US embassy cable - 05TAIPEI3195

UNCLAS SECTION 01 OF 02 TAIPEI 003195 
 
SIPDIS 
 
STATE FOR EAP/RSP/TC AND EB/CIP FOR FINTON AND SHAFFER, 
STATE PASS AIT/W AND USTR, USTR FOR WINELAND, MCHALE AND 
AUGEROT 
 
E.O. 12958: N/A 
TAGS: ETRD, ECPS, TW, Trade 
SUBJECT: LICENSING CONDITIONS IN THE TELECOM SECTOR 
 
REF: A. STATE 114687 (NOT SENT TO AIT-TAIPEI) 
 
     B. SHAFFER/MULLINAX EMAILS 7/19/05 AND 7/22/05 
     C. TAIPEI 1890 
 
1.  Reftel requested information regarding addressees 
telecommunications licensing regime for fixed-line networks. 
Although Taiwan does not require application or 
administrative fees for license applicants, Taiwan's 
licensing regime does impose conditions on entrants in the 
form of capital and build-out requirements.  In addition, 
interested parties may only apply for licenses during "open 
seasons" conducted twice yearly by the Taiwan Directorate 
General of Telecommunications (DGT) in March and September. 
Although telecom sector players tell AIT that these 
conditions constitute a barrier to entry into the market, the 
domination of the Taiwan fixed-network telecom market by 
state-owned Chunghwa Telecom (CHT) is cited as a greater 
disincentive to potential market entrants. 
 
============================================= ====== 
The Evolution of Taiwan's Fixed-Line Telecom Market 
============================================= ====== 
 
2.   Taiwan's fixed-line network telecommunications service 
market continues to be dominated by the state-owned former 
monopoly provider CHT.  In its first modest attempt at 
liberalization, DGT opened the market to new service 
providers on a one-time basis in 2000.  Three applicants were 
able to meet the paid-in capital requirements of NT$40 
billion (apx. US$1.2 billion) and agreed to create subscriber 
networks capable of handling 1 million lines within six 
years.  These requirements were imposed to prevent 
unqualified speculators from entering the market.  These 
three competitors, despite investing over NT$200 billion 
(US$5.7 billion) in Taiwan, remain marginal players.  At the 
end of 2004, CHT controlled 96.8% of the local call market, 
78.1% of the Taiwan long distance market, and 55.5% of the 
international call market.  In 2004, CHT's total fixed 
network and ADSL subscriber market share stood at 97.9% and 
99%, respectively. 
 
3.  As part of its WTO accession commitments, Taiwan agreed 
to further liberalization of the fixed-line network 
telecommunications market.  In September 2004, Taiwan 
announced that it had amended the administrative regulations 
governing fixed network telecom licensing, lowering the bar 
for entry by reducing paid-in capital requirements from NT$40 
billion to NT$16 billion (US$500 million) and the build-out 
requirement from 1 million lines in 6 years to 400,000 lines 
in 4 years.  In addition, DGT announced that it would hold 
biannual open seasons in September and March each year for 
applicants for new licenses. 
 
====================================== 
Not Much Interest in the Taiwan Market 
====================================== 
 
4.  The first open season for new licenses attracted no 
applicants.  DGT announced further revisions to the licensing 
requirements in November 2004.  Beginning in March 2005, 
paid-in capital requirements began to be figured on a 
proportional scale that would reflect the targeted service 
population.  For example, a local service provider offering 
service just to Taipei city would be required to meet a 
paid-in capital requirement of just NT$1.2 billion (US$37.5 
million) rather than NT$16 billion.  For long-distance and 
international calls, the paid-in capital requirement was 
reduced to just NT$2 billion (US$62.5 million).  Build-out 
requirements were also adjusted proportionally.  Despite 
these changes, there were again no applicants for new 
fixed-line network licenses. 
 
============================================= = 
CHT Still Finding Ways to Keep Competitors Out 
============================================= = 
 
5.  Industry watchers have not been surprised by the lack of 
interest in fixed-line network licenses in Taiwan.  CHT's 
dominance of the Taiwan market is further entrenched by its 
control of the "last mile" connections from the local 
switches into homes and businesses.  In May 2004, CHT 
announced that it would share last mile access with the three 
existing competitors in specifically negotiated leasing 
agreements, but included restrictive requirements that not 
only obligated consumers to initiate the shift in service 
provider but also limited these leasing agreements to voice 
service in the three major metropolitan areas (Taipei, 
Taichung, and Kaohsiung).  CHT plans to continue to restrict 
access for the increasingly lucrative data transmission 
services.  CHT's slowness in entering into "reasonable" 
leasing agreements with competitors has further depressed 
interest in Taiwan's fixed-line network market. 
 
6.  One industry analyst told AIT that potential applicants 
may be waiting for the government to privatize CHT before 
considering entering the market.  CHT has filed an 
application with the U.S. Securities and Exchange Commission 
to sell 15% of its stock currently held by the Ministry of 
Transportation and Communications on the New York Stock 
Exchange as American Depository Receipts (ADRs).  CHT 
officials hope the shares can be placed by August.  This 
sale, combined with a proposed sale of an additional 2% of 
CHT stock on the Taiwan Exchange, will bring the government's 
share in CHT below 50%, effectively "privatizing" the company 
according to Taiwan law.  The same analyst noted that U.S. 
firms may still be smarting from the collapse of the telecom 
bubble in the U.S. but that several European firms are 
exploring Taiwan as a potential target as they diversify away 
from saturated home markets into a growing Asian market. 
PAAL