Gross Domestic Product (GDP)
In the past five years, GDP of China increased from £903.6 billion to £1293.1 billion. Therefore, in 2005, China took the fourth place on the GDP ranking list of the world. Compared to the average world GDP growth rate, around 3% per year, the average growth rate of China in these five years was 9.48% per year. In the recent three years, the rates were stupendous at 10%, 10.1% and 9.9% respectively.[5]
Figure 3.1: 2001-2005 GDP of China
Source: Xinhua Net
The prime minister of China, Wen Jiabao, claimed the average GDP growth rate would be 7.5% per year in the next five years. Based on this data and economic environment in China, I believe the economy of China will have stable growth in the future, which will provide a steady platform for the development of MCSS.
Income
According to the spokes person of the Ministry of Labour and Social Security, PRC, in 2005, the unemployment rate was 4.2% and the government will try to keep the rate under 5% in the next five years. However, based on the data from the National Bureau of Statistics of China (NRSC), although, thanks to the stable economy growth, the average salary of citizens of China increased from ¥10,870.00 (£770.92) in 2001 to ¥18,405.00 (£1,305.32) in 2005, with an average growth rate at 14.07% per year, the average income of the population was only ¥7,902.00 (£560.43) and the Engel coefficient was 41.1% in 2005. [6]
Therefore, based on the data above, we can tell that the disposable income of the Chinese is not very high because of highly increasing housing prices, education, medicine and so on. Especially in the west and middle regions of China, people’s income is much lower than it in the east part. Meanwhile, generally speaking, people working in country sides may earn less than those in big cities.
Interest Rates
From May 1996 to February 2002, the People’s Bank of China (PBC), the central bank of China, decreased the interest rate eight times. In October 2004, PBC decided to increase the interest rate by 27 basic points (bps, 1 bp = 0.01%) for the first time in the last ten years. Analysts believe that China has entered the increasing interest rate stage since the government wants to use the increasing interest rate to cool down the “over-heated” economic development, because companies have to consider more carefully their investment if they need to carry out a loan.
The increasing interest rate will also influence customer income distribution because more money will be deposited into banks to gain higher interest and people will delay their investment into houses or cars and spend their money on other products without need of loans to avoid paying for higher interest.
However, since the increasing of interest rate was only 27 bps, it will not have a significant effect on customers’ spending on mobile communication. But it does have an implication for the future economic policy of the country which could influence the MCSS. Potential entrants may carefully consider the increasing interest rate since it means higher cost to finance the investment.
Socio-cultural
Now, about 400 million people choose mobile as one of their communication tools, which means one out of three persons in China is using the mobile communication service. As a country with 1.3 billion population, China is a very attractive market for companies. Therefore, understanding customer behaviour will help companies to satisfy customer needs by providing better service or products than rivals.
Demographics
In China, the whole country is geographically divided into three parts: east, middle and west, and the development levels of the three regions are different from each other. East part is comparatively more developed than the other two. Therefore, the customers in east part of China have higher income and would like to spend more on mobile communication rather than fixed line. According to the statistic data of MIIC, more than half of the revenue of telecommunication industry was contributed by east part in 2005. (Figure 3.2) I believe the percentage would be higher in MCSS because land lines are more popularized in middle and west part than mobile. Therefore, as the government started the programme “Development of Middle and West Regions” and increased the investment in middle and west regions, the mobile communication markets of both regions have more development potential than that of east region.
Figure 3.2 2004,2005 Telecommunication Industry Revenue by Region
Source: MIIC Website
Life Style & Work Style
In modern society, people’s life style and work style have changed significantly, especially in the last decade, with the technological innovations.
Business persons form the main consuming group in the MCSS market. Thanks to globalisation, more and more people travel around the world for their business. Thus, they need keep in touch with their colleague and customers all the time through a convenient way, especially in the so-called 24 hour society, in which time is money. In China, more and more people join “SOHO” (small office, home office) group, which lead to a kind of revolution of people’s work style. Internet and mobile are all they need for their work.
