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Feb 20, 2008

The Chinese consumer

McGregor discusses in "The Best Laid Plans" the power of the Chinese consumer. The czar of China's telecom industry, Wu Jichuan, had the best of intentions in creating a stable and well-planned communciations industry in China. However, even with his detailed plans and 5 year plans, Wu was unable to meet Chinese consumer needs. The inability to service their needs created a legitimate market for UTStarcom to enter and thrive. Wu Jichuan created a fundamentally monopolistic marketplace through his strategic planning of how telecommunications were to operate inside China.

Although it seems that Wu intended to ultimately open up the Chinese market to competition, his real goal was to not only bring communication to the far reaches of China but to do so without the interference of foreign firms. The fear, again, of foreigners using and abusing the Chinese market to their advantage without truly helping the Chinese people still runs deep. Consequently, after several rounds with AT&T, Bell Labs, and others, Wu fundamentally enabled the Chinese to acquire foreign technology without having a foreign "invasion" of their market through China Telecom. Wu Jichuan's success should not be understated. The ambitious goal of the five year plan from 1991-1995 was to increase the phone capacity from 10 million lines to 35.5 million lines. Wu Jichuan, instead, thoroughly exceeded this expectation by increasing the number of lines to 85 millions lines across the whole of China. His increased the communicative ability of 1 billion people by more than eight fold in the course of five years. The one caveat, however, is there is obviously still a wide discrepancy between 85 million and 1 billion.

This is where UTStarcom comes into the picture. UTStarcom was founded by two Chinese expats living in the States, Chauncey Shey and Wu Ying. The obvious massiveness of the Chinese market is/was enough to excite the most stiff CEOs. Shey and Ying realized 915 million Chinese still were without phone access. Wu Jichuan had certainly reached 8.5% of the market, but what about the 91.5% of the market that was blocked due to artificially high prices caused by the monopoly? Shey and Wu sought to create a solution to this obvious problem. Concurrently, the mobile market was begining to grow and take hold in the worldwide marketplace. Wu Jichuan attempted to belay the growth of the mobile network. Zhao Weichen, a longtime friend of Vice-Premier Zhu Rongji, however, worked through Unicom to manipulate the telecom environment to create China's mobile network and initially keep it from Wu Jichuan's uncompetitive domain. Ultimately, Wu Jichuan was named Minister of Information Industry which gave him de facto control over almost all types, forms, etc of communication. While he allowed Unicom to compete with China Mobile, his mobile spin off from China Telecom, the oligopolistic nature continued the artificially high prices and poor customer service in the mobile industry and China Telecom, as a monopoly, continued doing the same in the land line market.

UTStarcom took advantage of these inherent inadequacies and found a solution--the personal handyphone system (PHS) or "Little Smart". ("Little Smart" used a device that extended the parameters of cordless phone system. In the end, the cordless phones were able to shift between devices to create a neighborhood mobile network.) The solution, however, was frowned upon by most as it was an older technology AND it was not successful in Japan. (As a side note, the lack of success in Japan should be noted as one of the primary reasons Wu Jichuan found it undesirable. After the Japanese occupation, China continues to try and out do Japan.) UTStarcom sought to work within the paradigm of Wu Jichuan's machine and target the middle market. Mobile service and land line service was typically too expensive for the poor but feasible for the upper middle and upper classes. China's middle class, meanwhile, was left without an alternative. UTStarcom's PHS was defined as an extension of land line service. Therefore, it neither competed with China Telecom or the mobile industry. Wu Jichuan, therefore, could not necessarily regulate and control Chauncey Shey and Wu Ying's business albeit he tried through a technology review. UTStarcom was able to win over local officials with their value proposition which was hard to beat. It was simple: better, more reliable service at a less expensive rate.

Wu Jichuan, in the end, had to endorse UTStarcom due to its immense popularity despite his formulated plan for China's telecom industry. The Chinese consumer, in effect, won through a democratic process.

"Serving the New Chinese Consumer"

"The Formidable Market"

"Understanding China's Teen Consumers"

"The Value of China's Middle Class"