Memorandum submitted by Marconi Corporation
plc
Please find enclosed Marconi Corporation's submission
to the Treasury Committee Inquiry into the "Impact of China
on the World & UK Economy". Our submission has approached
the issue from the perspective of a telecommunications company.
Marconi Corporation is a global telecommunications
equipment, services and solutions company. The company's core
business is the provision of innovative and reliable optical networks,
broadband routing and switching and broadband access technologies
and Value Added Services. Marconi has 11,000 employees worldwide
with major centres of operation in the UK, Germany, Italy and
the US. Our 4,000 UK employees are situated in sites in Liverpool,
Coventry, London, Chelmsford, Basildon and elsewhere around the
UK.
Marconi has been providing telecommunications equipment
and solutions in China since 1987 and set up its first joint venture
in 1989 with the China Putian Group. In 1993, we became China
Telecom's first major optical equipment supplier and today our
products are used extensively throughout the country. We now have
three joint ventures in China and are intent on growing the business
in this important market.
We do hope our submission is useful to you and
would welcome the opportunity for further discussion either privately
or before the Committee.
INTRODUCTION
Marconi welcomes the opportunity to respond
to the Treasury Committee's inquiry into the impact China is having
on the world and UK economy. As a multinational telecommunications
company with a presence in China dating back to 1987, Marconi
is well placed to offer input to the Committee. Our comments will
focus solely on the telecommunications sector.
The main themes of our response are as follows:
GENERAL PRINCIPLES
1. Marconi is of the view that China presents
a unique challenge and should be viewed as an opportunity, not
a threat. Whilst the presence of Chinese vendors has dramatically
altered the global telecommunications environment and poses a
challenge to UK-based telecommunications companies, partnering
with those Chinese companies traditionally seen as a threat can
benefit UK companies.
2. The Chinese Government's commitment to
providing financial packages to encourage the expansion of its
national telecoms players has made it increasingly difficult for
UK firms to compete on international tenders because the Chinese
are not constrained by the OECD's international consensus guidelines
on the provision of export credit support.
3. China has made some progress on putting
in place strong Intellectual Property (IP) protections but more
work must be done in the area. The lack of IP protection must
be taken into account when investing in China.
CHINA IS
A CHALLENGE
AND AN
OPPORTUNITY
China—A Unique Challenge
1. In recent years, commentators, politicians
and others have commented that the Chinese are coming and a full-scale
response to that eventuality must be launched. Marconi and other
telecommunications companies would argue that the Chinese are
not coming—they are here.
2. Examples of the increasing presence of
Chinese companies on the global market include:
(a) Huawei Technologies (one of the two largest
telecommunications equipment companies in China alongside ZTE)
had international sales of $2.8 billion in 2004 and now has offices
in the UK, France, Germany, and the Netherlands as well as an
R & D facility in Stockholm.
(b) Huawei's international sales contributed
41% of its total revenues in 2004, up from 23% in 2003.
(c) ZTE posted a 90% increase in international
sales in 2004.
(d) TStarcomm, a Chinese company that recently
acquired a 3Com company to expand its presence into the US, has
annual international growth of 60%.
3. In the technology sector, China is one
of the world's largest markets, and is growing, especially in
key market sectors. In mobile technology, for example, China is
the world's largest market with nearly 270 million subscribers,
and is home to two of the world's largest mobile companies. It
also hosts the world's largest Internet Service Providers (ISP),
with Internet usage growing by nearly 300% per year and more than
78 million users expected by the end of 2004.
4. Whilst international competition and
market forces are desirable for reducing costs to the consumer
and driving innovation, the methods by which the Chinese are able
to expand rapidly and aggressively are presenting a unique challenge
to Western companies in terms of staffing and resources.
a. Chinese companies have access to enormous
economies of scale due to the size and rate of growth of their
domestic market. In Optical technologies for instance, the Chinese
market is now valued at $1 billion.
b. Manufacturing in China is cheap as a
result of an engineering base growing by 350,000 persons annually,
rock-bottom labour costs ranging from $120-a-month production
workers to $2,000-a-month chip designers and young workers willing
to put in long hours in exchange for housing based near a manufacturing
plant.
c. According to 2003 Oxford Economic Forecasting
data, the average hourly labour cost in China is $0.60 compared
to average costs in the UK of $19.50 per hour.
d. According to the US-based National Science
Foundation, China educates three to four times more engineers
per year than the US.
5. Even if labour costs were not a differentiating
issue, telecommunications equipment manufacturers across Europe
would find it difficult to match the number of engineers employed
by our biggest Chinese competitors because there simply are not
enough engineers in Europe. Ultimately this has a knock on effect
on our ability to produce competitively priced equipment, carry
out R & D and create wealth for the UK economy.
China as an Opportunity
6. Despite the fact that the above areas
have presented unique challenges for Western companies competing
in the telecommunications sector, China ultimately presents an
opportunity for British companies in the form of partnerships,
joint ventures, R & D etc. By outsourcing the production of
equipment to China, Western companies can reduce capital expenditure
by simply paying less to have the same product produced in China
instead of the UK or other high-cost locations.
7. Marconi has taken advantage of this opportunity;
we have had a joint venture in China since 1989. Most recently,
the company announced a Mutual Distribution Agreement with ZTE.
