SK Telecom in China

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International strategy of SK Telecom in China

Introduction

Company Introduction

SK Telecom is a South Korean leading mobile telecommunications operator, controlled by the SK Group. Since being established on March 29, 1984 the company evolved from a first generation analogue cellular system, to second generation CDMA, then to the world's first third generation system. SK Telecom also became the world's first to commercialize high-speed download packet access (HSDPA) in May, 2006. In 2004, SK Telecom launched Hanbyul, the world's first DMB satellite. The carrier currently provides satellite DMB to its subscribers through its subsidiary TU Media Corp. SK Telecom also offers a variety of internet services, many through its subsidiary SK Communications.

Background of Overseas expansion

1) Super saturation of the market and rivalry among competing sellers

In 2009, the numbers of subscribers of mobile communications domestic market were more than 47million people. Subscription rate is more than 98%. For a long period, SKT is ranked as one in the domestic market. However, there is excess competition with the other two companies (KT, LGT). In this circumstance, they judged domestic market don't have visions anymore.

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2) Potential new markets

In 2007, the number of subscribers of mobile communications world market was 1.91billion people and the rate is about 28%. When compared with domestic market, subscription rate is significantly lower. Especially, markets of China and India are growing recently. These markets are predicted to be 15.5% compound annual growth rate.

Why China has selected

SKT has entered the market in the US, Vietnam, Mongol and etc. Our team will focus on the China market. The first reason is that China is one of the world's big mobile communications market and the recently growth rate is so high. Also, recently SKT has been invested in China market concentrative.

Features of China

1) Economy

Since 1979 the Chinese economy has undergone a radical transformation from central planning and autarky to market orientation and openness to trade and investment. Though at times the transformation has been haphazard, it has delivered impressive results. Over the past 30 years GDP has increased 14-fold. Poverty has fallen sharply, and per capita income has risen to US$3,300.

2) Politics

China is a one-party state dominated by the Chinese Communist Party (CCP), which has held power since the end of the country's civil war in 1949. The CCP has approximately 70 million members, equivalent to 5.5% of the population. The party's highest body is the Party Congress, with the party's nine-member Politburo Standing Committee — headed by China's President Hu Jintao and the Premier Wen Jiabao — making most high-level decisions.

3) Business

Foreign investors are attracted to China by its low labor costs and vast domestic market, not its investment climate. On most benchmarks the investment climate lags well behind the best global standards. The government is focusing on improving performance in the following areas: consistency of law enforcement and regulations, intellectual property rights, the legal system and anti-corruption.

History of SKT in China

In July 2002, SKT and China Unicom signed an MOU for establishing a wireless Internet joint-venture company in China. In February 2004, SKT and China Unicom established a joint-venture company named UNISK. In June 2006, SKT reached a comprehensive CDMA business cooperation agreement with China Unicom, and purchased a China Unicom's convertible bond worth US$1 billion. And SKT converted this CB to share in July. In 2008, SKT established Beijing HQ sidus and took over E-eye gaoxin.

SKT in Chinese mobile communication market

Analysis of Chinese mobile communication market

The number of subscribers of mobile communication is 722.94 million exceed the sum of that of Japan and USA. In 2009, the number of fixed phone numbers reached 1,061 million. Mobile phone users over total number of telephone users reached 70.4%. On the other hand, the subscribers of fixed phone are decreasing, and the gap between them is increasing, over 400 million in 2009. [ex.1] However, though total revenue of Chinese mobile communication market is increasing continually, net profit is stagnated. [ex.2]

In the prospective of revenue, likewise, mobile phone occupies the most, 60.4%. And mobile internet occupies 11.8%. [ex.3]

Mobile internet market is increasing as well. In the end of 2009, 384.6 million users are using mobile internet. Comparing with 2005, it has grown rapidly almost 8 times. [ex.4]

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There are 3 mobile communication companies in China: China Mobile, China Unicom, China Telecom. China Mobile serves TD-SCDMA, China Unicom serves CDMA2000, China Unicom serves WCDMA. China Mobile is the biggest company which has 538.9 million subscribers, and it is the most in the world. Net profit of China Mobile in 2009 is CNY 115.166 billion, and it is exceed the net profit of China Unicom which is no.2 mobile communication company, plus that of China Telecom and China Netcom which are no.1 and 2 wire communication companies. [ex.5, 6] Moreover, by market capitalization, China Telecom is No.4 Company by 209.3 billion dollar.