Besides business persons, in the past five years, students in universities and colleges have become a vital segment in the market. They are well-educated and take fashion as a part of their life or even create “fashion”. They are risk takers, which means they would love to try new technologies. Pioneers of new service or products are considered “cool” and become models of the followers since young people would like to try something their friends are using. They send texts to each other as a kind of communication instead of letters or even emails, employ GPRS to download games from internet to mobile handset and talk to friends on MSN by receiving and replying texts by mobile. Nowadays, mobile has become an indispensable part of their daily life. Therefore, companies in MCSS all provide special contracts for this particular segment.
Technological
Undoubtedly, technological innovation is an essential factor which does and will influence the development of MCSS. Mobile communication has experienced several technological innovation stages [7]:
- 1G (Generation): Analogue Communication
- 2G: Global System For Mobile Communication (GSM), General Packet Radio Service (GPRS)
- 2.5G: Code Division Multiple Access (CDMA)
- 3G: Wideband Code Division Multiple Access (WCDMA), CDMA2000, Time Division-Synchronous Code Division Multiple Access (TD-SCDMA)
Nowadays, in China, 2G and 2.5G services are provided by telecommunication suppliers. As for 3G, MIIC decided to set protocol TD-SCDMA as the standard of China 3G communication. In this part, I will talk about the influences of these technologies on MCSS in detail.
GSM & CDMA
From 1994, GSM took the place of analogue communication and became the mainstream of the mobile communication network. In 2001, CDMA joined the competition with its low investment requirement, high communication quality, high security and other competitive characters. Nowadays, in the market, China Unicom provides both GSM and CDMA network services and China Mobile only use GSM as its network service standard. Both companies try to increase their market share. At the end of 2005, China Mobile took 65% of the total market. About 26 percent of the customers chose to use GSM service of China Unicom and the remaining 9 percent turned to CDMA. [8]
3G
Mobile operators can supply better audio, text and data service by using 3G system. Compared to 2G and 2.5G, the major advantages of 3G are larger system content, higher communication quality and data transfer speed. Besides, people can connect to the wireless communication system with internet by using the seamless roaming among different networks to enjoy more advanced service in the 3G time. [7] Since the bandwidth of 3G is between 100 KB per second (kbps) and 300 kbps, compared to 9.6 kbps of 2G and 56kbps of 2.5G, people can use their mobiles to access internet, browse web pages, process audio, or even download movie clips. Therefore, operators may get more added value through providing more information service.
At the beginning of 2006, protocol TD-SCDMA was set as the standard of 3G of China. In June of 2006, the standard will be put into business and the licenses will be given to operators.
PAPS (Personal Access Phone System)
PAPS is a new kind of personal wireless connection system, which uses data transfer system of the fixed line network and wireless connection technology to provide personal communication terminals with the ability of roaming within a certain range, normally in the city. In a short, PAPS is a kind of technology to change the fixed line to a movable wireless phone. [7]
Since it puts the low cost of the fixed line and convenience of mobile together, PAPS is very attractive to certain segment of MCSS, such as housewives, retired people. In the past few years, the increasing rate of customers of PAPS is unbelievable, for example, the customer number doubled in 2003. By the end of 2005, there were around 100 million people in China using PAPS. [8]
Summary
The general environment is very good for this sector in the foreseeable future. The economy of China is developing steadily and the government pays attention to the regulation of the sector. The changing of people’s life style and work style gives more opportunities to organisations. The technology innovations also direct the development of MCSS to a new stage.
Besides the factors I discussed above, there are some other elements which will influence the remote environment of MCSS:
- Political/Legal: taxation policy, competition policy, social welfare policies etc.
- Economic: inflation rates, life expectancy rate etc.
- Socio-cultural: customer buying habits, attitudes toward customer service and product quality etc.
- Technological: speed of technology transfer, rates of obsolescence etc.
