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China allows first foreign stake in its telecom market

A pair of long-dormant Chinese telecommunications deals flower, as the world's largest market shows signs of thawing to the presence of ambitious American companies.

A pair of long-dormant Chinese telecommunications deals flowered this week, as the world's largest market showed signs of thawing to the presence of ambitious American companies.

AT&T said Tuesday the government had at last allowed the company to take a direct stake in a regional telephone project, the first foreign network operator officially permitted to do so in decades. Separately, Chinese government regulators indicated support for a deal developing a mobile phone network using Qualcomm's wireless technology.

Taken together, the two deals appear to indicate the first glimmerings of a long-awaited opening of the giant market's telecommunications sector, as China prepares for its expected entry into the World Trade Organization next year.

For U.S. communications companies ranging from Sprint to Lucent Technologies, an opening of trade in China represents a potentially huge boost to the bottom line. American phone and infrastructure companies have spent considerable time and money in the past decade trying to find a way into the Chinese market. They see the country as a diamond in the rough, with more than a billion people and a communications infrastructure that is woefully underdeveloped by most Western standards.

But analysts warn that the bend in policy, though a significant step in the right direction, has a long way to go before it proves itself to be fertile ground for actual profits.

"Everyone's wanted to go to China, but I haven't seen anyone in 20 years make money there," said Brownlee Thomas, an international telecommunications analyst for IDC. "With the WTO this could change. But it's not going to happen anytime fast."

China's WTO entry is seen by world trade experts as a critical step for allowing foreign companies to set long-term roots in that country. By joining the trade agreement, China would agree to lift many of the trade barriers it now maintains and would be given similar treatment by other countries.

China's lure
The draw of the Chinese market is much the same as it has been for decades, or even centuries. It is the most populous nation on earth, and Western companies have long salivated at the prospect of establishing even a tenuous foothold there.

Many have been willing to make business sacrifices that would be instantly dismissed as foolhardy in any other market in the interest of establishing critical relationships with Chinese partners.

The telecommunications services sector, which has been becoming more liberal across the globe in recent years, has been a particularly difficult nut to crack for U.S. companies. The Chinese government has banned direct investment by foreign interests in its market and has kept even the equipment manufacturers needed to modernize the nation's infrastructure continually guessing whether today's deals will translate into sales tomorrow.

For the past year, San Diego-based Qualcomm's stock has fluctuated wildly because of news that it signed a deal allowing its next-generation wireless technology to become a Chinese standard, and that the government then put that deal on hold.

Other equipment manufacturers have had better luck. China has long been one of Ericsson's largest foreign markets for cell phones, while Cisco Systems, Nortel Networks and other infrastructure companies have touted recent sales of network gear there.

Stretching further back, service providers such as Sprint have taken risky bets on a model creating indirect joint partnerships with Chinese companies in an attempt to exploit possible loopholes in Chinese law. However, the government deemed those "irregular" last year, forcing the foreign companies to divest their interests.

It was that decision that makes this week's AT&T news so significant. AT&T will still be involved in a complicated three-way partnership with the government and a local business that will give Ma Bell just 25 percent ownership in the project. But the deal will be wholly legitimate for the first time in the case of a network operator, with the government's stamp of approval.

How much that will translate to other companies has yet to be seen, however.

"This means the Chinese government is trying to get ready for the WTO, to make sure they're up to speed," said Hui Pan, an analyst with the Information Gatekeepers Group who has closely followed the Chinese market. "This might be a test case to see how to work with foreign telecom operators."

AT&T itself says it sees the deal, which will create a broadband data-focused service in the business-rich region of Shanghai, as something of a trial. "We would have hopes that we can do something" more, an AT&T spokesman said. "But that will be more up to the government of China than to us."

Censorship, other hurdles
But there remain signs that China isn't ready to give up many of its own domestic rules. The government has imposed strict content censorship rules on its Internet sector, which could be a rocky adjustment for companies like AT&T that are interested in providing data services.

The Chinese government has also challenged the right of foreign companies to register Chinese-language domain names, in a move undermining VeriSign subsidiary Network Solutions' (NSI) still-strong influence over the ".com," ".net" and ".org" domain registration process. NSI has received hundreds of thousands of domain applications using Chinese characters.

The real plum for foreign companies will be the world of wireless, analysts say. China's traditional telephone sector is relatively undeveloped, with considerable capital costs ahead before enough copper and fiber-optic cables can be laid for a modern infrastructure.

By contrast, wireless phone systems can be built relatively quickly and cheaply, and already the wireless sector is growing quickly. Statistics put China's total mobile phone subscribers at 70 million by the end of September, with a penetration rate of just 4.5 percent of the population.

Wireless also will take complicated partnerships, however, with relative government-controlled giants like China Mobile or China Unicom or with smaller regional players, analysts say. And those partnerships will be tortuous for U.S. and other foreign companies to navigate, even if they wind up being legalized and start becoming more common.

"China is not an integrated country. It's a set of almost independent fiefdoms," said IDC's Thomas. "Joining the WTO is not going to change China overnight."