Download Over Consume and the Policy of Chinese Telecom Industry

Over Consume and the Policy of Chinese Telecom Industry
Jianqiu Zeng1
School of Economics and Management
Beijing University of Posts and Telecommunications
Beijing, 100876, China
Abstract: With Chinese economy developing quickly and Chinese telecom industry gained great
achievements, there is obvious telecom over consume in China. Over consume may make against the
sustained development of Chinese telecom industry. Only if industry policies were adjusted and proper
measures were carried out, could the disadvantages brought about by over consume be overcome and
Chinese telecom industry go on contributing to Chinese economy construction.
Key Words: over consume, tariff, investment, universal service, regulation
I. Introduction
Since 1985, the growing rate of Chinese telecom industry has overrun more than that of national
economy for 16 years. From 1989 to 2001 the revenue and investment of Chinese telecom industry have
increased 38 times and grown 41% yearly, 4 times as GDP. Basic optical-fibered network has been set
up and the capacity of telecom network has increased 15 times till 2001. The whole telecom network has
turned from small capacity to huge, analog to digital and few services to multiple services.
1
Jianqiu ZENG, Professor of Beijing University of Posts and Telecoms. Research fields include
Technology & Economics of Telecom Industry, Competitiveness and Strategy in Communications.
Publications include Technical and Economic Anatomy, Application of Input and Output Model into
Telecom Industry, Overviews on the Development of Telecom Industry, Who Control Telecom Tariffs,
etc.
80
60
)%
( 40
20
0
59
31.4
42.3
48.743.7
26
26
20
18.3
18.2
15.3
14.113.112.69
12.413.28.5
11.511.3
11
11.1
9.3
9.1
7.8
6.3 5.2
5.1 4.6
4.2 4.2 9.1
43.9
35.433.337.132.1
9.7 8.8 7.8 7.1 8
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20
The Growing Speed of GDP(%)
The Growing Speed of the Income of Post and Telecom(%)
Source: Jianqiu Zeng, Overviews on Telecommunication Development, Press of BUPT, 2001
During “the ninth five years plan”, the revenue of Chinese telecom industry grew 28.8% yearly, 3.2
times as GDP. The total investment to fixed assets reached US$96.7 billion (RMB800 billion), 3.3 times
as that in “the eighth five years plan”. The investing resources turned from state investment to enterprise
investment and telecommunication facilities were mainly homegrown or localization.
During “the ninth five years plan”, with 37 million new subscribers yearly, about 46 million lines were
increased in Chinese fixed telephone network and mobile telephone network, setting a record to the
history of international telecom industry. Until the end of 2001 the total subscribers of Chinese fixed
phone have been 179.034 million and those of mobile phone have been 144.812 million, both increased
the fast all over the world. It’s expected that in 2005 the added value of Chinese IT industry will be
US$112 billion (RMB920 billion), occupying 7.34% of total GDP in China. The subscribers of fixed
phone will be 220-270 million and those of mobile phone will be 300-350 million, occupying about
25% of the total subscribers all over the world, still leading the world. The phone popularization rate
will be over 40% in which the popularization rate of fixed phone will grow from 13.45% to 19.87% and
that of mobile phone will grow from 6.7% to 20.72%. 95% Chinese villages will be available in
telephone services.
In 2000 telecom tariffs were adjusted and prices of telecom services decreased too. The competition in
Chinese telecom market becomes more and more drastic and pricing wars bring about malignant
competition to certain extent. These factors resulted in ARPU’s decrease. In July 1st 2001, China
canceled the accessing charges of fixed phone and mobile phone, and this affects the growing speed of
telecom revenue. However versus the international telecom market, Chinese telecom industry is still in
stead development. In 2001 the total revenue of Chinese telecom and post was US$49.2 billion
(RMB406.97 billion), increasing 24% than that of 2000, in which the revenue of telecom industry was
US$43.67 billion (RMB361.2 billion) based on 2000’s prices, increasing 25% than that of 2000. Former
China Telecom was one of the biggest 500 enterprises of the world in 2000. Both China Mobile and
China Unicom belonged in 20011. Telecom industry has contributed much to the stead development of
Chinese national economy.
