China’s Third Plenum and its implications for the telecoms sector
In November last year, the 18th Central Committee of China’s Communist Party held its Third Plenum. These plenums are the most important events in Chinese politics, and the third plenum more so than any other. Harking back to 1978 when Deng Xiaoping ushered in a new age of economic reform and openness, party leaders ever since have used the Third Plenum to launch their major strategic initiatives.
The text of the Third Plenum presents in the guiding principles by which the rule of Xi Jinping, as General Secretary of the Communist Party and de facto head of state, will be judged. The text of the Third Plenum is not one single document, but it is bold and highly nuanced, and its meaning will be subject to debate and interpretation throughout the next ten years.
But what are the early manifestations of the Third Plenum and what does it mean for the ICT sector?
Firstly, while much of the western media has focused on the ‘decisive role’ to be played by market it is worth noting that the actual text not only lays emphasis on the role of the markets but also argues that the reform process is based on a relationship between the market and government and that full rein must be given to the role of government. So in the telecoms sector we can expect to see a prominent role played by government in reshaping the industry in light of broader government policies.
In terms of infrastructure this will almost certainly mean tight control on competition between state-owned enterprises (SOE) and will place the ICT sector as a key agent in the redistribution of wealth (through creating new economic opportunities across China) to the rural and urban poor. However, as stated in the Third Plenum, the government will be given full rein to its powers and this will be true in the implementation of the Third Plenum edicts –in related documents there is a clear indication that government control will be maintained to ensure the ‘correct use of the Internet’
It is the combination of government driven initiatives and policy together with private sector investment that the third Plenum intends will create new opportunities. In terms of the ICT sector the key questions are how the industrial structure might evolve and where the growth opportunities are to be found – and at what prices those growth opportunities will be realised. Also, how can the industry help in the redistribution of economic opportunity – for example, will it be through an elaborated universal service obligation – to rural poor and those disenfranchised in urban areas.
One way into this is to review the opportunities along a value chain – equipment manufacturers, networks, content, software, Internet companies.
The equipment industry has risen to become a significant global force and has taken market share in many countries. Residual concerns about the integrity of the equipment supplied have been largely dispelled by the revelations of the NSA and other security forces. However, what is clear is that the global footprint of the industry and its technological strength are a template that is being transposed into other sectors in the ICT industry.
The network operators, at this moment, remain national companies, delivering on national infrastructure obligations – most importantly universal broadband services. However, the network operators are building significant investment resources and have access to investment funding that is capable of driving overseas investment.
Furthermore, as the Rimbi becomes an increasingly important and internationally traded currency, so the currency risks of investment overseas are diminished. The tentative steps so far taken by operators to invest overseas are not indicative of the investment potential of the Chinese operators – secure in their home markets, these operators will expand into overseas markets in much the same way as the equipment industry has evolved. The reciprocal movement, of course, will be a further easing of market barriers in China and the encouragement of new entrants, albeit initially in well-defined markets. In part, the recent decision to open up the telecoms market in Shanghai to foreign investment is an indicator of potential opportunities.
The consumer market is vibrant and whilst consumers are shy of spending this is not a universal axiom. Branded devices, most notably Apple and Samsung, have dominated the mobile device market. New opportunities now abound with games consoles, and the Internet companies are delivering high value services free at the point of consumption (but funded through advertising).
What is clear is that consumers will spend money on high value added products that help to differentiate their behaviour in a commoditised market but at the same time will seek out opportunities to use ‘free’ commoditised services. Recent data show that 67 per cent of mobile devices sold were classified as ‘ultra premium’ i.e. selling for more than $450, yet WeChat has over 300 million customers and Tencent’s QQ close to 850 million users.
The content and applications segment of the value chain appears to be highly constrained yet here the third Plenum portends major market changes. It implicitly recognised the importance of a highly vibrant and diversified information sector driving content to users.
But a bifurcated strategy can be discerned – the three big players are intent on creating a global footprint and will use their scale and new market opportunities to do this. On the other hand, subject to tighter Internet regulation than many countries in the west find acceptable, new internet markets are being allowed to flourish. One indication of this power and commitment to these changes in the information sector is the ability of the Internet service providers to offer new financial services, essentially deposit taking, in light of an established and entrenched banking sector.
This was the final instalment of our four part series on China. The previous three instalments can be viewed by clicking the links to the left of this article.
Howard Williams is Emeritus Professor at the University of Strathclyde Business School.