Dynamics in the ICT manufacturing market in the Greater China Region - Extended Version -

1
Dynamics in the ICT manufacturing market in the
Greater China Region- Extended Version -
ITS Conference, August 2003 Helsinki

• Dieter ElixmannCornelia Stappen

2
Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

3
Objectives and basic approach
Development of the ICT technology industry in
the Greater China Region (PR China, Hong Kong,
Taiwan) Opportunities for the German industry
in this growth market Study commissioned by
Ministry of Economics and Labour Germany (BMWA)

• Focus of the study
• Interrelationship of the ICT- industry in the
  Greater China Region
• Trends and dynamics ...
• taking account of WTO entry
• Opportunities for German companies

4
Objectives and basic approach
Segmentation of ICT market
Data-communications
producingsegments
service orientedsegments
Software
IT-Consulting
5
Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

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Trends in the development of foreign trade and
the domestic economy (1)

• Partners in world trade
• PR China Rest of the world considerable trade
  surplus with ICT products and services
• Hong Kong Rest of the world two digits balance
  of trade deficit with ICT products and services
• Mobile network equipment plays an important role
  in trade (export and import) with Germany

• FDIs
• General trend foreign investments in the PR
  China are increasing, while they are falling
  considerably in Hong Kong
• For the first time PR China received the highest
  amount (52 bill. US) of the worldwide FDIs in
  2002, though "roundtripping"
• In 2001 considerable lowering of FDIs in Hong
  Kong by two thirds onto a level of 23 bill. US
  compared to the year before

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Trends in the development of foreign trade and
the domestic economy(2)
Market volumes (order of magnitude) and expected
future growth

• Clear differences of market volumes and growth
  rates across the segments.
• In the PR China market volumes of the producing
  segments are clearly higher than those of the
  service oriented segments.
• In Hong Kong high growth rates are expected
  especially in the service oriented segments.

Segments PR China PR China Hong Kong Hong Kong
Segments Marketvolumes in bill. US Growthrate in p.a. or trends Marketvolumes in bill. US Growthrate in p.a. or trends
Telecommuni-cations and Data communication equipment 25 - 40 limited n.a. limited
Data communication equipment 2.5 high n.a. high
PC-Hardware 16 25 n.a. high
Software 2.5 25 n.a. high
IT-Consulting 5 24 n.a. high
Semiconductors 18 17 Zero to low Zero to low
Source WIK-Consult
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Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

9
Market structure and competition of the ICT
manufacturing industry (1)

• Activities of international manufacturers in the
  PR China and Hong Kong
• The important foreign manufacturers of the ICT
  segments have already established activities in
  the Greater China Region some of them even since
  a long time.
• On the input side a considerable number of
  foreign companies have already started production
  in the Greater China Region or are expanding
  their activities.
• Commitment of international manufacturers is
  usually long term oriented.

10
Market structure and competition of the ICT
manufacturing industry (2)
Value added activities of international companies

• International companies intensively use
  location-specific competitive advantages.
• In PR China primary focus on production
  activities, however, gradually increasing
  establishment of the whole value chain.
• Hong Kong is RD centre and location of
  headquarters of foreign companies.

11
Market structure and competition of the ICT
manufacturing industry (3)
Importance of the domestic industry by segment

• PR China
• Importance of the domestic industry varies
  considerably from segment to segment.
• Focus on production of fixed network, mobile
  network and IT hardware and affiliated
  components.
• Intensive support of the Chinese industry by the
  Chinese government.
• Chinese manufacturers like ZTE, Huawei, Legend
  and Founder increase there activities on the
  world market .
• Hong Kong
• Domestic production of ICT Hardware products is
  neglectable.
• Main emphasis is on the software and
  IT-consulting segment.

Segment Relative position of the domestic industry in comparison to the foreign industry Trends regarding the local industry
Fixed network and Data communication Network infrastructure Router etc. nearly equallower
Mobile network Network infrastructureTerminal equipment lowerequal
IT-Hardware equal
Software weak
IT-Consulting weak
Microelectronics equal
Legend ? increasing ? decreasing ? constant
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Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

13
Telecommunications services market (1)
Penetration rates in the PR China
Telephonepenetration rate
Number of mobile phone users
Share of population in
in mill.
in mill.
e
e estimated

• Only about 18 of the population have access to
  the fixed telephone network.
• Significant is the increase of mobile phone users
  in the year 2002, but a decrease of the growth
  rate is expected.