However, in my opinion, the eleven factors mentioned above are the more important ones which have or will have significant effects on this sector’s remote environment. Some of them may even have combined effect on the sector, such as the changing life style and 3G. Operators may provide more added value service to cope with the changing life style since 3G provides technology support.
Since remote environment is the one which firms in the sector cannot control, the players can only obey the rules and respond to the changes by changing their strategies as soon as possible in order to maintain or increase their own market share and profitability.
Sector and Competitive Analysis
As I talked in the industry background section, in MCSS, there are two main competitors: China Mobile and China Unicom. How intensively do they compete with each other? What are their competitive strategies? How does the competitive arena have an effect on them? Is this sector an attractive market to competitors and potential entrants? In this section, I will use Porter’s Five Forces Analysis to evaluate the competitive nature of the sector and try to find answers to the questions above.
Porter’s Five Forces Analysis is an analysis tool widely used to analyse the intensity of competition in an industry. In this theory, the state of competition in an industry depends on five basic competitive forces, which are shown in Figure 4.1. [10]
Figure 4.1 Porter’s Five Forces Analysis
Intensity of Rivalry
Obviously, companies would like to invest or operate in an industry with low intensity of rivalry. As MCSS gradually matures, its growth rate tends to be lower, resulting in intensified rivalry. In this part, I will analyse the intensity of rivalry from the following factors: product differentiation, fixed cost, switching costs and exit barriers.
Lack of Product Differences
In MCSS, it is difficult to differentiate the service from the company’s competitors. Both companies, competing in this sector, provide “pay as you talk” and monthly rental contracts to meet different customer groups’ need. There is essentially no differentiation between the different contracts, but the number of free minutes, free texts or amount of GPRS download. Once one company promotes some new kind of service or contract, the other one will provide the similar service in a short time. As the end, the price war becomes the only choice and the quickest way to increase the market share.
High Fixed Cost
No operators would like to rent competitors’ network to do their own operation because this will lead to highly relying on others’ business conditions and strategies. Therefore, both China Mobile and China Unicom built up their own physical network through out the country in the past few years. Since geographically China is a very big country, both companies have to invest billions of money to setup a solid network to guarantee the coverage of the mobile signal, especially in country side, which result in a especially high fixed cost. Take China Mobile as an example. From 2000 to 2005, China Mobile invested no less than four billion pounds on the network building every year. (Figure 4.2) [11] Considering the issue of 3G licences of the government, companies need invest more to build up new 3G network, which means the fixed cost of this sector will increase significantly.
Figure 4.2 China Mobile’s Investment on Fixed Assets
Low Switching Cost
Actually, in China, the switching cost from one operator to the other one is very low. To be honest, the cost is almost negligible, for example, if a customer is using “pay as you talk” service of China Mobile and he/she wants to switch to China Unicom’s counterpart, all he/she need to do is to spend around £3 on a new SIM card; as for contract users, the cost may be a little higher, but most of the cost is time, not monetary. Of course, we should also consider other costs, such as informing friends and family the change of mobile number. However, even if these kinds of cost are considered, the switching cost is still not high. Therefore, companies try to provide high quality service or other rewards to maintain their customer groups and increase customer loyalty.
High Exit Barriers
There are several reasons why operators will face high exit barriers when they want to quit. Firstly, operators have already paid high fixed cost when they started the business, and the main fixed asset of the companies in this sector is the physical transmission network throughout the country. However, this asset is specialised to this particular business and location. Secondly, both companies are listed on Hong Kong exchange and China Unicom is also listed on Shanghai and New York exchanges. [12] Since both competitors mainly focus their business on mobile communication service, if they quit the market, it would be a disaster to the reputation of the companies and influence the access to financial markets. Finally, the government is not willing to see the liquidation of either of the two companies because of the job loss, regional economic effects and so on. Now, there are 120.8 [13] and 60 [12] thousand people working for China Mobile and China Unicom respectively. Obviously, if the company exited the business, it would lead to a serious social problem.