Mobile communication industry

1. SKT's international entry mode selection.

Considering the characteristic of mobile communication industry, SKT couldn't afford the cost of foundation facilities. And it was risky to penetrating China market directly from the beginning. So in order to enter China market, they chose to expand their business gradually with various entry modes.

1) Licensing CDMA technology.

SK telecom signed a contract in 2001 with China Unicom (CU) to provide consulting service on CDMA. Also, they provided CDMA network building, operating and marketing training. Also, by accompanying with local company they were able to reduce the start-up time, cost and risk. We thought that they laid the foundation of its expansion into Chinese market.

2) Constructing Joint Venture.

In 2002, SKT made an agreement with CU constructing joint venture in CDMA service and wireless internet field. Also, they actually launched UNISK which provided wireless internet service as a JV with CU in 2004.

3) Gaining ownership by acquiring share.

In 2006, SKT finally took over CB of CU and transferred it to share so they became the second-large stockholder. This means they changed their entry strategy to ownership mode.

2. International business strategy.

1) Transnational strategy.

We thought that mobile communication industry seems to be transnational strategy which is highly pressured for both global efficiencies and local responsiveness and flexibility. Because less customized service is required once the infrastructure is established, we thought that mobile industry is globally integrated. Also, SKT had to be flexible and sensitive to the Chinese government policies as they are extremely conservative. To be specific, SKT and Chinese government created TD-SCDMA which is specialized only for China.

2) Synergy

SKT and CU had different and distinctive competences. SKT had highly-developed technology and CU had tremendous existing customers; they were no.2 in that industry. So, they could expect huge synergy effect by strategic and multilateral alliance.

The failure of mobile communication business.

Because of restructuring of China Telecommunications Company, CU merged with China Netcom that is wireless carriers. So SKT's stake was reduced to 3.8%. At this time, Telefonica (Spanish companies) became 2nd shareholder and SKT was 3rd shareholder. Virtually, SKT's position is narrower in China. In addition, SKT's core business CDMA was transplanted to China telecom in the course of merge. Therefore, they conclude that further investment is meaningless and sold their stakes.

SKT in Chinese C&I market

Change business to Convergence & Internet (C&I).

As we mentioned above, the mobile communication business in China turned out to be a failure. So, they converted their main business to C&I. Even before the official converting, they already initiated their basic business of C&I like online game, GPS, music markets. To be specific, SKT acquired E-Eye Gaoxin, a auto-GPS venture, in 2008 and directly launched their own businesses such as cyworld China, Beijing Sidus HQ, Online game Magicgrids. SKT aggressively took the Greenfield investment whereas their mobile communication business was less risky and gradual; from licensing to JV and ownership.

Analysis of Chinese C&I market.

1) Definition of convergence.

Convergence means combination of product & product, product & service, service & service. SKT is now using ‘Alpharising' for this. Camera phone, MP3 phone, Smartphone can be examples of combination of product & product.

2) Spreading trends of convergence phenomenon.

In the firm's view, they can raise value of products and extend product's life. In addition to this, they can expect cut costs by economy of scale beause they can diversify their products. Also, the change of consumer's needs triggered trends of convergence. As society becomes complicated the needs for save time increased. Moreover increase of income had raised people's desire for leisure time. This circumstance leads to the desire of convergence products. From early 2000s convergence products like camera phone, MP3 phone, and combination printer are spreading sharply. [ex.7] Moreover recently Smartphone's share in mobile phone is increasing gradually.[ex.8,9] For SKT's aspect, spread of convergence products can be helpful because their contents will be utilized by these products. As a result, convergence market can be justified as blue ocean market and the change of SKT's core competence from mobile communication business to convergence business would be a effective strategy

Changes in functional level strategy.

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As SKT's C&I become a matter of life and death in China business, they are changing their strategies tremendously.

1) Organizational structure.

Theoretically, there exist many types of organizational structure. In reality, however, only a few MNEs can strictly be divided into functional, divisional, or matrix structure and most of them has mixed structure. SKT also seems to maintain mixed structure. But recently they are strengthening geographic division structure by establishing headquarter in China to adapt local market more efficiently. Moreover, they even totally transplanted C&I business sector to China. In the process of transplanting many headquarters and key people moved to China. This can be described that SKT will strengthen their power in China. This can be interpreted that they are centralizing their organization.

2) HRM strategies

SKT not only established headquarter in China, but also took all Korean executives of CIC. This means that they adapted highly ethnocentric staffing policy. By doing so, they will be able to leverage SKT's core competence-advanced technology and creativeness. And they scouted a new chief manager of C&I in China who is thought to be a best person and who has deep understanding of overall Chinese business culture. Furthermore, all executives sent to China took a couple of training programs in US in advance to enhance the cultural sensitiveness and adaptiveness. Furthermore, SKT C&I in China actually is providing higher monetary compensation to expatriates to motivate them.

