- 1 - China Netcom - The Boston Consulting Group --Confidential--Destroy by Shredding-- 45034-05-Interim-14Dec99-TZD-gx-SHI CHINA NETCOM BUSINESS PLAN

- 1 -China Netcom - The Boston Consulting Group

--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI

CHINA NETCOM BUSINESS PLAN UPDATE

December 14, 1999 - Beijing



TODAY’S OBJECTIVES

Review the overall analysis of regulation, competition, and market development

• Discuss the specific implications for CNC strategy

Review the specific draft business models for CNC

• How we might attack the business, carrier, and IDD/DLD markets

• What key trade-offs we need to make

• What are the key success factors and assumptions?

Discuss the initial economics of these business models, and of CNC overall

Discuss the specific next steps in two key areas:

• How to finalize and endorse the overall CNC business model

• How to move forward with the refined financials, organization design, and the plan for implementation



CONTENT

Key strategic principles

Regulatory overview

Market overview

Competition overview

Business models

Next steps



KEY CNC STRATEGIC PRINCIPLES

The objective of these principles is to provide further clarity in the development and evaluation of the CNC business model

These will be revisited and refined as the project progresses

• Our development of business models will seek to be aligned with the principles

Strategic principles and key assumptions will be considered in the following aspects

CNC shareholders

Backbone business

Local access business

International gateway business

Regulatory strategy

Competitive strategy

Marketing strategy



CNC SHAREHOLDERS

Principles:

• Leverage shareholders’ concerted vision in creating a new generation IP broadband communication infrastructure and a profitable, successful company

• Leverage shareholders’ existing backbone assets, local access assets, research capabilities and local government relationships to secure time-to-market and create competitive advantage

• Set a model of a new type of “SOE”, as efficient as the best of the FIE/private companies; beat shareholders’ expectations by delivering high return

Assumptions:

• CAS: strong interest in seeing CNC successful and profitable quickly, stands ready for favorable regulatory influence and research support; wants opportunities for networking R&D

• MOR and SARFT: extensive backbone and access assets and ROW

- main focus on using MOR for right of way, helping them participate in telecom

- will not use SARFT local CATV in the near term, but they are a key user of the backbone

· Leverage CATV’s city backbone

- MOR will continue to favor CNC over Unicom, provided CNC meets the expectation as a profit center for MOR

• Shanghai Municipal Gov't: Eager to make Shanghai as China’s test ground for building high-tech infrastructure (e.g. the integration of telecom, CATV, Internet)

- in particular, testing HFC to deliver broadband internet

- one issue: SPT and ATT JV; how to handle?



BACKBONE BUSINESS

Principles:• Target advanced backbone among 15 key cities in Eastern China; start with 2

cores from shareholders but quickly build own network• Use backbone for a variety of wholesale and retail voice and data services• Maintain the leading edge IP/packet network, both for technological superiority

and to fulfill shareholder mission• Maintain the best cost position, using ROWs, purchasing clout, right technology• Build reserve capacity/conduit to deter others

Assumptions:• The costs of construction and ROW will be the majority of new network costs

- virtually all of the network will use MOR or SARFT right of way• Network will be IP or packet in nature• Deployment plan will keep costs low, build out quickly, and create good position

- lay large number of conduits in one time- later fill, light up, and color fiber strands- lease out conduit/fiber/bandwidth to maximize return (utilization)



LOCAL ACCESS BUSINESS

Principles:• Be very focused in local deployment, targeting priority business areas only• Emphasize broadband to the customer, using FTTB and LMDS where logical• Seek strong local market share, especially in new data services growth areas• Differentiate from China Telecom by superior services, quality, responsiveness

- Build strong local team to enable fast service response- Emphasize “end to end” network ownership and management

Assumptions:• SH, BJ, GZ, and SZ business districts as targets for the near term

- These account for the vast majority of business telecom demand- Need to set specific estimates for timing and sequence of deployment

• Assume that CNC will have access to key city ROW, such as subway systems• Will need specific assumptions about the ease and cost of hooking up buildings• Assume that primary emphasis will be on FTTB, but that LMDS can play an

important role, especially in initial deployment and in secondary cities• Will need specific assumptions about timing of adding secondary cities



INTERNATIONAL GATEWAY BUSINESS

Principles:• CNC will be one of few players with a full international license• Vital to enable CNC to provide end-to-end services, global data services, and

higher margin IDD service• HK gateway link may be strategically important

Assumptions:• HK as one of the key location for international connection

- a major traffic destination- a major relay location

• International voice remains highly profitable segment in medium term future• Expect high growth together with steep price drop in international services• Actively plan ahead for joining international sub-oceanic cable consortium



REGULATORY STRATEGY

Principles:

• Must actively lobby for favorable regulatory decisions, together with shareholders

- provide regulators with international benchmarking for best practices

- align CNC objectives with fair competition, and public interests

- have effective senior management focus on lobbying issues

• Be careful about committing investment if regulatory issues too uncertain

• Ensure CNC strategy addresses national economic development priorities

• Pay careful attention to managing relations with China Telecom

• Expected WTO in 2000 will imply greater opening of the market in the future

Assumptions:

• At least a 2-3 year window when CNC can continue to enjoy favorable policy treatment, while also working to straighten out regulatory issues at local level

• Many key regulations remain in grey areas, where CNC can play a role in shaping the policy

• Will need to make specific assumptions on a number of regulatory issues, and develop several scenarios

• Assume that CT and Unicom are the only full service competitors, but several niche players

• WTO will introduce FDI into China’s telecom market by 2002, but infrastructure play remain tightly controlled (still limited competition) until 2004/5

- may be opportunity for some form of partnership with foreign telcos



COMPETITIVE STRATEGY

Principles:• Focus on the best service quality, supply what customers’ need, avoid competing

on price• Build both “highways” and “tollbooths”• Prepare for rapidly changing industry structure• Be careful in positioning toward China Telecom:

- complementary and addressing unmet needs- growing the whole market

• The only viable alternative to China Telecom for carriers• The only true “end to end” network across China, with clear central management

Assumptions:• Technology leads to continual change in industry structure• The decentralized nature and business oriented behaviors of China Telecom

enables CNC to partner at the local level• High opportunity for CNC to fill China Telecom product/service backlog • Unicom will be a threat to start a “price war”• Various niche players emerge in later years, more threat than (carrier) opportunity

for CNC



MARKETING STRATEGY

Principles:

• For local access, will target medium and large businesses in targeted buildings

• For backbone, provide carrier services

• For international, support other businesses and also offer IDD and refiling, etc.

• In all areas, emphasize quality, service, end to end, etc.

• Get a few key customers early; prove ourselves and then build further

Assumptions:

• Carrier and large and medium sized corporations are the key focus

- especially those in telecom-intensive industries

• Assume a growing demand for business telecom services

- will need both high and low growth scenarios

• Need to validate the willingness of key customers to switch, and their anticipated areas of future demand growth

• IP phone still the source of revenue in the near future

• Dial-up ISP (171) may conflict with ISP carrier interests, but could also serve as strategic inroad for future 3G(1)

(1) Not in scope of this project



CONTENT


Regulatory overview

Market overview


Business models

Next steps



REGULATORY HIGHLIGHTS

Our key assumptions:

• MII regards CNC’s IP-based license as Full Service license, but lacks clear regulatory documentation. In case of local interpretation difference, MII is willing to clarify on behalf of CNC

- e.g. ambiguity on local fixed line (CNC number)

• CNC will be granted International Gateway license by 1Q 2000

• CNC IP network protected by the current fixed/mobile interconnect regulation

• CNC not required to meet specific coverage targets for the near future (2-3 years)

• The market will be opened up gradually, with FDI increasing:

- more value added service providers by 2003

- more I-Phone providers by 2001

- no new Full Service providers till 2004/2005

• Account settlement specific for I-Phone will be regulated after the trial stage ends. It will be lower than the RMB0.14/min rate for basic telecom networks on a per call basis

• Equal access by prefix/pre-select in 1 year; number portability may take another 1-2 years at least

• CNC will have LMDS spectrum

CNC anticipates a well-intentioned regulator, with varied degrees of control over local incumbent practice

None of these assumptions are “guaranteed;” CNC must fight aggressively for them



KEY REGULATORY ISSUES AND IMPLICATIONS

Service licenses

Full Service license interpretation

Interconnect enforcement

Account settlement

Pricing and rebalancing

ROW and access

Frequency spectrum allocation and fees

Universal Service Obligation

Equal Access

Numbering and portability

IGW license important to competitiveness,size of customer base and # of partners

MII notification on each instance adds delay to CNC local interconnection

Time to market in each city affected, detract CNC resources

Future Interconnect economicsFuture price competitiveness vs. other players (e.g. CT)

economics; price competitiveness vs. CT

Case-by-case local coordination and negotiation delay local access build-out; may also be expensive to obtain

Time to market for local access build-out by LMDS access solutions

Subsidizing incumbent for USO affect cost structure of new entrants

Unable to reach CT local line customer

Medium term implication: on-net voice not targeted for the near 4-5 years

3 full service carrier including CNCMore licenses for value-added service providers (type II)

MII supports CNC IP based license as Full Service LicenseBut lack of clear documentation may cause confusion at local level

Based on cooperation of carriersArbitration/settlement process exist but time consumingMild punishment, law suit as last resort

For current IP-phone trial, fees not settledLikely future settlement: LD carrier pays local PSTN operator RMB0.14/min

Price floor likely specified for incumbent by regulationNo imminent initiative for rebalancing

Legally feasible for public telecom carrier (e.g. CNC)Practice will have to coordinate with municipalities and infrastructure building

Controlled by MII in co-ordination with PTAsFrequency not likely to be auctioned

USO for incumbent with contribution from new entrant2-3 years before transparent and equitable approach

Prefix based solution provided by regulation in 1 year

Number as national resources controlled centrallyFee will be collected for occupation of number resource2-3 years before portability regulations

Impact on CNC

Highest/Immediate

High/Medium Term

Key issues Assumption Implication to CNC



KEY REGULATORY BODIES AND RESPONSIBILITIES

Other depts, e.g

SETC

Various law

making bodies

NPCState

Council

Dept. of Radio Frequency

Administration

Telecom Administration

Bureau

Other depts.

Provincial Telecom Administration Bureau

ChinaTelecomNational

Company

Municipal Level Telecom

Administration Bureau

Telecom Operating Entities:

e.g. CT fixed line

Provincial government

MII

AdministrationOperations

National

Provincial

Municipality

• Drafting, passing of telecom laws and statues, e.g. China Telecoms Law

• International, National and Inter-Provincial scope license granting

• Highest level of regulatory enforcement/ arbitration

• International Gateway administration

• National level telecom resources control (e.g. numbers, frequency spectrums)

• Provincial level telecom administration

• Provincial level license granting

• Provincial level regulatory enforcement focus on coordination

• In the process of splitting operation and administration

• A number of Municipal Level TABs are yet to be created

• Limited enforcement power

• Operation and administration not separate

• Settle interconnect and other disputes

• When not settled by provincial & municipal coordination, propagate up to provincial level and MII

…

PTAs

PTB

Source: Pyramid Research; BCG analysis



KEY LICENSE ASPECTS AND IMPLICATION TO CNC

Full Service and International

Value added services

ownership

Geographic scope

Duration

license fees

Performance targets

Technology

Key Aspects

• Number of licenses tightly controlled: at most 3 in 2003, including CNC

• CNC full service license expected 1Q 2000• International licenses tightly controlled: at most 4

in 2003, including CNC• CNC IGW license expected by EOY1999

• More than 4 value-added service licenses possible

• Control-share foreign ownership not allowed in basic telecom and public data transport services

• Up to 50% of FDI in value added service providers

• Intra provincial services under control of provincial TABs

• No limit

• Regulation will require license fees

• Regulation will specify clear service buildout targets

• Regulations will be technology neutral• But will give preference to new technology

Assumptions

• Current regulation only cover interconnection between 7 types of licensed basic telecom carriers (e.g. NLD, local, wireless, international)

• With IP-phone license, CNC needs to negotiate with CT local branches city by city

• CNC IP based bandwidth wholesale service not covered in published regulation, adds delay in local negotiation

• Number of potential customers for carrier’s carrier services

• Speed of establishment and coverage of targeted customer for carrier’s carrier service

• Financial strength of new entrant customers

• Intra-provincial LMDS service require application in each targeted area

• Competitor’s ability to lockout key service areas

• Limited degree of impact on economics

• Adds planning and local coordination pressure to CNC local access solutions

• CNC IP/DWDM backbone receive positive influence

Implication to CNC



NATURE, SCOPE AND NUMBER OF LICENSES

Source: BCG analysis

VSAT transport service International NLD On-net voice

IP backbone

IP-phone (including

international)Wireless Paging

VAS(e.g.ISP,

VPN)

Service nature

• Owning satellite

• Maintain satellite channel

• VSAT base stations

• Ownership & operation of international gateways

• Interconnect with foreign carriers

• Leasing IDD channels and lines

• Building & operating of national switches and trunk lines

• Maintaining POP is nationwide

• Provide basic voice & data national transport

• Ownership & operation of local access networks

• Ownership of last mile

• Provide basic local voice/data transport and access to NLD/IDD

• Building and leasing of broadband IP based backbone transport capacity

• Provide IP based voice service

• No requirement in infrastructure building

• Including international IP based LD

• Building & operation of local BSC network

• Provide wireless voice services

• Interconnect with national transport carrier

• Building & operation of Local Paging Networks

• Interconnect with national transport carrier

• With or without building & operation of local network

• Offer web-hosting, VPN, call center services, etc.

Scope • National coverage

• Cross international point of presence

• Service national transport carriers

• Cross provincial boarders

• Have access to international PO connects

• Service local PSTNs

• Covers local service areas, (e.g. cities municipalities)

• Cross provincial boarders

• Access to international points of connect

• Covers 12-25 trail cities

• Access to international points of connect

• Covers local service areas: cities municipalities

• Majority in local scope

• 4 national coverage

• Primarily in local scope

No. of futurelicenses

Remain 3 for the next 6 years (CT, Unicom, and CNC)

3 In the next 6 years (CT, Unicom, CNC)

3 In the next 6 years (CT, Unicom, CNC)

4~5 in 1-2 years

5-6 possible in the next 1~2 years

Multiple licenses possible in the next 4-5 years

Numerous national scope licensespossible in the next 2 years

Numerous more licenses (with FDI) possible in the next 2 years

License controlled by MII MII MII MII MII MII MII

Primarily by provincial

government

Provincial government

No. of current licenses

1 3 2 23

(CT, Unicom,CNC)

4Trail stage 2

2 national scope;

multiple localUnlimited

Basic telecom services

Remain 1 for the next 6 years



INTERCONNECTION ISSUES AND IMPLICATION TO CNC

Key Issues Assumptions Implication to CNC

• Obligation clearly specified by regulation for interconnection between 7 types of telecom network licensed operators

• CNC’s IP broadband network receive equivalent protection• MII sets technical specification of interconnect solutions• Clear provision on cost and ownership of technical asset

• From time of written request, interconnect complete within:• 2 months if only CO data modification is involved• 4 months if capacity expansion needed• 7 months if new POI (1) needed

• Time frame not strictly adhered to, varies from 4-6 months

• Dispute settled primary via coordination• Arbitrated by MII and local government• Violation fine is very low (30,000 RMB max per offense)• Possible to claim for compensation due to non-cooperation of

incumbents (the last resort)

• RMB0.07/min for PSTN access of each end of call path• Settlement for IP based will follow scheme when trial finishes

• Incumbents provide cabinet room and conduit access• In case there’s no excess conduit capacity, incumbent has to

provide feasible expansion plan• Local practice will vary

• Incumbent charges rental fee for conduit access• Incumbent charges for leased line needed for interconnect• Infrastructure and network investment related to interconnect

are responsibility of both parties, separated from POI

Incumbent obligation to interconnect

Interconnect timeframe

Enforcement

Account settlement

Access and collocation

Charges and fees

• If CNC network is not covered by regulation, local negotiation will leave loophole for incumbent and add delay

• Incumbent local practice varies, add complexity and delay to project

• Incumbent can take advantage of timeframe loopholes, add delays at local level

• Central control over local TAB(2) varies due to varied degree of separation, lead to different degree of just and resolution timeframe

• Upward propagation to MII time consuming, adding delays to resolution

• Future economics: up to 30% of revenue paid to PSTN based on 0.30/min IP rate

• Incumbent can take advantage of capacity constraints to delay interconnect at local level

• Some incumbent local branches require CNC to pay for investment, ownership goes to incumbent, adds cost to CNC service

Note 1: Point Of Interconnect 2: Telecommunications Administration Bureau



CLEAR GUIDANCE FOR INTERCONNECT ALREADY PUBLISHED, LOCAL PTA OBLIGED TO FOLLOW

Local PTA can be resistant, also its organization not suitable for quick execution• The policy decision requesting local PTAs to corporate with interconnection trickles from top

down: the central provincial PTA city PTA• City PTA before implementation will generally ask for lead time for verification with upper levels.

