Cross Country Differences in Government Involvement in the Telecommunications Industry - Essay Example

Cross Country Differences in Government Involvement in Industry The Mobile Telecommunications Industry: The Mobile telecommunications sector consists mainly of direct communications through switching and transmissions via the air waves.(www.ibisworld.com/au). This includes all wireless telecommunications network services, including cellular telephone and paging services. This report undertakes an examination of cross country differences between Australia and China, in terms of Government involvement in the industry. Industry characteristics in the two countries: The Australian telecommunications market was liberalized in 1997 and the mobile telecommunications sector is booming. Internet based mobile phones were also recently launched in Australia through the VoIP provider Engin and Finnish Nokia (www.mergentonline.com). Current mobile phone penetration in the country is about 94% while broadband intake has increased to 19.2%, making it rank 16th among the 30 OCED countries. Revenues from mobile phone content are projected to experience explosive growth, particularly in entertainment, enterprise applications and productivity services. In China, the number of mobile phone users has increased to 461.1 million by December 2006 while revenues totaled 83.76 billion US dollars. The number of Internet users in the past year has also increased by 23.4% or 26 million. China is also emerging as the test market of choice for new technologies in this area, such as IPTV and WiMAX and the Chinese market is also poised for high growth in the camera phone market.(www.mergentonline.com) The extent of Government involvement: In Australia, the Government owns a 51.05 percent holding in the major telecommunications company Telestra Corporation, which has also been exercising a market monopoly in the VoIP sector. As a result of this and the slow development of infrastructure by Telestra, the country has been lagging behind in broadband adoption, although this is slowly picking up now. Since the Australian Government sold down its stake in the company in November 2005, investors have been attracted by improving margins of the Company and increased cash flows and the Company’s share prices have been rising. Other major players in the Australian telecommunications market are Sing Tel Opus, which is Singapore owned, Vodafone Australia and Hutchinson Telecommunications Ltd. In China, the telecommunications sector was primarily owned by the Government as China Telecom. Later, this single Government unit has been split into China Mobile, China Unicom, China Telecom and China Netcom. The Chinese Government invests heavily in the telecommunications sector every year (25.84 billion US dollars) and is the second largest investor in R&D(www.mergentonline.com). There is however healthy competition among the various telecom Companies and the sector has also been thrown open to foreign direct investment, thereby breaking the government monopoly. The reform in telecom structure is projected to optimize the competitive structure of the industry(www.mergentonline.com). The Chinese Government invests heavily in the telecom sector, which has further fuelled growth. There have also been collaborations with foreign companies in the telecommunications sector and in the development of 3G technology, with China waiting for its own TD-SCDMA technology to mature before issuing 3G licenses rather than relying on foreign technology. On this basis, it may be noted that both China and Australia have a high degree of involvement of the Government in the telecommunications sector, however the level of Government influence is much higher in China, since most of the major companies are Government owned, despite the existence of competition between them. The Chinese Government has also imposed new regulations to control Internet access by restricting the availability of various sites and imprisoning those citizens who express inflammatory opinions in chat rooms or on blogs. (Wall Street Journal, 2005). While some restriction may be in the public good, such as the restriction of pornographic websites, censoring of websites in China has also extended to sites on civil rights and freedom and foreign internet providers such as Yahoo and Google are also adhering to the limitations imposed by the Chinese Government. (Wall Street Journal, 2005). As opposed to this, in Australia, there is no Government censorship, although propagation of pornographic materials is a crime under Australian law. In Australia, the extent of Government control has been restricted to the ownership of Telestra and the slow development of infrastructure, while China is only now, slowly opening up its economy to foreign investors. In terms of 3G development, Australia is embracing 3G networks while China is insistent upon developing its own networks rather than using foreign sources of networks. Efficiencies in payment systems may be classified under three types (a) allocative efficiency which is the extent to which total welfare of consumers and suppliers is being maximized in the economy(b) productive efficiency – the extent to which production efficiencies are being maximized and (c) dynamic efficiency – or the extent to which suppliers are able to meet customer needs and in