By Peter C. Witton
Outlook Journal, June 1999
Remember the dream of selling a can of soda every day to each of China's 1.3 billion consumers? The cliché remains a lure for many international businesses. But consider, for a moment, the Chinese market from the Chinese side.
Imagine trying to meet customer demand for a sophisticated technological product—though accurately assessing the extent of the demand is fiendishly difficult—with a business organization still shaking off the vestiges of a vast state monopoly. That, in a nutshell, is what is happening in China's telecommunications market, particularly in the mobile phone sector, where a new, commercially oriented service provider is emerging.
China Telecom (Hong Kong) Limited was carved out of the state telecommunications provider in 1997. The Hong Kong-based company acquired the mainland's two largest mobile phone businesses, which serve the country's economic engines: the southeastern provinces of Guangdong, bordering Hong Kong, and Zhejiang, which lies to the south of sprawling Shanghai. (A third mobile business, covering Jiangsu province, to the north of Shanghai, was added later.) Today China Telecom (Hong Kong) has more than seven million subscribers, more than one-third of the mobile phone users in China—not bad for an organization that is barely two years old.
Beijing is using the company to pursue three distinct goals the central government has set for telecommunications on the mainland. The first is to build a modern telecommunications infrastructure. The second, reemphasized publicly in early 1999 by Prime Minister Zhu Rongji, is to provide cheaper, more efficient service by encouraging some degree of domestic competition. The third goal is to retain, directly or indirectly, state control to protect China's telecommunications market from international competition until the domestic industry is strong enough to hold its own.
The mobile market is the proving ground for telecommunications policy because of its powerful growth potential. China is in the midst of the fastest, largest telecommunications "build out" the world has ever seen, according to one Western analyst, who notes that "it is adding more telephones than a US regional Baby Bell every year." Indeed, China is installing 15 million new lines of switching capacity annually and laying down 100,000 kilometers of fiber-optic cable.
Watershed Event
Mobile is a relatively speedy way to add capacity, particularly in major cities. And demand is huge—the sector doubled in size in 1997 to more than 13 million subscribers and today stands at some 23 million, surpassing the target of 18 million set for the year 2000. China already is the world's third-largest mobile market, after the United States and Japan. The Chinese talk of becoming the world's largest mobile market within the next decade, with a stunning 200 million subscribers by 2010. Yet, in relation to its population, very few people in China use mobile phones. Even in Guangdong province, the wealthiest part of China, the penetration rate is less than 4 percent. Hong Kong and Singapore have penetration rates that are seven or eight times as high.
How quickly China catches up with its neighbors depends on how well China Telecom (Hong Kong) implements the government's goals. On an operational level, the challenge has been to create a commercially oriented business structure from disparate parts of a public-sector monopoly. The task on a strategic and financial level has been to acquire crucial market information with which to make sensible cost and revenue projections and investment decisions. Further complicating its work is the fact that the company's shares are listed in Hong Kong and New York. It is not always simple to provide the transparency demanded by professional investors when policy and regulatory decision making is still opaque.
Most challenging of all, however, has been dealing with the sheer scale of a business that is adding hundreds of thousands of new subscribers—every month. "The one certainty about the China telecommunications market is that all projections are underestimates," says John Wang, a communications industry strategist with the Accenture team that has been working closely with China Telecom (Hong Kong) since before its formal inception in 1997.
A key hurdle was persuading international investors that the Chinese telecommunications industry was up to the task. "There is a surprising depth of technical knowledge in the telecommunications industry [in China]," notes Wang, "and some fairly advanced technical systems." China Telecom (Hong Kong) had to demonstrate that it could transform this technical expertise into a profitable business.
The public listings in Hong Kong and New York would be a watershed event, the first time the Chinese authorities had sought outside capital for investment in this sensitive sector. The decision had to be approved by the State Council, the highest decision-making body in the Chinese government.