E.g. in some cases new entrant has to wait for extended time period for this process• Under the Market Department’s coordination, there are up to 18 independent departments within

each city PTA to cooperate for the execution and resource planning of interconnect• Each of these department can add delay to the process, lead times add up• In case of insufficient resource, the requesting and approval process for expansion / upgrade is

even longer• Local PTA can easily use resource constraint as an excuse for delay in interconnection

… But interconnection is feasible• CNC has so far been able to reach interconnect contract at provincial levels• Most PTAs in CNC’s target cities displayed timely cooperation

In order to ensure quick execution, CNC should• Understand and incorporate into planning process the status of incumbent network resources• Give lead time in planning and communicating intention to interconnect with the incumbent• Build strong communication channel with all levels of PTAs• Co-ordinate for good timing across all levels; parallel processing to minimize time needed and

clear bottleneck

BACKUP



THE PROCESS OF LOCAL INTERCONNECT IS GENERALY SMOOTH But There’s Great Difficulty in Some Cities

Interconnect in major cities is smooth• e.g. BJ, SH, GZ

Great difficulty in some cities • e.g. Wuhan

• Fast agreement reached• From negotiation to implementation

usually takes 2-3 weeks

• Takes 4-6 month to complete negotiation • Issues:

- local CT branch attempted to curtail CNC by forbidding connections of multiple lines at CNC level

• Resolution:- resort to regulatory provision to reach

IP phone interconnect agreement- push off multiple line issue as future

negotiation agenda

BACKUP



TERMINATION SETTLEMENT MAY REDUCE CNC MARGIN (I)

Current

Likely scenarios for Y2000

End user

• Customer pays local PTA for PSTN usage

• e.g. RMB 0.1 every 3 min to PTA

• No settlement paid by CNC to PTA

• Customer pays local PTA for PSTN usage

• e.g. RMB 0.1 every 3 min to PTA

• No settlement paid by CNC to PTA

• CNC pays RMB0.14/min to PTA for both origination and termination

• CNC charges customer IP-phone carrier rate

• e.g. RMB 0.3/min paid to CNC (debit from prepaid IP phone card)

• CNC charges customer IP-phone carrier rate

• e.g. RMB 0.3/min

• Per minute IP rate ¥0.44/min paid to CNC

• otherwise CNC see margin reducing

• No settlement

• No settlement

• No settlement

CNC CNC End userPTA

Switch

SHPSTN

Switch

CNC backbone(1)

Switch Switch

BJPSTN

PTA

Transmission(paid by CNC)Fees:

1

2

Transmission(paid by CNC)

Note 1: Currently leased from CT. Own backbone by July 2000

ExampleInter-

connection

Backup



TERMINATION SETTLEMENT MAY REDUCE CNC MARGIN (II)Example: National Long Distance

Backup

0.3 0.3 0.3

0.16

0.06 0.06

0.14

0.14CNC pays PTA

CNC paysPTA

KeepIP-phone price the same

Customerpays PTA(1)

IP-phone price

Customerpays PTA

IP-phone price

New IP-phone price

Current IP-phone Trial Stage scenario: no settlement

CNC Alternative I CNC Alternative IIPossible scenario

for 2000: no settlement

1

RMB/min

Note 1: PTA charges customer on 3 minute units, RMB0.18 per 3 min. Calculation for this example uses average per minute rate of RMB0.06, assuming customer calls long enough duration.Source: BJ PTA

Possible scenario

for 2000: RMB0.14/min

settlement rate for both

origination and

termination ends

2

• Increase IP price to cover settlement cost

• Customer doesn’t pay PTA but perceive IP-phone price increase

• CNC maintain current IP-phone revenue

• Keep IP price same

• Customer doesn’t pay PTA nor perceive IP-phone price increase

• CNC pays PTA out of IP-phone income

• CNC revenue = 54% of current IP-phone revenue

0.3

0.44

0.360.36

• CNC retains 100% of IP-phone price as revenue

• CNC retains 100% of IP-phone price as revenue

The RMB0.14/min settlement rate specified by current regulation is based on traditional fixed line economics. CNC would lobby for new settlement rate specific to IP-phone economics

The RMB0.14/min settlement rate specified by current regulation is based on traditional fixed line economics. CNC would lobby for new settlement rate specific to IP-phone economics



KEY PRICING REGULATION ISSUES AND IMPLICATION TO CNC


• Regulation follows cost-based pricing guideline

• Carriers obliged to publish accounting data assisting pricing regulation

• Price floor specified for incumbent• New entrant has flexible price range

around incumbent rate

• Local, NLD, IDD, wireless, satellite• National leased lines

• Price Bureau within each provincial government sets prices according to local standard of living and inflation rates

• Local PTAs will have autonomy• Since local networks have been built

by local PTA investments, local PTA has strong influence on local price levels

General pricing rules

Differential Treatment

Central control

Local control / Geographic practice

• Usually high initial CNC cost position due to leasing access and settlement

• Short term uncertainty in price based competitiveness

• Some flexibility in pricing of CNC product offering

• Advantageous long term competition capability over incumbent

• Clarity in pricing is favorable to CNC• But limits CNC pricing flexibility

• Disadvantageous local price based competitive position in some geographies

• Varied cost structure across geographies complicates product management process, difficult for CNC to have consistent pricing, and hence, image.



LEASED LINE COST HIGHEST AMONG INTERCONNECT COSTSApproximately RMB 134K/month to Link up One City

Item Cost per month (in RMB1,000)

Leased line to local PTA• Capacity: 2 M bps• Number of channels: 30

Domestic LD transport(1)

Total for connecting up one city

Leased line to international gateway• E1 capacity

Total for IDD from one city

9

100-150

109 - 159 134 average

320

454 average

(1) Before CNC backbone construction completes, bandwidth for this segment is leased from China Telecom

Backup



ROW AND ISSUES RELATED TO BULIDING LOCAL LOOP


• Theoretically, CNC can assume privileged access to public resources, e.g. bridges and roads

• There is no specific definition of ROW in most localities

• In practice, there’s no free access• On time fee charged for digging as high as RMB

20K per km reimbursement to local municipalities• Labor account for 5-10% of total cost

• Conduits in bridges and commercial buildings owned by municipal governments

• Conduits in residential area largely owned by CT

• Conduit access auctioned by local government when building completes

• Once auctioned, additional conduits can not be easily added for 4-5 years

Utility privilege

Access fees and cost

Ownership & control

Scheduling

• Theoretical utility privilege does not guarantee local cooperation

• Local access to conduit in most cities primarily rely on renting from resource holders e.g. CT, utilities etc.

• Negotiation of rental largely on a case-by-case basis

• Case-by-case negotiation will delay local loop buildout

• Conduit access rights have to be purchased back from exiting holders

• Planning and coordination needed to fit schedule



FREQUENCY FOR WIRELESS BB NEED TO BE ALLOCATEDCurrently Only Narrow Band Wireless Spectrum Assigned


• No clear regulation available and fierce competition expected in frequency bands for LMDS (25-38GHz)

• 1890-1900MHz and 1960-1980MHz reserved for FDD Mode WLL

• 1900-1920 reserved for cordless standards e.g. DECT• Wireless datacom in 821-825 and 866-870MHz range, NO

voice traffic is permitted in this range

• Frequency management policies implemented by local DTAs, in conjunction with PTAs and PTBs

• Local frequency allocation is issued after PTA test and MII examination, a process of 6 - 12 months

• Allocation remains fixed for 3-5 years on average• Frequency policies handled by local DTAs, problems

resolved locally and appealed to MII• 1975-1980MHz band occupied by DGT’s wireless access

network in SH, BJ, GZ, SZ, FZ and Xiamen• 1890-1895 and 1970-1975MHz occupied by Unicom in CD, TJ

and CQ

• Local wireless access licenses need to be obtained from local PTAs

• Primarily to be controlled instead of frequency auctions

• No overall regulation backing onetime solution• Roof top access and building access depend on case-by-

case negotiations with property owners

Frequency band allocation

Administration of frequencies

License of service

Frequency fees

Roof top access

• Reserved frequency and available LMDS modulation affects viability and quality of CNC access solutions

• Long circle of frequency allocation process will impact time-to-market for CNC solutions

• Occupied frequency spectrums in key target cities expect to take long cycle of negotiation and migration

• Cost of local wireless access solutions

• local license application cycle delay and variation

• Will introduce delays in key cities e.g. BJ, SH and GZ

• Time to market to key target customers



OTHER REGULATIONS AND OBLIGATIONS

Key Issues Likely scenario Implication to CNC

• Less transparent practices likely to remain for 4 -5 years before equitable policies are made

• During the interim, incumbent is subsidized for USO by other carriers, reflected in account settlement prices: RMB0.07/min instead of RMB0.044/min

• New entrant not expected to be obligated• … Instead indirectly participate in paying incumbent subsidy

via higher prices

• Expect to be thoroughly addressed over 1-2 years time• Regulation provides general end user right to choose LD

carrier, access provider to assign default LD carrier• Enforcement is responsibility of local TAB within provincial

governments• Technical solution requirement for incumbent not specified

• Numbers, as national telecom resources, regulated by MII and local TABs, granted via allocation or auction

• Regulation will specify coverage, service targets and timeframe

• Regulation will specify usage fee for assigned numbers

• Specific regulations and technical solutions not likely in 2-3 years

• Currently no carrier has portability practices


Equal Access

Numbering plan

Number portability

• Indirect USO subsidy affects price-based competitive capability and economics

• Non-transparent USO contribution practices creates loopholes for incumbent to predate pricing

• Customers’ willingness to switch carrier

• Unprotected numbering resources affect viability of future CNC offerings

• Timeframe requirement adds planning pressure and difficulty to solution

• Customers’ willingness to switch carrier



KEY CNC BUSINESS OBJECTIVES AND CORRESPONDING REGULATORY IMPERATIVES

The Carrier’s Carrier, Enterprise Solutions and Offnet Voice business models require CNC to achieve the following business objectives, and hence actively lobby for favorable regulations

()

Carrier’s Carrier

Enterprise Solutions

Off-net Voice

Fiber local access solution

Off-net voice interconnect solution

LMDS broadband wireless access solution

Business ObjectiveImportant to realizing business model



OBTAIN FREQUENCY SPECTRUM IN 6 MONTHS TIME FRAMETo Ensure LMDS Solution Is Available Before June 2000

Frequency Assignment

Feasibility Trial

Roof Top Access

Service License

Frequency Fee

• Advocate MII to reserve the suitable 25-38GHz frequency range for LMDS applications. Clarity in provision should be obtained in the near future.

• Advocate MII to sub-allocate suitable LMDS frequency spectrum to carriers in the near future

- finish national level planning for number of carriers- provide a short list of alternatives to determine allocation scheme sub-bands

within the feasible 25-38 range to planned carriers- e.g. 25 - 25.5GHz range reserved for CNC

or specific frequency spectrum auction plan- frequency allocation should have nationwide coverage, not geography

specific• Advocate MII to set specific migration procedure for occupied frequency spectrum

with timeframe specified

• Feasibility for LMDS solution should be technology specific instead of carrier specific(1), MII should publish acceptable solutions based on previous trials to avoid duplication of effort

• Obtain approval from MII for feasibility trial in one key city (e.g. BJ or SH) for two considerations

- control of trail time frame- early customer lock-in

• Obtain carrier utility right and compensation procedure that has nationwide application from MII, avoid case-by-case cooperation

• Obtain nationwide applicable service provider license based on spectrum allocation

• Advocate MII to set frequency usage fee based on number of operational base-stations, multiplied by a per base-station fee

Key Issues For The LMDS Business Objective CNC Imperatives deploying LMDS In 15 major cities

LMDS

CNCPriority

Highest/Immediate

High/Medium Term

Note 1: Unicom will start trial in ChengDu before EOY1999, expected to finish trial around June 2000.



OBTAIN REGULATORY SUPPORT FOR UTILITY PREVILEGEAvoid Case-by-case Local Negotiation to Ensure Quick Deployment

Fiber LocalAccess

CNCPriority

Highest/Immediate

High/Medium Term

Utility privilege & ROW

Compensation fees for digging

Building Access

Scheduling for future access and capacity

• Obtain specific regulation defining CNC’s utility right and obligation• Obtain specific regulation from MII for cooperation procedure with municipalities

for access- advocate MII to coordinate with Municipal Governments in 5 key cities for trial

of cooperation procedure- fix regulation based on trial for application in other cities

• Obtain regulation governing cooperation timeframe

• Advocate MII to coordinate with Municipal Governments in key cities for overall compensation produce and fee determination based on indicative indexes (e.g. Real Estate Index held by statistical institutions)

• Obtain specific regulation based on result of MII coordination, for application in other cities

• For Municipal Government controlled bridges and commercial buildings- advocate regulation to include specific provisions for

- obligation of building operator for conduit and equipment room access- conduit leasing fee scheme guideline- conduit provision timeframe

• For China Telecom controlled buildings and residential areas, advocate regulation for access similar to that of interconnection

• Advocate regulation for civil planning authorities to publish info and procedures in- conduit capacity and auctioning and fees- conduit ownership and transferring and fees- regulation should specify guideline for fee determination

Key Issues For The Fiber Local Access Business Objective CNC Imperatives In Building Fiber Access in 5 Key Cities



OBTAIN STRONG ENFORCEMENT AND FAIR SETTLEMENT RATETo Ensure Optimal Economics, Also Obtain Equal Access Provisions

Offnet Voice

CNCPriority

Highest/Immediate

High/Medium Term

Interconnect Enforcement

Account Settlement

Equal Access

• Advocate serious punishment clauses that are adhered to by all players and geographies, overseen by independent party

• Advocate for specific regulation for access pricing based on incremental cost of network, eliminate incumbent predatory charge for interconnection

• Advocate speed up of restructuring of incumbent’s organization to facilitate competition and cooperation

• Advocate for new settlement scheme different from the current settlement for fixed/mobile telecom network interconnection

- clarify with regulation making body that economics difference between IP and traditional calls

- advocate settlement rate lower than the current RMB0.14/min rate specified for traditional network interconnection

- use international benchmark and LRIC (Long run incremental rate)• Advocate completion of new settlement regulation before current trial stage ends

• Regulation for Prefixed Based equal access (e.g. same length prefix for all players) should be implemented within short time frame of less than 1 year

• Advocate regulation for technology investment requirement for all carriers to provide solution to identify caller

- enables user to avoid dialing long prefixes - enable enterprise users that demand differential service to have different

priority treatment

Key Issues For The Off-net Voice Business Objective CNC Imperatives In Offering Off-net Voice



SUMMARY: KEY REGULATORY RELATED CNC IMPERATIVES

Service licenses

Interconnect Enforcement

ROW and access

Frequency spectrum allocation and fees


Termination settlement

Equal Access

Numbering and portability

• Granting of International gateway license and clarification of CNC full service license• Clarification of equal interconnect privilege for IP broadband network (e.g. CNC’s)

• Serious punishment clauses that are adhered to by all players and geographies, oversaw by independent party

• Access pricing based on incremental cost of network, eliminate incumbent predatory charge for interconnection

• Restructuring of incumbents organization to facilitate competition and cooperation

• Specific regulation defining new telecom entrants’ utility right and obligation, and cooperation procedure with municipalities for access

• Overall compensation settlement produce and amount determination based on indicative indexes (e.g. Real Estate Index held by statistical institutions)

• Specific allocation of 25-38GHz spectrum for LMDS applications• Approval of six-month CNC LMDS trial in target city e.g. BJ or SH• Specific procedures for occupied frequency spectrum reallocation/migration• Guidelines and procedures for local frequency resource allocation and fees

• Transparent USO contribution regulation, eliminate indirect subsidy by higher price

• Accounting separation of incumbent along business line and geography• Reporting and accounting procedure for Cost Based Settlement

• Specific regulation governing responsibility and obligation for investment in equal access solutions

• Public number resource allocation/auction/ transfer procedures

Key issues CNC imperatives, key areas to advocate

CNCPriority

Highest/Immediate

High/Medium Term



CONTENT


Regulatory overview

Market overview


Business models

Next steps



KEY FINDINGS IN MARKET ASSESSMENT (I)

1998 telecom market size estimated at RMB 239 BN, grow at 19% CAGR to RMB 676 BN in 2004

• DLD/ILD voice at RMB 67 BN, with 6% CAGR growth to RMB 93 BN in 2004

• Total datacom at RMB 24 BN, with 36% CAGR growth to RMB 154 BN in 2004

Offnet voice (IP-phone) represents the major opportunity near-term, market size passing 30% volume by year 2004; but window for CNC closing as competition intensifies and price declines

Datacom growth solid mid-long term, fueled by emerging services (conservatively estimated to be over 20% of total datacom by 2004)

Geographically, demand highly concentrated in top cities

• Voice market 199 Bn in year 1998, 64% in top 60 cities

• Data market 24 Bn in year 1998, 46% in top 4 cities



KEY FINDINGS IN MARKET ASSESSMENT (II)

Business customer consumes 54% of voice market, 97% of data market

• Large, medium enterprises are bulk users in the business sector (55% of Toa voice, >95% of total data)

• Financial services, high tech, professional services, int'l trade, and top general manufacturing firms identified as major telecom

• Telecom service quality and service levels are the key purchasing criteria among key (large and medium)customers

Carrier market at RMB 15 BN in 1998, grow at 10% CAGR to RMB 27 BN in 2004

• ISP and mobile the main carrier segments: over 90% of total carrier market



CONTENT


Regulatory overview

Market overview

• Demand forecast

• Geographic segmentation

• Customer segmentation


Business models

Next steps



DEMAND MODELING METHODOLOGY

Product AProduct A

CURRENT MARKET SIZE

• By product

Product BProduct B

Product CProduct C

.

