`s and mpt`s joint policy is an attempt to overcome a perceived disadvantage. But if the standards issue is seen as another attempt to block foreign access to China`s market, then trouble lies ahead, not only from foreign governments but also from technological innovators who build to worldwide standards.
These innovators are entrepreneurial and competitive and most often are the driving force behind evolving technical standards. They would be reluctant to redesign their products to fill a specific need mandated by the mei, whose policy risks cutting off China from further technological advances if they are made elsewhere in the world.
This risk should be considered in light of the mpt`s apparent decision to wire the telecommunications and video infrastructure with copper twisted-pair loops and coaxial cables, respectively, instead of fiber optics. China`s public-switched telephone network is adding 3 million to 20 million copper loops annually for the next 10 years. Within 10 years, more than 100 million Chinese households will subscribe to either cable TV or direct-to-home satellite news and entertainment programming. The government also plans for the entire population to receive electric utility services. The utility, video, and telecommunications services combined demand for copper points to a vulnerability in China`s economic strategy: The country`s development may falter because on a per capita basis, China`s copper reserves are among the lowest in the world.
Total reserves are estimated at 60 million tons, one half of which is being mined today. China`s per-capita copper consumption is about one tenth of the per-capita consumption in industrialized countries but is increasing at a rate exceeding 8% per year. The rate cannot be sustained with domestic production. Thus, more than half of China`s copper demand is met by imports, ranging from concentrates to semi-manufactured products. In 1988, domestic supply was so scarce relative to demand that the government banned exports of domestically mined copper and turned to imports primarily from Australia, Chile, and Mongolia.
Meanwhile, China has improved its ability to mine copper and manufacture related products. For example, Alcan Aluminum Ltd. will build a smelter and power complex in Shanxi province. In Shangdong province, Phelps Dodge Corp., the giant American copper company, built a cable manufacturing facility in a joint venture with several Chinese electric utilities. Despite the improvements, China`s copper industry may not be cost-competitive with worldwide producers. Six months ago, a report made its way through the Asian metals-trading industry that China`s Army was importing 100,000 tons of copper, which would force prices so low as to ruin China`s domestic producers. Traders in Hong Kong dismissed the report as rumor, believing the government would not allow a vital industry to be ruined by an excess of imports.
Foreign copper suppliers would be delighted to increase exports to China because world copper supply is expected to exceed demand for several years. Phelps Dodge chairman Douglas Yearley says that China`s copper demand was "a real wild card" and that "China is about 10% of world demand."
Finding a balance
For the next several years, China`s economic planners may find themselves trying to find a balance between preserving the domestic copper industry and promoting the use of copper in utility and telecommunications services. But recent technological developments suggest the balance may be easy to find. As reported elsewhere in this issue (see page 46), an American company will soon be manufacturing a cable composed of fiber-optic and electrical materials, which are presumably copper. The composite cable supposedly delivers great amounts of bandwidth to supply video, voice, and data services. The new cable eliminates copper loops and coaxial cables but uses less than 5% of their copper content. If China were to adopt the new cable as part of its infrastructure, bandwidth would be available in copious amounts, and the country`s demand for copper would grow at a slower rate, thus allowing a higher portion of domestic consumption to be met by domestic facilities.
Of course, this strategy would completely change China`s market, ruin many of the business relationships that China has established with equipment suppliers, and stymie the mei`s and mpt`s joint efforts to establish nation-specific technical standards. But this is better than building a copper-based video and telecommunications infrastructure that will last for 100 years and be outdated in 10. China has little to lose and even more to gain by backing away from a standards issue that could deny the country beneficial telecommunications technology. q