The Three C's-computers, consumer electronics, and communications-are the global industrial stars of the future. In particular, when telecommunications networks link up information with audio-visual entertainment, this will create the information superhighway. Chunghwa Telecom, which has had a monopoly over telecommunications in Taiwan for half a century, has just passed the first anniversary since its reorganization. Can it adapt fast enough to cope with the new era?
It is lunchtime, and on the stairs going up to the front door of the Chunghwa Telecom offices, five or six well-dressed salespeople are waiting, letting no one past without asking: "Miss, what is your business today?" "Sir, do you need a mobile phone right away?"
Don't assume that the recently reorganized Chunghwa has suddenly become so solicitous of its customers that it is even greeting them at the door. It turns out that these are salespeople selling mobile phone numbers privately. "Don't waste your time applying inside. We'll turn over one to you for NT$20,000 or so, and you can have it right away!" says a Mr. Chang, who works for a mobile phone dealer.
700,000 people in line!
More than NT$20,000 for one line? Isn't that rather exorbitant, considering that the charge for getting a mobile phone number through Chunghwa Telecom's normal procedure is NT$1200? But then you enter the virtually empty lobby of the Chunghwa office building, and you hear the girl behind the counter delicately say, "There are no numbers right now, and there are more than 700,000 people waiting ahead of you, so please hold off for one year!" Then you know how those salespeople outside are getting their business.
For Chunghwa, which is earnestly striving to rebuild its image, the shortage of mobile phone numbers is a serious embarrassment. "Scalping" and stealing (through duplication) of mobile phone numbers are rampant. It has gotten to the point where telecom companies from Singapore and Hong Kong are coming in to supply the services Chunghwa is clearly unable to provide. Moreover, what's multiplying the pressure on Chunghwa is that the wireless communications market will be opened to private-sector competition at the end of this year.
"Private companies are not restricted by the budget and accounting laws, don't need to have public bidding, and don't have members of the Legislative and Control branches of government interfering. So of course it's a lot easier for them to develop lines of business," says Casper Shih, senior adviser to the China Productivity Center and a member of the board at Chunghwa, putting his finger right on the key problem.
Fortunately, these constraints have been largely removed. Early in 1996, after a long period of labor unrest and political maneuvering, the Legislative Yuan finally-on the last day of the legislative session-passed the "Tri-Partite Telecommunications Law." The Directorate-General of Telecommunications (DGT), an agency under the Ministry of Transportation and Communications (MOTC), which had previously held a total monopoly on telecom services, was broken up into two parts. One part still uses the DGT name, but it is no longer involved in operations or production. It is only a regulatory agency, similar to, say, the Civil Aviation Administration. Production and operations are now handled by "Chunghwa Telecom," a corporation staffed by people detached from the original DGT. Chunghwa formally hung out its shingle on July 1, 1996.
The first of the three elements in the telecommunications law is the "Telecommunications Act," which governs the overall development of the industry. The second is the "Organic Legislation for the DGT," restructuring the DGT into a regulatory agency. The third-the one that has drawn the most attention-is entitled "Regulations Governing Chunghwa Telecom Ltd." It was drawn up specially for Chunghwa's establishment. It makes Chunghwa the only state-run corporation with its own legal foundation, causing envy among all those other state firms (in sugar, petroleum, power, and so on) whose status is ill-defined.
Planning ahead
Former DGT director Steven Chen, who is now chairman of Chunghwa Telecom, explains why the "Regulations" were so important: "When the telecom market is opened to the private sector, the top corporations in Taiwan will certainly not let the opportunity go by. Under these circumstances, we need operational autonomy. Otherwise how could we compete?" When the "Regulations" were being drafted five or six years ago, his main goal was that Chunghwa be allowed to behave like a private corporation, regardless of whether the firm was to remain state-owned or be privatized. "If the firm is run like a private enterprise, then there's no need to be concerned about when privatization will take place," says Chen.
Steven Chen's preparations, which displayed such foresight, look even more opportune today given the suddenly accelerated privatization timetable. With the "Regulations" as a protective talisman, Chunghwa has become the first state enterprise to be clearly allowed to undertake the "buy first, report later" method for purchasing. Incidents like the holdup of the purchase of mobile phone exchange equipment are not likely to be repeated. Moreover, the regulations give Chunghwa many "special privileges." For example, it can pay fees to agents or retailers based on prevailing commercial practices (without approval from the MOTC on a case-by-case basis). It can establish subsidiary organizations at home or abroad. And the regulations require that at least one-fifth of the board of directors be "specialists," so that non-specialists will not interfere too much and adversely affect performance.
