FDI in China Telecommunication Industry (Nokia in China)

FDI are crucial part for developing and expanding the infrastructure in order to gain capital and new technology. Foreign direct investment can spark growth and create national wealth, but competition among companies, local and multinational alike, diffuses the benefits. Government policies designed to protect incumbents, high tariffs and joint-venture and local content requirements.

China is success to attract investors to make FDI in Mainland China while other countries are facing a number of challenges and downturns. In 2003 China received US$53.5 billion out of a global total of US$560 billion and in 2002 received US$52.7 billion out of US$580 billion beating United States as the first place recipient. China performance is anomalous but may also be instructive in gauging the determinant of FDI in emerging markets.

There are two keys in China's success, first is their tightly-knit political system, involving closely-knit business government networks of influence which is close to the optimal conditions of property rights provision. Second, is although the overall size of FDI is quite high but China does not yet allow FDI into basic telecommunication service provision, this condition is totally different with others developing countries.

The credible commitments are also made China can expand networks and increased the FDI. China makes reasonably strong commitments even though it only has a weak domestic liberalization program. China acceded to the WTO on December 11, 2001 and made commitments in goods and services including telecommunications. Prior to the accession, China allowed joint ventures with foreign company in equipment manufacturing and infrastructure building, and invited portfolio investments in mobile telephony and Internet-related arms.

The accession agreement allows joint ventures for Shanghai, Guangzhou, and Beijing in value-added services upto 30%, and up to 25% for basic (terrestrial and wireless) voice and data services. The geographical restrictions are removed and foreign equity caps raised to 49% or 50% for value-added services within two years of accession, within three years for mobile and data services, and within six years for domestic and international services. This event also triggered a huge investment of monetary and human R&D capital. Many foreign investors came to China announced to have establishment or expansion in China R&D center.

The increasing total amount of FDI to China can be seen as the following table (Summarized from People’s Daily, International Trade Daily, and China Daily). Company| Date of Announcement| Size of the new R&D center| Nokia| November, 2001| 500 researchers, it is the second Nokia’s R&D center in China| Motorola| November, 2001| It is the Motorola’s 19th R&D center in China. In the next 5 years inChina, Motorola will increase its researchers up to 5000 and invest1.3 billion dollars in R&D activities.| Microsoft| January, 2002| 100 full-time researchers and several hundreds visiting researchersand engineering students.| Honda| January, 2002| $17 million investment|

GE| February, 2002| 400 researchersIt is the third largest R&D center of GE.| Honeywell| March, 2002| 30 researchers|NEC| March, 2002| 50 researchers (up to 500 researchers by 2005)The size of this telecommunication R&D center is only behind itscounterpart in NEC’s headquarters.| Oracle| March, 2002| 100 staff membersIt will become Oracle’s strongest R&D base outside the UnitedStates within five years.|

Japan Koito Manufacturing| April, 2002| $12 million investment| Sun Microsystem| April, 2002| Sun will shift 10 per cent of its R&D work to this Chinese center.| Hewlett-Packard| May, 2002| 200 researchers (up to 2000 researchers in 5 years)| Ericsson| May, 2002| It is Ericsson’s 7th R&D center in China| Dell| July, 2002| 270 researchers initially, growing to 1,000 in the next few years.|

As we can see at the table above, the investment is mostly come from telecommunication industry like Nokia, Motorola, Ericsson, and Hewlett-Packard. Telecommunications industry developed at a high speed in China. The development was triggered by the large amount of foreign investors came to China.

This situation stimulates the Chinese government to keep developing a telecommunication infrastructures and technologies in a great pace. Telecommunication companies like Nokia, Motorola, and Ericsson used this opportunities to expand their companies.

The development for opening networks in telecommunication industry was started from 1990s. Number of telecommunications lines rose from 12 million in 1990s to 170 million in 2000. In the early 1990s when analogue cell phone held sway, the nChinese market was monopolized by a single transnational corporation, Motorola, and at that time Chinese consumers were paying high prices to use brick-like mobile phones produced by that company.

