Shutdown for a Gatekeeper of Telecom Gold

(Chengdu) – Equipment and IT services that sell for hundreds of billions of yuan, advertising contracts worth billions of yuan, and huge piles of cash for value-added services and special projects: It's all in a pot of gold at the end of China's telecom rainbow.

Many have found the gold, from multinational equipment manufacturers such as Siemens and Ericsson to small construction companies that build infrastructure for the nation's state-owned telecom empire.

But access to this glistening pot is restricted; only a limited number of executives at giant telecom companies, like leprechauns, know the secret way.

One of the gold gate-keepers was businessman Zhang Rui(张锐), according to investigators who have spent several months tracing corruption in China's telecom industry. Zhang was a key industry insider who apparently helped suppliers and contractors find those gold nuggets, while pocketing quite a few for himself.

Zhang moved freely through the executive suites of China's telecom world, giving advice to operator chiefs who called him an "industry sage" and quietly cutting deals for contractors in ways that earned him the nickname "invisible man." Only executives at the industry's highest echelons knew his name and his game.

Beijing art lovers, however, best knew Zhang Rui as the owner of a swank restaurant on the city's near-east side and a collector of contemporary art.

He might have held on to his art-lover front while continuing to run his advisory business Beijing Ruizhi Telecommunications Consulting Co. Ltd. behind the scenes if not for an investigation that exposed a corruption trail leading to his desk.

The first step on the trail, numerous sources close to China Mobile told Caixin, was the sudden dismissal and detention of China Mobile Group's former party secretary and vice president Zhang Chunjiang（张春江） in 2009. Authorities tied him to bribes worth more than 10 million yuan.

A pair of China Mobile leaders were the next to fall: the president of Sichuan Mobile, Li Hua（李华）, who has been detained since June; and the president of both Sichuan Mobile's data department and China Mobile's wireless music operations, Li Xiangdong（李向东）, who fled China earlier this year with an unknown amount of money.

Zhang and his wife, Raynetwork Advertising Co. President Yang Ruining, were recently detained by authorities on charges that remain unclear.

In the wake of the investigations, China Mobile has launched a major personnel shuffle involving several subsidiaries. And according to a telecom industry veteran, Zhang's trouble led to an exodus of Chinese executives working for several multinational telecom suppliers. They apparently left the country to avoid trouble.

The snowballing affair reflected the breadth and depth of the telecom industry's spending habits, and the enormous incentive for contractors to do whatever may be needed to find that pot of gold.

"I never imagined that telecom server-room air conditioning systems and alarm systems could be so lucrative," said one equipment supplier. "But telecom company fixed asset investment is really big, and even a small portion from the cup is still a lot."

'Consulting' Fees

Opposite Workers Stadium in Beijing is a peculiar building that combines a modern steel structure with ancient ornamentation. It's said this is a 200-year-old house that was moved from Jiangxi Province and is now the home of Le Quai, an upscale restaurant owned by Zhang.

Local officials, foreign diplomats and celebrities alike feel at home here. Over the years, Zhang has hosted a slew of high-profile events revolving around his reputation as an art collector. Some say his home is a veritable Guggenheim Museum, with nearly 1,000 works of art.

Few art fans know, however, that Zhang made his fortune in the telecom business. He got a start in Dalian in the 1990s as a representative for switchboard makers and eventually built an empire through firms offering "consultant" services to foreign companies seeking business with state-owned telecoms, advertising deals and mobile phone services.

In Dalian, he met his rainmaker and future government-business insider Zhang Chunjiang, then-deputy director of the Dalian Post and Telecommunications Administration, who later became, among other things, the youngest vice minister ever when the Ministry of Information Industries was formed in December 1999.

Zhang kept good relations with this rising star through a period of rapid growth for the nation's telecom industry.

Since 1992, the number of fixed-line subscribers in China has increased to 1.1 billion from 10 million, while the number of mobile subscribers grew to 800 million from almost zero. Regulators and telecom operators have had to expand networks quickly and on a massive scale. Paying for all this growth required a pot of gold that equipment and service providers were eager to tap, creating enormous opportunities for insiders such as Zhang.

Foreign telecom equipment manufacturers that joined local suppliers lining up for contracts soon learned about the importance of relationships in the Chinese business world. But foreigners who found themselves caught between overseas regulatory constraints and the need to cultivate relationships signed up with Chinese agents and consultants who acted as middlemen.