.

.

Driver 1Driver 1

Driver 2Driver 2

Driver 3Driver 3

Growth drivers

Forecast using• Historical trend• Foreign benchmark• China-specific adjustment

Forecast using• Historical trend• Foreign benchmark• China-specific adjustment

Product AProduct A

Product BProduct B

Product CProduct C

.

.

.

Driver 1Driver 1

Driver 2Driver 2

Driver 3Driver 3

FUTURE MARKET SIZE

• By product

IterationsIterations

Iterations/ verify modelIterations/

verify model

Share assumptions by product by year• Competitive environment• Foreign benchmark• Geographic coverage

CNC REVENUE by product

Fill in gapsFill in gaps

Breakdown to growth drivers, test formulae/ relationship

Breakdown to growth drivers, test formulae/ relationship



2004 TELECOM MARKET PROJECTED TO BE RMB 676 BNData And Internet Services Are The Growth Engine Going Forward

0

100

200

300

400

500

600

700

1998 1999 2000 2001 2002 2003 2004

Data(2)

Internet(3)

Other (4)

(RMB Bn)

99’-04’CAGR (%)

Voice (1)

Data (2)

Internet (3)

Other (4)

55%

10% 0%35%

239

Total

Voice (1)

(1) Voice services include local, domestic long-distance (on-net & off-net), and international long distance (on-net & off-net, including Hong Kong, Macau and Taiwan)(2) Data services include leased lines (mobile and paging operators, ISPs & business) and access ports(3) Internet services include internet access (broadband & narrowband), web hosting / collocation, and other emerging services(4) Other services include the sale and lease of dark fiber / conduits, mobile, and pagingSource: BCG analysis

312

363

441

506

587

676

10%

25%

102%

23%

19%

48%

9% 1%42%

46%

9% 2%43%

41%

10% 3%45%

39%

11% 5%45%

36%

12% 7%44%

34%

13%10%43%

Telecom Market Size



1998 TELECOM MARKET IS RMB 239 BN

0

50

100

150

200

250

Voice services Data and Internetservices

Other services

Market Size(RMB Bn)

Local (63)

DLD (48)

ILD (18)

Leased lines(0) (23)

Internet access (1) Mobile (69)

Paging (15)

97’ - 99’ CAGR

(0) Estimated(1) Voice services include local, domestic long-distance (on-net & off-net), and international long distance (on-net & off-net, including Hong Kong, Macau and Taiwan)(2) Data services include leased lines (mobile and paging operators, ISPs & business) and access ports; leased lines market estimated with CNC’s team inputs(3) Internet services include internet access (broadband & narrowband), web hosting / collocation, and other emerging services(4) Other services include the sale and lease of dark fiber / conduits, mobile, and pagingSource: China Telecom annual reports; CNC team inputs; BCG analysis

(1)

(2) (3)

(4)

38%

23%

20%

Overall - 27%

Backup



MARKET FORECASTBackup

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(RMB B)

VOICE SERVICESLocal 63.39 74.30 85.62 97.38 109.57 122.16 135.16 148.52 162.19 176.09 190.15 DLD 48.47 55.35 59.83 64.55 68.79 73.95 79.79 85.54 91.53 97.69 103.94

On-Net 48.47 54.81 57.75 60.46 62.84 64.72 68.57 72.55 76.65 80.86 85.17 Off-Net / VoIP - 0.53 2.08 4.09 5.96 9.22 11.22 12.99 14.88 16.83 18.77

ILD 18.30 15.90 14.75 13.44 12.01 11.02 10.30 9.53 8.95 8.40 7.87 On-Net 18.30 15.73 14.14 12.43 10.66 9.41 8.62 7.79 7.18 6.60 6.07 Off-Net / VoIP - 0.17 0.60 1.01 1.35 1.61 1.69 1.74 1.78 1.80 1.80

International Termination - 4.56 4.78 4.80 4.24 4.29 4.12 3.73 3.34 2.94 2.54 Traditional - 4.33 4.24 3.96 3.23 3.01 2.68 2.24 1.84 1.47 1.14 IP - 0.23 0.54 0.84 1.01 1.29 1.44 1.49 1.50 1.47 1.40

Subtotal 130.16 150.10 164.98 180.16 194.61 211.42 229.38 247.32 266.00 285.12 304.51 % of Total 55% 48% 46% 41% 39% 36% 34% 32% 28% 26% 23%

DATA SERVICESLeased Lines 23.26 29.21 32.56 46.12 57.55 71.61 86.41 102.13 112.34 121.58 129.43

Mobile Operators 14.14 16.19 15.35 16.97 17.90 19.19 20.04 20.46 20.89 21.33 21.78 Local 11.31 12.95 12.28 13.58 14.32 15.36 16.03 16.37 16.71 17.07 17.43 Backbone 2.83 3.24 3.07 3.39 3.58 3.84 4.01 4.09 4.18 4.27 4.36

ISPs 0.57 1.18 1.64 2.35 3.49 5.16 6.50 8.12 10.11 12.54 15.50 Broadband - - 0.01 0.08 0.27 0.90 1.98 3.66 6.54 9.97 13.35 Narrowband / Dial-Up 0.57 1.18 1.63 2.27 3.22 4.26 4.52 4.47 3.57 2.56 2.14

Paging 0.61 0.59 0.57 0.57 0.59 0.60 0.61 0.62 0.63 0.64 0.65 Business 7.94 11.26 15.00 26.22 35.57 46.66 59.26 72.92 80.70 87.06 91.50

Access Ports - - - 0.02 0.06 0.13 0.26 0.46 0.77 1.16 1.72 Subtotal 23.26 29.21 32.56 46.13 57.61 71.74 86.67 102.59 113.11 122.74 131.15 % of Total 10% 9% 9% 10% 11% 12% 13% 13% 12% 11% 10%

INTERNET SERVICESInternet Access 1.01 2.53 5.38 8.43 15.34 23.62 35.29 54.16 104.74 156.30 221.97

Business 0.20 0.51 2.04 3.74 9.33 15.30 25.45 42.66 89.80 136.97 197.56 Broadband - - 1.21 2.58 7.88 13.34 23.28 40.40 87.54 134.66 195.34 Narrowband / Dial-Up 0.20 0.51 0.83 1.16 1.45 1.95 2.17 2.25 2.26 2.31 2.21

Residential 0.81 2.02 3.34 4.69 6.01 8.32 9.84 11.50 14.94 19.33 24.41 Broadband - - - 0.04 0.09 0.35 0.75 1.35 3.45 7.99 12.97 Narrowband / Dial-Up 0.81 2.02 3.34 4.65 5.92 7.98 9.09 10.15 11.49 11.34 11.44

Web Hosting / Collocation - 0.07 0.35 0.90 1.92 3.54 5.36 7.72 10.33 13.07 16.24 Other Emerging Services - - 2.33 4.61 8.48 15.25 26.83 49.09 97.18 155.14 223.66

Subtotal 1.01 2.60 8.05 13.95 25.74 42.41 67.49 110.97 212.25 324.51 461.87 % of Total 0.4% 0.8% 2% 3% 5% 7% 10% 14% 23% 29% 35%

MOBILE & PAGINGMobile 69.33 115.90 143.36 186.90 211.93 244.37 274.30 301.17 330.68 363.08 398.64 Paging 15.02 14.19 13.59 13.45 13.90 14.16 14.42 14.69 14.96 15.24 15.52

Subtotal 84.35 130.10 156.95 200.36 225.83 258.53 288.72 315.86 345.64 378.31 414.16 % of Total 35% 42% 43% 45% 45% 44% 43% 41% 37% 34% 32%

OTHER SERVICESDark Fiber / Conduits - - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63

Sale - - - 0.13 0.22 0.37 0.59 0.90 1.32 1.46 1.89 Lease - - - 0.03 0.05 0.08 0.14 0.23 0.35 0.51 0.74

Subtotal - - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63 % of Total 0% 0% 0% 0.04% 0.05% 0.08% 0.11% 0.15% 0.18% 0.18% 0.20%

TOTAL 238.78 312.01 362.54 440.76 504.06 584.56 672.99 777.87 938.66 1,112.66 1,314.32

MARKET SIZE



BACKUP: DRIVERS AND ASSUMPTIONSProduct Drivers Sub-Drivers Assumptions Rationale

Population 1.3 B by 2004 (CAGR = 0.9%, 1999-2004) EIU forecastTeledensity around 15% by 2004 follow historical growthGDP growth RMB 8,000 B in 1998, up to RMB 11,000 B in 2004 EIU forecastMOU growth in line with GDP growth foreign benchmark

Price Expected trend an average rise of 3% per year foreign benchmark (with no major tariff rebalancing)GDP growth RMB 8,000 B in 1998, up to RMB 11,000 B in 2004 EIU forecast

MOU growthorganic growth in line with GDP;extra ~2% growth due to price elasticity

foreign benchmark

Price Expected trend an average drop of 10% per year foreign benchmarkGDP growth RMB 8,000 B in 1998, up to RMB 11,000 B in 2004 EIU forecast

MOU growthorganic growth in line with GDP;extra ~2% growth due to price elasticity

foreign benchmark

Price Expected trend an average drop of 15% per year foreign benchmark# Internet subscribers 2 M in 1998, up to 45 M in 2004 Yankee Group forecastBroadband penetration 0% in 1999, up to 16% in 2004 Morgan Stanley report for USA; assumed a 5-year lag

Average Usage15 hrs / month in 1998,up to 20 hrs / month in 2004

foreign benchmark, various forecast

Price Expected trend historical (?), foreign benchmarkGrowth of total # lines in line with GDP growthBandwidth upgrade ~10% upgrade to next bandwidth level each year Taiwan benchmark

Price Expected trend98-99: ~30% drop, converge toprice drop of 7% per year

historical, OECD benchmark

# LinesGrowth of # mobile /Internet subcribers

93 M mobile subscribers and45 M Internet subscribers by 2004

various forecasts (Yankee Group, Paul Budde,Warburg Dillon Read, Lehman Brothers)

Price Expected trend98-99: ~30% drop, converge toprice drop of 7% per year

historical, OECD benchmark

Growth of total # ports CNC's numbers foreign benchmark (Williams ?)Bandwidth upgrade CNC's numbers foreign benchmark (Williams ?)

Price Expected trend CNC's numbers foreign benchmark (Williams ?)Growth of total # ports CNC's numbers foreign benchmark (Williams ?)Bandwidth upgrade CNC's numbers foreign benchmark (Williams ?)

Price Expected trend CNC's numbers foreign benchmark (Williams ?)# Total Companies in line with GDP growth

% Active Web Pages0% in 1998, up to 20% (for small companies)and 92% (for large companies) in 2004

Morgan Stanley report for USA; assume a 5-year lag

% Outsourcing0% in 1998, up to 100% (for small companies)and 55% (for large companies) in 2004

Morgan Stanley report for USA; assume a 5-year lag

PriceRMB 370 per month for small companies, up toRMB 90k per month for large companies, in 1998

US benchmark

GDPRMB 8,000 B in 1998, up toRMB 11,000 B in 2004

EIU forecast

Foreign / US B2B Portal Market 2% in 1998, up to 9% in 2004 foreign benchmark; assume a 5-year lagOther Emerging Services % of Data Market foreign benchmark

# Mobile Subscibers 24 M in 1998, up to 93 M in 2004 Paul Budde, Warburg Dillon Read, Lehman Brothers forecast

GDP growthRMB 8,000 B in 1998, up toRMB 11,000 B in 2004

EIU forecast

MOU growth foreign benchmarkPer Minute Charge in line with DDD price trend

MOU Per Subscriber

# Lines

# Ports

Web Hosting

Portal - B2B

Mobile

Leased Lines -Business

# Lines

Leased Lines -Carrier

# Lines

MOU Per Line

MOU

Local

# Customers

Internet Access

# Subscribers

DDD

IDD

MOU

Access Ports

Leased Dark Fiber /Conduits

BackupTo be updated



DATA AND INTERNET SERVICES SHOW SUBSTANTIAL POTENTIAL FOR GROWTH: 37% CAGR 1999-2004

0

20

40

60

80

100

120

140

160

1998 1999 2000 2001 2002 2003 2004

Leased Lines - ISP

Leased Lines - Business

Market Size

(RMB Bn)

24

Total

Leased Lines - Mobile

99’-04’CAGR

Access Ports

Internet Access

Web Hosting / Collocation

Other Emerging Services

Leased Lines - Paging3241

60

83

114

154

4%

41%

1%

39%

152%

69%

136%

(1)

(1) 01’-04’ CAGR(2) 00’-04’ CAGRSource: CNC team inputs; foreign benchmarks; BCG analysis

84%(2)

37%



EMERGING DATA SERVICES WILL ACCOUNT FOR MORE THAN 20% OF THE TOTAL DATA SERVICES MARKET BY 2004

Existing data services market

Emerging data services market

Total data services market

24 32 3855

7395

122

0

50

100

150

98 99 00 01 02 03 04

RMB Bn

Year

32

1910

63

0.10

10

20

30

40

50

98 99 00 01 02 03 04

RMB Bn

Year

122

95

73

55383224

154

114

83

60

4132

0

40

80

120

160

98 99 00 01 02 03 04

RMB Bn

Year

99’-04’CAGR

Emerging

Existing

99’-04’CAGR

99’-04’CAGR

31%

238%

37%

Source: CNC team inputs; foreign benchmarks; BCG analysis



THE EMERGING SERVICES MARKET IS EXPERIENCING TREMENDOUS GROWTH

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008

Market size (RMB Bn)

Estimated emerging

data services

Portal

Broadband - contentBroadband - network applicationsIP VPN

Web Hosting /Collocation(1)

(1) Listed separately in CNC market analysisSource: BCG estimates

Examples

Backup



Emerging services Opportunities and challenges for CNCExpected market size

in 2004 (RMB BN)

Web hosting / collocation(1)