Besides the factors discussed above, there are some other influences: industry growth, intermittent overcapacity, corporate stakes and so on. To sum up, based on the analysis above, MCSS is a sector with high intensity of rivalry. Both companies compete fiercely with each other to sustain their position and maintain the profitability above the bottom line.
Barriers to Entry
In section 4.1.4, I talked about the exit barriers of MCSS. Here, I will talk about the barriers of entry. Since it requires high capital investment, licence from the government and other terms, not everyone can successfully enter this sector or survive even if they join the force competition. Then, what are exactly the barriers to entry of MCSS?
Government Policy
In China, MCSS is a state-owned industry. The operators in this sector must be authorised by the government. Before China became an official member of WTO, no foreign companies were allowed to invest in this sector. But even after China became one in 2001, there are still some restrictions on the investment of this sector. Because of the willingness of protecting national corporations, the government only allow foreign companies to hold no more than 49 percent of the total equity of the contractual joint company. Therefore, considering the current situation of China, the government policy is perhaps the most important entry barrier in mobile communication service.
Product Differentiation
In China, normally people have high customer loyalties to the brand they chose. China Mobile has about two thirds of the market share mainly because it was the first player in this business. Afterwards, even if China Unicom provided similar service or even less expensive products and the switching cost was not high, most customers still stayed with China Mobile. Nowadays, both companies have already had brand identification thanks to past advertising, customer service, promotions and so on. Therefore, it will be difficult for entrants because they have to spend heavily to overcome existing customer loyalties and build their own brand identification.
Capital Requirements
As talked in section 4.1.2, it requires large capital investment to build the physical network for data transmission in MCSS. Taking China Mobile’s investment data as a reference, new entrants may need around 30 billion pounds to setup a high quality network throughout the country. Indeed, entrants may rent the network from China Mobile or China Unicom, however, by this means, it is to set a limitation on the development of their selves or, even worse, handle “their lives” to the competitors. Besides the cost of fixed asset, other start-up costs should also be taken into consideration, such as advertisement, distribution channels and so on.
To sum up, companies do have to face some difficulties when they intend to join the competition. Besides the three factors talked above, some others should also be taken into account: proprietary learning curve, economies of scale, lack of product differences and so on.
Threat of Substitutes
China Mobile and China Unicom are not only competing with each other, but also, in a broad sense, engaging in a contest with industries producing substitute products. Therefore, China Telecommunication Group Corporation (China Telecom) and China Network Communications Group Corporation (China Netcom), suppliers who focused on telecommunication service other than mobile service, such as fixed line, Personal Access Phone System (PAPS) and so on, are also threats to China Mobile and China Unicom. In this part, I will analyse the threats of fixed line, PAPS and internet calling system by considering the relative price, performance and other characteristics.
Fixed Line
By the end of 2005, the number of customers of fixed line was over 353 million. [14] Compared to mobile, the most significant advantage of fixed line is low price since the unit price of fixed line is only about one fourth of that of mobile and it is free if using fixed line to receive others’ calls. Besides the competitive price, the transmission of the fixed line network is more stable, which leads to higher quality communication. Obviously, the disadvantage of fixed line is lack of removability and convenience.
PAPS
As talked in section 3.4.3, PAPS is a new kind of personal wireless connection system, which puts the low cost of the fixed line and convenience of mobile together. Although, to some extend, PAPS is a kind of movable fixed line, it can only be used within the city where the phone is registered.
Internet Calling System
Internet calling system has been developing at a high speed in recent years, accompanying the accelerated development of broadband network. At the beginning, people can only make free PC to PC calls, like on-line audio talking on MSN, (an on-line communication software provided by Microsoft). However, now, people may call from PC to fixed line or mobile by using certain software and paying very low rate. The most famous internet calling system in the market is Skype. The global rate of Skype is only € 0.02 per minute [15], which means customers can make international calls at this basic rate as they call their neighbours next door. However, so far, the network of Skype cannot cover all the countries of the world and the charging rate of some destinations is very high. As for the performance of internet call, it mainly depends on the condition of the broadband network. Therefore, the quality of the call may be volatile. All in all, internet calling system is very competitive at international calls because of the very attractive low price.
