Lines Crossed in China

By John Pomfret, Washington Post, Saturday 17 August 2002; Page A01

State-Owned Firms Bully Customers, One Another in Fight for Telecom Turf

TANGSHAN, China—An Jianye's desk does not look like a war zone. An, who manages a seedy six-floor walk-up hotel in this northern Chinese city, keeps the place neat and his In-Out baskets clean. But the two phones sitting there tell a different story.

Over the past few weeks, workers from one of China's state-owned telecommunications behemoths, China Netcom, have twice severed the phone lines of China Railcom, a plucky rival that is also state-owned, to keep it out of An's hotel. Government regulators, allegedly in cahoots with Netcom, clipped little Railcom's wires a third time.

Other government departments also pressured An to keep China Netcom over Railcom, threatening to cut off his water and electricity. The local press has not touched the story because China Netcom is a major advertiser, according to local sources. Railcom, for its part, offered to pay for mobile phones for hotel staffers for a month if they signed up.

So An settled on a compromise—two phones on his desk, one black, one red, and a line from each phone company leading into his hotel.

One is an old friend and one is a new one, he said somewhat sheepishly. Competition is good, but not like this.

Battles such as the one over An Jianye's desk have erupted across China as it grapples with the question of who will control communications in, from and to the most populous country in the world. Fortunes are at stake. Revenue in China's telecom sector reached $43.5 billion last year, much of it going to the government and the Communist Party.

Deregulating telecommunications has tended to be messy everywhere, including the United States. In China, with its huge market and unsettled rules, the deregulation battle is being fought block by block, wire by wire, by workers often willing to sabotage competitors' equipment and even attack their staffs—even though ultimately they all work for the Chinese government.

The account of China's telecom wars, one of a series of stories on the way power is wielded in the new China, shows how after two decades of economic reforms most key power struggles here are over turf and cash, not ideology. Where politics has a role, it is increasingly as an excuse to exclude competitors, including foreign firms. Ideological forces—such as those dividing people who want the information revolution to set China free and those who want controls to maintain Communist Party rule—take a back seat to profit.

In the rush to reform the Chinese economy, state-run and private firms alike have embraced rough-and-tumble competition that mocks the power once wielded by socialist central planners. Special interests, backed by ministries or local governments, have so fragmented a once monolithic system that the economy has turned into a grab-fest where the strongest or wiliest survive.

Collusion in America is easier than in China, quipped Zhang Weiying, associate dean of Beijing University's Guanghua Business School. It's crazy but it's true. Our phone companies are all owned by the state, but they behave like enemies, not brothers.

The telecom wars also dramatize the corporatization of power in China, shifting political gravity away from government bureaus and toward companies, which pay better, provide good housing and become sources of a potentially endless river of bribes.

In the past, power resided in ministries and Communist Party committees. The party committees—for the telecom sector, the State Information Leading Group—still wield a big stick. But the ministries, which are supposed to carry out the reforms, do not. Only 800 people supervise telecom deregulation for the Ministry of Information Industries, compared to more than 3,000 in the United States. Hundreds of government officials have abandoned the ministry in recent years for telecom companies.

The current philosophy is this: Don't worry about the government because it can't do anything, said Shi Wei, an expert on telecommunications at the State Council, China's cabinet. The companies think: Can I make money with this in the future? I don't know. Can I grab it now? I must. This whole reform is turning out to be a lot more difficult than we thought it would be.

Unprecedented Growth

China's telecommunications revolution has been unprecedented. No other country has wired up and bridged the digital divide so fast.

A decade ago, there were only 10 million phones in China. Because of official paranoia about controlling information, it was even difficult to get authorization to own a fax machine. By September, the government estimates, there will be 400 million phones. The growth rate of Internet users, currently at 39.8 million, is the highest in the world. More Chinese use mobile phones, 176.2 million, than anywhere else. And China's fixed-line use, 198.9 million, has grown faster than that of any country in the world for the past decade.

From the beginning, the government has spent countless hours and millions of dollars blocking foreign political, religious and pornographic Web sites and tapping into Chinese phones and personal computers to ferret out and even jail freethinkers. In late June, China sentenced one man to 11 years in prison for downloading what it called counter-revolutionary material.