• Fit with CNC’s strategy as a leading backbone provider• Build relationship with large businesses• Need to develop specific capabilities, e.g. e-commerce applications,

security• May lead to future application hosting opportunities

5

Portal

• B2B represents huge business values; opportunities to build relationship with large businesses; but first-mover advantage is important, competition may be fierce and market will eventually be dominated by a few big players

• B2C portals’ target are end consumers; may not be the most profitable option for CNC

16(B2B: 5

B2C: 11)

Broadband content• Content development not our priority• May form strategic partnerships with content providers; improve

customer retention2

Total emerging services market expected to reach RMB 32B by 2004, or more than 20% of the total data / Internet services market

Total emerging services market expected to reach RMB 32B by 2004, or more than 20% of the total data / Internet services market

IP VPN

• Fit with CNC’s strategy as a leading backbone provider• Part of a complete product bundle (including Internet access, web

hosting); help to build relationship and reduce churn• Need to address concerns including network security, end-to-end service

1

(1) Listed as “existing’ service in CNC market analysisSource: international benchmarks; Morgan Stanley; BCG analysis

Broadband network applications(e.g. video telephony)

• Fit with CNC’s strategy as a leading backbone provider• Need to address issues including network performance and QoS-level

guarantee1

A NUMBER OF EMERGING SERVICES WILL BECOME ATTRACTIVE OPTIONS OF PRODUCT OFFERINGS FOR CNC

Backup



CARRIER: EXPECTED SHARES

Competitor Key strengths / weaknesses2000 2004

Expected share

CNC

• IP/DWDM backbone, bandwidth and cost leadership

• Strike for excellent service and value for money

• Weakness: late-starter

<1%

7%• mobile bb

26% • addr. ISP

15%

China Telecom• Voice services

• Satellite communications

• Extensive existing backbone• Existing local access, captive demand• Weakness: legacy system makes it difficult to

cut down costs

80% 65%

• Existing coverage / user base• Weakness: bandwidth constraint

5% 5%

Unicom

• Early mover to market• Nearly complete coverage in 150 cities• Captive mobile demand• Weakness: In-fighting board, acrimonious

relationship with CT

10% 20%

Jitong

• Solution primarily based on VSAT coverage, bandwidth constraint

• Existing bandwidth primarily occupied by own IP phone service

• Questionable excess bandwidth for resale

5% 3%

Rationale / Benchmark

Mobile operatorsA high percentage of the leased line demand in local lines (80%), but CNC will have a relatively low share in local lines (~1%). For backbone, expect by 2004 about 40% will be IP-based and CNC will have a 65% share (as a dominant IP-backbone provider)

ISPsExpect by 2004 about 70% of the market will be addressable (instead of being captive by China Telecom). Since there will probably be at least 5 to 6 backbone operators at that time, we expect about a 15% share out of this.

Paging operatorsNot CNC priority

Source: CNC team inputs; BCG analysis



LARGE / MEDIUM BUSINESSES: EXPECTED SHARES


Expected share

CNC

• Multiple alternatives to ensure rollout/coverage in local access to targeted customers

• Able to capitalize on different local practice at CT , and partnership with MOR

• Need to build up capability & share quickly

1% 15%



• Incumbent: existing customer base• Extensive coverage in local loop• Weakness: service back log, bureaucracy

drags service quality• Legacy system in backbone, hinders ability to

offer lower price/high bandwidth services

74% 55%

• Coverage/bandwidth limited• Weakness: bandwidth constraint in later years

5% 5%

Unicom• Early to market, built local access in TJ/CQ/SC• Weakness: continuous management problems

10% 15%

Jitong

• Aggressively going after market from current ISP base

• Weakness: bandwidth constraint (VSAT-based solution)

10% 10%


In 2000, CNC coverage and time-to-market limits share achievable

By 2004, expect CNC coverage of over 80% of the business demand, with overall share of around 20% in the business leased lines and Internet access markets.

Also expect to aggressively go into the web hosting/ coll, reaching 15% share by 2004. For other emerging data and Internet services, expect to get a 5% share due to the nature of more fragmented competition.




OFF-NET VOICE: EXPECTED SHARES

Competitor Key strengths / weaknesses

CNC

• Low cost based on new technology• Innovative & motivated management team• Favorable regulatory backings• Weakness: late to market, IP voice the only

consumer oriented product (lacks synergy)


• Incumbent / early entrant• Existing coverage• No interconnect hassle• Weakness:

- higher cost position based on existing infrastructure

- cannibalize circuit voice services

Unicom

• Early to market• Synergy with mobile business• Weaknesses:

- initial stage unclear management focus- Acrimonious relation with CT

Jitong

• Quick and successful launch in 1999 ,early to market

• Aggressive marketing, high discount to distributors

• Weakness: no long-term backbone solution- satellite network may affect voice quality

(latency)

2000 2004

Expected share

15% 28%

55% 40%

15% 20%

15% 12%


In 2000, CNC deployment plan will not be as aggressive as our competitors; only about 60% of the IP voice market will be addressable. CNC will have about a 25% market share in these (addressable) areas.

By 2004, expect to cover all key areas. But CNC share will dropp from the peak of 33% in 2002 due to more competitors entering.

Benchmark:In Hong Kong, 3 new entrants with call-back: 20-30% share in 2 years; i.e., incumbent <=70%; half a year after ISR, incumbent has <50% share




SHARE ASSUMPTIONS

Backup

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

VOICE SERVICESLocal 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Geographic Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Share within Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

DLDOn-Net 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%


Off-Net / VoIP 0% 1% 15% 22% 30% 30% 28% 25% 23% 20% 18%Geographic Coverage 0% 80% 60% 75% 90% 100% 100% 100% 100% 100% 100%Share within Coverage 0% 1% 25% 29% 33% 30% 28% 25% 23% 20% 18%

ILDOn-Net 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%


Off-Net / VoIP 0% 1% 15% 22% 30% 30% 28% 25% 23% 20% 18%Geographic Coverage 0% 80% 60% 75% 90% 100% 100% 100% 100% 100% 100%Share within Coverage 0% 1% 25% 29% 33% 30% 28% 25% 23% 20% 18%

International TerminationTraditional 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%


IP 0% 0% 12% 19% 27% 30% 31% 31% 32% 32% 33%Geographic Coverage 0% 80% 60% 75% 90% 100% 100% 100% 100% 100% 100%Share within Coverage 0% 0% 20% 25% 30% 30% 31% 31% 32% 32% 33%

DATA SERVICESLeased Lines

Mobile OperatorsLocal 0% 0% 0% 0.1% 0.3% 0.5% 0.8% 1.1% 1.5% 1.9% 2.4%

Addressable % 30% 31% 100% 100% 100% 100% 100% 100% 100% 100% 100%IP % 0% 5% 11% 18% 24% 30% 35% 40% 45% 50% 55%Share within Addressable and IP 0% 0% 0% 1% 1% 2% 2% 3% 3% 4% 4%

Backbone 0% 0% 0.9% 8.0% 15% 21% 26% 27% 28% 28% 27%Addressable % 30% 31% 100% 100% 100% 100% 100% 100% 100% 100% 100%IP % 0% 0% 1% 10% 20% 30% 40% 45% 50% 55% 60%Share within Addressable and IP 0% 0% 90% 80% 75% 70% 65% 60% 55% 50% 45%

SHARE 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

ISPsBroadband 0% 0% 0.6% 5% 9% 12% 13% 14% 15% 15% 16%

Addressable % 30% 30% 38% 46% 53% 61% 69% 77% 84% 92% 100%Share within Addressable 0% 0% 2% 12% 16% 20% 19% 18% 18% 17% 16%

Narrowband / Dial-Up 0% 0% 0.6% 5% 7% 10% 9% 8% 7% 5% 3%Addressable % 30% 30% 38% 46% 53% 61% 69% 77% 84% 92% 100%Share within Addressable 0% 0% 2% 10% 13% 16% 13% 11% 8% 5% 3%

Paging 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Addressable % 70% 70% 100% 100% 100% 100% 100% 100% 100% 100% 100%Share within Addressable 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Business 0% 0% 1% 5% 9% 14% 17% 21% 22% 24% 25%Addressable % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Geographic Coverage 0% 0% 30% 47% 63% 80% 82% 83% 85% 87% 88%Share within Coverage 0% 0% 2% 10% 14% 18% 21% 25% 26% 28% 29%

Access Ports 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100%

INTERNET SERVICESInternet Access

BusinessBroadband 0% 0% 2% 10% 14% 18% 21% 25% 26% 28% 29%Narrowband / Dial-Up 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

ResidentialBroadband 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Narrowband / Dial-Up 0% 0% 0% 1% 3% 4% 6% 7% 8% 9% 9%

Web Hosting / Collocation 0% 0% 0% 5% 8% 10% 13% 15% 16% 17% 17%

Other Emerging Services 0% 0% 0% 1% 2% 4% 6% 7% 8% 9% 10%

MOBILE & PAGINGMobile 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Paging 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

OTHER SERVICESDark Fiber / Conduits

Sale 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100%Lease 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100%

SHARE



CNC REVENUE PROJECTIONBackup

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(RMB B)

VOICE SERVICESLocal - - - - - - - - - - DLD 0.004 0.312 0.889 1.769 2.807 3.125 3.284 3.379 3.390 3.298

On-Net - - - - - - - - - - Off-Net / VoIP 0.004 0.312 0.889 1.769 2.807 3.125 3.284 3.379 3.390 3.298

ILD 0.001 0.091 0.219 0.401 0.489 0.470 0.440 0.404 0.362 0.316 On-Net - - - - - - - - - - Off-Net / VoIP 0.001 0.091 0.219 0.401 0.489 0.470 0.440 0.404 0.362 0.316

International Termination - 0.065 0.157 0.272 0.392 0.445 0.467 0.476 0.472 0.456 Traditional - - - - - - - - - - IP - 0.065 0.157 0.272 0.392 0.445 0.467 0.476 0.472 0.456

Subtotal 0.006 0.467 1.265 2.442 3.688 4.040 4.191 4.259 4.225 4.070 % of Total 100% 76% 37% 30% 23% 16% 11% 7% 5% 3%

DATA SERVICESLeased Lines - 0.127 1.616 3.919 7.942 12.127 17.358 20.615 23.914 27.010

Mobile Operators - 0.028 0.285 0.575 0.883 1.167 1.287 1.400 1.505 1.602 Local - - 0.013 0.038 0.077 0.125 0.182 0.251 0.332 0.426 Backbone - 0.028 0.272 0.537 0.806 1.042 1.105 1.149 1.173 1.176

ISPs - 0.009 0.108 0.246 0.526 0.677 0.879 1.208 1.659 2.171 Broadband - 0.000 0.004 0.023 0.110 0.261 0.514 0.967 1.533 2.114 Narrowband / Dial-Up - 0.009 0.103 0.223 0.416 0.415 0.365 0.241 0.126 0.057

Paging - - - - - - - - - - Business - 0.090 1.224 3.098 6.532 10.284 15.192 18.007 20.750 23.236

Access Ports - - 0.017 0.058 0.134 0.263 0.462 0.770 1.165 1.721 Subtotal - 0.127 1.633 3.977 8.076 12.390 17.821 21.385 25.079 28.730 % of Total 0% 21% 47% 48% 51% 50% 46% 35% 29% 24%

INTERNET SERVICESInternet Access - 0.024 0.305 1.231 2.654 5.446 10.811 23.869 37.995 57.219

Business - 0.024 0.258 1.083 2.335 4.946 10.101 22.978 37.031 56.161 Broadband - 0.024 0.258 1.083 2.335 4.946 10.101 22.978 37.031 56.161 Narrowband - - - - - - - - - -

Residential - - 0.047 0.148 0.319 0.500 0.710 0.891 0.964 1.058 Broadband - - - - - - - - - - Narrowband - - 0.047 0.148 0.319 0.500 0.710 0.891 0.964 1.058

Web Hosting / Collocation - - 0.045 0.144 0.354 0.670 1.158 1.628 2.156 2.802 Other Emerging Services - - 0.046 0.170 0.610 1.677 3.436 7.774 13.963 22.366

Subtotal - 0.024 0.396 1.545 3.619 7.793 15.405 33.271 54.114 82.387 % of Total 0% 4% 11% 19% 23% 31% 40% 55% 63% 70%

MOBILE & PAGINGMobile - - - - - - - - - - Paging - - - - - - - - - -

Subtotal - - - - - - - - - - % of Total 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

OTHER SERVICESDark Fiber / Conduits - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63

Sale - - 0.13 0.22 0.37 0.59 0.90 1.32 1.46 1.89 Lease - - 0.03 0.05 0.08 0.14 0.23 0.35 0.51 0.74

Subtotal - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63 % of Total 0% 0% 4% 3% 3% 3% 3% 3% 2% 2%

TOTAL 0.01 0.62 3.45 8.24 15.84 24.96 38.55 60.58 85.40 117.82

REVENUE



2000 2004

CNC share CNC share

Market growth

Market growth

Market size RMB 10B

RELATIVE ATTRACTIVENESS OF DIFFERENT PRODUCT CATEGORIES CHANGES IN THE NEXT FEW YEARS

80%

40%

0%

0% 15% 30%0% 15% 30%

3000%

50%

0%

300%

Emerging data

IP voice

Existing datacom

On-net voice

Carrier

On-net voice

Carrier

Emerging data

Existing datacom

IP voice



CONTENT


Regulatory overview

Market overview

• Demand forecast




Business models

Next steps



CHINA TELECOM MARKET CONCENTRATED IN TOP CITIESTop 60 Cities Account For 64% of the Voice & Data Market

1998 Accumulated Revenue (RMB Bn )

(1) Excluding paging of RMB 14 BNSource: Pyramid Report; China Statistics Yearbook; BCG analysis

BJ

GZ

SZ Next11 cities

Next45 cities

223

SH

China Total(1)

0

50

100

150

200

250

0 10 20 30 40 50 60 70



IP / OFF-NET VOICE REPRESENTS SUBSTANTIAL OPPORTUNITY IN NEAR-TO-MEDIUM TERM

0

5

10

15

20

25

99 00 01 02 03 04 05 06 07 08

IP Voice Market Size (RMB Bn)

0

5

10

15

20

25

30

35

99 00 01 02 03 04 05 06 07 08

CNC’s Expected Share (%)

0

1

2

3

4

5

99 00 01 02 03 04 05 06 07 08

Estimated CNC Revenue and Profit (RMB Bn)

Revenue

Likely Profit(1)

YearYearYear

Market Share Revenue / Profit

• CNC’s share drops after 2002 when the IP voice market becomes more competitive

(1) Estimated using a profit margin of 30% in 1999 down to 10% in 2008; based on foreign benchmarksSource: CNC team inputs; BCG analysis

• Profit margin drops as competition intensifies and price decreases

• IP voice continues to replace traditional circuit voice in DLD & ILD



FOR VOICE MARKET: IDD/MOBILE CONSUMPTION MAJOR SOURCE OF REVENUE IN TOP CITIES

Mobile

SH BJ GZ SZ Other 11 cities

45 other cities Rest of China

Source: China Telecom; BCG estimate

36%

1998 voice market size(RMB Bn)

26%11%5%7%7%8%

Local

DLD

IDD

3.1 2.31.6

719.4 30

2.92.4

2.3

0.40.3

4.4

13.823

3.2

19.3

2.7

15.1

1.8

7.8

2.76

7.4

2.4

7.6

2.8

5.4

2.8

6.8

Backup

Total: 199



21

0

13

16

0

5

10

15

20

25

30

35

0 10 20 30 40 50 60 70 80

GEOGRAPHICALLY EVEN MORE CONCENTRATED FOR DATACOM46% Revenue in Top 4 Cities

1998 Data Communications Revenue (RMB Bn )

Source: Pyramid Report; China Statistics Yearbook; BCG analysis

Backup

Next 11 cities

Next45 cities

Top 4 cities

China Total24

600+



GEOGRAPHIC SEGMENTATION

Top 4

Next 11(1)

45 others(2)

Beijing, Shanghai, Guangzhou, Shenzhen

Fuzhou, Xiamen, Shijiazhuang, Zhengzhou, Wuhan, Changsha, Nanjing, Xuzhou, Jinan, Tianjin, Hangzhou

