Reform Process and Development Situation of China Telecom Industry

1. Reform Process and Development Situation of China Telecom Industry Prof. Hao Weimin Vice President & Secretary General China Association of Communication Enterprises Vice Chairman, President China Orient Telecomm Satellite Company Ltd. Nov. 30, 2002 Hong Kong

2. Section 1. Reform process * Objective and Measures * Industry Reorganization * Open market Section 2. Development situation (1) * Rapid increase of Market Volume ( number of users ) * Market competition plays its role * Service quality improved * Service price reduced Outline

3. Section 2. Development Situation（2） * Revenue increase recovery * Expanding of customers scale * The situation of increase of customers in the first half year * Competition pattern changed * Market share of operators Outline

4. Objective * Separating government and enterprises，ensuring the independent administrative supervision by government departments; * Breaking monopoly, improve the engendered issue of low efficiency ; * Protect competition, promote telecommunication enterprise to improve service, cut down price level and strengthen competition capacity； * Adapt to the development of market economy, establish modern enterprise system of clear legal rights and obligations 1.1. Target and Measures

5. Measures * Introduce competition, reorganize China Telecom and other telecommunication enterprises; * Support China Unicom and other newly risen enterprises; * Open market：allow CNC and CRC etc. to enter telecom operation market; * Fulfill the promise of entering WTO, allow foreign investors to operate telecom business in China; * Refine market competition structure and promote the forming of the effective competition.. 1.1. Target and Measures

6. 1.2.New Pattern in China Telecom Market In 2002 CNC and Jitong merged with Northern 10 provinces 1994.7 China Unicom In 1999 Guoxin Paging was put under China Unicom 2002.5 CNC Directorate General in China Post before 1999.5 Other small and medium- sized enter- prises Directorate General of Telecom in MPT before 1995.4 1999.5 China Telecom 2002.5 China Telecom Group (Southern 21 provinces) 1999.5 China Mobile over 4000 Paging; 1300 ISP: 1500 ICP: 1400 2001.12 China Satcom In 2000 CRC

7. * Government restructuring state-owned properties; * Introduce new telecom operators such as CNC, CRC; * Promote the rapid development of China Unicom, CNC and other newly risen enterprises; * Telecom charges tend to fall due to price adjustment by government and market competition; * Meanwhile, thousands of value-added services providers entered into telecom market to develop their business. 1.3. Industry Reorganization

8. * At the beginning stage of market competition; * Competition pattern formed of many operators participating in the market; * Legal system gradually improved; * Plural investors; * Very fast development speed; * Relatively quick improvement of service quality; * Advanced technology; * Vast market potential and bright future 1.4. Main features in China Telecom Market at present:

9. 1.5.China Telecom Industry is in a Period of Transition Present (transitional period）： limited competition Future： period of effective competition Past： monopoly period

10. 1.6.Operators are changing Before reform: sole operator Problems in the new competing environment: 1. Disputes on network connection is apparent; 2. Price war in telecom service has become violent； 3. Proper allocation of resources is the condition of fair competition.; 4. Enterprises tend to focus on improving services; 5. Overall coverage of service is facing new difficulties After reform: many operators

11. 1.7. Plural Investments State-owned investment foreign investment private investment China telecom industry

12. Achievements: * Market competition pattern formed; * Development trends maintained as rapid, stable and sustainable; * Public satisfaction level improved on telecom service; * Telecom industry plays prominent role in national economy and social informationalization 1.8. Achievements and Defects of the Reform

13. Problem to be settled: * Unfair and ill-purposed competition occurred sometimes; * Asymmetric rights and responsibilities of the supervision bodies, resulting in their lack of capability in legally enforced administration; * Enterprises’ comprehensive competitiveness need improvement; * Overall coverage service mechanism wait to be established. 1.8. Achievements and Defects of the Reform

14. 2.1. Increasing Market Scale *fixed telephone users 19900 20000 17933 15000 14400 10840 10000 8472 7031 5494 5000 4070 0 1995 1996 1997 1998 1999 2000 2001 2002`6

