China to Open Its Telecom Market

On January 6, 2014, China's Ministry of Industry and Information (MIIT) issued a new policy to further open its value-added telecommunications services (VAS) to foreign investors. The enterprises that operate the regulated VAS business should register in Shanghai's free trade zone (FTZ), and the service facilities should also locate in the area. The relaxed foreign ownership currently only applies to the enterprises that meet the requirements.


One year ago, China announced a consultation paper on the provision of mobile communication resale businesses on a trial business, which started to pave the road for private capital to enter the telecommunication industry. Private enterprises will be able to provide mobile voice, text, and data services by leasing networks from China Mobile, China Unicom, and China Telecom. On January 2, 2014, 11 mobile virtual network operator (MVNO) licenses were awarded to private enterprises such as Alibaba. Through the introduction of foreign and private capital to the telecom industry, China hopes to build a fair and competitive market to promote the sustained and healthy development of the telecom industry.

The openness of China's telecom industry to foreign capital in VAS allows foreign ownership to exceed the limit of 49%. The new guideline helps create equal access for foreign investors to enter into VAS in the form of wholly foreign-owned or controlled enterprises. Moreover, the foreign enterprises registered in Shanghai's FTZ can sell their products and services to the greater Chinese market. However, the traditional telecom business, including voice, text, and other services, is not totally opened to foreign capital as VAS. As shown in the issuance of MVNO licenses, the companies with more than a 10% foreign ownership stake were excluded from the license process. No matter whether the telecom market is opened to foreign capital or private capital, it aims to stimulate market competition and find a more effective business and market operation model, since China's telecom industry has been controlled by state-owned enterprises for a long time.

Regarding opened VAS, there is no limitation for foreign investment in the business of online application stores and online storage, but a 55% cap for online data and any transaction-processing business. Besides, new service sectors will be opened to foreign capital, including call center service, Internet access service, multiside voice and video communication services (without a cap), and domestic Internet virtual private network business (with a cap of 55%). It takes time for foreign capital to penetrate and deepen in China's telecom market. In order to build better development strategies, foreign investors should be able to determine the right business field and geographies first. Then they should figure out whether they might find any collaboration base in China. Finally, the foreign enterprises should learn to localize their services.

Considering the environment faced by China's MVNO operators, it is different from the initial development stage of MVNO operators in other countries, as it is of greater opportunities in the period of mobile Internet innovation. The companies receiving MVNO licenses can be broken into three types: customer service providers, handset distributors, and Internet companies. They might choose to seize market share through market segmentation, exploiting unsatisfied demand to propel business development. On the other hand, the MVNO operators can leverage the networks of mobile carriers to achieve synergies for their own business development. Furthermore, new products might be developed and brought to market by the MVNO operators by a combination of different resources.