II. Implication of Telecom Over Consume and the Correlative Factors
Over consume means that the consuming level is over the corresponding economy’s development or
revenue level. According to the theory of national economic reproducing2, the final distribution to NI
can result in accumulation and consume. Accumulation can be used in social reproduction and consume
can be used to meet people’s demands. According to Keynes’s economic model3, families offer
producing factors to enterprises to get revenues and the revenues compose NI. One part of NI is in
consume by purchasing and the other part is saved into financial organizations; Enterprises can get
selling revenue from families’ consume and investing capital from financial organizations, and have
productive factors into production procedure. The products compose national producing, one part of
which is used in families’ consume and the other part is used in enterprises’ investment. Consume,
saving and investment are the most important factors in national economy. The unreasoned inflation in
consume brought about by over consume could decrease saving and affect social reproduction,
eventually will influence consume itself.
Telecom industry, as one part of national economy, includes accumulation and consume too, over
consume may come as well. Telecom over consume means that in telecom market the telecom services
consumed by subscribers are over the corresponding revenue and economy developing level.
Theoretically the developing level of telecom industry is usually consentaneous with that of national
economy. Chinese telecom industry wouldn’t have gained great achievements without the support of
China’s reform and open policy and quick development of national economy. However the developing
level of telecom industry is usually consentaneous with that of national economy, yet sometimes
telecom industry gets behind national economy to haul the economy’s development and sometimes
telecom industry advances national economy to promote the economy’s development. Telecom over
consume usually happens when telecom sector develops quicker than other sectors according to
international telecom development history. In telecom industry production and consume take place at the
same time, which is the most important difference to telecom industry from other sectors. Telecom
consume is beyond the promotion to telecom production. So it’s necessary to analyze the effect brought
about by telecom over consume based on the features of telecom industry. According to international
telecom history there are mainly three factors that will result in telecom over consume.
(1) Demonstrative effect from developed countries
From the relationship between economy level and consume structure, the consume structure of
developed countries often bring obvious demonstrative effect to lagging developed countries. This
makes that the consume structure of those lagging developed countries exceeds their economy level and
1
Time and Warner, Fortune, 2001,7
Zhiyuan Li, Macro Economy Analysis, Qinghua Press, 1997
3
Joseph E.Stiglitz, Economics, (The Second Edition), Press of People University, 2000.
2
over consume in some kinds of products and services appears. In China many people are in habit of
comparing telecom tariffs in China with those in USA though income to both body is different.
(2) Telecom Industry Policies
In the whole social producing course consume is in the end stage and consume is both the producing aim
and the practical realization to production. Consume can promote production to certain extent and this is
why market enters saturation or market demand is insufficient. From the development of international
telecom industry many governments encouraged certain telecom over consume in order to keep
adequate demand for telecom consume and promote telecom industry development. Because production
and consume take place at the same time in telecom procedure, telecom over consume is much more
obvious.
(3) Telecom Tariff and Correlative Policies
Telecom tariff is an important factor affecting telecom consume, if telecom service prices or tariffs are
lower, the telecom consume would be over-stimulated to over economy level or revenue.
III. Disadvantages by Over Consume and the Corresponding Measures
It’s necessary to analyze the effects brought about by over consume. Telecom industry is different from
traditional industries. Because of different cost structure and obviously descending margin cost, there is
obvious scale efficiency in telecom industry and this feature hasn’t changed fundamentally. Because
consume and production take place at the same time in telecom field, the promoting effect from
consume is more obvious than that of traditional industries. So proper telecom over consume is helpful
to keep high market demand and promote telecom industry development. Global economy has entered
information age, many countries, especially developing countries, establish policies to encourage the
development of telecom industry. To those countries the economy level aren’t high, telecom over
consume is easy to be happened with the advancing development of telecom industry. According to
ITU’s data, telecom over consume has happened in many developing countries and it’s more obvious in
some countries such as India and Malaysia than in China. Telecom over consume in China has its own
milieu of history. According to the history of international economy development, telecom industry
usually developed faster than national economy. However the long-term effect from planned economy in
China resulted in telecom industry lagging behind national economy. From example at the end of 1980
every 100 inhabitants only had 0.43 telephones in China. It brought about wide gap between demand
and supply. After the Policy of Reform and Opening the huge demand from telecommunication burst out.
It is the long-term blooming demand that assures Chinese telecom industry developing fast for over 10
years.