15. 2.2. Expanding Users Group Development of telephone 30 25 Popularization rate of telephone （set/100 people） 20 15 10 Popularization rate of main lines 5 （line/100 people） 0 80` 85` 90` 95` 00` 02`3 02`6

16. 2.3. Increasing Customers Increasing of the number of mobile phone users (ten thousand ) 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1995 1996 1997 1998 1999 2000 2001 2002.6

17. 2.4. Increasing Customers Increasing of the number of Internet users（ten thousand） 3700 2922 3000 2500 2250 2000 1500 1000 890 210 500 67 1 8 20 0 1994 1995 1996 1997 1998 1999 2000 2001 2002.6

18. * Basic telecom service providers raised to 6；and value-added service providers reached to several thousand; * Mobile telecommunication developed rapidly, playing a substitution effect in the fixed phone service market and took off a large market portion away; Role of enhanced competition： * The charges of service continued to go down in a reasonable or unreasonable way： * To obtain competition advantage in the market, enterprises notably raised their enthusiasm as well as the ability in developing new business. 2.5. Market Competition Played Its Role

19. Results of enhanced competition： * Enterprises’ market promotion awareness increased, and the number of new customers keeps increasing; * Enterprises put more emphasis on improving service quality and reduction of users’ complaints； * Illegitimate competition occurred sometimes and disputes on network connection increased, government supervision difficulty increased； * Business development plan displays importance, as its impact on market competition is obvious 2.5. Market Competition Played Its Role

20. Achievements * The total number of users of fixed and mobile telephone ranks No. 1 in the world and still keeps increasing; * The technical performance of network keeps in line with the leading level in the world; * The increase of the revenue is higher than that of GDP; market promising; * The telecom market tends to see a stable expansion; * Foreign and domestic investors keep active investment activities. Insufficiency * The pattern of effective market competition hasn’t been established. Government supervision capability limited and not efficient; * Enterprises’ comprehensive competitiveness is limited and State-owned enterprises need further reform; * Unbalanced development in various regions;Telecom service level in western region and rural areas is still low, which adds the pressure for overall coverage service; * A few enterprises attempt to hold back rivals by using illegitimate ways; * Pressure of regional over supply exists 2.6. Achievements and Defects of the Market Development

21. * The pattern of effective market competition hasn’t been established. Government supervision capability limited and not efficient; Insufficiency * Enterprises’ comprehensive competitiveness is limited and State-owned enterprises need further reform; * Unbalanced development in various regions;Telecom service level in western region and rural areas is still low, which adds the pressure for overall coverage service; * A few enterprises attempt to hold back rivals by using illegitimate ways; * Pressure of regional over supply exists 2.6. Achievements and Defects of the Market Development

22. 3.1. Recovery of the increase ofTelecom Business Revenue Unit：100 million yuan 920.6 1000 724.41 800 565 497.8 600 222.44 222 400 84 200 44.1 50 36.8 0 International business Data communication Domestic long-distance call Local network communication Mobile communication Increase of telecom business revenue in the first half in 2002 First half in 2001 First half in 2002

23. 3.2. Business Income Distribution International business 6% 2% 4% Data business 11% Domestic long-distance call Local network communication 48% 29% Mobile communication Others The proportions of various business in total telecom income in the first half in 2002. Mobile communication business became the largest business revenue sector in the whole industry

24. 3.3. Increase of users in the first half year Unit:ten thousand 19900 17600 20000 12500 Total number of users 15000 7411 New users in the first half year 10000 3135 1900 5000 1385 605 0 Fixed phone Urban phone Rural phone Mobile phone

25. 3.4. Geographical Distribution of Telecom Customers Western part 19％ East part 52％ Middle part 29％

26. 3.5. Market Share of Operators in the First Half Year 1％ 11％ 33％ China Telecom CNC China Mobile 38％ China Unicom CRC 17％

27. Thanks