MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | WILLIAM KRUEGER
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | WILLIAM KRUEGER
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
Mr. William Krueger
Thank you Mr. Chairman. Well, we have a broad topic and that's one reason we're sitting so far apart I think on this big panel. I want to thank you all for coming and thank you very much to our hosts and to the PBEC Organizing Committee who make it so easy for us to come here and have made a good forum for us. Yes, I actually am on the PBEC delegation from China and have the honor for several years to be the only "lao wai" on the PBEC China delegation because actually my company represents the small but growing number of international companies that are born in Beijing, that are reaching out to the world from a base in Beijing and partly are in fact the result of foreign investment in China. So I'd like to take the topic from the inside China view, run through some information that I hope will inspire your interest and your curiosity about the opportunities in China and then also address some of the challenges that face China. I think they can be generalized to be facing any of the developing markets and how to take advantage of the opportunities of a information and telecommunications driven new economy. I think the first thing to point out though is that we are talking about an economy. One of the take-aways from the dot com crash or correction if you have perfect 20-20 hindsight is that everyone emphasized the new and sort of forgot the economy. And that means that taking advantage of the opportunities or making the most of what's available in IT and Telecom is very much dependent upon some sort of old-fashioned thinking about corporate governance, financial accountability, transparency and regulations. These are not peculiar to the new economy, they are in fact relevant to everywhere. I'll point out how the challenges China faces and some of the reason for optimism about how it will go. First of all, the sheer scale of the opportunities in China are pretty astounding. In an attempt to make this post lunch meeting a little more lively, I'd like to illustrate the point about you really could go crazy thinking about the fact that in the time it took us to get this on the screen, about 60 new people signed on to a Telecom network, a mobile network in China. 50 people are getting their first fix line phone hooked up to their homes and 10 families are getting cable TV for the first time. And that's happening every minute of every week so those kind of what happens in a minute statistics when you talk about China are really pretty impressive. By 2005, there should be about 265 million mobile customers in China making it the largest mobile market in the world. Now this one I read on someone else's advertising campaign and then we went to dug around and we also could share the assertion that by 2007, Chinese may well be the largest single language in percentage terms available on the world wide web. And that the total industry for telecommunications is going to grow to about $133 billion, that's 20% kegar over the next five years. And if you doubt that that's possible, then you have not been watching what happened in China the last five years. When you take a look at where it will be, you're talking about markets that, for example data internet dial up, VOIP and other which are very small only about $4 billion markets today growing up to be more along the lines of $20-$30 billion markets. You are talking about a fix line business of $27 billion growing to $57 billion focusing on the broad band or Internet really specific sector. You'll see Internet dial up grow 50%, VOIP 170%, that is compound annualized growth over that period. And you'll see certain value added services which are fairly non-existent now but becoming really significant. We pulled out unified messaging here having about 78% compound growth rate to $161 million. This portion here which are really Internet value added goes from less than half of a billion to $11 billion revenues in this period of time. So it's just enormous and there's no other word for it. Just taking a look at what the size of the customer bases will be, there will be more cable TV subscribers in China than there is populating much of Europe. There are 347 million fix line customers, Internet users about 118 million by the year 2005. Those are the kinds of forecast we're talking about. So no matter how complex, difficult, challenging it might be, it is almost impossible for any global company in Telecom or IT not to have a China strategy and not to be thinking about where they're going to be when the China market is this size. Now, what is necessary to create that growth is a huge amount of investment, if you take the figures from the Ministry of Information Industries, it's about $184 billion U.S. to be invested from 2001 to 2005. The investment, this is basically, this investment alone is growing at about 13%. So this picture should tell you that in order to drive the growth of the China Telecom and IT sector, there has to be enormous amounts of capital generated not only in China but brought into China and it needs to move around efficiently within China. So the financial services sector actually is going to experience a huge amount of reform, expansion and increase sophistication to support this major infrastructure sector's growth. So as far as the regulatory environment, all of us have at one time or another studied, learnt and probably promptly forgotten the exact percentages and timing for foreign direct investment. Basically the main headlines are WTO will be a reality and but WTO by itself will not make it possible to do all of the things. WTO is a treaty, it's not a company automatically with domestic laws and regulations and the rule-out of the implementation of them in order to support the foreign direct