However telecom over consume will bring about disadvantages. The unreasoned tariff and the overly
investment could activate existing contradictions and do harm to the sustained development of telecom
industry. During the period of over consume, it’s relatively easy for telecom operators to develop fast
and gain high profits. It’s not the result of good dealing but the result under certain period and market
conditions. With market demand meeting telecom market will enter buyer market from seller market.
The developing speed will become stead. Meanwhile the monopoly profit will decrease with
competition, and eventually reach to the same level of social average profit. Sooner or later Chinese
telecom industry will be faced with the problem of sustained development, some lagging telecom
enterprises will be faced with dilemma and may have to withdraw from telecom market. Over consume
brings about three disadvantages to Chinese telecom industry.
(1) Universal service
Universal service means that qualified telecom services should be provided to all subscribers by
reasonable prices that subscribers can offer.4 That is to say telecom operators can’t carry out higher
prices or contract services in high-cost area.
In China, telephone popularization rate isn’t high, with 16% at the end of 2000, and it is unbalanced in
different areas. The telephone popularization rate in major cities is near saturation while that in rural
area is very low. There is still high demand for telephone in China. As a very important basic condition,
telecom serving is necessary for rural areas to get rid of poverty and develop economy. Without telecom
universal service, telecom market might be diminished and Information Gap would be wider. So telecom
universal service is significant as a policy aim in China.
Former China Telecom was the sole operator offering universal service for a long time. Before the
monopoly was broken in Chinese telecom sectors, the problems in unreasoned tariffs and receiving
investment weren’t obvious because of ubiquitous cross-compensation. After the monopoly was broken
in Chinese telecom industry and competition was inducted, especially China Telecom was reformed the
first time, the problems of unreasoned tariffs and overly investment brought about by over consume
became more and more obvious.
The constructing cost in Chinese rural area is much higher than that in cities. Moreover in rural area
people consume in telecom service is limited and the period of receiving investment is longer. So under
current market conditions it’s unrealistic for China Telecom to offer universal service alone.
In 2001 China Telecom was reformed the second time and its capital plan was cancelled. Meanwhile the
cancel to telephone accessing charge and the decrease in revenue make China Telecom be short in
investment, which influence telecommunication capacity increase the and future development. For
instance, after the accessing charge for fixed telephone was cancelled in July 2001, the subscribers of
fixed telephone have been increasing with over 100000 every day, while the increasing capacity of
exchangers is lagging. In some rural area it’s difficult to apply telephone set again.
Universal service is a problem faced by many countries. Competition and cross subsidy or compensation
is usually contradictory to government regulation. Special methods are necessary such as universal
service fund, universal service tax and universal service auction5. Universal service fund means that
telecom operators take compensation from revenue according to certain rate to compensate those
operators offering universal service. The compensating scale is usually based on new subscribers yearly
in rural area to settle the contradiction between competition and universal service. Universal service tax
4
5
FCC CC Duplicates No.96-45, 1996,11,28
Jean.Jacques Laffont, Jean Tirole, Telecom Competition, Press of People’s Posts and Telecoms, 2001
means that financial resource is used to compensate those operators to offer services in high-cost area.
This method is decided by the efficiency of tax system and could reduce certain social welfare loss.
In China, 3%-5% of 180 million telephone subscribers are non-consumers who only receive phone
without calling. Universal service is faced with new pressure. Now in west area of China telecom
service can almost keep up with the development of local economy and in some places even in lead
development. However the total developing level lags behind that in east area obviously. For example,
the telephone popularization is 25% lower in west than that in east. The operations in rural area are
defective. It’s urgent to establish universal service fund and assure telecom basic services available in
rural area to realize harmonious development all over the country. Although Telecom Rules2 regulates
that the method of compensating cost in offering universal service should be established, the detailed
solution hasn’t been available up till now. The problem of universal service should be studied and solved
rationally.
(2) Telecom Deregulation and Polities
Telecom over consume may disturb the judgment to the developing stage of Chinese telecom industry.
According to the standard of GNP per capita, China is a developing country and belongs to
medium-and-low-revenue country, which means that Chinese telecom industry couldn’t be in high
developing level. But China is a big country and Chinese telecom market scale is leading in the world.
