China: Will Wto Help?

Foreign telecom outfits may still get tossed out of joint ventures

It's the world's fastest-growing telecom market, adding enough phone lines every year to replicate a network the size of Pacific Bell's. Its consumers are signing up for Internet and cellular phone service at an astounding rate. And now, thanks to the Nov. 15 deal with the U.S. on terms for entering the World Trade Organization, China is about to throw this fabulous growth market open to foreign investment. One would think the world's telecom service providers are gleeful.

Far from it. To several dozen companies that already have sunk $1.4 billion into around 40 different telecom joint ventures in the mainland, the signals coming out of Beijing are as gloomy as ever. For the past year, Chinese officials have been warning the likes of Sprint, France Telecom, and Bell Canada to unwind partnerships they had forged since 1994 with state-owned China Unicom. The foreigners had been seizing on an apparent loophole in the country's investment rules to put money into Unicom. Since Beijing has declared it will soon allow foreigners to own up to 49% of domestic telecom ventures, these companies had hoped they were in the clear. Instead, since the WTO deal was signed, Beijing has only intensified its pressure to sell their stakes at a minimal profit--just as many of these businesses are taking off. "We've been tortured and pushed around," says the head of China operations for one Western telecom provider. "We've been waiting so long."

As the celebrations over the trade pact abate, reality is settling in among many multinationals still facing the hard fight of making their mainland investments pay off. Even though import and investment barriers are supposed to fall, the protectionist mind-set of Beijing mandarins toward industries ranging from autos to financial services won't easily change. And in areas where Beijing grudgingly agreed to give foreigners any role, officials may interpret China's WTO pledges as narrowly as possible.

The Information Industry Ministry's standoff with foreign telecom companies highlights a broader problem. Since relationships have long taken precedence over rules in China, many investors have operated in a legal gray zone. Often with winking approval from officials, they plunged into everything from Web startups to power plants and retailing. Since the deals weren't explicitly banned, the foreigners hoped Beijing would eventually adopt rules making these ventures legitimate. Some foreign stakes in Unicom ventures exceed 50%.

At first glance, the WTO deal legalizes these stakes. Although Beijing did not agree to let foreigners own majority control of telecom providers, it did say they could own 49% upon WTO accession, and up to half after two years. But the Information Industry Ministry insists that because the existing ventures never secured official blessing, they must still sell all their shares immediately. To date, it has refused the companies' requests to grandfather their deals into the new rules.

The foreigners are getting little support from their partner, China Unicom, the country's second-largest operator. Founded in 1994 to bring competition to the industry, Unicom struggled to get domestic financing and win customers from powerful China Telecom. So it turned to foreign companies for help. Now, Unicom isn't complaining about the order to dissolve these partnerships. One reason: it soon expects to raise several billion dollars by listing its stock in Hong Kong and New York.

Thus, it can afford to play hardball with the foreigners. Unicom is offering only to refund its partners' original equity, plus a small return ranging from 6% to 20%. For the most lucrative ventures, Unicom may also offer foreigners warrants that can later be converted into some equity. Unicom officials are advising foreign partners to depart gracefully. "They are saying we shouldn't ask for too much and should be more cooperative," says a foreign executive now locked in negotiations.

So far, few are biting. Instead, most Unicom partners are fighting to at least keep 49% of their ventures when China enters the WTO. "We're waiting to see if Unicom will receive instructions from the Ministry to change its stance," says Pascal Nedellec, head of France Telecom's China operations. His company has sunk $50 million into two mobile-phone units in Guangdong province launched in early 1998.

Publicly, Unicom is showing no signs of budging. "We are still following our original plan," says an official. "The government has declared this model illegal. So we have to clean it up." Unicom insists talks with partners are going smoothly. It claims it has already settled with Japan's Nippon Telegraph & Telephone Corp., which invested $50 million in cell-phone ventures on Hainan Island and Hubei province. It also says Asian American Telecommunications, a unit of New York-based Metromedia International Group, will sell its stakes in mobile and fixed-line networks in Zhejiang and Sichuan provinces. NTT and AAT executives weren't available for comment. Muses one foreign partner on Unicom's aim: "It may be easier to kick everyone out and start over again."

To be sure, the tie-ups with Unicom always were on shaky ground. In 1994, Beijing decreed that foreigners could own no stakes in telecom services. But with the tacit approval of some officials, they devised an end-run. Foreign telcos invested in other Chinese companies, which in turn formed ventures with regional Unicom affiliates. Beijing now says such arrangements are illegal.

FUZZY. As the battle unfolds, other investors who hoped the WTO deal would solve their woes are watching. Companies such as Dow Jones, Intel, and International Data Group have plowed millions into Chinese Internet companies--another sector where the rules are fuzzy. Here, too, it's unclear whether existing investments will stand. And while Beijing says foreigners can soon own stakes, notes lawyer Jeanette Chan of Paul, Weiss, Rifkind, Wharton & Garrison, "there are still a lot of questions on what type of Internet services will be open to foreign investment."

Of course, for companies now shut out of China, the WTO deal is a clear win. "We can do virtually nothing there now, and this is a very big opening," says Bank of America lobbyist Robert D. Kramer. And in telecom, Beijing says it will now allow the sale of cell phones using America's CDMA standard.

But for direct investors in telecom services, making money will still be tough. Beijing will exercise control over rates and who gets operating licenses, for example. The cap on investment also will limit investors' say in management. Whatever the new rules, China will likely remain one of the world's most alluring--and exasperating--markets.

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