But the broader battle lies elsewhere. The first front is the fight for bureaucratic influence in Beijing, and then over the ability to stall or speed implementation of regulations. The second front is in the provinces, where Beijing's influence waxes and wanes depending on the willingness of local governments to listen.

For decades, there was basically one phone company in China. Ministries such as forestry, railways, coal, power resources and the People's Liberation Army ran private networks, but the majority of Chinese used phones from the Ministry of Post and Telecommunications, which called its phone operations China Telecom.

In 1994, the government created China United Telecommunications Co., or China Unicom, with investment from the ministries of electronics, railways and electric power. Competition had come to China's telecommunications industry. But the going was rough for China Unicom because the Ministry of Post and Telecommunications was at once the telecom regulator, the owner of China Telecom and in no mood to be nice to a competitor.

Sitting at the ministry's helm was perhaps one of the greatest power brokers in contemporary China, Wu Jichuan. China's telecom revolution had exploded under Wu's leadership; he was not about to let go of his telecom monopoly without a fight.

Backed by Wu, China Telecom regularly refused to allow China Unicom to link its tiny phone system to China Telecom's. And in 1998, Wu persuaded the government to force Unicom to divest itself of $1.4 billion in investment from 40 foreign telecommunications companies, a move that hurt the start-up.

Wu's argument was political. Foreigners should not be allowed to invest in China's phone system, he said, even though at the time China, as part of its accession to the World Trade Organization, was in the process of finalizing regulations allowing foreigners to do just that. But the real reason Wu stopped Unicom's foreign investment, Chinese industry sources said, was that China Telecom was worried about the boost foreign capital and management expertise would give to its minuscule challenger.

Since then, other state-owned shareholders bought into Unicom, bolstering the company's political heft, including China International Trust and Investment Corp. (CITIC) and Huaneng Power International Inc. China Huaneng, as it is called, is run by Li Xiaopeng, the son of Li Peng, the architect of the Tiananmen Square crackdown in 1989 and No. 2 in the Communist Party hierarchy. CITIC is linked to the family of Rong Yiren, China's former vice president.

Unicom has used this political pull to protect itself from China Telecom and to gain a more equal hearing before government agencies. It now has 30 percent of China's mobile phone market.

Disastrous Experiment Last year the government awarded Unicom exclusive rights to use code-division multiple access, or CDMA—a mobile phone technology from the United States—as a way to help it compete in the mobile phone market. So far, Unicom's experiment with CDMA has been a disaster, with the number of customers a fraction of what Unicom had predicted and losses on the service mounting. But the government, to protect Unicom, has forbidden China's press to report about the troubles, Chinese journalists say.

Restructuring did not end with Unicom. In the late 1990s, other firms were split off from the China Telecom empire. Among them were China Mobile, now China's biggest telecommunications company in revenue, and ChinaSat, a satellite communications firm. During a government reform in 1998, the Ministry of Post and Telecommunications was amalgamated with other ministries to become the Ministry of Information Industries, but Wu kept his position at the top.

Once China's leaders let the genie of competition out of the bottle, it proved impossible to put it back. Guerrilla companies run by local governments or private entrepreneurs, using the Internet to carry phone calls, ate into long-distance phone revenue. Wu's ministry, seeking to protect China Telecom, masterminded the arrest of a pair of brothers in 1999 in Fujian province for running a long-distance Internet phone service, according to Chinese newspapers.

That case further illustrated how politics has become a convenient screen for what is basically an economic war. The brothers, Chen Zhui and Chen Yan, were accused of endangering state security. What they did was run a tiny telephone operation out of an electronics store in a rural hamlet. But China Telecom was trying to scare competitors. Eventually, Wu's opponents organized a defense of the pair in China's press, and the case was dropped.

Cable television stations, desperate for revenue, began experimenting with pay TV that allowed customers to surf the Web in dozens of cities around China, violating government regulations saying China Telecom would monopolize Internet access. Local bureaus of Wu's ministry, backing China Telecom, dispatched teams to smash up cable TV stations and rough up cable TV workers in several provinces. But the programs continued under the protection of government departments that benefited from the sale of the services.

In China, to do business you have to be everybody's friend, said Terry Lui, the chief executive officer of DVN, a Hong Kong-based firm that has set up interactive TV in several cities. Sometimes the technology runs faster than the rules.