Like most partnerships with Chinese companies, this agreement
is beneficial for both companies. For Marconi, it helps us deliver
on our stated strategy of developing new routes to market in key
regions and segments. It also allows us to enhance our product
portfolio by providing access to complementary equipment and capabilities.
8. More importantly, agreements such as this
one provide Western companies the opportunity to tap into new
markets by leveraging their Chinese partner's local presence and
distribution models. Other companies engaging in similar activities
include:
(a) 3Com has formed a joint venture with
Huawei that will give 3Com access to a range of new products;
(b) Intel and ZTE are jointly developing
global broadband wireless solutions and will work together to
secure radio spectrum from international regulators;
(c) Flextronics, a US manufacturer, employs
41,000 engineers to design and assemble products.
9. It is important that HM Government continue
its efforts to promote trade between China and the UK, and foster
closer ties between the two nations. It is also important to open
a dialogue on the issues, such as those identified below, that
are creating barriers to doing business with China.
CHINESE GOVERNMENTS
COMMITMENT TO
PROVIDING FINANCIAL
PACKAGES
10. Although they have a large pool of engineers
and significantly lower costs than Western competitors, the two
largest Chinese telecommunications companies have expanded at
rates requiring much more than low costs and a large employment
base.
11. Marconi and others would argue that
their ability to expand is directly linked to the billions of
dollars the Chinese Government provides to ZTE and Huawei for
use in expanding their businesses. Because these companies are
not publicly traded, they are not obligated to comply with the
same rules as their competitors in the telecommunications equipment
market.
12. In December 2004, Huawei was granted
a $10 billion credit line from the China Development Bank to finance
overseas expansion. This expansion includes opening 20 new offices
outside of China in 2005.
13. As recently as 13 January 2004, the
Chinese Ministry of Information Industry (MII) announced its intention
to roll out additional preferential policies for the entire Chinese
telecommunications sector in the shape of loans and credit insurance.
The MII has claimed this strategy of direct financial support
is key to the country's international competitiveness.
(a) With the Government's financial backing,
Chinese companies can offer (and have) loans and credit insurance
(which would not otherwise be commercially available) to cash-strapped
telecommunications operators in markets such as Kenya.
(b) Whilst the risk of default on such loans
is high, the financial support is given anyway to secure a larger
global foothold. (In November 2004, Huawei won over $400 million
in contracts in Africa using methods including financing).
(c) The financial incentive partnered with
the technical capabilities of Chinese telecommunications companies
makes it exceedingly difficult to achieve a level playing field
on international tenders.
14. The Chinese Ministry of Finance and
State Administration of Taxation announced in December 2004 another
initiative favouring international expansion. The Ministry raised
the tax rebate on 14 categories of IT products, including mobile
handsets and LCDs, from 13% to 17%.
15. Whilst HM Government is clearly not
expected to match the funds offered by the Chinese Government,
moves like these being made by China threaten the ability of UK
firms to compete in international tenders against Chinese firms.
Whilst efforts have been made of late to strengthen the Exports
Credit Guarantee Department (ECGD), particularly by transforming
it into a Capitalised Trading Fund (CTF), the level of financing
offered by the ECGD is too restrictive.
16. This limitation arises because Export
Credit Agencies (ECAs) comply with the OECD's Consensus Guidelines
for export credit support. As a result European companies can
never obtain ECA support for loans above 85% of a contract value
(and often less) and must comply with repayment terms that are
typically quite rigid. Whilst these commercial guidelines are
an important tool for stopping the "credit race"—or
the rush to offer cheaper and cheaper loans at rates that are
not commercially viable—the fact that China does not comply
with them makes it particularly difficult for Western companies
to rely on ECAs as a tool to increase competitiveness.
17. Whilst the intention of this submission
is not to focus on ECGD, it is important that the Committee bear
in mind the importance of ECGD to competitiveness particularly
in light of the presence of Chinese competitors.
INTELLECTUAL PROPERTY
PROTECTION IS
LACKING
18. China is frequently criticised for its
lack of strong IP laws and regulations.Although China complies
on paper with world standards and the Chinese State Council has
put in place a group, including the Ministry of Commerce, the
police, and customs, to oversee IP protection across the country,
more needs to be done if China wishes to alleviate concerns about
IP and improve its track-record in the area.
19. Whilst Marconi itself has avoided IP
infringements in China by developing deep business relationships
with Chinese partners, the American Chamber of Commerce in China
and others indicate that enforcement is poor due to failure of
government at central, provincial and municipal levels to seriously
tackle the issue, lack of knowledge and understanding of IP issues
by authorities charged with IP enforcement, and inadequate fines
that fail to act as a deterrent. In the IT sector, these failings
have led, according to the American Electronics Association, to
pirating of 90% of software exported to China resulting in losses
of billions of dollars in exports.
20. Although China's membership of the WTO
is four years old and it has signed up to international IP protection
rules and regulations, their lack of IP protection and enforcement
is a serious issue and one that might deter some international
companies from partnering with the Chinese. For Marconi, IP protection
is an issue that factors into our investment decisions and all
appropriate measures are taken to protect corporate information,
trade secrets and proprietary information.
21. HM Government can support British companies
wishing to partner with Chinese companies by working with the
Chinese to further prioritise IP protection.
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