China Netcom Group Corporation (Hong Kong) Limited

Bldg. C, No. 156 Fuxingmennei Avenue, Xicheng
District Beijing 100031
China
46 Floor, Cheung Kong Centre
2 Queen's Road Central
Hong Kong
Telephone: +852 2626 8888
Fax: +852 2626 8862
Fax: +8610 6642 9253
Web site: http://www.china-netcom.com

Public Company
Incorporated: 1999
Employees: 150,000
Sales: CNY 64.9 billion ($7.84 billion) (2004)
Stock Exchanges: Hong Kong
Ticker Symbol: CNC
NAIC: 517110 Wired Telecommunications Carriers; 334210 Telephone Apparatus Manufacturing; 334220 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing; 334290 Other Communication Equipment Manufacturing; 517212 Cellular and Other Wireless Telecommunications; 517910 Other Telecommunications

China Netcom Group Corporation (Hong Kong) Limited is the Hong Kong Stock Exchange-listed arm of state-controlled China Network Communications Group (China Netcom), formed from the breakup of the China Telecom monopoly. China Netcom represents the merger of the northern China operations of the former China Telecom, including the cities of Beijing and Tianjin, and eight provinces, including Hebei, Henan, Shandong, and Liaoning, in northern China, with broadband pioneer China Netcom and data communications group Jitong Communications. China Netcom provides telecommunications and broadband and Internet services, including IP-based telephony and television services, as well as mobile telecommunications services through Xiao Ling Tong. China Netcom controls about 30 percent of the total national fixed-line network, including 35 percent of the country's fixed-line customers and 30 percent of broadband users. China Netcom's total subscriber base includes more than 80 million fixed-line subscribers, more than 15 million Xiao Ling Tong subscribers, and 6.9 million broadband subscribers. The company also has access to southern China's Shanghai Municipality and Guangdong Province, although the southern region remains dominated by market leader China Telecom Corporation Ltd.. China Netcom is ranked third in the market, behind China Mobile Communications Corporation. China Netcom itself remains a state-owned company; the successful listing of its Hong Kong subsidiary in 2004 has provided the company with funding to pursue further expansion, both in China and into the greater Asia-Pacific Region. China Netcom is led by CEO Edward Tian. In 2004, the company posted revenues of nearly CNY 65 billion ($7.8 billion).

Building China's Internet Infrastructure in the 1990s

Telecommunications played only a marginal role in China, despite the introduction of the first telephone services there in 1882. Yet no effort was made to create an integrated telegraph and telephone network in the country through the first half of the 20th century. Telephone use remained the perquisite of Chinese royalty, high-ranking government officials, and the wealthy. By the late 1940s, only about 10 percent of the country's provinces had any kind of telephone service and the total subscriber base barely reached 0.05 percent of the population.

Telecommunications took on a greater role following the Communist revolution of 1949 and the creation of the People's Republic of China. The new government launched an effort to wire the country's largest cities during the first of its many Five-Year Plans, forming a network centered on Beijing. Over the next several decades, Beijing remained the hub of the country's telecommunications network, as it extended to the country's other major cities. Nonetheless, large portions of the country continued to be left out of the telecommunications loop.

The desire of the hardline Communist government, especially during the Mao-led Cultural Revolution, to control the flow of information in the country limited investment in the development of a full-scale telecommunications network. As such, into the late 1970s, as the country's population topped one billion people, only about two million telephone lines had been installed.

The launch of economic reforms at the end of the 1970s and the reform-minded government's greater openness to the international community led to increased investment in the telecommunications system. The network began to grow strongly, under the government-controlled monopoly China Telecom. By the early 1990s, China's total telephone lines had passed the ten million mark. By 1998, the country's telephone system had grown into one of the world's largest, in terms of subscriber lines, with more than 100 million. China Telecom itself had grown into a corporate behemoth, with some 500,000 employees.

China Telecom's unwieldy size, and its position as an arm of the Chinese government, meant that, despite its strong growth in the 1990s, the country's telecommunications network remained more or less closed to the new revolution in telecommunications—that of the Internet. Indeed, the Chinese government remained wary, as always, of allowing the free flow of information, and recognized that the nature of the Internet made the control of information difficult, if not impossible. The Chinese government, therefore, dragged its heels on the introduction of a public Internet in China, which was finally launched only in 1995, and then, only reluctantly.

