Handset licensing policy under review
By Li Weitao (China Business Weekly)
Updated: 2004-07-08 11:15

Chinese telecoms regulators are under increasing pressure to review the nation's restrictive mobile phone manufacturing licensing policy.

Relaxation of the policy would help cut off irregularities in the mobile phone manufacturing sector and present a level playing field to all market players, analysts said.

"Obsolete" scheme

Vice-Minister of Information Industry (MII) Lou Qinjian, said earlier last month that mobile phones should now be classified as consumer electronics products, instead of as telecoms products, due to their increasing popularity.

The MII will encourage consumer electronics manufacturers to enter the handset market, he noted.

In China, all companies need to apply for a government licence if they intend to manufacture and sell mobile phones.

But there is no such requirement for manufacturing and selling consumer electronics products.

Lou's remarks triggered speculations that regulators will loosen their licensing grip.

But, Wang Bingke, deputy director of MII's Economic System Reform and Economic Operation Department, said the ministry is only currently studying the feasibility of loosening the policy, stating that such a policy shift will not take place in the near future.

But he acknowledged that the MII is under pressure to review its licensing policy.

Industry insiders said that about 13 companies are applying for licences to manufacture and market mobile phones in China.

Analysts believe that regulators may be forced to eventually scrap the policy, which is out of line with the market development.

"It's of no significance for the regulators to continue holding on to such a rigid licensing policy," said Wang Guoping, a telecoms analyst with China Galaxy Securities.

The licensing policy, issued at the end of 1998, was initially designed to shelter domestic firms from foreign competition.

The government has so far handed out 30 GSM handset production licences and 19 CDMA licences.

Those firms that have already obtained licensees, especially those that have two, should be considered lucky, as none have been issued since May 2000.

Domestic firms now control more than 60 per cent of the mobile phone market, according to MII statistics.

Most independent industry observers doubt the figure, but agree that domestic firms have given most global giants a run for their money.

But the licensing policy is now giving rise to a host of market irregularities.

For example, it has become a common practice for uncompetitive licensees, or those with a small production scale, to profit from leasing licences to the unlicensed firms.

Those licensees reportedly make up to US$8 from each mobile phone under the licensing leasing scheme.

Some unlicensed firms are also forced to form joint ventures with uncompetitive licensees in a bid to enter the mobile phone market.

Big names like South Korea's SK, Taiwan Province's BenQ and the Chinese mainland firm Tsinghua Unisplendor, have resorted to such methods to bypass licensing barriers.

"That has resulted in high costs for the unlicensed firms. And it's obviously unfair," Galaxy's Wang said.

"Regulators should treat all market entrants equally and try to create a fair environment for competitions instead of holding on to the licensing scheme."

The Law on Administrative Licensing, which took effect on July 1, may phase out the handset manufacturing licensing scheme, some industry observers noted.

The law was designed to more clearly define the relationship between the government and the market and offer more rational macro control.

The law was also meant to abolish unnecessary and unreasonable administrative licensing items, which have hampered the country's efforts to build a market economy.

China is now seeking recognition of market economy status from many economies including the United States and European Union.

So far, a total of seven countries including New Zealand, Singapore, Malaysia, Thailand, Benin, Togo and Kyrgyzstan have recognized China's market economy status.

"Regulators may eventually find that the handset manufacturing policy is not in line with the Law on Administrative Licensing," said an anonymous industry professional.

"Once it is proved that the cellphone industry can be effectively regulated by market competitions, it is time to abolish the licensing scheme."

Concern over glut

One major concern for the regulators is that a relaxation of manufacturing licensing may lead to a production glut with new players entering an already overcrowded market.

But Galaxy's Wang dismissed such concerns.

"The balance between supply and demand should be regulated by the market, instead of the government," he said.

"I expect the production and need will be basically balanced in the coming years."

Wang predicted China's mobile phone sales volume this year will increase 10-15 per cent year-on-year.

"The days of dazzling growth are over, but steady growth will continue," he said.

Zhou Xiaoyang, head of Samsung Electronics' mobile phone division in China, said the country's handset sales volume will maintain "a double-digit" growth this year.

GSM phones' retail sales volume will reach 52 million this year, compared with 48.6 million units last year, according to an analyst with data tracking firm GFK Asia.

CDMA phone retail sales totalled 7.1 million units last year.

The firm has predicted the volume will hit 10 million units, but now has downgraded the figure to 8.5 million.

That represents a growth rate of 8.6 per cent of the whole market, combining GSM and CDMA phones.

The MII predicted handset production volume will hit 170 million units this year, while exports will reach 80 million units.

The government is worried that the domestic mobile phone industry would follow the TV sector where production glut puffs up hostile price wars, if the licensing scheme is abolished.

Wang Guoping disagreed, saying: "The TV sector is largely different from the cellphone industry where the replacement rate is quite high."

"The replacement market will continue to buoy the whole mobile phone industry."

China now has more than 300 million cellular subscribers. The figure is expected to reach 435 million by 2008.

"The handset market, like the consumer electronics market, is characterized by small profits with large sales," Wang said.

"It is very natural."

The analyst estimated that profit margins for the whole handset market will stand at 4-5 per cent, adding the figure will remain steady in coming years.

MII officials indicated the government may also look at the option of introducing a relegation system to weed out non-performing licensees.

Analysts insist that abolition is a better way forward.

"If the licensing scheme is abolished, those profiting from leasing licences will be naturally washed out of the market," said the anonymous industry professional.

"And then a new balance of competition will struck."

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