3) International Marketing Management.

As we mentioned above, the potential demand of convergence market would significantly increase. In that sense, marketing is going to be truly important for SKT.

Above all, SKT is focusing on promotion. They recently participated in Auto China 2010 and presented their auto-related sophisticated technologies and products. Also, they held a promoting booth in Beijing during the Olympic in 2008.

Recommendation

1. Intimate Relation with Chinese Government

As we analyzed above, Chinese government has shown a tendency to be conservative against foreign firms and nationalistic especially in communication business. So, we might say that business in China contains a big uncertainty. SKT actually had to give up mobile communication business due to the government intervention. Besides, the prime minister of China recently announced the integration of broadcasting, communication and internet. This could be a tremendous opportunity for SKT, but also be a huge threat at the same time. Hence, SKT must establish and keep an extremely intimate relationship with Chinese government. For instance, lobbying for Chinese government would be truly helpful for SKT.

2. Selecting more influential partner.

When doing international business and especially entering for the first time, most companies tends to take less risky strategies such as Joint venture or alliance. SKT chose China Unicom, no.2 company in Chinese mobile communication market, as their JV partner, and failed. We now recommend that SKT should choose most influential partner for JV. China Mobile, no.1 company of the industry would be a good example.

3. Include Chinese executives.

SKT recently changed its organizational structure and HRM. And we concluded that SKT C&I in China is using centralized structure and ethnocentric HRM strategy. However, as we mentioned again and again, it's truly important to fluently and properly respond to the changes in China. In that sense, we recommend that SKT have a Chinese executive and adopt the concept of polycentric strategy properly. This will help them to see and find the special virtues of China.

4. Aggressive customized marketing

SKT is very famous for its highly reputed marketing ability in Korea, and it is even told to be one of core competences. However, China is pretty different from Korea. Chinese have a tendency to have pride of their own culture and even too nationalistic. Thus, our recommendation is to have a quite customized marketing strategy to fully account for differences of China and Korea. In addition to this, we think that SKT should focus on promoting activities such as advertising so that they could enhance the brand cognition and image. For instance, it would be very helpful if they cast Korean Wave big stars as their models.

5. Recommendation for C&I market.

To succeed in C&I market, SKT must think consumer oriented and make consumer oriented products. In Whirlpool's case, they launched a product that is microwave with LCD TV. They thought this product is part of convergence and expected great success. However, consumers' reaction was minimal. Because cooking time is very short in front of the microwave, watching TV is improper. That is, not thinking technical aspects but, thinking consumer aspects. In that sense, SKT should study Chinese consuming process like their habits, values and life circulation. And also, SKT need to change their convergence strategy according to changes in consumer preferences. Also, as idea is very important in convergence market, SKT should protect their intellectual property thoroughly.

References

‘International Business Environment and Operations', Daniels, Radebaugh, Sullivan

Lecture materials

‘국제경영론', 이장로

Private E-mail interview with Oh Sehyun ex-chief manager of C&I Korea

‘Introduction of SKT', From sk telecom homepage

‘China Mobile Net Profit Up 2.3% In 2009', 03.19.2010, Chinatech news

‘세계 화상기업 1000곳 선정',11.29.2009, Choong chung daily

‘글로벌(중국)통신시장 빅뱅', 6.2008, Hankyung biz megazine

http://www.miit.gov.cn,

Ministry of industry and information technology of the people's republic of china

‘세계 이동통신시장 현황 및 전망', 송영근

‘컨버전스의 성공조건', 03.08.2007, Samsung economy research institute

‘Wiki encyclopedia'

http://www.sktstory.com/, SK Telecom corporate blog

‘한국이동통신사업자의 해외진출에 관한 연구', The national assembly library

‘KT·삼성은 와이브로 수출, SKT는 중국진출에 주력', 01.13.2010, Digital daily

‘SKT 중국 진출사업 재편 가속화', 11.06.2009, Asia economy daily

‘SKT, 차이나유니콤에 1조원 투자', 06.21.2006, Views & news daily

‘중국, 방송・통신・인터넷 통합 ‘3망 융합' 착수', 01.15.2010, Joongang daily

‘SK텔레콤, 중국 돌파 승부수', 18.12.2009, ZDnet Korea daily

‘SK텔레콤, 한-중 공동 IT 문화 도시 만든다', 07.2008, Onthenet magazine