Hefei, Chongqing, Foshan, Jiangmen, Shantou, lanzhou, Guilin, Quanzhou

Nanning, Haikou, Baoding, Daqing, Harbin, Qiqihar, Guiyang, Handan,

Tangshan, Luoyang, Xiangfan, Changchun, Jilin, Nantong, Suzhou, Nanyang,

Changzhou, Wuxi, Yangzhou, Nanchang, Anshan, Dalian, Shenyang, Chengdu,

Jining, Taizhou, Qingdao, Weifang, Weihai, Yantai, Taiyuan, Xian,

Urumqi, Kunming, Ningbo, Shaoxing, Wenzhou

Backup

Sample list: actual names of city may differ

(1) According to CNC plan (on CNC backbone)(2) Ranked by total GDP and GDP/cap, expected to correlate with telecom spending level



TOP CITIES BOAST HIGHEST TELECOM SPENDING PER CAPITA1998 Annual Telecom Spending Per Capita

RMB /cap

SH

BJ

GZ

SZ (1)

11 cities

45 cities

Mobile

525

444

1135

6721

117

60

Backup

IDD DLD Local

ROC 22

233

256

397

2351

30

12

4

176

200

348(2)

348(2)

66

55

26

240

187

239(2)

239(2)

105

77

34

(1) Large non-local/business traveler population base(2) GZ, SZ estimated under same assumption



CONTENT


Regulatory overview

Market overview

• Demand forecast




Business models

Next steps



BUSINESS CUSTOMERS REPRESENT 54% OF VOICE MARKET, 97% OF DATA MARKET

Local

1998 Telecom revenue (RMB Bn )

Residential

Business

DLD IDD Mobile Paging Leased lines

Internet

Voice Data

35

28

22

27

3

15

32

37

7

8

23

0.8

0.2

63 49 18 69 15 23 1

Source: China Telecom; Pyramid research

Total237



4 BUSINESS CUSTOMER TIERS ARE IDENTIFIED ACCORDING TO MONTHLY TELECOM SPENDING

Tier ranking

Typical company profileCompany examples

Typical monthly telecom spending per office (RMB K)

1

• Top high tech firm• Top international trade • Top financial institutes• Top news agency and ministry info center

Ericsson, Motorola, Sinochem, Bank of China, XingHua News Agent

500-1000

2

• Financial services companies (regional HO, foreign banks)

• FIE/JV professional services companies (e.g. consulting firms, market research firms, law firms)

• Medium size international trade firms and advanced general manufacturing companies (e.g. active application of ERP to improve efficiency, several locations in China)

ABN AMRO, Pudong Development Bank, BCG, Xi'an Janssen, Tung Tai Food

100-500

3

• Local high tech firms (usu. 100-500 employees)• JV professional services companies (usu. Around

50-100 employees)• General manufacturing firms ( typically. 100-500

employees)

SH Hua Teng, Nestle, Zhen Fong Electronics,Gillette

10-100

• Small companies4 2-10



EACH TIER HAS DISTINCT NEEDS AND EXPECTATIONS

Tier Ranking Most Important telecom needs

• Increasing bandwidth• Increasing network coverage• Voice/data system integration• Improving the ability to using

the internet for eCommerce

• Increasing bandwidth• Increasing network coverage• Introducing new services to

improve efficiency

• Cost management• Increasing bandwidth• Handling growing demand for

internet access• Installing and managing

LAN/WAN

• Cost management• Increasing bandwidth

Products/services needed

• Video conferencing• lower cost VPN• better link of wireless and fixed

line phones(1)

• VPN• Video conferencing• High speed data access to the

office from home• Redundancy, to reduce

dependence on China Telecom( esp. FS firms)

• Lower cost, more reliable access to the foreign countries

• Easy adjustment of telecom usage• High speed internet access

• Telecom cost tracking system• High speed internet access

Service Level expectations

• Extensive access network coverage

• One stop, flexible services• Detailed service level

agreement (e.g. monthly downtime limit, on-site support time)

• More responsive support services (e.g. quick fix of leased line problems)

• Less lead time/ response time for telecom services (e.g. adding lines or bandwidth)

• Less down time for reliable email/data transmission

1

2

3

4

(1) Product/services CNC might not provide in near term



INDUSTRY TYPE AND CONSUMER TIER ARE HIGHLY CORRELATED

Financial Services

General Manufacturing

High Tech

Professional Services

InternationalTrade

Other industry

• local voice, DLD• local data, international data, most of which are real time• Potential needs from ecommerce business involvement

• local voice, DLD• local data for management systems, international leased line

(for FIE)

• Local voice, DLD, IDD (FIE)• local data transmission between HO and branches,

international leased line (for FIE)• Extranet, VPN

• local voice, DLD, IDD (FIE)• local data, international data(FIE)

• local voice, DLD, IDD• local data between HO and branches• Internet, Extranet for ecommerce

• local voice, (DLD)• dial up internet• no dedicated leased line

Tier 1Tier 2

Tier 2 (most FIE)Tier 3 (other advanced)

Tier 1,2 (top FIE)Tier 3 (local/medium)

Tier 2 (FIE)Tier 3 (local/medium)

Tier 1 (largest)Tier 2

Tier 3 or below

Industry Types Main Telecom Needs Typical Tier Ranking



LARGE AND MEDIUM ENTERPRISES REPRESENT 62% OF TELECOM SPENDING IN BUSINESS SECTOR

Over 95% For Data Services

48

43

16

16

Small(1)

(Tier 4 and below)

Voice (107) Data (23)

1998 Revenue (RMB Bn )

(1) Size definition according to China Statistics YearbookSource: China Telecom, Pyramid Research, China Statistics Consultants Co., China Statistics Yearbook, BCG estimate

6

1

Large(1)

(Tier 1,2,3)

Medium(1)

(Tier 3, Tier 4)

4,600

20

42

# of companies (‘000)

Total: 130



EXAMPLE: KEY INDUSTRIES AND COMPANY PROFILE

Company name

ABN amro bank

Gangao Security

Pudong development bank

Xi’an Janssen

Nestle

Advance Electrics

Ericsson (SH)

Ericsson (BJ)

Hua Teng

BCG

Horizon

Overseas trade

Company name

SH

BJ

BJ

Sinochem

East Net

Gubei Real Estate

BJ

SH

SH

SH

SH

SH

SH

SH

SH

SH

SH

SH

Tier ranking

2

2

2

2

3

3

2

1

3

2

4

2

1

N.A.

N.A.

Telecom spending RMB per m2/month

147

250

67

56

20

233

25

150

33

67

70

50

N.A.

N.A.

N.A.

Telecom spending RMB per/cap/month

3143

2000

1000

556

40

1750

240

2400

417

2000

538

167

N.A.

N.A.

N.A.Other

Trade

PS

HT

GM

FS

Backup

Info. high way BJ N.A. N.A. N.A.



A TYPICAL BUSINESS BUILDING GENERATES ~4.5 MM RMB TELECOM REVENUE PER MONTH

Backup

Typical Business Building# Company

(by type)

1~2 Tier 1

3~5 Tier 2

50-60Tier 3

~30Tier 4

5000m2

15000m2

4000m2

750

250

50

4

Typical Spending Per Month (K RMB)

1,500

3,000

120

=

=

=

(1) Gross Floor SpaceSource: BCG interview, BCG analysis

GFS(1): 30,000m2

Occupancy: 80%

Average in SH:3,000 (RMB K)

Total: 4,620(RMB K)

eitherxorx

x

x



INTERVIEWS CONDUCTED TO ASSESS CUSTOMER NEEDS AND TRENDS, TO COMPLEMENT AND VERIFY SECONDARY DATA

Identify key customer needs, ensuring CNC supplies what our customers need• Telecom needs in the coming 1 to 3 years• Expected growth in telecom spending

Verify assumptions on key customer segments• Typical customers’ profile (industry type, office size, # of employees, avg.

monthly spending, FIE/SOE, etc.)• Typical purchasing decision process/patterns

Test possibility and criteria for customers switching to CNC, hence CNC addressable market and plausible share in a building

• Main dissatisfactions toward current telecom service providers• What will make customers be willing to switch? What are their key

concerns regarding switching?

Estimate demand for typical business buildings, to enable local access economic modeling



IN DEPTH INTERVIEWS REVEAL SIGNIFICANT OPPORTUNITY FOR NEW ENTRANT TELCOS

Long process for CT to meet customer requirements, which is fast-growing

• On average, expecting 5-10%per account yearly growth in the expenditure on data services; key growth driver in data usage penetration in enterprises

• Demand for data services driven by the increasing needs for management tools (e.g. ERP), Internet access, eCommerce capability, etc.

Bandwidth usage for most large companies still relatively low

• A few leased lines; mostly 64-128kbps, only a few at 512kbps

• Would welcome higher bandwidth at reasonable cost

Major discontent is in response time and service quality

• Long lead time to install service, e.g. more than half a year for an international leased line

• Never inform consumers of service down-time, take an ‘intolerably long time’ to fix

• Big users don’t feel favorably treated when their inquiries processed with residential and small business users’ through a common service number 112

Hence price is not the primary factor for switching to CNC

• Quantified service level guarantee and excellent service quality are the key switching factors for big and medium size business users

Backup



SERVICE QUALITY & SERVICE LEVEL ARE THE KEY SWITCHING FACTORS

Especially for Tier I & 2 Customers

Switching Criteria

Product/Service quality

Service level

Price

Product offering

Relative maturity as telecom customer

Tier 1 Tier 2 Tier 3 Tier 4

Source: BCG interview

Impact on switching decision weak strong



CUSTOMER EXPECTING GROWTH IN DATA SERVICES EXPENDITURE

“We expect 5-10% increase each year in data services spending mainly because of the using of ERP and the pursuit of ecommerce opportunities.”

- Head of Communications, Sinochem

“Many things will drive up our telecom needs rapidly in the near future: the growth of the company size, the increasing traffic between HQ and branches, the increasing needs for product testing and development, and the development of ecommerce capability. I think our company’s data services expenditure will continue to grow at 5-10% per year.”

- Head of Communications &Network, Shanghai Hua Teng

“We are seeing our trader group expanding at very fast pace. Our telecom spending, especially data services spending, will definitely go up fast (at least more than 15% per year) if our business continues to grow.”

- Branch Manager, GangAo Securities

“Our current MIS system requires more frequent data transmission between sub-branches, branches and the HQ. We are replacing all dial-up with leased line and adding bandwidth. Telecom spending will thus increase.”

- IT DIV. Mgr., Pudong Development Bank

Backup



CUSTOMERS CAN BE WON OVER BY MEETING GROWTH NEED China Telecom’s Slow Pace and Long Cycle is Major Area of Discontent

ISPs seeking alternatives to CT Business Clients also frustrated

“ As we build up strong momentum in customer base growth, having the right capacity at the right time is critical. China Telecom, with their own network development plans, tends to starve us on capacity or to force us to pay in advance for excess capacity.”

- Founder, EastNet

“We want to build our own national brand, but the fact that it takes China Telecom two months every time we need an extra line makes us very difficult to have our own customers. We want another operator who can get us leased lines fast.”

- Manager, Div. Of Customer Develop, Information Highway (IHW)

“We’re are fretting over our customers’ complaint about increasing difficulty to access time critical information and perform trades. Our request for bandwidth upgrade were submitted to China Telecom months ago, nothing’s happening.”

- Branch Manager, GangAo Securities

“We need help to easily adjust our usage of telecom services, such as adding lines or bandwidth. CT’s not very responsive to our requests.”

-Head of Communications &Network, Shanghai Hua Teng

Backup



RESPONSE TIME AND MEASURABLE SERVICE QUALITY ARE DIFFERENTIATION FACTORS

Customers need quantifiable metrics

“We are not satisfied if the carrier simply gives us qualitative reports about downtime in general - We are interested in quantifiable, detailed MTBF(Mean Time Between Failure) and recovery time reports as measurement of service quality. So far China Telecom failed to deliver on it.”

- IT Manager, Ericsson

“When our Leased Line link is down, we need an expert at the other side to answer our specific questions. The 112 Customer Service number China Telecom provides for both residential and business customers merely adds frustration and delay.”

- IT Manager, Ericsson Beijing HQ

“As one of the biggest telecom users, we will certainly require favorable treatments, like bandwidth guarantee and priority in IP phone processing.”

- IT Manager, SinoChem

Key customers require specialized care

Backup



TELECOM SERVICE QUALITY AND SERVICE LEVELS ARE THE KEY PURCHASING CRITERIA AMONG KEY CUSTOMERS

One-stop, end-to-end solution desired Price is important, but not predominant

“Multiple carriers had approached us with various service propositions. Our answer is: We’re committed to sign up if it can give us one contact point for a total solution and service agreement.”

- IT Manager, Ericsson

“P&G has clear initiatives in building world wide VPN and driving eCommerce growth. When it comes to data infrastructure, what intolerable is the delay in contract arrangement for each of the building blocks.”

- Manager, Data & Computing Services, P&G

“Lower price may appear attractive. But we won’t consider using services any less reliable than CT’s services - even if they are of much lower price.”

- IT Mgr, Pudong Development Bank

“We are definitely more concerned with the overall telecom service performance and reliability. I would say price is not the primary concern for any financial institutes.”

-MIS Manager, ABN AMRO Bank

“As a trade company, we welcome lower price service providers. But we are not going to make compromise on service levels and qualities. International call over IP is much cheaper than IDD, but is inconvenient to use and the current voice quality is unsatisfactory.”

- IT personnel, Overseas Trade

Backup



ISP AND MOBILE ARE THE MAJOR CARRIER SEGMENTS

(1) Customers include MOR, CATV and other large volume usersSource: Pyramid research; BCG analysis

Dark Fiber, Conduits & Access Ports(1)

Paging

ISP

Mobile

N/A

0.2%

46%

5%

CAGR (98-05)

Carriers’ market size(RMB Bn )

14

20

8

0.6

0.6

0.6

1.1

0

10

20

30

1998 2005 (projected)

0



BOTH CHALLENGES AND OPPORTUNITIES FOR CNC TO ADDRESS CARRIERS’ NEEDS

ISPs looking for alternatives to CT ...• More reliable services (backbone, i

nternational gateway)• Broader bandwidth at a reasonable

price• Less lead time for adjusting info ne

eds (e.g. adding line/bandwidth)

… also worry about carriers compete directly with ISPs

CNC best positioned to address such needs

• But need to address ISP’s concern of CNC’s 171 as competition

ISP

Mobile carriers still concerned with IP voice quality

• More lead time expected before toll quality will be achieved and carriers will be willing to lease IP backbone

Tradition link of Mobile Operators with CT weakening over time

• Opportunity for CNC, but CNC needs to provide value-for-money

Mobile



CONTENT


Regulatory overview

Market overview


Business models

Next steps



COMPETITIVE SUMMARY

Regulatory response to WTO development will lead to more open market in general

• More emerging (Type II) players in the Value Added Service areas

• Emerging players more likely to become CNC customers than competitors

China Telecom’s split along service lines will create cooperation opportunities to CNC

• Geographical break-up of China Telecom fixed line services uncertain, opportunity of cooperation for CNC

• Break-up may not be complete, as former China Telecom constituents still hold commanding share at least till year 2005

Unicom might emerge as CNC’s arch-rival if internal conflict ends

Jitong has built quick customer response capability based on VSAT platform, but would largely remain as a minor competitive force due to bandwidth constraint

• Not excluding cooperation opportunity

Therefore, Initial assessment asserts CNC to target about 20%+ long term share in the Carrier, Large/Medium Enterprise Solutions markets



China Unicom

COMPETITIVE LANDSCAPE TODAY: 1999 (I)

Residential

Business

Segments Full-service providers Value Added Service Providers

Cellular

Internet access

Broadband applications

On-net voice

Off-net voiceIP phone

On-net voice

Off-net voice

Internet access

Leased line

VPN / other broadband applications

Multiple ISP’s

LocalMSOs

Satellite

CNC

ChinaUnicom

Paging

• China Telecom

SatelliteCommunications

Corp

MobileCommunications

Corp

FormerChina

Telecom

Former CT paging

Hold license/ Deploy ?

