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China telecom breakup edging closer

The government considers breaking up its telephone monopoly, a move that could inject a new dose of competition into China's rapidly growing market.

The Chinese government is considering breaking up its state telephone monopoly, a move that could inject a new dose of competition into the country's rapidly growing telecommunications market.

But the timetable for any breakup of the sprawling China Telecom company remains unclear. And while similar breakups in other developing countries have proven to be a kind of telecom buffet table for foreign firms, Chinese officials have said they want to reverse much of the overseas investment in the sector. This leaves any outside investors' role in the privatization uncertain.

Reform in the country's telecommunications market has been building since last spring. Officials have begun the process of separating the company from the ministry that oversees its operations, as part of a nationwide policy of pushing state businesses away from their government sponsors.

Meanwhile, a 4-year-old effort to establish a competitor to China Telecom has yet to make significant headway. Backed by significant foreign investment from companies such as Sprint and Deutsche Telekom, the fledgling China Unicom has made some small progress in wireless service and infrastructure, but still offers very limited phone service.

Reports in the country's state-affiliated newspapers have said the ministry in charge of China Telecom has submitted several plans for breaking up the company's monopoly to state officials. None of these plans has been accepted, however.

The stalling marks in part a clash between the desire for competition and modernization, and the fear of losing what has been one of the government's best businesses, say China watchers.

"China is considering a Western model. Breaking down China Telecom is one of the possibilities," said Zixiang Tan, an assistant professor at Syracuse University's School of Information Studies, who recently co-authored a book on the Chinese markets. "But a lot of people are still arguing to keep it as one."

The company, which made almost $20 billion dollars last year according to state figures, is a significant source of revenue for the government. The company serves most of the country's 110 million telephone customers, a figure that analysts say is likely to reach 170 million by the end of the year 2000.

The company could be broken down along geographical boundaries--much as AT&T was split in 1984--or could be split along business lines with new companies created to offer telephone, wireless, paging, and other telecommunications services.

Closing investment doors?
Western companies are watching eagerly for signs that they might be able to bid on a piece of the China Telecom pie. But recent pronouncements by Chinese trade officials make this an increasingly unlikely hope.

"It's not that related to whether foreigners are allowed into the market," Tan said. "They would have to change their policies."

Western companies have traditionally skirted laws against direct foreign investment in the sector by forming joint ventures with local companies which then create new operations. Sprint has used this "China-China-Foreign" model in its work with China Unicom, and other companies like Ericsson have profitably created a string of new companies to open up the mobile phone service and infrastructure markets.

But Chinese officials now are saying they will crack down on this strategy, with warnings that they might force current investors out of the market.

Hard evidence of the crackdown has been slow in coming, however. Sprint officials say the government has not yet made any kind of move to push them out of their Unicom investment, which opened a new phone service in the northern industrial city of Tianjin in August.

Ericsson officials say they had expected a crackdown for some time, but add that they have been in the market long enough that they don't expect any serious fallout.

"We're not seeing any change," said Johan Wiklund, press relations manager for Ericsson mobile systems. "The government wants to promote local companies and local providers. But we have been very clear with our transfer of technology."

China is Ericsson's biggest foreign market, making up about 12 percent of the company's total sales, Wiklund said. Through its joint ventures, the company serves about 45 percent of the country's GSM wireless phone market, he added.

Tan said it is unlikely that officials will try to push foreign companies out of the market altogether, losing access to the outside capital and technology. "I don't believe they would act so totally," he said. "It's a very risky thing."

But the country's internal political struggles over the shape of privatization and foreign investment don't bode well for overseas companies trying to move into the market now, Tan added.

"So many things are going on there," he said. "Generally speaking, this is not a good time for investment there."