After a digital mobile telecommunications network was established in China in 1994, Nokia Ericsson, and some others quickly expanded their production in China, and the monopoly of Motorola began to shake. In 1996, Ericsson become the largest cell phone producer in China with a 37% share of the Chinese market, but two years later it was replaced by Nokia whose market share reached 36%.

Nokia in China Nokia opened its first office in Beijing in 1985. The reasons for NMP to enter the Chinese market for mobile phones as late as 1995 had to do with the size of the market. The main reason being that the mobile phone subscriber base was slow to develop. The number of users in 1992 was less than 50.000 (Collins et al., 1999, p. 10). Subscriptions had a quick and rapid take off after the economy opened for FDI and trade in China since mid-1990s. Between 1992-1995 the number of subscriptions grew by 400%.

The rapid growth of a new middle class is also a sign for mobile phone manufacturers. China’s rate of telephone coverage was in the early 1990s the lowest in the world. This had also to do with the lack of proper and functioning mobile phone networks. The Ministry of Posts and telecommunication (MPT) announced instead of developing landlines to develop wireless solutions, which boosted the market for both networks and later on mobile phone sales China currently the second largest market for Nokia after United States. Nokia has currently two units in China producing mobile phones.

One unit is located in Beijing and the other in Dongguan. In 1986 it sold the first NMT450 analogue cellphone system in China, which was a landmark for the beginning a long lasting success. Nokia began to sell GSM in China in 1991. By the end of 2001, Nokia has invested a total of 2.3 billion Euro (nearly $2 billion) in China and established itself as a strong contender in the mobile phone market. The company has twenty-two local offices, eight joint ventures and a research centre, total employees amount to 5.500.

Nokia is the second largest mobile phone supplier in China after Motorola, with a market share of 30% (situation at end of 2001). Nokia's winning strategy in China lies in unique product design, combined with functionality and ease of use.

The company offers a broad range of mobile phones to accommodate different needs and tastes. In addition, the company has developed an extensive reseller network with 900 outlets throughout China. Nokia is also a pioneer in new generation mobile technologies including GPRS (General Packet Radio Service). Nokia has invested heavily in China, and one new manufacturing facility located in the Beijing area has brought about 15,000 jobs (Li, 2002).

Foreignowned, export-oriented enterprises have sharply increased income and benefit levels since foreign firms usually pay more and offer more comprehensive benefit packages than local Chinese-owned firms (Angresano and Zhang, 2000). In 2001 Nokia opened a "Xing Wang (StarNet) International Industrial Park" with a Chinese partner. The 10 billion Yuan ($1.2 billion) park will be used to manufacture Nokia handsets and other products by attracting part suppliers and other companies in the world. Nokia has also seven joint ventures and two product development units in China. This situation prevailed at the end of 2001.

The Nokia networks division has 6 joint ventures in China (of which 3 production units). Nokia Ventures Organization has one joint venture in China for the production of multi-media terminals. Nokia’s two production units in China and one located in South Korea primarily produce units for the Asian markets. In February 2002 there existed around 145 million mobile phone users in China. It has been estimated that the number of users will increase with up to 55 million new subscribers during 2002. China is the largest market for mobile phones in the world. In the end of April 2002 the number of users had reached 167 million.

China has become the key growth-market for mobile phone makers and telecom-network providers (HO 2001). The opening of the Chinese market and China’s membership in the WTO in 2001 together with the economic growth have been boosting this development. Nokia announces that it expects over 20% growth in sold mobile phone units in China during 2002 compared to the previous year. If this is the case Nokia will expand much more than its competitors. The estimated growth of the Chinese mobile phone market is 10-15%. This is an impressive estimate especially if we consider the size of the market. Until 2010 Nokia still held the market share in China with 31%.

The company sold 70.7 million mobile phones and China has become Nokia’s largest consumption market in the world. Nokia also made a joint-venture with Siemens established Nokia Siemens Networks that providing infrastructure and telecommunication equipment. This company has many competitive advantages, advanced technology which telecommunication industry needs it to developing the networks and technology like building infrastructure for 3G or 4G technology.