investment and involvement inherent for highly protected sectors but the new laws are being drafted. A lot of new policies and regulations are put in place. There's been a shift from the old days when China Telecom was seen to be acting exclusively in the state's interest to where basically all incumbent operators are owned largely by the state and an environment of managed competitive has been created. The intention is to improve the operations and service level of all operators inside China through managed competition. This is very much in support of incumbents. That does not necessary make it easier for a foreign operator, a foreign investor to participate. These new regulations also are being felt not only in regard to foreign direct investment in the operators but in areas of content, capital raising, licensing, everything surrounding the Internet and Telecommunications. WTO by itself will not make it possible, you just can't open a chief rep office in Beijing and expect to be cutting deals with Ministries. There won't be kind of a gold rush of opportunities. The large critical mass facilities based carriers will be available only to cooperate or have investment from very prestigious, very large global carriers. That's basically the tone and almost literally the wording we saw in some of the draft regulations. There has to be a courting process, we all know in Asia that doing business together is based on a trust which derives out of knowing each other over time in relationships. So if anyone wants to be important in the year 2005 in China, you had really better be getting about starting because others are already there. With regard to corporate governance and operating transparencies, it's just frankly extremely difficult for any international investor to go meet a Chinese state owned enterprise or entity for the first time and walk away with enough information to analyze and then report to their Board of Directors whether there's a good opportunity there or not. It's almost impossible for a state owned enterprise to respond to an investor dediligence set of questions the same way in China that you would expect in another developed market. Just gathering information to make a decision about investing is extremely difficult. As far as the opportunities, we still have a case where it's one of the biggest and fastest growing markets, at the same time that you have the roll out of basic services, at the same time you're having leapfrogging in the implementation of the most advanced technology. So it's a very dynamic environment and there should be investment opportunities and strategic opportunities on all kind of points of the life cycle of the Telecom and IT. The government has launched a very wide reaching and very aggressive campaign to encourage the IT literacy of the country at every level. In state enterprises and the Ministries you see and hear the effects of the government's informatization campaigns and that the point is at the very high level of moving top down, appreciation for the importance of IT literacy in the life of a country and in the life of companies as they're trying to make progress. A similar kind of top down campaign should be expected in other areas like financial management and eventually corporate governance. One of the benefits of the system in China is that communication about a top level theme that is deemed to be very important can be made effectively and it actually does roll out. So we're still however facing the fact that the domestic capital markets are extremely underdeveloped. It's still basically a bank loan market. Foreign capital and know how are really necessary but extremely difficult to deliver. It's very difficult for an entity within a Ministry or state owned enterprise to really understand how to even put the specifications out for a consulting or banking or financial advisory engagement. Yet that's the know how that's needed most to attract investors. As tough as it is, you still have to be there early and you have to be on the ground and you have to be on the ground to stay. An early presence is really critical otherwise your folks on the ground do not develop the awareness and the trust and the relationships and the experience to be able to make judgements balancing both Chinese opportunities and foreign requirements. So anyway, the message is that we believe now is a good time to commit or recommit to investment in China but despite all the huge amount of potential, one should not forget basically there's no excuse for lack of prudence. The new economy after all is still an economy to begin with. Now as far as the way forward, one of the issues facing China and one of the things we see basically everyone has the same problem when you're a foreign investment or corporate outside, you frame the question in different ways. I would suggest one would be - how are you supposed to take advantage of these opportunities when you're faced with so many barriers or culture, political, geographic barriers? How can you achieve an acceptable risk return profile on China investments during a period when the nation's legal, economic, physical, technological and even the human capital infrastructure are still under construction basically. Another point is how can corporate managements and financial fiduciaries reconcile the fact that in a highly advanced economy there is a very high standard accountability with what you do with other people's money. Yet the standard that you usually face with in a developing economy including in China would not make it possible for you to uphold your normal standards for corporate governance. I think there are basically two areas where China and any other developing economy have to concentrate but particularly for China, I would say the first is in the area of capital markets and capital management. Now that, China has produced a lot of very good engineers but there are some disciplines that are simply