Another major victory for Chunghwa was the freeing up of its personnel system. In the past, people could only enter through the civil service exam system. But now employees can be hired on a contract basis. It is no longer necessary for the MOTC to hold a large special exam. "State enterprises have had a hiring freeze, and the special exam hasn't been offered in two years. But the average age of our employees is already 43. If we don't bring in new people, it goes up every year. It will be over 50 before you know it!" says Steven Chen, speaking with a sense of urgency.
However, even as bringing in fresh blood is urgent, Chunghwa, like other state firms, has an excess of senior personnel. This burden cannot be eliminated simply by a change in regulations.
Chunghwa is the largest of all the state-run enterprises, with more than 34,000 personnel. Of these, nearly 11,000 are considered "management." Management bonuses run from NT$7000/month for the lowest level to more than NT$44,000/month at the highest. The overall effect is that Chunghwa's average salary is now in excess of NT$60,000.
From civil service to enterprise
With regard to this, Chen explains that early in the DGT era, the business was run like a government agency. And everywhere there is government bureaucratic organization, there you will find the civil service ranking system. As a result, from the vice general managers on down, there are 19 distinct levels.
"There are too many chiefs, not enough braves. One interferes with the next, and every document becomes covered with the dense scribblings from layer upon layer of management. It's ridiculous!" Chen knows full well that this cannot go on. "In the future, headquarters management will only go down to the office-director level. Section chiefs below that will no longer be considered management. It will be the same in the operations department. From team leader on down, everybody will just be considered the same, with no-one having authority over anyone else."
However, admits Steven Chen, there is much resistance to the new system. Low level management, despite keeping their titles and pay bonuses, are still unhappy about losing their power to tell other people what to do. Middle managers, who must now personally deal with responsibilities they could previously delegate to lower managers, are also complaining. But when the company took a less strict line, it was accused by the labor union of coddling management and failing to reform.
There is still no internal consensus, while outside the war for this market worth tens of billions of NT dollars is already well under way.
Beginning last year, the MOTC has opened several lines of business connected with wireless communication, including various kinds of mobile phones and pagers. Many of Taiwan's large corporations formed multi-national telecommunications industry alliances to obtain one of the scarce licenses.
As new competitors have been entering en masse, Chunghwa has announced a series of price reductions. For example, the monthly base fee for a mobile phone has gone from NT$1800, before market liberalization was announced, to the current NT$600. Use charges have fallen from NT$12 per minute to less than half that. With the drop in prices, private mobile-phone businesses, which are expected to be allowed to begin operating at the end of this year, will face stiff resistance from Chunghwa.
"The strong prey on the weak, the old consume the young," sighs one telecom company manager. Early on, the DGT earned huge profits with its exorbitant mobile phone charges; it was this fat market that private firms yearned for. Unexpectedly, since the civil-service-style DGT was transformed into Chunghwa Telecom, and adopted the look of a commercial enterprise, it has surprised everyone by moving swiftly and sharply.
Chiang Tien-ssu, market research director for the Institute for Information Industry, notes that telecommunications is a form of infrastructure. It requires a large initial investment, but returns, though steady, are not rapid. Thus in many industrial countries, when the government opts for market liberalization, it first stipulates that the existing monopoly cannot engage in price-slashing for a certain period of time. This gives the newly entering competitors a transition period to find their feet, after which they can compete equally. But Taiwan's Telecommunications Act includes no such provision.
"It's like a child learning to walk being smacked by a giant even before it takes its first step. You tell me: Is this child likely to get anywhere?" says the telecom company manager quoted earlier, who unhappily accuses the government of stacking the deck in favor of the state firm.
Who defends the weak?
Nevertheless, says Chunghwa, this is a result of events beyond their control. A section manager explains that "we had always expected that after reorganization as a corporation, we would review and rationalize various fees, gradually eliminating the previous system of relying on excessively high mobile-phone and long-distance charges to subsidize local intra-city calls." This would all take place, it was thought, well before market liberalization.
However, the Tri-Partite Telecommunications Law was unexpectedly held up with haggling in the Legislative Yuan for four years. This delay meant that the processes of reorganization, price-rationalization and market liberalization have been compressed into the same time frame. "This is just complete coincidence. We are simply proceeding according to the original plan to rationalize prices. Where do people come off saying that we are trying to undercut the competition?!"
