China Unicom's Long-Distance Leap

It's a soggy afternoon in Guangzhou, and a bicycle courier is struggling along a six-lane boulevard. Five computer-monitor boxes are strapped to a tiny rack over his bike's back wheel, and only a blue tarpaulin protects his cargo from the rain. A bumper crop of billboards praise the virtues of Giordano jeans, Anna Sui handbags, and other fashionable consumer goods. Spanning the roadway, suspended from an overpass, is an even bolder message carried on an enormous red banner. The pitch: Join legions of satisfied telephone customers by jumping on the voice over Internet protocol (VOIP) bandwagon.

Huh? Fewer than 10% of the people in China have any kind of telephone at all. And while Guangzhou is one of China's busiest port cities, it's never been a high-tech trendsetter. The dominant industries are textiles and light manufacturing, as Guangzhou feverishly tries to keep pace with nearby Hong Kong.

But something remarkable is going on. Billions of dollars are pouring in to create one of the world's most advanced VOIP networks. The result: larger call loads and cheaper per-minute rates. In countries such as the United States, where a strong telephone infrastructure already exists, installing a VOIP network is daunting. But in China, where phone networks are less advanced, it represents an opportunity to leapfrog generations and land smack in the middle of the most advanced telecom technology in the world. Guangzhou, as the nation's commercial and industrial hub, plays host to the vast majority of China's Internet telephony. As China embraces the future of telephony, that future is being beta-tested in Guangzhou.

Dialing for Dollars

The company leading the charge is China Unicom Ltd., an operation that didn't even exist until seven years ago, when the government first opened the market to competition. Now Unicom, with annual revenue of nearly $3 billion, is one of six telecom providers in China. Its mandate is to build a 21st-century phone system by betting the company on Internet telephony. "We believe that, in the future, packet-switching networks will replace traditional telephony," says Liang Jian Hao, the general manager of Unicom's Guangdong VOIP operations. "Our goal is to lead this revolution."

In August, China Unicom completed the second of three phases in its network buildout, giving it the world's largest VOIP network. It has connected 327 cities throughout mainland China to its four network hubs in Guangzhou, and it has built international Internet protocol gateways in Beijing, Guangzhou, and Shanghai. The network is densest near China's eastern coast, offering the greatest capacity to that region's larger, more commercial cities -- but it also extends 1,200 miles inland to Lanzhou. Phase three of the project will see further expansion into China's most rural communities.

The Coca-Cola Co., Ford Motor Co., and other Western companies have long dreamed of capturing the market of a billion Chinese people. So far, they have made only limited progress, perhaps because no single product is compelling enough to create that kind of demand. Telephone service, however, is different. Now that China Telecom no longer maintains a state-supported monopoly of voice-and-data communications, its five recently created rivals -- Unicom among them -- each are scrambling for a piece of the market of 65 billion long-distance minutes that Chinese businesses and individuals generate each year.

China Unicom and its employees would seem unlikely candidates to lead a business revolution. The business-casual cultural transformation of Silicon Valley hasn't made its way to the company's offices in Guangzhou and Hong Kong. Formally dressed employees hold meetings in rooms decorated with little-used beige-leather couches and ceremonial porcelain vases filled with dried flowers. The atmosphere is calm, controlled -- far from the frenzied pace of work that one might expect of a company that continues to expand at a dizzying rate.

Unicom has built its network hubs on land that five years ago was a series of ponds outside Guangzhou's city limits -- one indication of how much the city has expanded in that time and how rapidly the telecommunications industry is gobbling up available land and resources.

Last year, Unicom had the capacity to provide 1.1 billion long-distance minutes in China -- including both VOIP and traditional calls. Now Unicom's IP network has the capacity to support up to 10 billion minutes annually. Actual usage in 2000 totaled just 690 million minutes -- a far cry from a controlling interest in the long-distance market, or even in the IP market. But according to Li Zheng Mao, executive director and vice president in charge of Unicom's Hong Kong office, which oversees the publicly traded portion of Unicom's assets, use of the VOIP network is rising on a daily basis. In just the first four months of 2001, Unicom hosted 790 million minutes of traffic on the network, on track to more than triple the totals from last year. Unicom's figures for 2000 represent an approximately 25% share of the Chinese VOIP market. Officials hope that with usage rates climbing at the current pace, Unicom's market share will reach the 50% level by the end of 2003.