Operators in MCSS have already felt the threat of these substitutes. In the past few years, the price of mobile communication dropped by one third from £0.04 to £0.027 per minute (local call). Obviously, operators are using price cutting to maintain their competitive capability, even if the price war will lead to a low profitability.
Power of Buyers
The customer is God of corporations. In modern society, the bargaining power of buyers is getting stronger and stronger because, in most industries except some natural resource industries, such as oil mining, the competition is getting more and more intensive. MCSS is not an exception.
Group Buyers
As usual, the buyer with a large volume may have strong bargaining power in the negotiation. This rule is also applicable to MCSS. Both companies offer favourable packs to company customers. Take China Mobile as an example. The company started to promote its VPMN, (Virtual Private Mobile Network), service to group customers in Shanghai in May 2004. [16] The group could sign a contract with China Mobile to set the number of group members and the minimum cost. All the group members should be customers of China Mobile and the minimum cost normally is around £200. Once a customer becomes a group member, he/she need pay only ¥2 (£0.14) for 500 minutes free time within the group every month, compared to the regular charge rate ¥0.4 (£0.03) per minute. [17] Before this project was launched, China Mobile had given group costumers 30 percent discount on the calls between group members since July 2002. [16]
Thanks to the high intensity of rivalry, the profit margin has been cut down. In such a condition, whole sale has become an efficient way to save operating cost and maintain the profitability and major customer group.
Low Switching Costs
As talked in section 4.1.3, the switching cost of this sector is not high. People can choose the company they like, or even sign contracts with both companies to find the best “portfolio” for their mobile communication cost. Thanks to the low switching cost, customers may change their supplier when they are not happy with the service, which enhances the bargaining power of customers.
In China, more and more customers realise that they may use their increasing bargaining power to gain benefit from their service suppliers. However, wholesale customers will have more power when negotiating with operators since they contribute more to the revenue of operators than individual customers.
Power of Suppliers
As a part of the industry line, MCSS is influenced by not only the bargaining power of buyers but also suppliers’. However, in the relationship between mobile communication service companies and their suppliers, the companies are at a more defendable position against the bargaining power of suppliers since now they are “God” of their suppliers.
The most important reason why the bargaining power of suppliers is relatively low is that there are only two operators in this sector and the sector is an important customer of the supplier group, especially the mobile manufacturers. The mobile manufacture industry is experiencing the shake out stage. The significant signal of this is that Siemens sold its global mobile department to Benq in June 2005. [18] Therefore, all the mobile manufacturers are fighting for their position or even survival. In such a condition, millions of dollars worth of orders from China Mobile and China Unicom will be attractive. Hence, the mobile manufacturers will offer competitive terms in order to win the bid.
Besides mobile manufacturers, other suppliers are facing the similar situation, such as physical network establishment companies. All the companies want to share the big cake, around £600 million investment of China Mobile and China Unicom on network setup.
China Mobile and China Unicom can thereby squeeze profitability out of their suppliers in order to recover the loss because of the price war.
Summary
Based on the analysis above, the forces having impact on the competition in MCSS and their drivers have been diagnosed. High entry barriers and relatively low bargaining power of suppliers are good news to established firms, however, high bargaining power of buyers, high threat of substitutes and high intensity of rivalry make the living condition of operators get worse. Although the overall market is still growing at a rapid rate, both China Mobile and China Unicom have realised that they are in a highly intense competition and they are competing with not only each other but other competitive forces. Therefore, an effective competitive strategy should be set down in order to obtain a unique position in the market.
