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Analysis of the telecommunications industry in China

1287 words (5 pages) Essay in Marketing

5/12/16 Marketing Reference this

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Vodafone is a London-based major telecommunication firm employing over 84,000 employees worldwide as of 2010. They are in more than 20 countries and have partnership in another 40 more for total revenue in 2010 of £44 billion. [1] There focus is on R&D and license management which make Vodafone a leader in new technology and product development. With this reputation, a lot of local companies can be interested in partnership with Vodafone in order to gain a technological boost which can help them overtake on the local competition.

In 2000, Vodafone added CMHK (China Mobile Hong Kong) to his partner list by buying 2.19% of the company shares at a price of $2.5 billion. Two years later a second purchase of $750 million increased their share to 3.2%. By creating this partnership, Vodafone gained access to over 477 million subscribers in Hong Kong and China. From CMHK side, the alliance with the British firm set the table for a technological innovation campaign. The first remarkable output of this collaboration was JIL (Joint Innovation Lab), with the goal of accelerating the innovation process. [2] 

China and the WTO

-How has China’s entry into the WTO affected Vodafone’s development in China and Hong Kong?

-How has it affected foreign telecommunications in general? C:UsersMYDocuments2011-1학기국제경영론china telecom statistics.jpg

After almost 15 years of negotiation, China joined WTO as of 11 December 2001. Before the adhesion, China’s policy protected the national emerging telecom industries [3] while allowing only foreign equipment vendors to invest in China’s economy. [4] The new contract gave entry to foreign investment for up to 49% of one of the local company’s share in the 17 largest cities in China. [5] 

As well as other markets, China’s telecommunication market is expected to grow very rapidly especially if open to foreign service suppliers. The whole market generated over $130 billion in 2010 and is expected to grow by an average rate of 8.8% in for the next five years. Thus overtaking Japan and becoming the leader in the Asian market. [6] For foreign investors, those odds were quite attracting.

The Reality

-Why has Vodafone still held a minority stake in CMHK?

-What factors do you think have inhibited Vodafone’s investment in the Chinese telecommunications market?

Still, even after the entry in the WTO, China’s telecommunication market stayed under the large influence of the Ministry of Information Industry (MII). The maximum level of stake ownership was set up to 49% under WTO agreement but no foreign telecommunication companies got close to that number. Vodafone, for example, was planning to increase its share up to 20% by 2005; in 2009 the 3.2% was still the reality.

The main problem in the Chinese market is a multitude of complex and multi-layered political, economic and cultural factors. [7] China is still operated with ancient art of “Guanxi” (network of contacts) [8] and MII is considered to be both regulator and party in Chinese telecommunication market. So even if the contract allows some expansion for foreign companies, the huge bureaucracy makes investing in China a long and laborious process.

China Unicom and SK Telecom

-What has China Unicom done in its attempt to remain competitive? What are the advantages and challenges of such a strategy, and how effective do you think it will be?

In 2006, a few years after the entry of Vodafone in the Chinese market, SK Telecom of South Korea invested $1 billion in China Unicom. In total the South Korean firm received about 7% of the company shares in return of this investment.

The great advantage for the Chinese giant was a possibility for a technological advancement. The two firms would now work together on handset development and IP sharing. China Unicom could then have a glance at foreign technology, just like their main competitor did 6 years ago with Vodafone. For SK Telecom, the transaction was also a great advancement. It allowed them to gain entry in the protected Chinese market and escape the South Korean saturated market.

On the other hand, as part of the contract, China Telecom had to accept SK Telecom as the sole partner until the end of 2007. [9] In technology business, one year and a half tied to only one partner could hold you backward. Another foreign company could release a great new technological advancement and it would be impossible for China Unicom to get their hands on it.

The Third Giant: China Telecom

-What actions do you think China Telecom should take, given the competitive position of the CMHK-Vodafone and China Unicom-SK Telecom partnership?

The telecommunication market in China has been quite homogeneous so far. Looking for foreign partnership could be a way to get a hand on advanced technology or management system that would give the firm a competitive advantage over their competitors, especially since the two other leading companies already stepped forward by accepting foreign investment. With that in mind, China Telecom should get into a serious search for a foreign partner in order to keep up with the competition.

But what if those foreign partnerships were not as successful as planned? In fact, in September 2010, Vodafone sold their 3.2% stakes in China Mobile, pocketing $6.5 billion which is nearly twice the original investment4. After the sale, CMHK and Vodafone will continue to cooperate in areas such as roaming, network roadmap development, multinational customers, and green technology and so on [10] . Vodafone left with a profit and the alliance stayed but most of the cooperation died in the separation process.

What about China Unicom and SK Telecom? Well in November 2009, the Korean firm sold the whole 3.8% stake of China Unicom to unknown buyer(s). SKT also earned more than 50% of their initial investment but abandoned their business plans in China. China Unicom dropped CDMA business, which was SKT’s main strength, and absorbed China Netcom’s GSM part and decided to focus on GSM. However, SKT is continuing cooperation in technology and conversion service area. [11] 

Accepting foreign investment is not a definite key to success. As said before, China used to be a quite closed and homogeneous market, so as the customers. Outsiders may have a hard time to understand how to conduct business in China and how to understand the needs of its people.

In brief, the most important is for the host company to analyze how foreign firm could help them in their actual market and if the fusion can be done efficiently. Surely in a few years there will be a lot of success story in the telecommunication firm in China, but for now China Telecom is better not to jump on the first offering.

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