not taught at an advanced level at most Chinese universities or the very few fledgling MBA programs and one of them is definitely the area of financial management. There needs to be more widely dispersed basic knowledge about the nature of risk and return. The accountancy, law, insurance and banking professions all need to be increased with regard to their levels of sophistication. There needs to be a higher level of professionalism in the financial management of companies and of government entities. It would be good and I expect some day it will be in fact dictated if not strongly urged that a basic working understanding of the principles of corporate finance, valuation, financial management, controlling or reporting should be at the fingertips of anyone running an enterprise or responsible for a significant amount of budget whether in an enterprise or any government bureaucracy. There was a lot of talk this morning and I think a really good panel on corporate governance. This is obviously another area of challenge in China. The concept of accountability to shareholders, the concept of accountability to stakeholders needs to be further developed. The domestic capital markets are characterized by being underwired if you will. Systems technology management, trust in those systems and in the management, corporate governance and oversight, accountability to shareholders, property rights, contracts, all of these are areas where progress has been made recently but they are the areas which are holding back development of the Telecom and IT sector in China as we move into the next phase. There was a lot of talk this morning and I think a really good panel on corporate governance. This is obviously another area of challenge in China. The concept of accountability to shareholders, the concept of accountability to stakeholders needs to be further developed. The domestic capital markets are characterized by being underwired if you will. Systems technology management, trust in those systems and in the management, corporate governance and oversight, accountability to shareholders, property rights, contracts, all of these are areas where progress has been made recently but they are the areas which are holding back development of the Telecom and IT sector in China as we move into the next phase. The second main area of challenges facing China is to move away from concentration on boxes to the valuing of ideas. The epicenter of the challenge facing China in the macro level and also for companies when they want to make investments or evaluate projects in China on the micro level is this shift from the stuff you buy to what you know. China as sort of the legacy of the planned economy and also just by the fact that so many people need to be connected has and continues to be focused on equipment acquisition, fixed asset roll outs. This is extremely important because you still see there is a huge number of customer hook ups that are going to occur over the next 5 years. Really what needs to be valued is software over hardware. I mean software in the broader sense. The roll outs of the last several years and the expansion of the China telecom sector of the last several years has basically been based on connectivity, not based on customer services, not based on billing, not based on value added. The service levels are generally those you'd expect to find in a developing country despite the huge number of customers and the huge revenues being generated. The new economy or the Internet driven improvements in the future are driven by IP based broad bands, convergence. These are the buzz words and what they actually mean is that it's the content, it's the software, it's the operating system, it's not the box. In China, equipment vendors have been particularly effective and aggressive in introducing new technologies but in the next era of development, China's operators are going to have to rely upon other more objective sources of information. Interoperability and the fitting of everything into one system is the big challenge for the future. Customer care, billing, these things will all have to be solved in China because China will become a very important back hall for international carriers. Professional management, marketing communications, human resource development, these are all the soft areas which need to be developed. It takes more than engineering basically to advance the nation in this Internet age. So these challenges are real and you shouldn't underestimate them and we can't take for granted they'd be solved. And we certainly can't take for granted that any one project is going to benefit from some macro level improvements. However we should take some comfort in the fact that there'd been a lot of advances in the mean time and what China's accomplished so far is really to be admired. So in summary I would say on the eve of China's entry into WTO, you have to see an environment where there is low inflation, there's high single digit annual GDP growth, stable currency, a rapidly expanding middle class, there's never been actually more of a macro reason to be bullish on investing in China. And despite that we've experienced explosive growth in Telecom, media and technology sectors the penetration rates and the service quality are still that of a developing country. I would say for China to take advantage of its opportunities and the things that we can focus on for reasons for optimism can be summed up as three or four things:
So, I know I think, China's success in IT and Telecom in the future is going to be based upon paying attention to what makes investors comfortable for putting their money and what makes strategic partners interested to engage in the economy. Those are sort of kind of the old-fashioned concepts of using money well, reporting on it and being transparent and you're handling and having unambiguous contracts. |
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