A number of excellent blog postings, for example over at China Herald, have covered the nuts and bolts of China’s telecom restructuring announced in late May, but few have mentioned the ramifications the announcement is having on critics of China’s industrial policy. Such critics, it is fair to say, run the gamut from free-market Friedmanites to political appointees of the Bush administration, who inevitably say China’s telecom market is closed to outsiders and anti-competitive. After this restructuring, it turns out they are still half right.

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With the recent news of a reshuffling of China’s six major telecommunications providers, critics of China’s telecom industry have two less targets to shoot at, namely the de facto monopoly of China Mobile and the slow-pace of telecom industry reform in the post-WTO era. But these critics, including the offices of US and EU Trade Representatives, were firing blanks in the first place: China Mobile was never a true monopoly, and industry reform does happen, it just happens at China’s pace, not at the pace trade negotiators desire, as this implementation of pro-business government policy clearly shows.

On May 24 guidance on the telecommunications sector’s planned restructuring was finally made clear in a joint announcement by China’s Ministry of Industries and Information (MII), the National Development and Reform Commission (NDRC) and the Ministry of Finance: Where there were six operators before, now there will be three - China Mobile, China Telecom, and China Unicom - that will each have an existing fixed-line and a mobile phone business as a result of mergers and divestitures.

Furthermore, at the end of the process, new 3G licenses will be issued for each, on different technology platforms: China Mobile will get the home-grown and untested TD-SCDMA standard, China Telecom will get the stalwart CDMA 2000 system, and China Unicom will get a license for WCDMA technology, which has long been popular in Japan. The market will now decide which is best for China. Critics, however, have been fast to say that China Mobile’s long-dominant position stacks the deck and so it will likely emerge the winner anyway. This is not a foregone conclusion for two reasons.

A short history lesson can help to put this into perspective: Before restructuring, the dominance of a certain telecom provider was undisputed. It had the most subscribers and the largest cross-country network of telecommunications infrastructure, and its revenue and profits exceeded those of all of its smaller competitors combined. At its peak, it had more than one million employees. After deregulation the giant telecom provider would be forced to open its network to smaller competitors and have its competitive powers capped by the regulator, which would mandate rates for it and watch it much more closely than its younger, more nimble, adversaries. Does this sound like China Mobile? No, this was American Telephone & Telegraph, at the end of 1981.

AT&T, once the biggest telephone company in the world, was reduced to a mere shell of its former self following deregulation and the forced divestiture of seven regional operating companies in early 1982. After a few bad strategy decisions, parent AT&T ended up being bought by one of its own spin-off children twelve years later.

So, the first reason the critics are wrong: History shows that the preeminence of an incumbent is by no means assured. The second reason: Asymmetric regulation, whereby China’s regulators intend China Mobile to overcome greater obstacles than the other two, is going to be a burden for China Mobile. For example, it is being saddled with the smallest of the fixed-line operators, China Tietong, and receiving the TD-SCDMA 3G platform license, which is unproven in both its technology and market appeal. This means that China Mobile’s ability to maintain its monopoly is uncertain.

As to the slow pace of change that critics have leveled at China’s telecom deregulation process, it bears reminding that AT&T, the US’s dominant telecommunications provider for more than a century, with its dying breath, clung to its monopoly for more than eight years against a US Department of Justice antitrust suit lodged in 1974. Regional carriers in Canada have been known to drag proposed rate cuts through years of debate and court action to avoid changing their business practices, meaning Canada only started deregulation of its telecommunications industry in April 2007. In that light, the speed of China’s telecom restructuring has not been slow.

In fact, China’s telecom regulators have shown remarkable brevity when it comes to implementing a given proposed change. For example, China significantly reduced rates for all mobile phone users in the last two years, most recently by cutting roaming charges in March by up to 80 percent. China’s telecom industry has some way to go before it will be totally transparent and fully-competitive, but it is far from the unchanging, anti-competitive sector that US and EU trade representatives paint it to be.

One thing the critics get right: It is true that China continues to groom its national champions, much as the economies of Japan, Korea and, to a lesser extent, Malaysia and other Asian economies did in their high-growth periods up to 1997.

Yet while economists regularly point out the folly of governments picking winners versus a Darwinian policy of survival-of-the-fittest free-market selection, so far China has bucked the trend: It now has three formidable national competitors that will all undoubtedly become global companies fighting over the title, “The biggest telephone company in the world.”

Categories: Pro-business Policy
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In a recent post on China’s Human Flesh Search engine, I discussed how the behavior of Netizens in China can be harnessed for good and ill to solve social problems. Occasionally, the online forums in China become vitriolic (much as they do anywhere) for reasons related to China’s strong sense of cohesiveness (which we describe in Supertrends of Future China as a key driver of China’s major trends).

The following article, reprinted (and updated) from my newspaper column on May 23, details how some Netizens have a new target for their anger: Governments, people, and companies that do not donate enough for earthquake relief. While the outpouring of praise for donating companies is generally strong, the praise is reserved mostly for Chinese companies, while the anger is often directed at foreign-related entities.  While there are exceptions when it comes to foreign individuals, the reaction to foreign companies’ donations is often negative even in the face of a large contributions.

