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China telecom is facing difficulties
The Epoch Times
6/21/2005

Recently, China’s telecom industry, once known as the “silver rice bowl” guaranteed to make profits, has consistently shown a downhill trend. New telecom companies continue to emerge and the industry is under-regulated. The telecom companies are losing money due to poor internal management. This has caused China to lose enormous profits.

According to a recent report from Outlook Weekly, a direct impact of the large number of telecom start-ups, that aren’t properly regulated, has created an extremely competitive market as companies vie for customers. The slow process for regulating telecom, the weak market adjustment mechanism, lack of self-regulation, and inadequate asset management systems have lead to chaotic competition in the current telecom market. The main problems manifest in the following ways:

1. Profitability Declines

The keen competition among telecom companies, plus the fact that the government loosened the market supervision prematurely, have caused “dumping” to occur. These factors have resulted in severe cuts to the profitability margins. To worsen the matter, an even cheaper Personal Handyphone System (PHS) came onto the telecom market and further decreased the market for cell phones. The less expensive cell phones and the growing PHS products have eroded the market for home phones, thus shrinking the [usual] increase in state profits.

Although the number of consumers in China’s telecom industry ranks very high globally, the overall profitability margin is still low. In 2003, the average capital stock return on equity (ROE) of China Mobile, China Unicom, and China Telecom was 17.9 percent, which is far below the 50 percent of Telefonica Mobiles, the 43 percent of Italy Mobile, and the 37 percent of TelMex. As the companies try to lower prices, the average profit margin of the many telecom companies in China continues to decrease.

2. It is Hard to Form An Efficient Competition Environment

The trend of the current China telecom industry is “the strong get stronger and the weak get weaker.” It is very hard to form an efficient competition environment. In 2001, the profit ratio between China Mobile and China Unicom was 86.5 to 13.5. In 2003, the profit ratio was 89.5 to 10.5. It is estimated that in 2004, the profit ratio will be about 91.6 to 8.4. In 2003, among the 70 billion yuan profit earned by the telecom industry, about 74 percent was earned by China Mobile. Therefore, China Mobile only needs to rely on its cost advantage and lower profit margin of its sales, to easily beat out all competitors. The government agency that supervises the telecom industry loosened the market prematurely, which caused competition between companies to lessen. It is almost impossible to form an efficient competition environment now and that is a great disadvantage to the development of the telecom industry.

3. A Deficit Crisis is Looming

Too many companies and an under-regulated environment severely hinder the healthy development of telecom companies in China, and directly lead to an imbalance between the amount of business and the expected revenue. According to statistics from the Ministry of the Information Industry, in 2002, the trade done by telecom businesses in China increased by 29 percent but the increase in revenue was only 15 percent. In 2003, although business increased by 32 percent, the revenues dropped to 14 percent. Last year, the amount of business increased by 38 percent, but revenue was only 13 percent. This indicates a rapid decline in market spending on telecom products

If the current situation continues, it is estimated that in 2006, the overall market spending on telecom products will be 29 percent of that in 2001. In the next few years, the telecom companies in China are very likely to lose money. In fact, in the last two years, the telecom industry has already needed to use profits accumulated from previous years to stay afloat. In China, the four major telecom enterprises are all state-owned. Hence, too many companies and an under-regulated environment have severely hindered government’s income. The ultimate loser will be China.

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