Chinese officials, as well as China Telecom (Hong Kong) executives, had to be convinced that international investors would get out their checkbooks only if they had a realistic assessment of China's telecommunications market and the company's capabilities. Much of the basic information was available. But it was scattered among the more than one million employees who worked for the country's state-owned telecommunications bureaucracy, which regarded the information as a state secret.
It was a slow process, recalls Wang. "We had to change people's mentality," he says. But once the company's top management understood what was required, he adds, "they helped us navigate" through the labyrinthine Chinese bureaucracy to the relevant facts and figures needed to put together market-growth forecasts.
"Only then could we create the models for analyzing the cost of upgrading the networks in Guangdong and Zhejiang, the cost of interconnections, the cost of starting up services, the cost of providing the best service profile for customers," explains Stephen Snyder, partner in charge of the Accenture Communications Industry Segment in Greater China. Then revenue models had to be devised. This modeling work, as well as much of the necessary financial and business analysis, was done by the Accenture team.
World-Class Player
The resulting investment rationale proved so compelling that the October 1997 initial public offering—at the time the largest-ever Asian IPO outside Japan–was oversubscribed approximately 35 times. The original plan was to raise $3.5 billion by floating 24.9 percent of the company (the state, through various wholly owned corporations, would hold the rest). Demand boosted that amount by $600 million.
Compared to the larger ambitions of China Telecom (Hong Kong), however, the IPO may have been the easy part. The company seeks nothing less than to become a world-class mobile service operator.
Speaking on behalf of the China Telecom (Hong Kong) management team, a spokesman says, "Our focus is to obtain operational synergies across all provincial assets and to deliver a consistently high level of service. Competition will drive our need to continuously improve our offerings. To be a player on the world stage, we must continue to strengthen our capabilities and deliver the greatest value to our consumers at all points of contact. Nothing less will do."
To determine where it needed to fill in gaps, China Telecom (Hong Kong) sought guidance from Accenture. In addition to coming up with strategies for growing the business and developing consumer market segments, this guidance has meant designing new organizational structures and new systems. The provincial telecommunications entities in Guangdong, Zhejiang and Jiangsu provinces have been split up. The provinces retain their data and fixed-line operations, but their large existing mobile businesses have been stripped out and transferred to China Telecom (Hong Kong).
Surviving units and employees of the old organizations have had to shed the worst aspects of their public-sector ethos, including overstaffing, indifference to financial performance and a disregard, bordering on contempt, for customers. Creating an entirely new culture and mind-set—one that is results-focused and service-oriented—has been something of an uphill battle for management.
The new structure of China Telecom (Hong Kong) emphasizes flexibility and is geared to finding out what customers want and how to provide it. Responsibilities and reporting lines are clearer, and management has been sensitized to the need to be more responsive to commercial, not bureaucratic, demands. The planned introduction of technical systems and processes–standardized billing, pricing and information technology systems, for example—will allow the company to operate as a single, integrated and effective entity. Meanwhile, the company has been growing rapidly through acquisition and through expanding services (voicemail, international roaming, stored-value cards and fax/data communications) as well as through its customer base.
"The organization and the new processes need to have the capacity to do what management wants to do and the scalability to cope with the sheer numbers of new customers," says Wang. "The secret for future success lies in how well these new ideas are implemented."
There is still much to be done, especially if China Telecom (Hong Kong) is to reach its projected target of nine million subscribers by the end of 1999. But it looks like the company's position as a corporate role model is already seen as a success and is to be emulated. The government has announced plans to split up the country's state-owned telecommunications organization into separate companies. One would control fixed-line networks, another, paging services, a third, satellite telecommunications, and a fourth, mobile services.
It is too early to tell whether all this means China Telecom (Hong Kong) will be expanding further in the future. But if it does, the experience and knowledge it has gained as a path-breaking mobile phone services provider undoubtedly will make it a competitor to be taken very seriously indeed.
Peter C. Witton is a Hong Kong-based business journalist.
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