Nokia Siemens Networks was doing a great business in China. Nokia Siemens Networks' latest financial report shows that during the forth quarter of 2010, its net sales in the Greater China region reached EUR506 million, a year-on-year increase of 20% and an increase of 63% compared with the previous quarter. According to the report, the company's total net sales in the reporting period was EUR3.961 billion, an increase of 9% compared with the same period in 2009.

In addition, its annual worldwide sales reached EUR12.6 billion. Due to the strong business growth and the improvement of consumer confidence in the Chinese mobile communication industry, Nokia Siemens Networks' net sales in the Greater China region reached EUR1.451 billion during the entire year of 2010, a year-on-year increase of 3.9%. In April 2010, Nokia Siemens Networks signed agreements with China Mobile and China Unicom, respectively, selling EUR750 million 2G and 3G mobile network equipment and solutions to the two Chinese telecom operators.

In China Mobile's IMS platform bidding, Nokia Siemens Networks became the provider for China Mobile's Beijing, Xinjiang, Jiangxi, and Yunnan branches. By 2010, Nokia Siemens Networks had completed the distribution of its TD-LTE industry chain, covering research and development, manufacturing, procurement, sales, services, and tests. Conclusions and Recommendation

Mobile phone production and marketing is presently undergoing a repositioning phase globally. The first rapid growth of mobile phone markets in the core economies of the world has come to a halt. New growth possibilities can be found in emerging economies and in transition economies, notably so in China. Asia is currently the world’s largest single market area for mobile phones. The East-Asian region has also become the largest single market area for FDI for mobile phone manufacturers. In this development there was a take-off stage in the mid-1990s, which increased during the latter part of the century.

China opened up its telecommunication equipment market almost two decades ago (Ho, 2001). It has opened up even more since it has joined the WTO in 2001, which probably will boost investments and trade further. Many joint ventures have been established and the Chinese are keen to learn and develop their own industries, as well as their own position as a service provider as well. The telecom and mobile industry is one key industry in developing the country.

China has also jumped over the building phase of wired telecommunications to direct mobile communication. Recommendations for the future include the following(Zhang, 1998): 1. Continue to keep China’s open door policy to FDI and MNCs in the long run; 2. MNCs should receive similar treatment to locally owned businesses and special treatment should be restricted in thelong run; 3. Using the positive effects of FDI to adjust the economicstructure; and 4. Using FDI as a weapon to promote domestic reform and aid locally owned businesses.

In conclusion, due to the positive effects of FDI investment on Chinese economy, Chinese government should continue to keep its open door policy to FDI and MNCs in the future. However, feasible measures should be taken to limit the disadvantages on domestic businesses. The foreign investment policy should be considered as a supplemental part of the domestic development policy.

The opening to FDI andMNC investment should be carried out simultaneously. Special treatment should not be given to MNCs. Rather, the local firms should be given the same treatment and the administrative constraints on the domestic stateowned- enterprises should be gradually eliminated.

Reference Collins, D, T., T. Høgberg-Petersen, C. Stuart & R. Wetstone (1999), “Nokia Mobile Phones: Connecting Countries. A Lesson in International Strategy”. May 13, 1999, Yale School of Management. Available http:\www.yale.edu/nordic/reading_room/nokia.htm. Ho, S-C (2001), “The Prospects of Foreign Investment in China’s Mobile Services Market in the Post-WTO Era”, (Dept. of Information Management, Shun-Te University. Available http://www.econs.ecel.uwa.edu.au/economics/Links/papers/aces_ho_sc.pdf. Xiaojuan, Jiang (2004). FDI in China Contributions to Growth, Restructuring, and Competitiveness.

Zhang, Fan. (August, 1998). The Impact of Multinational Enterprises on Economic Structure and Efficiency in China. China Center for Economic Research, Peking University. The Washington Center for China Studies (WCCS).

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FDI in China Telecommunication Industry (Nokia in China)

By: Jo Hansen Subject: Chinese Foreign Trade and FDI Lecturer: Huang, Xiao Ling