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Telecommunications services market (2)

• Penetration rates in Hong Kong

Number of mobile phone users
Telephone penetration rate
Fixed network (March 2003) Fixed network (March 2003)
Absolute Share of population in
3.8 mill. 56
Mobile network (March 2003) Mobile network (March 2003)
Absolute Share of population in
6.4 mill. 94
Source TDC, Wik-Consult, March 2003

• In Hong Kong the fixed and mobile penetration
  rate is much higher than in the PR China.
• A striking feature is the higher number of mobile
  phone users as compared to fixed-link access
  lines.

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Telecommunications services market (3)

• Regulatory environment
• Ministry of Information Industry (MII)
• Legislation
• Presently a telecommunications law does not exist
  in the PR China..
• ..though a decree passed in 2000 is being
  applied
• Main items
• Classification of telecommunications services
• Licensing
• Pricing
• Interconnection obligation for dominant companies

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Telecommunications services market (4)
Classification of telecommunications services

• Basic telecommunications services
• Voice and data transmission on the basis of
• Fixed network and mobile network
• Satellite communication
• Resale

• Value-added services
• E-mail
• Online information services
• Value-added services
• EDI
• Internet access
• Internet content

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Telecommunications services market (5)
Market shares of Chinese providers on the basis
of sales volume in 2002
Providers in the Chinese telecommunications
services market
Provider Local Long- distance Mobile network IP- network Satellite communi- cation
China Telecom X X X
China Netcom X X X
China Unicom X X X X
China Mobile X X
China Railcom X X
China Sat X
Source MII, March 2003

• TC services market as investing unit
• Investments planned by the providers in the year
  2003 24 bill. US. In the year 2002 24.5 bill.
  US were invested.
• Less investments into fixed network than into
  mobile network.
• Further investments are expected regarding
  building up of mobile network of the third
  generation. It is still uncertain which mobile
  network standard (W-CDMA, CDMA 2000 or TD-SCDMA)
  will be chosen.

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Telecommunications services market (6)

• Providers in the Hong Kong telecommunications
  service market

• Fixed network providers
• Pacific Century CyberWorks HKT Limited (PCCW-HKT)
  
• New World Telephone Limited
• Wharf TT Hong Kong Limited
• Hutchison Communications Limited
• Hong Kong Broadband Network Limited
• Eastar Technology Limited

• Mobile network providers
• Hutchison Telecom (about 1.7 mill. customers),
• PCCWHKT,
• SmarTone,
• Peoples,
• New World and
• Sunday Communications Ltd.

• TC services market as investing unit
• High competition, but relatively low investment
  of the alternative providers in their own
  infrastructure. 70 of all telephony runs on
  PCCW-HKT network.
• Investment in the year 2001 9.2 bill. HK.

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Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

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Location and industrial policy (1)
Political, social and economic environment

• PR China
• Social tension because of urban/rural and East/
  West differences
• PR China not a single market, rather, patchwork
  of different regional markets
• High savings rate (in the year 2002 increase of
  18 )
• Average income of the population is lower than
  1,000 US p.a
• Ailing banking system
• Inefficient state-owned enterprises, increasing
  unemployment
• Development of infrastructure (road system,
  shipping, airports) differs from one region to
  another

• Hong Kong
• Homogeneous (buyer) market
• Functioning banking system
• According to Western standards highly developed
  infrastructure (road system, shipping, airports)
• Functioning legal system
• Private consumption is declining (-1.5).
• High unemployment rate (7.4 in the first quarter
  of 2003)
• Continuous deflation
• High budget deficit end of October 2002 5.6 of
  GDP.

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Location and industrial policy (2)
Industrial policy in the PR China
Industrial policy in Hong Kong

• Especially the domestic software industry is
  currently supported by the government.

• Intensified focus on modern IT- und
  TC-infrastructure

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Location and industrial policy (3)

• Situation and prospects of e-commerce and
  e-government in the PR China

E-commerce

• Presently low acceptance of e-commerce, it
  doesnt correspond to the Chinese purchasing
  pattern.

Internet access

• Reasons
• Only about 4 of the population have Internet
  access.
• Mainly Western orientation of Internet content.
• Language barriers, because most of the Internet
  content is written in English.
• Low penetration of credit cards.

in mill.
Source MII, March 2003

• Nearly half of the Internet users live in the
  wealthier coastal regions.
• Nevertheless a growing acceptance of e-commerce
  is expected.

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Location and industrial policy (4)

• Situation and prospects of e-commerce and
  e-government in the PR China

• E-Government
• E-government in the PR China is not comparable
  with international standards. Presently the
  building-up of Inter- and Intranet-connection for
  the government and the supply with information
  are the main objectives.
• High priority is given to e-government by the
  government
• but the realization of projects hasnt proceeded
  very far.
• Project Government Online (1998) Focus on
  application e.g. online resourcing, contract
  award processes, online taxation..
• but e-government activities are mainly island
  solutions, confined to one town/ province. Peking
  and Shanghai are holding the lead.