particular refers to future costs. Applying this concept, it may be noted that China exhibits greater productive efficiency, through economies of scale achieved by Government control, while Australia has achieved greater allocative efficiency by further the interests of consumers. In China, consumers are still disadvantaged in terms of prices, although competition among the various companies is bringing some benefits to them. A natural monopoly exists when it costs less to produce two or more units together than to produce one separately, so that the efficiency of the industry is boosted by making the cost function sub additive in terms of demand. In the case of both Australia and China, the most efficient scales may not have been reached; however especially in the case of China, it may be necessary to boost penetration of telecommunications products by offering subsidies to lower selling prices below marginal costs until scale benefits occur. In this way, there will be a better allocation of resources to achieve strong economies of scale in payment systems. China has a potentially monopolistic market structure which may be detrimental in terms of consumer choices. While there is a greater demand for mobile phones and larger numbers of broadband users, customers still do not enjoy the benefits of the best and lowest prices, as Australian customers do. In a globalized economy, Australia has been better able to achieve high levels of customer choice and the growth of its telecommunications sector has been aligned towards public good. In China however, customers are still not receiving the best deal on phones and censoring of broadband purportedly for the public good, may in reality may working in a contrary direction. Reasons for differential Government involvement: The reasons for different levels of Government involvement in the two countries may lie in the differing political systems in the two countries. Australia is a democratic country where freedom of expression is respected and where the role of the Government is viewed as a regulatory agency rather than a controlling agency. The Government’s ownership of half of the Company Telestra has also been challenged by the Treasurer Peter Costello, because it has become a conglomerate which is investing funds in all kinds of risky transactions and speculative investments.(www.asiamedia.ucla.edu). In most other democratic countries, ownership of telecommunications companies is private, on this basis Costello argues that the ownership of the Company should be shifted into the realm of private enterprise or the Company should be re-nationalized. This debate over Telestra’s ownership is typical in a democracy, where the role of Government needs to be a minimal one. Furthermore, as also mentioned above, the progress and development of the industry, especially in terms of the development of broadband has been considerably slowed down by Government involvement in this sector, so that broadband speed is 256 kilobits per second in Australia, as opposed to 100 megabits per second in France, Japan and Hong Kong, a speed that is 400 times faster than in Australia. In terms of the mobile phone sector, it may be noted that the interference by the Australian Government towards foreign firms has been minimal and foreign companies have been operating successfully in Australia. The reasons for this may also lie in the principle of free trade and the promotion of economic enterprise and globalization that is characteristic of globalization. The Government has not attempted to control the industry in any way, rather it has allowed market forces to prevail and move the industry in the direction of economic growth, in accordance with the capitalistic enterprise which is a part of the economic system in Australia. China on the other hand, has its roots in a Communist form of Government where there is a much larger scope of control exercised by the Government. Until the time of Hu Jintao, industrial institutions in China have been State owned and controlled and this is also reflected in the telecommunications sector. China has remained a tightly controlled economy and has not been quick to follow the capitalistic model of economic activity. It is only recently that has begun to open up its borders to foreign investors. According to Professor Angang Hu (2007), China is rapidly emerging as a potent political and economic force in the world. China and India have double the population of the developed countries, with the combined share of GDP of these two countries equaling that of 29 European countries. China’s rise in recent areas parallels that of the United States a century ago in terms of high economic growth rate and contribution to the world’s GDP and it is now a superpower in terms of world resource consumption growth. However, it is not rooted in democratic traditions but in a State owned and controlled way of life. As pointed out by Dowell (2006), the Chinese Government wants to utilize the tools of the worldwide web and technology to enhance its economic growth, however at the same time it also wants to restrict information which could threaten its power, especially information on democracy and civil rights. While allowing its citizens access to the Internet, the Chinese Government still controls content and propagates its own propaganda, restricting blogging and