Yet that year marked the arrival of a new player in the Chinese telecommunications market: Edward Tian. Born in 1963 to Soviet-trained parents, Tian was raised in a family which suffered greatly during the Cultural Revolution. Both of his parents were sent to the country's reeducation camps. The Tian family's house was taken over by the Red Guard, and Tian and his grandmother were forced to live in a single room.

Inspired by the new era promised by Deng Xiaoping after Mao's death in 1976, Tian excelled as a student, attending the elite Chinese Academy of Science. In the late 1980s, Tian and his wife went to study at Texas Tech, in Lubbock, Texas, where Tian earned a doctorate degree in biology. The Tians remained in Texas, raising their daughter. Yet Tian sought a means of contributing to China, particularly to the growing momentum of the country's economic and social reforms.

Tian's introduction to the Internet pointed the way to his return to China. In 1993, Tian and friend James Ding founded a new company, AsiaInfo, which began providing Chinese news services for the American market. By 1994, however, the company had set up a second company with offices in Beijing, and began producing software for the newly developing information technology (IT) market. The company's breakthrough came in 1995, when Tian and Ding launched AsiaInfo in China in order to secure a contract for building the backbone for China Telecom's new commercial Internet service, ChinaNet.

AsiaInfo quickly emerged as one of the major players in China's new Internet market. By the late 1990s, the company had gone public, listing its shares on the NASDAQ. AsiaInfo then became the first nongovernment-controlled Chinese company to see its market value top $1 billion. Yet, by then, Tian was no longer overseeing AsiaInfo's growth.

Broadband Start-up in the 2000s

The development of the Internet became a source of contention among members of the Chinese government in the late 1990s. Whereas many government officials remained wary of the new technology, and reluctant to roll out high-speed technologies, others recognized that the sustained development of the country's economy depended on its ability to build a national broadband infrastructure. This appeared particularly true as the date approached for China's entry into the World Trade Organization, at which point the entry of foreign IT players threatened to steamroll over China's own slowly developing technological infrastructure.

Few of the proponents of faster broadband development believed in China Telecom's ability to adapt and expand broadband capacity, given the slow pace of its dial-up Internet growth. In 1999, therefore, four state-owned entities—the Academy of Sciences; Information and Network Center of State Administration of Radio, Film and Television (INC-SARFT); China Railways Telecommunications Center (CRTC); and Shanghai Alliance Investment Limited (Shanghai Alliance)—decided to found a new start-up company, called China Netcom.

For this the partners turned to Tian, and finally persuaded him to take the new company's CEO spot by offering him an unprecedented degree of autonomy. Each of the four founding shareholders also agreed to put up some $75 million in startup costs.

China Netcom quickly began building its own fiber-optic-based network. For this, the company was aided by founding member CRTC, which agreed to allow the company to lay cable along its extensive railway network. China Netcom's early efforts were impressive: Just two months after launching construction of the network, China Netcom had extended the network to reach more than 8,500 kilometers. By the end of the first year, the company also had completed construction of ten of its proposed 50 data centers. China Netcom's fiber-optic network not only rivaled the scale of those built by Sprint and Qwest in the United States, it also boasted far higher broadband capacity, enough to offer virtually unlimited bandwidth for the entire Chinese market. In 2000, China Netcom boosted its network again when it launched construction of the 500,000-square-foot Super Internet Center in Beijing, with room for 100,000 servers, and its own power plant.

Company Perspectives:

Our Goal: We aspire to become one of the best telecommunications operators in the region, a leading broadband and regional corporate data services provider and a premier communications company in China and the Asia-Pacific region.

China Netcom's original business model was to serve as a wholesale bandwidth provider, selling bandwidth to China's mobile telephone network, cable television, and others. The company also began extending its network into the more neglected regions of China, connecting up schools, libraries, hospitals, and other facilities in towns and even cities that until then had not even been served by the country's telephone network. China Network then began offering IP-based telephony and other services as a means to ensure its cash flow and fuel its continued expansion. The company's fiber-optic network, meanwhile, soon boasted the lowest wholesale rates in the world. In this way, the company helped providers slash online access fees—which remained at more than CNY 1,000 a month at China Telecom—by a factor of ten.

