China: Is the honeymoon over?

It may not

yet be a complete U-turn, but that is hardly a consolation for

the foreign telcos who have been told to get out of the joint

ventures (JVs) that they had entered into with China Unicom,

a consortium of three Chinese ministries and 13 state companies.

It had set out to challenge the monopoly of China Telecom-the

incumbent monopolistic state PTT.

These operators

had entered into these JVs-numbering more than 40-with China

Unicom, taking advantage of a "loophole" in the government

policy. China does not allow foreign equity participation in

telecom services as a policy matter. But with just about $200

million at its disposal and big, ambitious dreams-some of which

are materializing-China Unicom was looking everywhere for funds

when the "miracle formula" was found. Called China-China-Foreign

(CCF), the model worked like this. Chinese companies-particularly

the 13 shareholders of China Unicom-formed JVs with foreign

companies, which in turn partnered with China Unicom. Many foreign

companies, big and small, jumped at the opportunity. Prominent

among them were Bell Canada, Deutsche Telekom, France Telecom,

Korea Telecom, NTT, Singapore Telecom, and Sprint. And they

are estimated to have invested somewhere between $1.4 to $1.6

billion together-that is about three-fourth of the total investment

that China Unicom has made so far in building GSM networks.

Today, they

are in a helpless situation. China Unicom, under government

pressure, has asked them to willingly withdraw by September-end

by accepting whatever compensation it offers or receive nothing

after that. The bigger companies who look at long-term market

opportunity have decided to keep mum. But some smaller ones

are reluctant. Korean major Daewoo, one of the JV partners,

has threatened to sue China Unicom. But that means little in

China.

Whose

Fault Is It?



There are intense debates on who is responsible for the situation
in China today. There are broadly four opinions.

Outside

observers squarely blame the Chinese regime. According to them,

this is deliberately meant to remind the investors who is the

boss. Even today, they are sceptical of the Chinese reforms.

They are also mildly critical of the companies who invested

in these ventures, knowing fully well that the policies in China

are extremely uncertain. Though that would be the simplest conclusion

to draw not many familiar with Chinese and Asian market, buy

this argument.

Many other

analysts accuse China Unicom of taking an extremely combative

posture against China Telecom, thus creating unnecessary troubles

for itself. They also accuse Unicom of painting a rosy picture

to foreign investors. "The situation is similar to India''s.

You may compete with the DoT, but most private operators in

India do not want to annoy it for small things," says a

top executive of the Indian subsidiary of a European telecom

equipment company.Quite a

few others blame the "opportunistic" moves of the

foreign investors. "It was illegal. As a creditable company,

you must follow the regulatory regime, not try to find loopholes.

Otherwise, you don''t have any right to complain," says

Ian McKenzie, chief of operations (strategic markets), British

Telecom (BT). Incidentally, BT was one of the few major global

operators who did not enter into JV with Unicom.

Those who

have followed the Chinese developments very closely, however,

partially blame Wu Jichuan, minister for information industries,

who is known for his anti-reformist inclinations. Probably they

are the most right.

The

Reversal



In March 1998, a government restructuring put Wu, the former
MPT minister, in charge of the powerful ministry of information

industries, giving him a position from where he could control

the entire telecom in China. An anti-reformist, his long association

with China Telecom made him close to the incumbent operator,

whose monopoly position he wanted to protect. He moved fast,

introducing a proposal the very next month to ban the CCF model.

After some delay, Zhu Rongji, the reforms-friendly prime minister,

gave in to the pressure of his minister and China Telecom.

It is surprising

how a country like China tolerated this loophole for so long.

Many analysts believe the model had the indirect blessing of

the premier. But then why, when the anti-reformists are losing

out in China and rumours are rife that Wu might be replaced,

has the premier allowed such a move?

The

Real Reason



The actual reason could lie elsewhere, believe many. Says an
executive of a major foreign operator, which has been affected

by the ban, "The actual reason is not internal pressure.

It is the WTO."



He could be right. For joining WTO, these existing JVs make
the Chinese position much weaker in the negotiations'' table.

Now, China could well use allowing of foreign equity in telecom

services as an offer to bargain. But had these JVs existed,

it would have made no sense. In fact, a lesser official offer

would have been a kind of embarrassment.

So

after all Rongji could well have stooped to conquer.

Too

Many Wrong Signals



WTO might be the real reason. And by all probability, China
might well allow foreign participation in telecom services-that

too sooner than later. Even then, the way foreign investors

have been treated is not something many will love. Allowing

them to keep investing for so long, and throwing them out when

you feel like clearly sends a wrong signal to the investor community.

Meanwhile, Wu Jichuan has also barred foreign participation

in the Internet services.

Also, China

Telecom, forced by competition, has dropped tariffs, resulting

in drop in revenues. That has forced the Goliath to cut telecom

investment by about one-fifth. That is bad news for the equipment

makers. All these may be isolated developments. But their simultaneous

occurrence does send a strong negative signal.India:

Does It Gain?



What does the whole thing mean for India? Will the foreign companies,
at least some of them, bid adieu to the dragon land and flock

to India?

Highly unlikely.

First of all, China is a much bigger and faster moving market.

Statistics is something you can manipulate to prove your point.

But try doing that while comparing India and China! By whatever

parameters-penetration, investment, pace of reforms-or segments-fixed

phones, cellular, paging, the Internet-our neighbour is on top.

Says a telecom

consultant, "China takes ten steps forward, maybe two backward.

In the same period, India takes just one step. So, the gap is

widening."

India scores

on just one point. While progress is slow, sudden policy reversal

is almost ruled out. And India has a strong legal system.

However,

these are important only when there is some problem. If things

are smooth, China moves much faster. India is a market a company

can afford to be in, if it has long-term plans and enough sustaining

capability. Many feel the present crisis will make foreign investors

to look beyond China. India is the biggest and safest bet in

the region.

India has,

however, to be proactive in winning back the confidence of the

foreign investors. A stable government itself is a major enabler.

Its policies have to be forward looking.



India may not gain much from the crisis. But it can, actually.