Both companies change their strategies to respond to the changing market competition condition or use offensive strategies to influence the balance of forces. China Mobile focuses its service on GSM mobile communication and competes with China Unicom and other substitutes by improving service quality, cutting price, raising brand identification and other effort to make itself “the expert of mobile communication” [19](company motto). On the other hand, China Unicom utilises a totally different strategy: diversification. Although the main product of the company is GSM and CDMA mobile communication service, the company also provides other telecommunication service, such as broadband internet connection, IP calling, GPS and so on. [20]
Conclusion
So far, I have analysed the remote environment and the operating environment of MCSS and how they impact on the general development of the sector and the players in the market. However, it is important to bear this in mind: the market environment is changing all the time. Therefore, companies should be sensitive with the market changing in order to modify their strategies to adapt the new competitive environment.
Generally speaking, the remote environment is propitious to the development of MCSS, but the operating environment is more intense. In the foreseeable future, the government will regulate the competition in MCSS by Telecommunication Law and support the development of this sector since, so far, the sector is still state-owned. And the general economic climate of China also provides a steady platform for the development of MCSS. However, the competition within the sector will become more intense. Before 3G time, China Telecom and China Netcom were not authorised to provide mobile communication service, however, both corporations have received the 3G licence from the government. Thus, more companies will directly compete with each other in MCSS.
Based on the analysis above, it shows to me that MCSS will have a bright future, but operators in this sector still have a long way to go.
Appendix A: Evaluation of Techniques Used
In this dissertation, I mainly used two tools to analyse the remote environment and operating environment of MCSS respectively: PEST and Porter’s five forces. In this section, I will critically evaluate the techniques used.
The PEST framework categorises environmental influences into four main types: political/legal, economic, social-culture and technological. In the real world, these factors are not independent of each other. Many are linked to form a web in which organisations operate. Therefore, understanding how PEST factors impact on the remote environment is not the ending of the business analyse, but the starting point. Managers should understand not only the key drivers of change, but also the differential impact of these external influences on particular industries and their own operations. Although globalisation has become the trend of world economy, the influences and drivers still vary from nation to nation, or even from region to region within countries. [21]
It is more important to understand that PEST is used to look at the future impact of environmental factors, which may be different from their past impact. [21] As for business analyse itself, obviously managers have more interest in the future of the industry. But since different people will have different views on how the influences will impact the environment, the PEST analyse of the future impact will also add high levels of uncertainty to the strategy management.
Porter’s five forces framework was originally developed as a way of assessing the attractiveness (profit potential) of different industries. Therefore, it can help in identifying the sources of competition in an industry or sector.
When using this framework to identify competitive forces it is important to bear the following in mind [21]:
- It must be used at the level of strategic business units and not at the level of the whole organisation. This is because organisations are diverse in their operations and markets.
- Understanding the connections between competitive forces and the key drivers in the macro-environment is essential.
- The five forces are not independent of each other. Pressures from one direction can trigger off changes in another in a dynamic process of shifting sources of competition.
- Competitive behaviour may be concerned with disrupting these forces and not simply accommodating them.
Bearing these points in mind, Porter’s five forces is a useful starting point in understanding competitive forces of an industry.
Appendix B: Reference
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at 27 Feb 2006
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http://www.wto.org/english/thewto_e/acc_e/completeacc_e.htm#chn at 25 Apr 2006
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http://www.bj.xinhuanet.com/bjpd_sdzx/2006-03/01/content_6356796.htm at 24 Apr 2006
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at 12 Apr 2006
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at 18 Apr 2006
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7.
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at 24 Apr.2006
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at 13 May 2006
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Porter, M E; 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press
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= at 13 May 2006
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at 13 May 2006
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at 13 May 2006
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at 15 May 2006
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at 15 May 2006
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at 16 May 2006
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at 16 May 2006
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at 16 May 2006
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at 17 May 2006
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at 17 May 2006
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Johnson, G; Scholes, K; Whittington, R; 2005, Exploring Corporate Strategy, FT Prentice Hall
Appendix C: Bibliography
Finlay, P.N., 2000, Strategic Management: an Introduction to Business and Corporate Strategy, Financial Times Prentice Hall
Mueller, M., 1997, China's Telecommunication Sector and the WTO: Can China Conform to the Telecom Regulatory Principles? Paper
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13 May 2006
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at 25 Feb 2006