Until September 2001 the subscribers of fixed telephone were 172 million and those of mobile
telephone were 140 million, both leading the world. However the benefit or economic effect of Chinese
telecom industry isn’t good. For example the revenue of each main line was 580$ in 1999, only 1/5 of
that in high-revenue countries, specifically, 1/7 of that in HK and Singapore, 1/6 of that in USA and
Australia and even less than the average of medium-and-low-revenue countries. Meanwhile in 1999 the
investment of each main line was 200$, which was much higher than the average level of
medium-and-low-revenue countries. As for competing structure, because competition inducted into
Chinese telecom industry is not long and major telecom operators are state-owned, these factors result in
the lack of complete market competition in Chinese telecom market. If Chinese telecom market was
regarded as a developed countries market, wrong conclusion is easily to be made. In 2001 the argument
about whether China Telecom should be reformed again reflected the topic of how to confirm the
developing stage where Chinese telecom industry is.
Now how to entry and compete with each other between telecom sectors and CATV is another
deregulating hot point in China. Although Broadcast TV has entitled to enter telecom field in some
countries, yet it is still to need time for Chinese Broadcast TV entering telecom field according to
China’s situations.
There is special industry regulation system and different benefits belonging to different bureaus, it’s
much likely for Broadcast TV to be admitted entering telecom market before the current benefit
relations are broken and telecom operators are admitted to enter broadcasting field.
Broadcast TV can’t play an important role of breaking monopoly in Chinese telecom market.
2
Telecom Rules of PRC, granted in October 2000 in China.
Internationally the aim that Broadcast TV is admitted to enter telecom market is to break telecom
monopoly and boost competing efficiency. However it’s difficult to conclude that the action of
Broadcast TV is available to stimulate competition considering the situation of China. Firstly Chinese
telecom market is in competition to certain extent. The market of fixed telephone exist China Telecom,
China Netcom, China Unicom and China Railcom and the market of mobile phone exist China Mobile
and China Unicom, aside from “XiaoLingTong” offered by China Telecom and China Netcom and
market of data communication exists all major Chinese telecom operators. So it’s not urgent to admit
Broadcast TV to enter telecom market to boost competition in China. Secondly in current Chinese
telecom market all major operators are state-owned, which means the market competition is still in the
imitating competition controlled by government and complete market competition has not appeared up
till now. Broadcast TV entering telecom market can’t change the current competing situation and boost
competition as well. To realize complete market competition and boost competing efficiency, it’s
important to admit foreign capital and private capital entering telecom service industry to reduce the
non-marketed decision-making and push up social efficiency.
Deregulation to Chinese telecom industry is still in studying and breaking monopoly and boosting
competition has been carried out as an identified policy. However in 2001 the argument about whether
China Telecom should be reformed again reflects the issue how to go deregulation where Chinese
telecom industry will go. The international telecom history in the last 20 years can be divided into two
stages. The first stage was from 1984 to 1996, the marking events were the department to AT&T and
privatization to BT. During that period the mainstream of international telecom industry was to break
monopoly and induct competition. The second stage is from 1996, the marking event was the releasing
of American New Telecom Law. During this period the mainstream of international telecom industry is
telecom globalization and deregulation. Although USA is leading telecom reformation, yet America paid
attention to break the edge between local phone and long-distance phone after New Telecom Law issued,
out of the mainstream of international telecom industry. As a result several hundreds of billion dollars
were wasted and the monopoly in local network hasn’t been broken too.
The experience of American telecom policies making is helpful to China. Although China Telecom was
reformed again in 2001, reformation of Chinese telecom industry may be possible. Even it would be
likely to merge of China Telecom and China Netcom if international competitiveness of Chinese
telecom industry would be faced with serious challenge and international competition is more and more
drastic,
In summary, deregulation policies should be based on Chinese telecom sectors’ situations, otherwise it
may result in worse aspects to the development of Chinese telecom industry. In recent years global
telecom market was in depression with the break-up of net foam and adjusting period has come. Chinese
telecom industry needs to settle the problems in unreasoned industrial structure, such as telecom over
consume, and make good use of the chance of China joins WTO and have long-term development plan,
can absolutely do great help to the sustained development of Chinese telecom industry.