Internet content providers routinely send video down China's phone lines, even though one government bureau, the State Administration for Radio, Film and Television, said it would allow the practice only if it got a piece of the action. So far, it has not.

China is a big country, said one executive at a private Internet firm that has been selling video downloads for almost two years. There is a lot that the government can't control.

Wu has had some victories. His ministry winked while China Telecom established a local mobile phone service, called Little Smart, without a license to do so. Operating in 250 cities, this business in some regions is killing China Mobile and China Unicom, the only two firms in China with licenses to sell mobile phone service.

Largely because of the competition, phone prices and revenue have plummeted. Mobile phone revenue per user has dropped 50 percent in three years. China Telecom used to charge as much as $3 per minute for an international call. Now, competition has forced the price down to about $1. In the first five months of this year, revenue from domestic long-distance telephone service rose by only 0.27 percent while international call revenue dropped 15.32 percent.

This is the warring states period of Chinese telecoms, said Duncan Clark, managing director of BDA China, a leading telecom consultant.

China Telecom was broken up last May into two firms as part of the government's efforts to encourage more competition. One, which operates in 21 provinces and cities in southern China, kept the name China Telecom. The other, which operates in the 11 provinces in the north, took the name China Netcom.

In theory, the two are owned by the Large Enterprise Department of the Communist Party and managed by the Ministry of Finance. In reality, Wu has retained enormous influence; of the 11 top executives in both firms, 10 were his proteges.

A smaller firm, China Railcom, backed by the Ministry of Railways, also was given a license to operate. As part of the government's policy to encourage competition, Railcom was allowed to charge less than its bigger rivals.

The original Netcom, once a tiny firm in Shanghai, was backed by Jiang Mianheng, the son of China's president, Jiang Zemin. It floundered for several years and, according to industry sources, was on the verge of bankruptcy before the merger with China Telecom's northern assets. That Netcom's name continues to be used and that the firm continues to exist at all, industry sources said, is a testimony to the influence of Jiang's son.

It is the perfect compromise, said a Western telecommunications executive, who spoke on condition of anonymity for fear of hurting his company's business. Jiang Mianheng's company was effectively eaten by China Telecom's northern businesses. But the firm took the Netcom name. So Jiang's son got some face, but in the end not much power.

Tangle of Phone Lines

China Telecom's reorganization marked the declaration of open season on phone lines. To break into the market, Railcom and Unicom began offering deals below government-set prices, laying phone lines and not always paying attention to the law.

Behind An's hotel in Tangshan, the results of the reforms are on full display. A cat's cradle of phone wires, both Railcom's and Netcom's, connects several run-down apartment blocks.

It's a little chaotic here, said Rui Xinhe, a 50-year-old Railcom executive from Tangshan as he walked beneath the mess. But this is competition.

The battle for An's hotel happened in the wires above Rui's head. In early July, Railcom laid its wires, running them alongside Netcom's wires. In some cases, workers hung the wires on hooks belonging to Netcom.

We're the little guy, explained Rui. Maybe we cut a few corners.

Railcom has 10,000 customers in Tangshan, Netcom 1.4 million. Their goal is monopoly, Rui said of Netcom.

Sometimes I think we just should let one company do it, Rui continued, strolling under a maze of phone lines, power lines and clotheslines. You know, just let one business do it and regulate them. You know, a real socialist company serving the people. But we don't have those in China anymore.

Across town, Li Liqiang, a Netcom official, is unrepentant.

Our people cut the cable, he said, but they shouldn't have hung their cable there. If you want to hang your clothes out to dry, do you put it on your neighbor's clothesline?

Tangshan is not the only battleground. In the town of Liaocheng in Shandong province, China Netcom workers, repairing an underground cable, discovered Unicom phone wires running through a system that belonged to their firm. Unicom sneaked underground and laid their cables there, said Li Tao, an executive with China Netcom in Beijing. They laid the cable on our property. Of course, we're going to rip it out.

And in Suining county, in Sichuan province, China Telecom workers flexed their muscles. In June, they stormed into the operations center of China Unicom, smashed equipment and beat up employees in an attack that led to an eight-hour halt in service for Unicom's customers.

So far, the Ministry of Information Industries, which supervises the telecommunications industry, has not issued a ruling on any of the cases because, an industry official said, most of its investigators have moved over to the phone companies.