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In the aftermath of the Sichuan earthquake, the generosity and compassion of corporations has been put on display by using donation lists in building lobbies, office memos, online bulletin boards, and newspaper articles.

While corporate donors in many foreign countries, if they are listed at all, might be shown alphabetically, here the common practice is to rank organizations together with the amount of money they give and circulate the rankings for all to see.

As a form of peer pressure, this method seems very effective in China in encouraging contributions. But at the same time, lists of foreign corporate donations have caused controversy on China’s online forums.

In the days following the disaster, the netizen community quickly shifted to discussions about the donations of foreign countries and multinationals because the pre-earthquake controversies such as the Olympic torch relay and Carrefour were still unresolved. A new theme has been that there were insufficient earthquake relief donations by multinationals.

In a comment echoed on numerous online forums, netizen “Botage” wrote on Sina.com’s community page on May 15, “Why do foreign companies give so little? Take McDonald’s, KFC, Nokia… they give even less than Chinese companies, it is terrible.”

Another netizen on Sohu.com, “Zongq,” writes, “China has given these foreign companies and brands such a huge market and profits, but when something like the earthquake happens in China, we actually don’t see even humanitarian aid (from them).”

This has had some unfortunate implications for the multinational companies doing business in China, with some Chinese Netizens calling into question their commitment to Corporate Social Responsibility while Chinese companies are lauded for their generosity.

The wave of criticism about donations started against the US government, for donating only US$500,000 to the Chinese Red Cross when it had offered millions more in aid to Myanmar. (Editor’s note: The US also donated 10 million to the International Red Cross to be earmarked for China. In fact, aid to Myanmar was pledged but either not accepted or not delivered because of prevailing political conditions, whereas aid flowed to China much more easily: More here.)

And when it comes to foreign money, even China’s own are not exempt from online criticism: Basketball superstar Yao Ming was pilloried in the media and online forums for “only” offering half a million yuan until he quadrupled his donation. From there, debate extended to how much Chinese firms were giving and how little foreign firms seemed to be giving. Is this criticism justified based on the facts?

Chinese companies have undoubtedly shown their support for the unfortunate in Sichuan. Seventy-five Chinese-listed companies have contributed more than 563 million yuan, nearly US$81 million, as of May 19, as reported by financial news portal Hexun.net (partial English translation here). There is no precedent to compare the actions of the national firms as a group, but donations by 75 large foreign firms, based on a similar ranking list published on the Chinese Website manage.org.cn, have reached about half the national firm’s figure, 350 million yuan as of May 20. Both groups likely have much more to give as time goes on.

One firm in particular, the State Grid Corporation of China, already contributed 76 million yuan in cash, almost US$11 million, and almost twice that in non-cash aid, to be recognized as China’s largest donor.

This firm also topped the Hurun Report’s 2008 Corporate Social Responsibility Ranking (English version, 2007 only, here) and is a paragon of how Chinese would like national corporate citizens to act. Another large donor is China Mobile which, in addition to a large cash donation of 86 million yuan, has also committed to donating possibly billions of yuan to mobile phone subscribers in the afflicted regions by automatically increasing every phone’s account by 100 yuan if it falls below a 50 yuan threshold. Large Chinese banks and insurance companies have also contributed significantly, such as the Bank of China’s 64 million yuan cash donation. Larger Chinese firms are typically donating at the 10 to 20 million yuan levels. Many foreign firms, contrary to netizen opinion, are well within this range.

For example, KFC has donated 15.8 million yuan, while Nokia donated 10 million yuan plus thousands of free mobile phones. The largest foreign donations to date, 30 million yuan each, come from Samsung and Nike, but GE, Chevron, GSK, Toyota and others all have made donations at the 10 million yuan level or above. These are no small amounts by any standard.

It may therefore be said that foreign company donations in total are not as large as those of Chinese national firms, but should they be?

In the Hurricane Katrina disaster in the US in 2005, US corporations donated more than US$547 million, according to USAToday, while foreign firms contributed very little, most of the donations coming to the State Department via the donor countries directly.

Meanwhile, the small donation by the US government aside, US firms’ donations in China as of May 20 have totaled more than US$25 million, a significant amount by just one country’s corporations.

The time and distance factors should also be considered in evaluating foreign firms’ responses to the earthquake. It takes more time to communicate with head offices abroad, plan an appropriate assistance package, and select the best channels to deliver relief.

Many foreign firms likely elected to wait until the initial confusion after May 12 had settled down: Cisco Systems, initially making a donation of US$250,000, generously increased its commitment to more than US$ 1 million several days later, once the scope of the tragedy became known.

In the rush to be the first and highest on the lists, is it possible some people are losing sight of the real purpose of giving in times of need?

Foreign firms are certainly aware of the benefits of being in the Chinese market and take seriously their responsibilities as good corporate citizens, but they must be allowed the time to make a measured response and not be held to the same standards as companies in the country suffering from the disaster. And the most important point of all: no matter the source of the aid, it is for a common good and I think that nobody can disagree on that.

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Notes:

1 US$ = 7 RMB

The best resource I found for a total list of donations that is semi-regularly updated can be found here.

Categories: Chinese Determination, Inter-Networking
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