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China's Authoritarian Hang-Up

By Bruce Einhorn In many parts of Asia, the conventional wisdom says democracy is nice, but it doesn't make sense for developing countries, which must focus on eliminating poverty first and foremost. Some people from developing countries, while proud of their democratic systems, believe the give and take of democracy is a drag on their economies -- India, for example. I've met many Indians who look enviously at China's amazing economic progress and decide that the reason the Chinese are improving so much is that their country is an efficient dictatorship, while India is a sloppy democracy.

Things happen fast in China: Officials make decisions, companies push through policies, and it all takes place much quicker than it does in India. After all, China's mandarins don't have to waste their time lobbying lawmakers to approve their policies. And they don't need to worry about those same lawmakers launching any annoying investigations if those policies turn out badly.

This argument does, of course, have flaws. Yes, without democracy, key people can make their important decisions without wasting time convincing a majority that they're right. But what happens if those choices turn out to be wrong?

STANDARD BEARER. The giant Three Gorges Dam that Beijing is building on the Yangtze River is a case in point. This vast project will cost billions of dollars, displace millions of people, flood one of the most scenic spots in China (American readers: Imagine a dam on the Colorado River engulfing the Grand Canyon). Does this make sense? Little debate had taken place. The Chinese government has pushed ahead, with only a few brave souls inside China willing to express opposition.

This lack of accountability is hindering China's efforts to become more of a market-driven economy. Consider China Unicom (CHU). The Hong Kong-listed telecom is China's No. 2 cellular operator. The Chinese Ministry of Finance owns over 80% of Unicom's parent, China United Telecom Corp., with other parts of the government owning the rest.

China United, in turn, owns 77% of Hong Kong-listed Unicom, which raised $5.6 billion in selling the rest of the shares to the public in a June, 2000, IPO. Like its main rival, state-owned China Mobile (CHL), China Unicom runs a GSM network -- the same cellular standard that dominates in Europe and is popular in much of Asia.

EDICT FROM ON HIGH. Clearly, Chinese consumers like GSM, too: Today, China has more than 160 million cell-phone users, making the country the world's largest mobile-phone market, and almost all of them are using GSM (see BW, 6/17/02, "Maybe Beijing Should Have Stayed Out of This One").

So if China really is GSM country, why has China United just spent more than $2 billion building a network that uses CDMA, an alternative standard? And why is China Unicom struggling to convince consumers that they should switch from GSM to CDMA -- buying up half a million CDMA handsets from local manufacturers and offering them to customers at discount prices?

The answer, many outsiders feel, is that China Unicom has no choice. For political reasons, it has had to embrace the opposing standard. Since CDMA is an American export (pioneered by San Diego-based Qualcomm (QCOM) and since Beijing wanted to be friendly with Washington during the on-again, off-again negotiations over China's entry into the World Trade Organization, the Chinese government decided a few years ago that China should have a CDMA network -- and that China Unicom, as the Avis to China Mobile's Hertz, should run it.

SLOW ADOPTION. Never mind that China Unicom already had its hands full running a GSM network or that China -- still a poor country with crying social needs -- probably had better ways to spend a few billion dollars. The Important People made the decision, and that was that.

Unicom launched its CDMA network early this year, and the numbers so far are disappointing. Through April, it managed to get 700,000 subscribers -- compared to a target of 7 million for the year. The take-up rate, admits Unicom Executive Vice-President Li Zhengmao, "is not so high."

But Li is hopeful things will improve. And he insists that Unicom's decision to operate a CDMA network makes solid business sense. Is this all about politics? "People can say that," says Li from the company's office on the 75th floor of a Hong Kong skyscraper. "But that's between governments. We are confident about CDMA."

SKEPTICAL INVESTORS. The new standard makes sense for Unicom's investors, Li maintains. "We did a study a year ago and found that the cost for building a CDMA network was significantly lower" than a GSM network, he says. How much lower? "Thirty percent," he answers. "This is why the management decided to go with CDMA. It's a consideration on behalf of our shareholders."

Perhaps Li is right. Maybe it does make sense for Unicom to operate a CDMA network. And maybe it will be good for China if local factories gain experience making CDMA phones, in case a related standard becomes popular in the next few years for high-speed third-generation mobile networks.

Investors certainly have their doubts, though: China Unicom's stock price is off 16% this year, compared to an 11% drop for China Mobile and a 1% fall for the Hang Seng index. Have China Unicom and its government-owned parent poured several billions of dollars down the drain? The next few months will tell.

Should things really turn sour for China Unicom, though, don't count on any Chinese lawmakers being brave enough to ask any embarrassing questions. Authoritarian governments may be good at some things. But providing accountability isn't one of them. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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