Jitong

Jitong

Jitong

CNC

Multiple

ISPs

CNC



COMPETITIVE LANDSCAPE TODAY: 1999 (II)Competitors In Telecom Markets

Targeted offerings

Carrier’s Carrier

Switched

Voice

All

DLD

ILD

IP

Large/medium business customers

China TelecomChina Telecom

SatelliteUnicom Jitong

Competitor

()

()

TJ, CQ, Sichuan

CNC



2 SCENARIOS WILL EMERGE IN COMPETITIVE LANDSCAPEDepend on Interaction of Pro-competitive regulation and FDI

Pro-competitive Regulation

Implementation

Activeness of FDI• Number of FDI backed players• Intensity of FDI funding

Landscape today• Few basic carriers• Limited number of

type II carriers• Low FDI activity• Funding depend

on internal resources

Landscape today• Few basic carriers• Limited number of

type II carriers• Low FDI activity• Funding depend

on internal resources

Scenario 2: Open Competition

In the VAS area• Controlled number

of basic carriers• Numerous active

FDI backed regional/Type II players

Scenario 2: Open Competition

In the VAS area• Controlled number

of basic carriers• Numerous active

FDI backed regional/Type II players

OpenCompetition

ClosedCompetition

Latent Active

Likely in 2004

Less likely

in 2004

Scenario 1: Open in all fronts

• Multiple CLECs and IXCs

• Numerous regional/Type II players

• up to 50% FDI

Scenario 1: Open in all fronts

• Multiple CLECs and IXCs

• Numerous regional/Type II players

• up to 50% FDI



MOST LIKELY COMPETITIVE LANDSCAPE IN 2003/4

Residential

Business

Segments Full-service providers Value Added Service Providers

Cellular

Internet access

Broadband applications

On-net voice

Off-net voiceIP phone

On-net voice

Off-net voice

Internet access

Leased line

VPN / other broadband applications

Multiple ISP’s

ProvincialMSOs

Satellite

CNC

ChinaUnicom

Paging

CT broken into regions

• Six regional operating companies for NLD

• HQ controls international and data

SatelliteCommunications

Corp

MobileCommunications

Corp

FormerChina

Telecom

Former CT paging

Jitong

Jitong

Jitong

Multiple ISR

players Multiple I-

Phone players

Multiple ISR

players

Multiple I-

Phone players

UtilitiesCATVs

MultipleRegionalPlayers

Multiple VANs

Multiple ISP’s

MultiplePlayers

CNC

4-5 morenationalplayers

CATVs



LIKELY SCENARIO MEANS MORE OPPORTUNITY THAN THREAT

• 1-2 type II new entrants in each locality likely allowed by regulation• CNC low cost IP based backbone provide national/international access and transport• Initial market research point to CNC’s aspired one contact services attractive to type

II players

New entrant ISPs, MSOs and Wireless Carriers as potential customer

• Local autonomy and separate P&L lead to flexibility in partnership• CT local bandwidth requirement not easily accommodated by national plan due to

separate investment ownership

Paging, Wireless, ISP services separated from incumbent as potential customer

• Becoming more responsive to key customer needs• Starting to form allegiances with new entrants (e.g. CT with Unicom in wireless)• Increasingly focus on building datacoms capabilities in anticipation of demand growth• Building capability to bring quick solutions to key customers (e.g. JT with VSAT)

Incumbents building flexibility

Opportunity

Threat



CHINA TELECOM (I)

99%

Recent split along service lines, national paging service folded into Unicom

But each former China Telecom constituent still holds dominating share in respective market *:

China Mobile Communications

Corp.

China Mobile Communications

Corp.

China Telecom(Voice and Data Services)

China Telecom(Voice and Data Services)

China Satellite Communications

Corp.

China Satellite Communications

Corp.National Long

Distance Services

National Long Distance Services

International Long

Distance Services

International Long

Distance Services

Broad-bandData

Services

Broad-bandData

Services

ISPservice

(163, 169

China-Net)

ISPservice

(163, 169

China-Net)

National / International Level

Regional Level

Municipality/ City Level

ProvincialLevel

Local Voice and Data Services

Local Voice and Data Services

• Likely to further break down into 6 regional companies

• Likely to remain as one national entity

• VSAT based backbones and local base stations


• Holding local GSM networks and frequencies


• Likely to further break down into 6 regional companies

~100% ~100% 90% 80%+ 95% 100%

* As of 3Q 1999



CHINA TELECOM (II)

The fixed line services of China Telecom will likely to be broken up into 6 regional companies

Generating significant competitive impact to CNC

Potential threat:

• Separate P&L improve ability to have business focus and cohesive control

• FDI cooperation become more feasible

• Resulting in overall stronger competitor

CNC expect 4-6 years’ window of opportunity to establish and preempt competitive disadvantage

• CT’s huge amount of complexity in control and asset will delay separation process

• CT’s management in-flights need to be resolved before significant progress made

• Central regulatory maintain tight control on FDI in basic telecom services

• Expect only some baby CT could establish successful coop with strong FDI

China Telecom

West China Telecom

Southwest China Telecom

North China Telecom

East China Telecom

South China Telecom

Central China Telecom

Broken up

• Local networks will belong to the region• Uncertain if there will be a separate national

long distance carrier• Further breakdown along geographical lines

possible



CHINA TELECOM (III)

Key strength• Unmatched existing infrastructure:

- international gateway in BJ, SH, GZ and SZ; - 18 International SOC(1); “8X8” national FO backbone of 173,000 km;- ChinaDDN, ChinaPAC, ChinaFRN, ChinaX.25, ChinaNET comprise national datacom coverage

• Holds critical resources in local networks and largest business and residential customer base

Key weakness• Management team and organization not competition ready• Slow to provide total solution in product offering and support, due to multilevel/department control

Competitive move• Reducing tariffs (latest in 3/99) and installation fees (latest reduction up to 50%), led to subscriber base

boom; Offer 50% - 70% discount on DLD, eliminated administrative fees• Increasingly try to raise value of each subscriber, e.g. installation of 2nd phone line, VAS• Aggressively investment in datacom: 1998-1999 growth 24%• Improving customer service to key accounts (e.g. Ericsson)

Threat / Opportunities presented to CNC• Before complete and transparent regulatory implementation, strong ties with local telecom administration

will remain powerful leverage against new entrants• Currently holds ~100% business customer base, network effect and CT’s initiative to improved service will

add difficulty for CNC to persuade switch• After CT split, mobile and ISP service have potential to become customers or partners to CNC• Uncertainty around regional breakup of fixed-line services, if split may present cooperation opportunities

(1) Submarine Optical Cables, CT SOC connects to Japan, Korea, Europe (including land cable) and US



UNICOM

Entrenched new player• The only other GSM carrier besides CT, the only CDMA carrier. Holds ~5% share wireless market• Licensed to operate local service in TJ, CQ and Sichuan province, TJ service rolled out with 10’000 users• Inherited CT’s profitable paging service with RMB14bn in asset value, and 41M subscribers• Received MOR’s telecom assets worth RMB10bn, with 42,000km SDH FO links covering 500 L/M cities

Key strength• Backbone coverage to all major cities nationwide, with self-built intra and inter provincial FO backbones

covering 25 provincial capitals, plus the MOR backbone (one of the largest reseller of capacity)• Own access networks in some key cities (e.g Tianjin) enables short time-to-market

Key weakness• Lack of cohesiveness in management and organization• Lack of focus in business strategy and product offering

Competitive move• Sets priority on Datacoms and Mobile network development, and long distance services• Won approval to offer direct Internet access and VPN services to business customers, covering 100 major

cities and most of China’s local nets• Recently started wireless local loop trial in CD, targeting commercial service by mid-2000, also begin LMDS

trial by EOY 1999

Threat / Opportunities presented to CNC• Emerge as strong competitor to CNC’s targeted business customer base• Uncertainties around possibility for CNC to resell capacity to its mobile services



JITONG

Primarily an ISP, with aggressive targets in business market• Holds one of the two existing Internet backbones• National VSAT covering 14 provincial capitals

Key strength• VSAT based solution provides flexibility and quick response to ensure rollout/coverage in local access to

targeted customers• International gateway presence in BJ, SH, and SZ• Holds large business and residential datacom user base

Key weakness• Bandwidth with existing primarily VSAT based backbone primarily occupied by its ISP service• Weak management team, lacks clear vision in network building and service offering

Competitive move• Aggressively targeting business customers in key geographies• Aggressively seeking funds for network buildout, planning IPO in early 2000

Threat / Opportunities presented to CNC• Has aggressive plan targeting business customers in key cities, e.g. SH, BJ• Cooperation opportunity likely to exist for CNC IP/DWDM backbone to offer transport capacity



HIGH POSSIBILITY FOR COOPERATION AT LOCAL LEVEL

Competitor

China Telecom fixed line Services

China Telecom Wireless

Unicom (include former CT paging services)

Method Probability Method CNC’s shareRationale/comments

Potential partnership Potential as carrier customer

• Interconnect• Leased line for local

access

• 100% for VoIP• 1999-2000: 50% of

targeted cities• 2001-2004: 60% of

targeted cities

Inter-city traffic diverted to CNC backbone

Inter-city traffic through CNC backbone as backup

20% of total CT wireless traffic goes through CNC backbone

At most 5% of inter-city traffic goes through CNC backbone

• Required by government, but expect some delay in implementation

• CT backbone is assumed to be CT wireless’ primary carrier

• CNC IP/DWDM back bone as complementary carrier with lower cost

• CNC only complements areas where Unicom cannot cover

• CNC as low cost backup solution

Jitong CNC backbone provide back-up bandwidth

20% of total Jitong traffic

• Jitong’s primarily VSAT based backbone will not meet expansion need

CATV HFC as local access partner in major cities

Over 50% possibility in CNC target cities, if fiber available

carrier customer and fiber leasing

2000-2002: 5 key cities2003-2004: 15 major provincial capitals

• CNC fiber only complements areas SARFT lacks coverage

ISPs carrier customer 1999-2000 10%2000-2004 40%

• CNC high speed back bone is effective to drive up end user demand



CARRIER: EXPECTED SHARES


Expected share

CNC

• IP/DWDM backbone, bandwidth and cost leadership

• Strike for excellent service and value for money

• Weakness: late-starter

<1%

7%• mobile bb

26% • addr. ISP

15%



• Extensive existing backbone• Existing local access, captive demand• Weakness: legacy system makes it difficult to

cut down costs

80% 65%

• Existing coverage / user base• Weakness: bandwidth constraint

5% 5%

Unicom

• Early mover to market• Nearly complete coverage in 150 cities• Captive mobile demand• Weakness: In-fighting board, acrimonious

relationship with CT

10% 20%

Jitong

• Solution primarily based on VSAT coverage, bandwidth constraint

• Existing bandwidth primarily occupied by own IP phone service

• Questionable excess bandwidth for resale

5% 3%


Mobile operatorsA high percentage of the leased line demand in local lines (80%), but CNC will have a relatively low share in local lines (~1%). For backbone, expect by 2004 about 40% will be IP-based and CNC will have a 65% share (as a dominant IP-backbone provider)

ISPsExpect by 2004 about 70% of the market will be addressable (instead of being captive by China Telecom). Since there will probably be at least 5 to 6 backbone operators at that time, we expect about a 15% share out of this.

Paging operatorsNot CNC priority




LARGE / MEDIUM BUSINESSES: EXPECTED SHARES


Expected share

CNC

• Multiple alternatives to ensure rollout/coverage in local access to targeted customers

• Able to capitalize on different local practice at CT , and partnership with MOR

• Need to build up capability & share quickly

1% 15%



• Incumbent: existing customer base• Extensive coverage in local loop• Weakness: service back log, bureaucracy

drags service quality• Legacy system in backbone, hinders ability to

offer lower price/high bandwidth services

74% 55%

• Coverage/bandwidth limited• Weakness: bandwidth constraint in later years

5% 5%

Unicom• Early to market, built local access in TJ/CQ/SC• Weakness: continuous management problems

10% 15%

Jitong

• Aggressively going after market from current ISP base

• Weakness: bandwidth constraint (VSAT-based solution)

10% 10%


In 2000, CNC coverage and time-to-market limits share achievable

By 2004, expect CNC coverage of over 80% of the business demand, with overall share of around 20% in the business leased lines and Internet access markets.

Also expect to aggressively go into the web hosting/ coll, reaching 15% share by 2004. For other emerging data and Internet services, expect to get a 5% share due to the nature of more fragmented competition.




OFF-NET VOICE: EXPECTED SHARES

Competitor Key strengths / weaknesses

CNC

• Low cost based on new technology• Innovative & motivated management team• Favorable regulatory backings• Weakness: late to market, IP voice the only

consumer oriented product (lacks synergy)


• Incumbent / early entrant• Existing coverage• No interconnect hassle• Weakness:

- higher cost position based on existing infrastructure

- cannibalize circuit voice services

Unicom

• Early to market• Synergy with mobile business• Weaknesses:

- initial stage unclear management focus- Acrimonious relation with CT

Jitong

• Quick and successful launch in 1999 ,early to market

• Aggressive marketing, high discount to distributors

• Weakness: no long-term backbone solution- satellite network may affect voice quality

(latency)

2000 2004

Expected share

15% 28%

55% 40%

15% 20%

15% 12%


In 2000, CNC deployment plan will not be as aggressive as our competitors; only about 60% of the IP voice market will be addressable. CNC will have about a 25% market share in these (addressable) areas.

By 2004, expect to cover all key areas. But CNC share will dropp from the peak of 33% in 2002 due to more competitors entering.

Benchmark:In Hong Kong, 3 new entrants with call-back: 20-30% share in 2 years; i.e., incumbent <=70%; half a year after ISR, incumbent has <50% share




CONTENT


Regulatory overview

Market overview


Business models

Next steps



AGENDA

Business Models

• Domestic and international long-distance voice

• Wholesale/carrier

• Enterprise solutions

• Issues going forward



Economic modelingEconomic modeling Choice of business modelsto pursue and timing

Choice of business modelsto pursue and timing

Roadmap for pursuing business models and

expected financial performance

Integrated approach to CNC business plan

MajorissuesMajorissues

Expectedoutput

Expectedoutput

How do the market sizing and share assumptions translate into overall top line revenue for CNC?

What capital investments will be necessary to build out metro and long haul fiber networks?

Predicted cash flow profile by business model and selected scenarios

Assessment of market opportunities

Assessment of market opportunities

How will China datacom market develop?

How large is the overall opportunity for a new entrant?

Overall market sizing and revenue forecast by product area

Regulatory and competitive analysis

Regulatory and competitive analysis

What type of regulatory environment will evolve in China?

Will equal access for voice and data be granted and when?

What effect will WTO have?

Regulatory mapping and CNC share predictions across scenarios

Strategic implications and capabilities assessment

METHODOLOGY BEING USED TO DEVELOP BUSINESS MODELS AND OVERALL STRATEGY

- Current areas of focus



CNC AT A CRITICAL STRATEGIC CROSSROADS

Preliminary Conclusions Recommendations/Decisions to be Made

Offnet VOIP predicted to generate to provide breakeven economics for building backbone1

Wholesale revenue provides significant upside potential

• Majority of wholesale revenue relies on access to mobile carriers

Enterprise solutions economics very attractive, but substantial complexity and resources involved

High-bandwidth international gateway critical to success in both wholesale and enterprise

Economic predictions highly sensitive to a set of key assumptions

Accelerate vendor selection and backbone construction; time to market critical

Commitment to utilizing IP/DWDM invlolves risk to mobile carrier business

• RFP to vendors should be based on product requirements vs. technology

Staging of investments and service launch must consider tradeoff between quality of service and coverage

Preliminary talks with international carriers should begin ASAP

Scenario modeling will help us decide where to focus

Overarching question: Can CNC successfully pursue all opportunities outlined in the short/medium term?

Overarching question: Can CNC successfully pursue all opportunities outlined in the short/medium term?

