Vodafone Turns East

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Vodafone turns East

1. Presentation of the case

Before China’s entry into WTO in 2001, government protected its strategic telecommunication industry and there were two domestic state-owned enterprises in the telecommunication market, CMHK and China Unicom. Whereas, the fixed-line telecommunication was dominated by China Telecom, China Tietong and a smaller fixed-line player, China Netcom. While the negotiations for WTO were taking place, China firstly agreed to basic telecommunication opening to foreign companies and to the establishment of Joint Ventures in three cities with maximum 25% of foreign stakes within three years and within five year increase to 35% of foreign stakes in seventeen cities. Finally in six years of accession, JVs would be able to lift foreign stakes to 49%. On the other hand, during this time china’s telecommunication sector has undergone major reconstruction which caused the merge of CMHK and China Tietong and the absorption of China Telecom and China Netcom from CHINA Unicom, leaving China with tree telecommunication players each able to offer fixed-line and mobile services. In 2001, China’s entry in WTO let Vodafone to expand forming an equity alliance with CMHK , investing US $ 2,5 billion in the purchase of 2,19% stake from CMHK. This alliance offered to CMHK the learning how mobile phone standards were regulated worldwide and the roles of international trade. Whereas Vodafone’s superiority is summed up to kea technologies, resources, telecommunication licenses and network infrastructure, creating a powerful competitive advantage. While Vodafone grew steadily in Chinese market, in 2004 it formed a partnership with SmarTone , Hong Kong’s leading mobile operator in multimedia services, which rebranded its name to SmarTone-Vodafone allowing Vodafone to have presence in Hong Kong, too. In 2005, China Netcom’s 3 percent stake was bought by the largest Spanish telecommunications operator, Telefonica. On the other hand, China Unicom understanding the threat of this CMHK-Vodafone partnership, in 2006 it signed a strategic alliance with SK Telecom in order to improve its technological networks, research, technological development and know-how. While with this alliance SK Telecom was given the opportunity to get into the Chinese telecommunications market. All these changes in telecommunication industry created the need for China Telecom to seek synergy with a foreign strategic partner to enhance its operation and management.

2. WTO’s General Information

To begin with, World Trade Organization (successor of GATT) is fully responsible for controlling the world trading system and making sure nations adhere to the rules which exist in trade treaties signed by WTO members. Also, facilitates the establishment of additional multinational agreements between the members and it is responsible for arbitrating trade disputes. Moreover, main aim of the WTO is to lower barriers to cross-border trade and investment.

- Few words about China’s emerging market

In China, before the entrance to WTO the mobile telecommunications market was dominated by two state-owned companies, China Mobile (Hong Kong) Limited (CMHK) and China Unicom. The fixed-line telecommunication market has also two basic players China Telecom and China Tietong. This shows that the telecommunication industry in China was highly centralized, monopolistic and the telecommunication investments were completely arranged by the government. In 2001, China finally agreed to open the basic telecommunications to foreign companies for trading and agreed to the establishment of joint ventures. Another point worth mentioning is that Hong Kong was a member of WTO from 1997 as a Special Administrative Region of China (SAR). After China entered the WTO in 2001 in order to boost its international trade, the barriers of protectionism started to fall down and there was an increasing trade liberalization supported by the government. On the one...
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