(3) The Sustained Development of Telecom Industry
Telecom industry depends on capital and technology and investment plays an important role in
promoting. Before 1990 the investment to Chinese telecom industry was mainly from the state-planned
allocation. At that time telecom industry was priority by government, from then on the state-planned
allocation was decreasing until abolished in 1995. After 1995 the investment has been mainly from
telecom enterprises themselves. Under this situation the problems as unreasoned tariff and overly
investment brought about by over consume began to produce. The following data show that, although
the investment to telecom industry in China was higher than that in those developing countries, the
investment’s occupation in GDP was keep on falling. It means the investing ability of Chinese telecom
enterprises was turning down. If the situation couldn’t be changed, the developing step of Chinese
telecom industry would slow down and its promoting effect to national economy would wear off.
120
100
100.4
82.9
81.1
80
68.1
)
%
( 60
54.2
63.6
40
20
0
1995年
1996年
1997年
1998年
1999年
2000年
The Occupation of the Investment to Fixed Assets in the income of
Post and Telecom （％）
Data source: The Manual Statistics of Chinese Communication Industry, 1995, 1997, 1999, 2002
There exist two measures to settle the problem. The first measure is to admit and encourage suitable
telecom enterprises to come into stock market to get capital. In July 2000 China Unicom issued stock in
HK and New York to get 5.65 billion US dollars. In November 2000 China Mobile (HK) issued new
stock and Changeable bond in HK and New York to get 7.56 billion US dollars. Including two financing
in 1997 and 1999, Chinese telecom enterprises have financed over 20 billion US dollars from
international capital market. At the early of 2001 with market value of 100 billion US dollars China
Mobile was one of the most valuable enterprise in Asia market. The second measure is to ask foreign
capital and domestic private capital entering Chinese telecom market. According to Chinese
government’s commitments, foreign capital can hold 49% of the total share at most in all telecom fields
and can hold 51% of the total share at most in value-added serving fields after China jointing WTO. It
could promote Chinese telecom industry entering a new development stage.
That foreign capital enters Chinese telecom industry could help Chinese telecom enterprises enter
international telecom market for competition. After China joining WTO according to the rules of
reciprocity and market entering, foreign capital can enter Chinese telecom market and Chinese telecom
enterprises can enter foreign telecom market as well. Chinese telecom enterprises have had the ability of
entering international telecom market for competition. Theoretically the development of one country or
one enterprise can be divided into two stages. The first is accumulation inside and the second is
expansion outside. It is capital law one enterprise starts to expand when developing to certain extent.
After over 20 year’s reformation and high-speed development in the last 10 years specially, Chinese
telecom industry has finished the accumulation stage. China Telecom, China Mobile and China Unicom
have had the ability of developing international telecom market. Entering Chinese telecom industry
foreign capital could bring Chinese telecom enterprises not only with capital, technology and
management, but also with the international market and resource. It also has chances for Chinese
telecom enterprises to develop foreign telecom market. To realize internationalization, Chinese telecom
enterprises need to establish modernized enterprises according to international standard and the stock
telecom enterprise can expand by purchasing other companies’ stock or merging both domestically and
internationally, China Mobile and China Unicom have this ability to go international. The Chinese
telecom market is relatively limited for development to Chinese telecom sectors, because of existing
over consume the market fluctuation might be more drastic once the market slowing development or
enter adjusting period. Lack of the ability of decentralizing market risk those telecom enterprises are
limited in Chinese domestic market would be faced with more challenge. It is necessary for Chinese
telecom sectors to go international because of telecom globalization.
IV. Summary
There is obvious telecom over consume in China and it is the result of fast development of Chinese
telecom industry. Over consume may make against the sustained development of Chinese telecom
industry. Only if industry policies were adjusted and proper measures were carried out, could the
disadvantages brought about by over consume be overcome and Chinese telecom industry go on
contributing to Chinese national economy.
Reference
[1] JianqiuZeng, Overviews on Telecommunication Development, BUPT Press, 2001.
[2] QianFang, the Center of Global Telecommunication Turning to China, Chinese Economy Time,
2001,4,10.
[3] ChaoGao, The Discuss to Telecom Universal service in “the Tenth Five Years Plan”, Designing
Technology in Posts and Telecoms, 2002,3.
[4] ITU, Report of World Telecom Industry, 1996, 1997, 1999.
[5] YingNao, The Warning to Chinese Telecom Industry, Communication Information, 2001,10.
[6] ZhufaLei, Where Will Telecom Go without Determined Reforming Solution, The Manual Report of
Telecom Information, 2001,10.
[7] QichengLiu, Can Chinese Telecom Operators Enter International Telecom Market, Communication
World, 2002,1,28.