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Location and industrial policy(5)

• Situation and prospects of e-commerce and
  e-government in Hongkong

• Intensive use of e-commerce and e-government by
  the population.

Internet access

• Reasons
• Higher income
• Bilinguality (Chinese and English)
• High penetration of broadband Internet access

Internet access (total) (March 2003) Dial-up Broadband access
2.4 mill. 1.4 mill. 1 mill.
Source TDC, Wik-Consult, March 2003

• E-government and e-commerce are much further
  developed in Hong Kong than in the PR China.
• Regulation of e-commerce and e-government
  activities is further developed than in the VR
  China.
• There is a law concerning digital signatures.

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Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

26
WTO entry and conditions for market entry (1)
Impact of Chinas WTO entry
Chances
Challenges

• Discrepancy between assumed and realizable
  obligations.
• Non-tariff barriers to trade on the provincial
  level in the PR China.
• Establishment of direct trade and traffic
  relations between the PR China und Taiwan.

• An improvement of business activities for foreign
  investors is expected in the following areas
• Liberalization of trade
• Protection of intellectual property rights
• Access to capital
• Nondiscrimination of foreign investors
• Higher transparency of legislation

• The WTO entry requires legal, political and
  social reforms for the PR China.
• Especially for SMEs the WTO entry implies an
  easier handling of business activities.

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WTO entry and conditions for market entry (2)
Impact of the WTO entry on the percentage of
foreign direct investment permitted in the
Chinese telecommunications services market
Type of Service Percentage of Foreign Investment Permitted Percentage of Foreign Investment Permitted Percentage of Foreign Investment Permitted Percentage of Foreign Investment Permitted Percentage of Foreign Investment Permitted Percentage of Foreign Investment Permitted
Type of Service Upon WTO Accession One Year from Accession Two Years from Accession Three Years from Accession Five years from Accession Six Years from Accession
Basic Telecom Services - Fixed 0 0 0 25 in Beijing, Shanghai and Guangzhou 35 in 17 cities 49 with no geographic restrictions
Basic Telecom Services- Mobile 25 in Beijing, Shanghai and Guangzhou 35 in 17 cities No change 49 with no geographic restrictions No change No change
Value-added Services and Paging Service 30 in Beijing, Shanghai and Guangzhou 49 in 17 cities 50 with no geographic restrictions No change No change No change
SourceYan Xu, 2002

• Mainly the segment of value-added services is
  interesting for foreign investors because of
  short transitional periods.

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WTO entry and conditions for market entry (3)

• Institutional market entry conditions

Foreign Investment Industrial Guidance Catalogue
Categories encouraged restricted prohibited
Segments (examples) Computer, Chip-Manufacturers, Software, Switching and Transmission TC Services Media, Publishing

• The persistence of the catalogue after WTO
  accession is doubtful.

• Catalogue of Advantageous Foreign Investment
  Industries in Central and Western China serves
  the support of the underdeveloped regions in the
  west.

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WTO entry and conditions for market entry (4)

• Market entry barriers

• Support of indigenous industry
• Politically motivated contract award process
• Non-tariff barriers to trade
• Necessary licences
• Lack of legal security
• Exaggerated requirement for know-how transfer (by
  cooperation partners and the Chinese Government)
• Intellectual Property Rights (IPR) though there
  is a law for the protection of property rights,
  law enforcement is difficult
• Local market entry barriers
• "guanxi"

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Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

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Opportunities for foreign companies(1)
Theoretical possibilities for market entry
1. Input stage
2. Input stage
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Opportunities for foreign companies(2)
Market entry form
Approximate values for the choice of the market
entry form
Company Represen-tative Office JointVenture WFOE
Turnover in mill. Euro 0.5 2-3 2-3

• The Joint Venture is not so important as market
  entry form than in the past. Presently the
  establishment of WFOEs is increasing.

• At least there is no general recipe for market
  entry into the PR China. A detailed analysis of
  all decision relevant factors is necessary.

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Overview

• Objectives and basic approach
• Trends in the development of foreign trade and
  the domestic economy

• Market structure and competition of the ICT
  manufacturing industry
• Telecommunications services market
• Location and industrial policy
• WTO entry and conditions for market entry
• Opportunities for foreign companies
• Conclusions

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Conclusions

• ICT markets in Greater China exhibit strong
  dynamics concerning market volumes, market
  structure and competition.
• The development in the Greater China Region is
  determined to a great extent by the PR China.
  This leads to changing economic relations
  between and to a new positioning of the three
  regions.
• Market entry opportunies for foreign companies do
  exist,there are strong segment-specific and
  regional differences.
• Challenges for market entry market situation and
  competition,segment-specific and regional
  differences.

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