(1) Assuming settlement fees of 10% of revenue



Overall approach

Where

How

BUSINESS MODELS SUMMARY: THREE CORE ELEMENTS

Enterprise Solutions

Capture datacom growth in key business centers with leading-edge products and superior customer service

Top business districts in major urban areas; only the most dense areas in short term

Focused Deployment • Leverage existing conduits

to lay in major urban areas

Superior service and bandwidth• Target CT’s weakness in

service and bandwidth

Utilize LMDS in intermediate cities and areas where time to market is critical

Wholesale/Carrier

Target mobile carriers and ISPs with backbone transport; consider supplying fixed-line incumbents

Cover POPs in all major calling zones; develop local leased lines network in key locations

Aggressive deployment of backbone infrastructure to provide unparalleled bandwidth

Establish high bandwidth international gateway to differentiate internet access

Superior service with clear positioning

• “The clear alternative to CT”

ISP

Long distance voice

Capture early revenue from to fund development of subsequent business models

Top 60 POPs by end of year 2000 utilizing mix of leased lines from CT and CNC network

Position offnet voice as first product from “China’s first datacom carrier”

Do not overextend resources in VOIP as it does not fit CNC’s long term strategy

Create “dial-around” solutions for business and interconnect terms

- 17930 -



Enterprise solutions

POTENTIAL BUSINESS MODELS COVER WIDE RANGE OF PRODUCT/MARKET ALTERNATIVES

Opportunity for growth

Current market size

Wholesale/carrier

Consumer ISP?

Domestic and International Long Distance Voice

Residential Med/large enterprise customers

Carriers

Potential traffic per consumer

Products

Emerging datacom

Data

Voice

Emerging data niche



AGENDA

Business Models







APPROACH TO DOMESTIC AND INTERNATIONAL VOICE BUSINESS MODEL

Objectives Hypothesized Approach

Capture early revenue from launch of prepaid IP calling cards

• “Cash cow” for funding other business model development

Pursue prefix and equal access long distance for business customers as soon as possible to begin establishing relationships

Manage pricing and product life cycle effectively to maximize total margin and avoid investing in declining products

Do not overextend ourselves nor blur our “datacom” image

Fight the regulatory battle to ensure favorable approaches to equal access and interconnect

Market calling cards to business customers in the short term for travelling personnel

Emphasize quality image/brand to distinguish from CT and Unicom--position calling card as first step in becoming a next generation full services provider

Establish mechanisms to link marketing expenditures with revenue and margin growth by product to ensure effective investment

Emphasize low cost targeted marketing and loyalty programs

• Do not overextend• Always emphasize advanced technology

and evolution to full services provision



DOMESTIC AND INTERNATIONAL VOICE SUMMARY

Preliminary Economics

Phase I CapEx (2000,2001): ~3.8 B RMB• Fiber/construction: ~2.4 B RMB• IP/DWDM equipment: ~720 M RMB• POP/VOIP: ~530 M RMB• OSS/Network management system: ~100 M RMB

OpEx expected to be ~30% of revenue by 2002

Market share and revenue estimates - 2002• Offnet DLD: 30%• Offnet ILD: 30% ~ $2 B RMB• IP Intl. termination: 27%

5 year NPV: Essentially breakeven considering offnet voice alone1

Key Issues to be Addressed

Interconnect agreements with local PTA’s; attempt to obtain blanket policy from MII

International gateway license and connectivity

Settlement charges commensurate with VOIP pricing

Development of business offnet strategy• Scalable “dial-around” solutions in short term• Equal access longer term

Quality of service for voice, must approach switched quality rapidly

Point of diminishing returns for adding VOIP gateways vs. strategic value of providing coverage

(1) Highly sensitive to settlement fees



LARGE MARKET WITH POTENTIAL TO GAIN SHARE QUICKLY

New entrants typically gain share quickly

Example: IDD and DLD services

Market sizeable - off-net traffic accounts for ~15% of total DLD/ILD revenue by 2004

Source: China Telecom annual reports; CNC’s team inputs; BCG surveys, analysis & benchmarking

0

10

20

30

40

50

0 1 2 3 4 5 6 7

Year after entry

Optus (DLD)

Tele 2 (DLD)

Mercury(DLD)

Hong Kong (IDD)

Japan (IDD)

US (IDD)

0

20

40

60

80

100

1998 2000 2004

(RMB BN)

DLD On-Net

DLD Off-Net

ILD On-Net

ILD Off-Net

(%)



CAREFUL MANAGEMENT OF PRE-PAID CALLING CARD BUSINESS NECESSARY TO ALIGN WITH LONG TERM STRATEGY

Prepaid calling cards call for different capability set and target customers than longer term business models

• Focus on consumers will not complement long term vision of providing enterprise solutions

• Mass advertising and marketing around a low-cost position may not fit image required for future needs

Three factors important to consider in managing prepaid calling card business

• Attempt to position cards in marketing messages as the first product from a company that is building the most advanced network in PRC

• Consider selling cards to businesses for their traveling personnel to begin establishing enterprise relationships

• Carefully manage product life cycle to begin pulling back marketing investment as wholesale and enterprise business models grow



CNC VOIP REVENUE AND MARKET SHARE EXPECTATIONS

Source: CNC’s team inputs; various benchmarks; BCG analysis

Voice revenue Share assumptions

0

1

2

3

4

1999 2000 2001 2002 2003 2004

CNC Revenue(RMB BN)

Off-Net DLD

% of total CNC revenue

100% 76% 37% 30% 23% 16%

Off-Net ILD

International Termination

1999

3%

80%

1%

3%

80%

1%

5%

80%

0%

Off-Net DLD

Off-net share of total DLD

Geographic coverage of CNC

CNC share within coverage

Off-Net ILD

Off-net share of total ILD



International Termination

IP share of total



2000

10%

60%

25%

11%

60%

25%

11%

60%

20%

2001

17%

75%

29%

18%

75%

29%

18%

75%

25%

2002

23%

90%

33%

26%

90%

33%

24%

90%

30%

2003

30%

100%

30%

33%

100%

30%

30%

100%

30%

2004

32%

100%

28%

35%

100%

28%

35%

100%

31%



PRELIMINARY ECONOMICS FOR LONG DISTANCE VOICE MODEL (PHASE I BUILDOUT)

VOIP Revenue Alone Justifies Building Backbone

-2300-1400

3700

-700

740

-500

570

-100

-490

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

5 year PV(1) (M RMB)

CapEX OpEx

Revenue

5 year NPV@15%:5 year NPV@15%:~ -500M RMB

5 year IRR:5 year IRR: ~12%

Essentially breakeven economics for operating backbone for VOIP only

VOIP(2)Backbone construction

Backbone

International termination

IDD

DLD

IP

POP/Access platformOSS

Present value of cash flows

(1) Assuming 15% cost of capital(2) Including settlement charges estimated at 10% of VOIP revenue, and marketing/sales at 10% of revenue(3) Backbone OpEx charges allocated 1/3 each to VOIP, wholesale, and enterprise business model economicsSource: BCG benchmark database; industry interviews; BCG analysis



AGENDA

Business Models







APPROACH TO WHOLESALE/CARRIER BUSINESS MODEL


Develop wholesale business as traffic generator to improve economics of backbone through higher utilization

Become the wholesale carrier of choice with technologically superior service offerings including high bandwidth international gateway connectivity

Consider wholesaling access to CT, Unicom, and Jitong depending on competitive implications

Superior customer service with clear positioning

• “The clear alternative to CT”

Aggressive deployment of backbone infrastructure • Connecting top 15 cities by end of 2000 and

expanding to top 50 cities by 2002

Seek partnerships to establish high bandwidth international gateway connectivity--absolutely essential for differentiating CNC offering

Develop interconnection capabilities in all major POPs and mobile basestations in key geographical locations

Wholesale access to incumbent providers where feasible, but do not wholesale sources of competitive advantage (e.g., enhanced data services such as IP VPNs)

Rollout product offering in staged manner to ensure quality of service

• Internet connectivity• Mobile interconnect• Access ports to backbone



WHOLESALE/CARRIER SUMMARY


Phase I CapEx (2000,2001): ~100 M RMB• ISP access platform: ~50 M RMB• OSS/Provisioning systems: ~50 M RMB

OpEx expected to be ~ 10% of revenue by 20021

Market share and revenue estimates - 2002• Mobile (backbone): 15%• ISPs: 9% ~ 1.1 B RMB• Access ports: 100%2

• Dark fiber: 100%2

5 year NPV: ~ $2.1 B RMB

Assumes launch date of 3Q 2000 for leased lines and relatively aggressive mobile shares

• Potentially too optimistic


Backbone technology platform - QOS for voice vs. lower cost deployment?

High-bandwidth international gateway paramount to differentiating ISP access

Favorable regulatory backing for courting regional CT mobile carriers

Ensuring existing VOIP gateways can serve wholesale needs

Revenue opportunity of wholesaling dark fiber vs. enabling competition

Organizational challenges

(1) Including allocation of backbone OpEx(2) Market estimates based on revenue generation by CNC alone



POTENTIAL WHOLESALE CUSTOMERS INCLUDE ISPs, MOBILE OPERATORS, AND FIXED LINE CARRIERS

ISPs offer significant potential if CNC can provide superior bandwidth access and to international gateway

• Current satisfaction among regional ISPs very low

• International gateway license in conjunction with high bandwidth trans-oceanic carrier alliance could provide vastly superior service

Mobile carriers will be searching for lower cost alternatives to carry long distance traffic due to intensifying competition

• CNC’s new high capacity VoIP network and international gateway likely to yield lower costs

Fixed line carriers potentially looking for alternatives

• Existing long-haul transport infrastructure limited

• China Telecom could even be a possible customer given current focus on increasing residential teledensity



OVERALL WHOLESALE MARKET SIZE IS SUBSTANTIAL AND GROWING AT A MODEST RATE

Anticipated Price Decrease in Leased Lines Limits Overall Revenue Growth

0

5

10

15

20

25

30

1998 1999 2000 2001 2002 2003 2004

Leased Lines - ISP

Market Size (RMB B)

15

Total

Leased Lines - Mobile

99’-04’CAGR

Access Ports

Leased Lines - Paging

18 18

20

22

2628

4%

41%

1%

152%(1)

9%

(1) 01’-04’ CAGRSource: CNC team inputs; foreign benchmarks; BCG analysis

Dark Fiber 68% (1)



CARRIERS SEEKING ALTERNATIVES...

ISPs definitely seeking alternatives to CT Mobile carriers likely to follow

“We need a telecom service provider that is not our competitor.”

- Founder, Eastnet

“China Telecom, with their own network development plans, tends to starve us on capacity or to force us to pay in advance for excess capacity.”

- Manager, Infohighway

“The fact that it takes China Telecom two months every time we need an extra line makes it very difficult to have our own customers. We want another operator who can get us leased lines fast.”

- Manager, Infohighway

Mobile carriers might consider diverting part of their traffic to alternative service providers with:

• more attractive pricing

• higher quality service

• higher bandwidth

Interviews with regional mobile carriers and Unicom need to be conducted to verify potential



…BUT TECHNOLOGICAL LIMITATIONS AND COMPETITIVE CHALLENGE ARE IMPORTANT FACETS TO MANAGE

Competitive ChallengeTechnological Limitations

Mobile carriers may be hesitant to use VOIP technology for primary applications

• Carriers currently addressing sound quality as a major improvement initiative

• VOIP has yet to deliver toll-quality voice transmission, even on landline

• Mobile carriers may take view that VOIP could further degrade voice quality

China Telecom likely to have advantage in competing share of CT Mobile’s business

• Strong former intra-CT connection even after split

• Extensive backbone coverage and large TDM based capacity

Unicom Mobile Services’ business as tough target

Build presence by offering low-costtrials and backup capacity

Lobby for clear regulation from MII on freedom of choice for carriers



PREDICTED WHOLESALE ECONOMICS ADD SIGNIFICANT VALUE TO VOIP BUSINESS MODEL

Additional CapEx and OpEx Minimal

1670

-160

660

730

5010

-1890

-3600

-46

-400

-52

200


CapEX OpEx

Revenue

5 year NPV@15%:5 year NPV@15%: ~2.1B RMB

5 year IRR:5 year IRR: ~ 40%

Wholesale critical to enhancing profitability of backbone

VOIP

Backbone allocation

Dark FiberAccess ports

ISPs

Mobile operators

VOIP

VOIP

ISP accessOSS

(1) Assuming 15% cost of capitalSource: BCG benchmark database; industry interviews; BCG analysis

OSS/provisioning

Present value of cash flows8,000

7,000

5,000

1,000

6,000

-3,000

-4,000



AGENDA

Business Models







APPROACH TO ENTERPRISE SOLUTIONS BUSINESS MODEL


Capture strong share among medium/large business by offering enhanced datacom solutions

• Goal to establish clear position as best service/quality provider in major markets

Utilize most cost effective deployment technologies to cover major metro areas

Minimize head-to-head competition by offering differentiated, data-centric products--attempt to drive datacom market

Develop image as fast, responsive solutions provider

• Enable competitive advantage for business customers through datacom

• For building managers: make their buildings more attractive to tenants

Deployment to target key buildings in major metropolitan areas

• Four cities by year 2000/01• Top 15 cities by 2001

Fiber in most dense urban hi-rise areas and LMDS to complement and serve less dense areas

Initial lead products will be low cost voice over IP and high bandwidth internet access

• Migration to full datacom solutions as customer base and capabilities grow

• Quality customer service more important short term than full product offering

Emphasis on ease of use and fast provisioning versus competitors--exploit CT’s weaknesses

Education of customers on use of datacom products as competitive weapons

Marketing partner with key building managers



ENTERPRISE SOLUTIONS SUMMARY


Phase I Capital Investment (2000,2001): ~1.1 B RMB• First four cities (assuming fiber): ~650 M RMB• Additional 11 cities1: ~400 M RMB

OpEx expected to be ~ 40% of revenue by 2002

Market share and revenue estimates - 2002• Offnet Voice2: ~20%• Existing data: ~10% ~ 1.1 B RMB• Emerging data: ~ 5%

5 year NPV: Roughly 1.2 B RMB

Assumes launch date of 3Q 2000 for data services• Likely too optimistic


Right of way for existing ducts and digging

Partnership strategy for high bandwidth IGW

Rights to LMDS frequency spectrum

Are the 15 cities designated for Phase I buildout the right 15 cities for local access?

Tradeoff between pure economics by city vs. strategic value of providing end-to-end connectivity

What is a realistic time frame for launch?

Magnitude of organizational and human resource requirements

(1) Assuming LMDS capital and revenue 2 times Fuzhou estimate for cities 11-15; 3 times Fuzhou estimate for cities 5-10(2) Assumes no local voice revenue through 2004



ENTERPRISE SOLUTIONS BUSINESS MODEL MOST COMPLEX WITH HIGH CAPEX AND OPEX REQUIREMENTS...

Building metropolitan fiber rings to offer access to medium and large businesses poses significant challenge

• Operating expenses required dwarfs long haul network costs on a per city basis

• Complexity in obtaining night-of-way varies by districts within each city

• Designing fiber route and network configuration requires significant experience

Converting customers to full CNC service may not be as easy as it seems on surface

• Initial risk for companies utilizing new entrant

• Coverage issues for offering service to all business locations

• Experienced sales-force with established relationships a must



…BUT COMPRISES TREMENDOUS UPSIDE POTENTIAL

0

20

40

60

80

100

120

140

160

180

200

1998 2000 2004

Internet Access

Leased Lines

ILD

DLD

Local

0

5

10

15

20

25

30

35

2000 2004

Other

Portal

Broadband Content

Web Hosting/ Collocation

Existing Services Emerging Services98-04CAGR

124%

40%

-10%

7%

11% IP VPN

Broadband Network Applications

71%

83%

186%

98%

111%

286%

00-04CAGRMarket size

(RMB BN)Market size (RMB BN)

78

96

187Overall 16% Overall 86%

3

32




CUSTOMER NEEDS EXIST THRUGHOUT THE VALUE CHAINCT’s Offering Yields Significant Gaps

Learn Buy Get Use/support PayCustomer value chain

Needs identified

• How datacom services can help their business

• Assistance deploying solutions

• Quicker and more convenient application channels

• Rapid and reliable provisioning

• Faster, reliable repair services

• Prompt, customized billing

• Lack customer focus

• Solutions virtually non-existent

• Mostly one-way product marketing

• No customer input for provisioning

• CT determines queue without specific timing

• No penalties for missed appointments

• Negligent repair service

• Slow fulfillment & technical support response

• Poor response to customers

• Limited bill customization

CTapproach

Significant opportunity for CNC establish position in customer solutions, ease of use, and responsive service

Significant opportunity for CNC establish position in customer solutions, ease of use, and responsive service

Areas highlighted most in customer interviews

Source: Customer interviews; BCG analysis



STAGED PRODUCT INTRODUCTION NECESSARY TO MANAGE QUALITY

Hypothesized Product Introductions

Voice

Data

2000 2001 2002 2003 2004 2008

Phase I & II Phase III Phase IV

Leased Lines• Mobile carriers• Eneterprise

High bandwidth dedicated internet access for businesses and ISPs

Access Ports VPN

• Basic enterprise Broadband applications

• Platforms to enable VOD, etc... Web HostingDark FiberResidential ISP?