Joining China's Telecom Leaders for the New Century

Despite its successes, China Netcom struggled against continued losses. By 2002, the company was said to be heading toward collapse. The company received a temporary lifeline when the government allowed it to sell a 12 percent stake to a group of foreign investors, including News Corp. and Goldman Sachs, for $325 million—a rare event, considering that foreign ownership in the Chinese telecommunications industry remained prohibited.

Near the end of 2001, however, China Netcom appeared to be in line for a more permanent solution to its financial woes. By then the Chinese government was preparing to break up China Telecom. The government's plan called for the telephone monopoly to be divided roughly in half, into its northern and southern operations. Tian, who represented not only Westernstyle management techniques, but who also had established himself as China's leading Internet personality, was tipped to take over as the northern telecom business's new head.

The "new" China Netcom was established with the breakup of the China Telecom monopoly in 2002. At that time, the Chinese government decided to merge northern operations of China Telecom into the existing China Netcom. The merger brought control of the fixed-line telecommunications market in the major urban centers of Beijing and Tianjin, as well as in eight other northern provinces, giving China Netcom control of roughly 30 percent of the Chinese fixed-line market, a subscriber base of more than 80 million (placing it among the world's largest) and an employee payroll of more than 150,000 (compared with the original China Netcom's less than 3,000). Also joining the merger was another Chinese IT pioneer, Jitong Communications, which had been established in 1993. Tian remained at the head of the new telecommunications leader, which took third place in the Chinese market, trailing only China Telecom and the cellular phone group China Mobile Communications.

Merging the three companies, which had very different corporate cultures, proved difficult at the start. The three entities continued operating more or less independently—even competing against each other—in the first year. In 2003, however, Tian began the process of integrating the businesses, announcing China Netcom's intention to buy out the government's share in Jitong Communications, then absorb that company's operations into its own. China Netcom then began the slower process of extending its full control over the former China Telecom business.

In the meantime, China Netcom continued to eye growth, not only within the northern region, but into southern China and, ultimately, throughout the Asia-Pacific region. By 2004, the company had succeeded in gaining access to six more provinces in southern China. The company also sought new resources to fund its expansion. At the end of 2004, China Netcom created a new subsidiary in Hong Kong specifically as a vehicle for a public offering. That offering came in November 2004, with a dual listing on the Hong Kong and New York Stock Exchanges, which raised more than $1.1 billion for the company.

By the beginning of 2004, China Netcom boasted revenues of more than CNY 64 billion ($7.8 billion). The listed vehicle had taken over most of its parent's northern China operations. In 2005, the two companies began negotiations that would transfer four more provinces, including Heilongjiang, Jilin, Shanxi, and Inner Mongolia, to direct control by China Netcom Hong Kong. Meanwhile, China Netcom enjoyed steady growth in its core markets, boosting its subscriber base by more than 145 percent in 2004. China Netcom appeared poised to become a major world player in the Chinese—and international—telecommunications markets.

Principal Subsidiaries

China Network Communications Group Corporation (parent company); China Netcom (Group) Company Ltd.; China Netcom BVI Ltd.; Asia Netcom Corporation Ltd.

Key Dates:

1882:: The first telephone network is installed in China.
1992:: Telephone lines top ten million for the first time.
1993:: Edward Tian sets up his first business, AsiaInfo.
1994:: Tian establishes his first company in China.
1995:: The first commercial Internet network in China is launched; Tian establishes a new AsiaInfo, which begins building an Internet infrastructure.
1999:: Tian is asked to become head of China Netcom, founded by a group of government agencies to develop a broadband Internet structure.
2002:: The government breaks up the China Telecom monopoly and merges northern operations as well as Jitong Communications into China Netcom.
2003:: China Netcom absorbs Jitong as part of its integration effort.
2004:: China Netcom forms a Hong Kong subsidiary, which launches a public offering on the Hong Kong and New York Stock Exchanges.
2005:: China Netcom begins negotiations to acquire fixed-line operations in four more northern provinces.

Principal Competitors

China Railway Communication Corporation; China Mobile Communications Corporation; China Telecom Corporation Ltd.; China Unicom Ltd.; UTStarcom China Ltd.; China United Telecommunications Corporation; Wuhan Hongxin Telecommunication Technologies Company Ltd.; Fiberhome Telecommunication Technologies Group; Changfeng Communication Group Company Ltd.