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

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Dynamics in the ICT manufacturing market in the Greater China Region

- Extended Version -

Dieter ElixmannCornelia Stappen

ITS Conference, August 2003Helsinki

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Overview

• 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

• Objectives and basic approach

• Trends in the development of foreign trade and the domestic economy

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Objectives and basic approach

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

“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)

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Objectives and basic approach

Data-communications

Computer Hardware

Software

Telecommuni-cations

Fixed Network

MobileNetwork

IT-Consulting

„producingsegments“

„service orientedsegments“

Segmentation of ICT market

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Overview






• 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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Market volumes (order of magnitude) and expected future growth

Segments

PR China Hong Kong

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

equipment2.5 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

• 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.

Trends in the development of foreign trade and the domestic economy(2)

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Overview






• Conclusions



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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.

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

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R + D Production Distribution

R + D Production Distribution

PR China

Hong Kong

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 R+D centre and location of headquarters of foreign companies.


Value added activities of international companies

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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.

Importance of the domestic industry by segment


Legend: increasing decreasing constant

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

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Overview






• Conclusions



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Telecommunications services market (1)

Penetration rates in the PR China

Telephonepenetration rate Number of mobile phone users

in mill. in mill.Share of population in %

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.

Source: MII, March 2003

e

e = estimated

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Penetration rates in Hong Kong

Fixed network (March 2003)

Absolute Share of population in %

3.8 mill. 56

Mobile network (March 2003)

Absolute Share of population in %

6.4 mill. 94

Telephone penetration rate Number of mobile phone users

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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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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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

Classification of telecommunications services

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Provider Local Long-distance

Mobile network

IP-network

Satellitecommuni-

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

Market shares of Chinese providers on the basis of sales volume in 2002

Providers in the Chinese telecommunications services market

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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Providers in the Hong Kong telecommunications service market

Fixed network providers

• Pacific Century CyberWorks HKT Limited (PCCW-HKT)

• New World Telephone Limited

• Wharf T&T 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






• Conclusions



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Location and industrial policy (1)

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

Political, social and economic environment

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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• Promotion of domestic industry, establishment of brandnames

• Shift from the production in the low-end-sector to the production in the high-end-sector with own R + D

• Governmental programs and initiatives, e.g.– 863 Program– National New Product Program– Torch Plan– E-government Initiative

• State subventions• Business parks

Industrial policy in the PR China

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

• Expansion of the information society• Promotion of domestic software industry• Re-positioning of Hong Kong as part of

the Pearl-River-Delta• Locational advantages

• Programs and Initiatives:– Digital 21

• Business parks (Cyberport)

Industrial policy in Hong Kong

Intensified focus on modern IT- und TC-infrastructure

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

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.

Presently low acceptance of e-commerce, it doesn‘t correspond to the Chinese purchasing pattern.

E-commerce:

Internet access


in mill.

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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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 hasn‘t 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.

The lack of a general Internet-legislation prevents a common use of e-commerce. For the handling of digital signatures there is no general (nationwide) regulation yet.

General view:

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Location and industrial policy(5)

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

Internet access (total)

(March 2003)Dial-up Broadband access

2.4 mill. 1.4 mill. 1 mill.

Internet access

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.

Reasons:

• Higher income

• Bilinguality (Chinese and English)

• High penetration of broadband Internet access

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

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Overview






• Conclusions



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WTO entry and conditions for market entry (1)

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.

Impact of China‘s WTO entry

• 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

Chances:

• 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.

Challenges:

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Type of Service

Percentage of Foreign Investment Permitted

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 Guang zhou

35% in 17 cities49% with no geographic restrictions

Basic Telecom Services- Mobile

25% in Beijing, Shanghai and Guang zhou

35% in 17 cities No change49% with no geographic restrictions

No change No change

Value-added Services and Paging Service

30% in Beijing, Shanghai and Guang zhou

49% in 17 cities50% with no geographic restrictions

No change No change No change

Impact of the WTO entry on the percentage of foreign direct investment permitted in the Chinese telecommunications services market

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

Source:Yan Xu, 2002

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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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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






• Conclusions



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Opportunities for foreign companies(1)

1. Input stage

2. Input stage

R + D ProductionDistribution/

Marketing MixFinal user

markets

Theoretical possibilities for market entry

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Market entry form

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.

CompanyRepresen-

tative Office

JointVenture

WFOE

Turnover in mill. Euro

0.5 2-3 2-3

Approximate values for the choice of the market entry form

Opportunities for foreign companies(2)

Export

RepresentativeOffice

JointVenture

WFOE

Time

Turnover

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Overview






• 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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