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

Dynamics in the ICT manufacturing market in the Greater China Region - Extended Version -. Dieter Elixmann Cornelia Stappen. ITS Conference, August 2003 Helsinki. Overview. Objectives and basic approach Trends in the development of foreign trade and the domestic economy .

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

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  1. Dynamics in the ICT manufacturing market in the Greater China Region- Extended Version - Dieter ElixmannCornelia Stappen ITS Conference, August 2003 Helsinki

  2. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  3. Objectives and basic approach “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) • 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

  4. Telecommuni-cations Computer Hardware Fixed Network MobileNetwork Objectives and basic approach Segmentation of ICT market Data-communications „producingsegments“ „service orientedsegments“ Software IT-Consulting

  5. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  6. Trends in the development of foreign trade and the domestic economy (1) Partners in world trade • PR China – Rest of the world:considerabletradesurplus 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

  7. Trends in the development of foreign trade and the domestic economy(2) Market volumes (order of magnitude) and expected future growth • 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. Source: WIK-Consult

  8. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  9. Market structure and competition of the ICT manufacturing industry (1) 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 ChinaRegionor are expanding their activities. • Commitment of international manufacturers is usually long term oriented.

  10. PR China Distribution Production R + D Hong Kong Production R + D Distribution Market structure and competition of the ICT manufacturing industry (2) Value added activities of international companies • 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.

  11. Market structure and competition of the ICT manufacturing industry (3) Importance of the domestic industry by segment • 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. Legend:  increasing  decreasing  constant

  12. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  13. Source: MII, March 2003 Telecommunications services market (1) Penetration rates in the PR China Telephonepenetration rate Number of mobile phone users Share of population in % in mill. in mill. e e = estimated • 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.

  14. Telecommunications services market (2) Penetration rates in Hong Kong Number of mobile phone users Telephone penetration rate 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.

  15. Telecommunications services market (3) 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

  16. 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 Telecommunications services market (4) Classification of telecommunications services

  17. Telecommunications services market (5) Market shares of Chinese providers on the basis of sales volume in 2002 Providers in the Chinese telecommunications services market Source: MII, March 2003 • 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.

  18. Telecommunications services market (6) 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$.

  19. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  20. Location and industrial policy (1) 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. • 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

  21. Expansion of the information society • Promotion of domestic software industry • Re-positioning of Hong Kong as part of the Pearl-River-Delta • Locational advantages • 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 • Governmentalprograms and initiatives, e.g. • 863 Program • National New Product Program • Torch Plan • E-government Initiative • Programs and Initiatives: • Digital 21 • Business parks (Cyberport) • State subventions • Business parks Location and industrial policy (2) Industrial policy in the PR China Industrial policy in Hong Kong • Especially the domestic software industry is currently supported by the government. • Intensified focus on modern IT- und TC-infrastructure

  22. Location and industrial policy (3) Situation and prospects of e-commerce and e-government in the PR China E-commerce: • Presently low acceptance of e-commerce, it doesn‘t correspond to the Chinese purchasing pattern. Internet access • 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. in mill. Source: MII, March 2003 • Nearly half of the Internet users live in the wealthier coastal regions. • Nevertheless a growing acceptance of e-commerce is expected.

  23. General view: • 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. Location and industrial policy (4) 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.

  24. Location and industrial policy(5) Situation and prospects of e-commerce and e-government in Hongkong • Intensive use of e-commerce and e-government by the population. Internet access • Reasons: • Higher income • Bilinguality (Chinese and English) • High penetration of broadband 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.

  25. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  26. WTO entry and conditions for market entry(1) Impact of China‘s WTO entry Challenges: 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. • 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 • 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.

  27. WTO entry and conditions for market entry (2) Impact of the WTO entry on the percentage of foreign direct investment permitted in the Chinese telecommunications services market Source:Yan Xu, 2002 • Mainly the segment of value-added services is interesting for foreign investors because of short transitional periods.

  28. WTO entry and conditions for market entry (3) Institutional market entry conditions Foreign Investment Industrial Guidance Catalogue • 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.

  29. WTO entry and conditions for market entry (4) 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"

  30. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  31. Final user markets Distribution/Marketing Mix R + D Production Opportunities for foreign companies(1) Theoretical possibilities for market entry 1. Input stage 2. Input stage

  32. Turnover WFOE Joint Venture Representative Office Export Time Opportunities for foreign companies(2) Market entry form Approximate values for the choice of the 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.

  33. Overview • Objectives and basic approach • Trends in the development of foreign trade and the domestic economy • 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

  34. 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.

  35. wik-Consult GmbHRathausplatz 2-453604 Bad HonnefTel 02224-9225-0Fax 02224-9225-66eMail info@wik-consult.comwww. wik-consult.com

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