activity in chat rooms; however as Dowell (2006) states, this deprives Chinese citizens the opportunity to express their spontaneity and imagination and the opportunity to come into contact with view points that may be quite different from the conventional stereotypes that they are used to. It may also be noted that in so far as mobile phone companies are concerned, there is competition among the various major telecom companies, however four of these major companies are owned by the Government. The Government plays a significant role in this sector, contributing a high proportion of investment and controlling the emergence of new technology, unlike Australia where the Government’s role and investment is minimal. The recent Chinese move towards deregulation of the telecommunications industry, and its decision to allow foreign investors in this sector of its economy may be a move in the right direction, to bring maximum benefits to customers and capitalize on the opportunities existent in a global economy. Australia has also been gradually withdrawing from its ownership of Telestra in order to allow a higher degree of free enterprise and market forces to operate in the Australian telecommunications sector. Winner and losers from Governmental role: In China, it is the Government that is largely benefiting from the explosion in customer traffic in so far as the telecommunications industry is concerned. Moreover, by also restricting the content of websites and usage of the internet, it exerts a significant amount of control over customer access, with foreign companies also succumbing to its restrictions and allowing the censoring of content. While the telecommunications industry is experiencing a growth surge in both China and Australia, the growth and its benefits are controlled by the Government in China because it restricts customer use and access of these services. It is only recently that some foreign investors are being allowed to capitalize on the huge market existing in China. However, it appears unlikely that they will be able to experience unlimited benefits, for example broadband companies like Yahoo and Google that are based overseas are still subjected to Government control, Thus while they may be able to derive some financial benefits from tapping into the huge Chinese market, these profits are limited by Government control. However, as opposed to this, in Australia, it is the customers who gain and benefit the most because the existence of competition among several privately owned companies provides a better deal for customers. Also benefiting are investors in the once Government owned Telestra, who are able to receive higher cash flows from their investments. Foreign investors are also benefited by the free trade policies of the Australian Government, especially with the telecommunications industry set to experience rapid growth. However, despite the fact that it is the Chinese Government that is winning, as opposed to other parties in Australia winning, this is also a function of the different political structure in the two countries. For example, the levels of Government control that are being exercised in China would never be accepted in Australia, because of its democratic traditions. Therefore, if the Australian Government were to exercise such unacceptable levels of control, it would be voted out – as a result, the Australian Government cannot be in a position where it would be the beneficiary of involvement in this industry. Investors are the ones most likely to benefit from the political structure in Australia; in China however it is the domestic investor who are reaping the benefits while foreign investor activity and profits will be restricted through Governmental controls. Lastly, in terms of the ordinary consumer, Chinese consumers are not gaining as much as Australian consumers, because of Governmental controls and restriction of access to the Internet. Since foreign investor activity is still restricted, the Chinese customer is largely limited to Chinese goods, while Australian consumers benefit not only in terms of the variety of goods available in the market but also in terms of lower prices due to intense competition among suppliers of such products and technology. References: * “Australia: Costello wants Telestra ownership resolved” [online] Retrieved October 6, 2007 from: http://www.asiamedia.ucla.edu/article.asp?parentid=11028 * Australian Telecommunications: Sector Overview: [online] Retrieved October 6, 2007 from: http://www.mergentonline.com.ezproxy.libproxy.db.erau.edu/IndReports.asp?Type=View&Page=first&ReportNumber=619 * “China Industry Reports: Telecommunications” [online] retrieved October 6, 2007 from: http://www.mergentonline.com. * Dowell, William Thatcher, 2006. “The Internet, Censorship, and China,” Georgetown Journal of International Affairs, 7(2):111-119. * Hu, Angang, 2007. “The Economic Impacts of the rise of China on the world.” [online] retrieved October 5, 2007 from: http://www.nottingham.ac.uk/china-policy-institute/events/documents/Angang_HU_CPI_Chatham_House_Talk_18_04_07.pdf * Mobile Telecommunications carriers in Australia – Industry report.” [online] Retrieved October 5, 2007 from: http://www.ibisworld.com.au/industry/retail.aspx?indid=1830&chid=1 * Wall Street Journal, June 15, 2005, p. 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