Also, notes Steven Chen, "Private corporations will only choose operations where there is profit to be made. Will they try to grab any share of the unprofitable local-call market?" He says that for local calls, the network is very dense, as lines must be connected to each home. Thus local networks account for 80% of Chunghwa's investment, but less than 20% of revenues.
Under the former government policy of making phone service universally available, rates for intra-city local calls, the most common type, were kept very low. The going rate of NT$1 per five minutes was a de facto subsidy. Long-distance, international, and mobile-phone charges made up the difference. In the future, with commercial considerations at the fore, public phones in Taipei will be like those abroad. It's possible that it will cost NT$5 for a local call, with additional charges for remote areas.
On this point, Chen Cheng-tsang, a professor of economics at National Taiwan University and convener of the Public Works Policy Committee of the Consumers Foundation, can't conceal his concern. After telecommunications liberalization, Chunghwa will have freed itself from public-policy considerations, but consumers-though they will have more choice-will not necessarily receive better, fairer treatment. In densely populated urban centers, the value of the market is high. With competition, consumers can receive faster and more reasonably priced service. But people in remote areas may well find themselves disadvantaged, and left out by the market mechanism.
"When you talk competition, you cannot only mention profit. You also have to take social justice into account," says Chen Cheng-tsang. Though the Telecommunications Law requires firms to contribute to a "universal access service fund" to subsidize remote areas, it is uncertain how much they will contribute, and under what circumstances the fund can be tapped. Chen Cheng-tsang-having attended the DGT's discussion seminar, and seeing telecom firms haggling vociferously over every point-is not sanguine.
Long distance
Local intra-city calling has not yet been opened to private firms, so Chunghwa is solely responsible for it. However, for all kinds of wireless communications, after connecting it is still necessary to go through the city telephone-line networks. The Telecommunications Act stipulates that no operator may refuse to allow any other operator to use its lines. Therefore, the sharpest point of conflict between Chunghwa and private firms is how to set the "carrying charge." Private firms are especially anxious to settle this issue, since, by law, a firm that does not begin actual operations within six months of being licensed will forfeit that license.
Chunghwa people argue: "Over more than 50 years, Chunghwa has invested billions of NT dollars building an island-wide network one meter at a time. There should be some reasonable return for that." Chunghwa is currently engaged in marathon negotiations with others in the industry. The pressure of competition, the livelihoods of 34,000 employees, the huge sums of money that will be needed for "seniority resolution payments" over the next five years, the budget surplus target of NT$40 billion for one year. . . all of these have weighed heavily on Steven Chen's mind.
"We either need to lower the surplus target that we are required to turn over to the national treasury, or raise the 'carrying charges.' If the government doesn't approve of one or the other, isn't that forcing Chunghwa on the road to failure?!" Yet while Chen speaks out, private operators keep a low profile, and are unwilling to discuss any topic related to operational competition.
However, not long after Chen's solemn statement, the situation improved sharply. In order to open the door to business sooner, many private firms have agreed to accept Chunghwa's conditions for carrying charges: For every sixty minutes of accumulated charge time, they must pay Chunghwa NT$1.6. Currently about half of the private firms have signed agreements with Chunghwa. Those still complaining and adopting a wait-and-see attitude will have little choice but to accept.
In its initial contact with the private sector, Chunghwa has won the first skirmish. But, from adopting private sector business practices to privatization, Chunghwa still has many battles to fight.
p.18
A constant stream of people come and go at the offices of Chunghwa Telecom on Jen-ai Road, right near the main center of government. Private firms are now eyeing this market. Is Chunghwa ready to face open competition?
p.20
Telecommunications is the economic star of the future. Liberalization of the telecommunications market in Taiwan, with its revenues in the hundreds of billions of NT dollars, will have far-reaching implications. The photo was taken at a large telecom exhibition held last year.
p.21
Amidst competition from without and privatization from within, Steven Chen has seized the moment, overseeing the break-up of the old Directorate-General of Telecommunications and the founding of Chunghwa Telecom, of which he is chairman.
p.23
Large adverts declare lower prices and sales incentives. These mark Chunghwa Telecom's initial thrust, which has surprised private competitors.
Amidst competition from without and privatization from within, Steven Chen has seized the moment, overseeing the break-up of the old Directorate-General of Telecom munications and the founding of Chunghwa Telecom, of which he is chairman.
Large adverts declare lower prices and sales incentives. These mark Chunghwa Telecom's initial thrust, which has surprised private competitors.