Advanced VPN• Extranet• Voice, video QoS guarantees• Industry specific offerings

Other emerging services (e.g. e-Commerce)

IP-phone voice• Prefix • “Dial-around” solutions

Equal access voice? On-net voice?

Focus on quality over quantity

Market as integrated products

Stress CNC role as integrated datacom player

PositioningIssues



CNC SHOULD USE CREATIVE WAYS TO GROW THE MARKET, AVOID HEAD TO HEAD COMPETITION

Competitors all focus on the same demand from the same customers

Savagely compete on price

Reactively wait for customers to identify need, request products

Pursue growing customers - data intensive enterprises• Fresh opportunities for sales, instead of competing

over existing business• Approach proactively with new products, instead of

waiting for customers to initiate sales process

Creatively identify new markets• I.e. market for companies requiring very rapid

provisioning or customized products• Become the only choice for these companies

Lobby the government to support more e-commerce and information industries growth

CT

CNC

Unicom

Jitong

CT is likely to be unable to meet growing demand aloneCT is likely to be unable to meet growing demand alone

Traditional, narrow view New approaches to growing sales



TOTAL GDP VS. GDP/CAPITA IS A PRELIMINARY INDICATOR FOR ATTRACTIVE LOCAL ACCESS MARKETS

Example: 15 Initial Cities with POPs on CNC Network

1,000,000

6,000,000

11,000,000

16,000,000

21,000,000

26,000,000

31,000,000

36,000,000

0 20 40 60 80 100 120

Shanghai

Beijing

Guangzhou

Tianjin

Hangzhou

Wuhan

NanjingJinan

Shijiazhuang

Zhenzhou

ChangshaXuzhou

Xiamen

Fuzhou

Shenzhen

Examples of additional cities not in initial 15 designated for CNC POPs

Hypothetical breakeven curve for building local access

SuzhouWuxi

Total GDP (k RMB)

GDP/cap (k RMB)



VERY DENSE MARKETS SUCH AS SHANGHAI BEST SERVED BY METRO FIBER RINGS

M

POP/rail station

Hong Qiao Development

Area

People’s park

Huai Hai Road

Xujiahui

Pudong Financial

Zone

Fiber length:Along subway:Along elevated ring road:Along road:

Fiber length:Along subway:Along elevated ring road:Along road:

17000m9000m8000m

# of major businessbuildings accessed:# of major businessbuildings accessed: ~200

Fibers alongFibers along

Subway in construction

Subway

Elevated ring road

Road (dig required)

Dense Business Area served

Metro stations

M

M

M



SHANGHAI ECONOMICS VERY ATTRACTIVE DUE TO HIGH BUILDING AND BUSINESS DENSITY

-248

705

133

-106

78

-9

-54

-142

-46-14

45

-31

-600-500-400-300-200-100

01002003004005006007008009001000


CapEX OpEx

Revenue

5 year NPV@15%:5 year NPV@15%: ~310M RMB


Shanghai presents most attractive enterprise solutions

market

SG & A

Allocated backbone

IDDEmerging data(3)

DLD

Data services

SONET/switching equipment

OSSAllocated backbone(2)

(1) Assuming 15% cost of capital(2) Cost of providing F/R and ATM service on backbone allocated over first 4 cities(3) Web hosting IP VPNS, etc.Source: BCG benchmark database; industry interviews; BCG analysis; real estate agency interviews; field analysis

Power provisioning, etc.

Fiber construction

Right of way




MEDIUM SIZED CITIES WITH HIGH GDP/CAPITA SUCH AS FUZHOU BEST SERVED WITH LMDS SOLUTION

Fiber length:Along road:# LMDS station:

Fiber length:Along road:# LMDS station:

5000M1

Area served(1):# of major businessbuildings covered:


~40km2

~40(2)

LakeFiber along roadRailwayRailway stationRoadLMDS stationMajor buildingsArea served

R

S

(1) More detailed field analysis required to map buildings and most effective LMDS positioning; assumes 3.5 km radius for LMDS area(2) Assume half of the buildings are prime business buildings for economic modeling

S

R



PRELIMINARY FUZHOU ECONOMICS UTILIZING LMDS VERY FAVORABLE

-7

31

6

3.5

-4.1-3.7

-3.1-1. 2-2. 5

2

-2.1-15-10-505101520253035404550


CapEX OpEx

Revenue

5 year NPV@15%:5 year NPV@15%: ~20M RMB


LMDS solutions for medium sized cities will play a critical role in

developing enterprise solutions

SG & A

Power, provisioning, etc.

IDDEmerging data services

DLD

Data services

Base station

CPE

(1) Assuming 15% cost of capitalSource: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data

Bldg equipment

Spectrum feesFiber to POP




OTHER CITIES OF SIZEABLE POPULATION BUT RELATIVELY LOW GDP/CAPITA MAY NOT WARRANT INVESTMENT

Example: Shijiazhuang

No fiber connectionrequired, assume rail station is LMDS base

No fiber connectionrequired, assume rail station is LMDS base

1



~40km2

~20(2)

RailwayRoadLMDS stationMajor buildingsArea served

S

S

(1) More detailed field analysis required to map buildings and most effective LMDS positioning; assumes 3.5 km radius for LMDS area(2) Assume half of the buildings are prime business buildings for economic modeling



OVERALL ECONOMICS APPEAR MARGINAL FOR SHIJIAZHUANG

-4

9.7

-4. 1

-2. 9-2. 5

1.8

-1. 9

1.10.6

-0. 6

-20

-15

-10

-5

0

5

10

15


CapEX OpEx

Revenue

5 year NPV@15%:5 year NPV@15%: ~ -3M RMB


Cities without dense business districts may not be attractive enterprise markets

regard less of overall size

SG&A

Power, provisioning, etc.

IDDEmerging data servicesDLD

Data services

Base station

(1) Assuming 15% cost of capitalSource: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data

Spectrum

CPEBldg. equipment




OVERALL REVENUE AND MARKET SHARE EXPECTATIONS: ENTERPRISE SOLUTIONS

Predominately voice (DLD / ILD) revenue in the first two years; migrating to data and Internet services by 2002

0

5

10

15

20

25

2000 2001 2002 2003 2004

CNC revenue(RMB BN)

Internet Access

Leased Lines

ILD

DLD

Share assumptions

OtherEmerging Services



1999

3%80%1%

3%80%1%

0%0%

0%0%

0%

0%

DLDOff-net share of total DLDGeographic coverage of CNCCNC share within coverage

ILDOff-net share of total ILDGeographic coverage of CNCCNC share within coverage

Leased LinesGeographic coverage of CNCCNC share within coverage

Internet AccessBroadbandNarrowband / Dial-Up


Other Emerging Services

2000

10%60%25%

11%60%25%

30%2%

2%0%

0%

0%

2001

17%75%29%

18%75%29%

47%10%

10%0%

5%

1%

2002

23%90%33%

26%90%33%

63%14%

14%0%

8%

2%

2003

30%100%30%

33%100%30%

80%18%

18%0%

10%

4%

2004

32%100%28%

35%100%28%

82%21%

21%0%

13%

6%



OVERALL ECONOMICS ATTRACTIVE FOR PHASE I BUILDOUT IN TOP FOUR CITIES

5 year PVs (M RMB)

CapEx OpEx Revenue 5 year city NPV 5 year IRR

Shanghai

Beijing

Guangzhou

Shenzhen

Total

145

149

157

95

546

504

447

400

332

1683

960

768

640

480

2848

311

172

83

53

70%

45%

30%

28%

Overall Phase I 5 year NPV: ~620M RMB

5 year IRR: ~44%

Overall Phase I 5 year NPV: ~620M RMB

5 year IRR: ~44%

Source: BCG benchmark database; industry interviews; BCG analysis



GOING FORWARD, CITIES WILL NEED TO BE ANALYZED ON A CASE BY CASE BASIS

Deployment technology will play a critical roleMethodology/criteria for

choosing local access markets

Initial prioritization by total GDP vs. GDP/capita

Relevance and proximity to CNC network

Map urban area by biggest buildings and availability of existing conduits

Determine if density falls into one of the three density categories

Estimate costs and revenue associated with buildout

1.

2.

3.

4.

5.

Go or no go!

Cost to deliver

enterprise solutions

Increasing business density and area

Intermediate density best served

by LMDS

Very dense and large area best served by fiber

Too costly to serve

Fiber

LMDS



RECAP OF OVERALL PHASE I ECONOMICS AND KEY ISSUES

Enterprise Solutions2

1.1 B

3.2 B (38%)

1.2 B

Businesses/km2

Data growth

IGW/connectivity Deployment cities Realistic rollout

Buildout economics for 15 cities vs. connectivity value

Wholesale/Carrier

100 M

2.3 B (27%)

2.1 B

Mobile share Internet growth

IGW/connectivity Voice QOS Regulatory backing

Cost of deployment vs. service flexibility

Long distance voice

3.8 B

3 B (35%)

--

Settlement charges Pricing/competition

IGW/connectivity Managing life cycle Business solutions

Economics of 60 VOIP cities vs. strategic value of coverage

Economics1

CapEx

2004 Revenue (% of total)

5 YR NPV3

Key Issues Sensitivity

Top issues to address

Tradeoffs

(1) All values in RMB and based on preliminary inputs to be refined(2) Includes only Phase I buildout to top 15 cities(3) Assuming 15% cost of capital



AGENDA

Business Models







EMERGING OPPORTUNITIES EXIST FOR CONSUMER ISP AND ADVANCED DATA SERVICES

Residential ISP

• CNC may be in unique position to offer true broadband internet access due to IP network and international gateway

• What strategies will capture significant value while minimizing development time and necessity for brand equity?

Web Hosting/Data Centers

• Niche competitors such as Exodus in the U.S. aggressively pursuing this business model

• Will opportunities develop in the near term for China and could CNC supply resources necessary?

E-commerce solutions

• Many telcos in Europe and U.S. offering e-commerce solutions

• Will opportunities develop in the near term for China and could CNC supply resources necessary?



Datacom services explosion

Slowed adoption

Stable competition with CT, Unicom, and Jitong; clear regulations

Increased competition with limited cooperation from CT

Fragmented, unstable competition; multiple entrants and unclear regulations

Base case

Best

Worst

Demand side

Competitive/Regulatory Situation (Supply side)

ENVIRONMENTAL UNCERTAINTIES LEAD TO THREE BASIC SCENARIOS TO BE ANALYZED

Growth in existing data and and emerging datacom services (as expected)



MONTE CARLO SIMULATION WILL ALLOW FOR GAUGING THE EFFECTS OF UNCERTAINTIES IMPLIED IN SCENARIOS

Example: Effect of Average Building Size, Tier 1 Business Proportion & Spending on Shanghai Metro Access Economics

Establish Input VariablesEstablish Input Variables

25,000.00 28,750.00 32,500.00 36,250.00 40,000.00

Average building size (m2)

Min

Most likely

Max

7.5% 11.3% 15.0% 18.8% 22.5%

% Tier 1 businesses

Min

Most likely

Max

300.00 350.00 400.00 450.00 500.00

Average spending/sq m for Tier 1 (RMB)

Min

Most likely

Max

Pro

ba

bil

ity

Monte Carlo simulation of

1000 trials with 5 year

NPV as forecast output

Monte Carlo simulation of

1000 trials with 5 year

NPV as forecast output

Frequency Chart

Certainty is 95.00% from $238,500 to $558,816 000 RMB

Mean = $381,016.000

.023

.046

.068

.091

0

22.75

45.5

68.25

91

$150,000 $262,500 $375,000 $487,500 $600,000

1,000 Trials 6 Outliers

Forecast: 5 YR NPV

Resulting forecast



MONTE CARLO SIMULATION PROVIDES VERY USEFUL OUTPUT

95% certainty that with the inputs provided, 5 year NPV will be greater than 239M RMB

Statistically impossible for the project to have a negative NPV based on provided inputs

Forecast mean is actually higher than our base case value (381M vs. 318M) due to effects of variable inputs

A sensitivity report generated from the simulation tells us that average building size contributes the most to output variance, therefore it is the most important input to focus on clarifying



CONTENT


Regulatory overview

Market overview


Business models

Next steps



NEXT STEPS

Agree on business mix assumptions

Develop organization structure

• Agree on key principles and objectives

• Timeline, key milestones

Develop implementation action plan

• High level plan (by quarters) till Jan 2002

• Detailed plan (by month) Jan-Jul 2000

• Key milestones, process control

Integrate and refine overall CNC financial

• Objectives and assumptions for financial model

• Scenarios / sensitivities



ORGANIZATION DESIGN METHODOLOGY

Define principles & objectivesDefine principles & objectives

Key criteriaKey criteria

Design organization structure• Possibility of combination/hybrid models

Design organization structure• Possibility of combination/hybrid models

Define job responsibility/accountability corresponding to organization structure

• Example for process flow (how each function interacts)

• Example for KPI, principles for KPI

Define job responsibility/accountability corresponding to organization structure

• Example for process flow (how each function interacts)

• Example for KPI, principles for KPI

Select models to test

Select models to test



MAJOR OUTPUTS: ORGANIZATION DESIGN

Key principles for KPI

• With examples

Key principles for KPI

• With examples

Division/accountability

• “Internal market” as cross-dept incentive

Division/accountability

• “Internal market” as cross-dept incentive

Organization chart

• Dotted line vs. solid line

• Reporting/accountability

• Rationale/methodology

Organization chart

• Dotted line vs. solid line

• Reporting/accountability

• Rationale/methodology



IMPLEMENTATION PLAN DESIGN METHODOLOGY

Objective/target scheduleObjective/target schedule

Major function/module working backwardMajor function/module working backward

Detailed work and cycle time for module/sub-module refine timeline

Detailed work and cycle time for module/sub-module refine timeline

Draft implementation timelineDraft implementation timeline

Key checklist & mile stones per division

Key checklist & mile stones per division

Key process for rollout (across divisions)

• Product rollout• Geographic rollout

Key process for rollout (across divisions)

• Product rollout• Geographic rollout

Revise target if necessary

Identify bottleneck, refine schedule

Segmented view of implementation



Key cross-functional coordination process flow

• Examples

Key cross-functional coordination process flow

• Examples

MAJOR OUTPUTS: IMPLEMENTATION PLAN

Key rollout plan example• Product • City

Key rollout plan example• Product • City

MS project time-line/milestones• Overall• By division

MS project time-line/milestones• Overall• By division

Highlights• Major milestones

resource planning

Highlights• Major milestones

resource planning



WORKPLAN(1)

(1) Refer to CNC team schedule for details. TDC off Dec 22-30; TC off Dec 20-24; Rest off Dec 27, 31 for holiday

Week 4 Responsibility key milestonesstrarting

Phase IReview/presentation Dec 14

Phase II JSFinancial modeling JS

Model construction JS Jan 3 integratedFinancial assumption JS Dec 15 finalizedTechnical assumptions JS Dec 15 finalizedOther cost assumptions TC Dec 16 first cutIterations JSScenario definition JS Dec 13 first cutScenario run JS

24 months master plan NLRegulatory/lobbying NL Dec 13 first cutMarketing/product LC Dec 20 first cutSales LC Jan 3 first cutTechnical deployment/vendor plan JS Jan 7 first cutProcess development NL Jan 7 first cutOSS NL Jan 7 first cut

Organizational development NL/TCKPI and accountability NL Jan 7 first cut

Knowledge sharing, BCG USA (RC) DM/RCSynthesis/production teamReview/presentation Jan 14 team

X'mas/New Year Break 7 86-Dec

527-Dec 3-Jan 10-Jan13-Dec 20-Dec

Documents

- 1 - China Netcom - The Boston Consulting Group --Confidential--Destroy by Shredding-- 45034-05-Interim-14Dec99-TZD-gx-SHI CHINA NETCOM BUSINESS PLAN