Zhang signed up numerous telecom equipment and software companies who hired him as a consultant. In fact, though, authorities say he functioned as a third-party representative by transferring payments from contractors to telecom company insiders. He called the payments "consulting fees."

What Zhang did is common in the industry, insiders say, especially when foreign companies are involved. Middlemen often enjoy close ties to telecom executives and government officials.

Zhang was "a middleman for many foreign companies," a close associate said.

Gold Rush

Yet Zhang was more than a middleman. As his friend Zhang Chunjiang climbed his career ladder, Zhang expanded his business scope.

Zhang established Beijing Huamai Electronic Technology Co. Ltd. with registered capital of 2 million yuan in July 1995. His wife Yang Xuxia (who later changed her name to Yang Ruining) put up 800,000 yuan, and Zhang and Zhang Chunjiang's now ex-wife Ji Rong each put up 600,000 yuan.

This became a foundation for Zhang's other platforms, such as a company with a Hong Kong connection that made alarm systems for clients including China Telecom, China Mobile and China Unicom. But mainly these entities built relationships and shuffled documents; Caixin found only a few employees recently working at the alarm company's office in Beijing.

Zhang established his first telecom company – Beijing Siruide Computer System Integration Co. – in 1997 and became its legal representative. The company handled computer communication network technology and project integration, but also sold telecom equipment. Huamai Electronic was a shareholder. Others were Sichuan Galaxy Technology Co. Ltd. and Sichuan businessman Li Xinze.

Apparently, one of Zhang's first business ties to Sichuan was Li, who later worked up to Sichuan Mobile value-added and data services posts, and became a core member of the mobile phone music services provider Sichuan Mobile Music Base.

Zhang established Beijing Ruizhi in 1998, offering communications products as well as computer software and hardware. In 2001, the company invested in another outfit called Raynetwork.

Raynetwork was valuable because it held a telecommunications business license. Such a license requires approvals from multiple government departments and applications are tightly controlled by the government. Zhang sold it in 2007 for 7.2 million yuan.

These and other deals underscored the advantages Zhang enjoyed thanks to Zhang Chunjiang, who became director of MII's Telecommunications Management Office in 1998, and other friends in high places.

Advertising Whiz

Advertising profit potential caught Zhang's eye in 2001 after China's telecom sector had completed its first reform step, which separated companies from government administrations. Telecom operators began to spend more money on image promotion, for example, and so Zhang and his wife set up Beijing Raynet Advertising.

In the first year, the ad company's sales topped 14.7 million yuan thanks to big clients such as China Mobile and Sanyo. By 2002, revenues had soared to 56.4 million yuan.

The agency won a national contract from China Netcom in 2004, the year after Zhang Chunjiang took a job as Netcom's president.
By 2007, Raynet had expanded its client base to provincial departments of telecom operators in Shanghai, Liaoning, Changchun, and other regions. Money poured in.

"After getting the Netcom project, we basically didn't need to do ads for other telecom companies," a Raynet executive told Caixin.

"A single provincial telecom can support a large advertising company, which can live well," said a former provincial director of a mobile advertising agency.

A senior advertising source said it's not uncommon for telecom executives to invest in advertising and advertising production companies, some of which can be half-owned by a telecom company chief or his family. Because production companies have no equity links to advertising companies, it's difficult to trace the ownership links. They are also less risky than under-the-table gift-giving.
"Everyone avoids directly giving ‘red envelopes' (cash payoffs)," said one industry insider. "Travel packages, Louis Vuitton bags, jewelry, etc., are too low brow."

Raynet's performance opened a door to cooperation with the global ad giant Ogilvy & Mather. The companies established a joint venture in 2007, with Zhang's wife serving as legal representative.

Sichuan Trio

Another moneymaking venture for Zhang started in 2003, when he and Li each put up 250,000 yuan to establish We Think, a telecom technology company based in Sichuan. Its downtown Chengdu headquarters opened two years later.

The plan was to grab some of the gold available in value-added services (VAS), which had become the fastest-growing sector for the country's major telecom operators. A rapid increase in mobile phone and Internet users gave birth to an army of VAS providers.

First came text message services, and then mobile music services through places such as China Mobile's Mobile Music Base in Sichuan. Again, revenues surged.

China Mobile elevated the successful Sichuan Mobile's music business, giving it oversight of the company's nationwide music business. Numerous wireless VAS providers like We Think sprang up, and a Caixin survey found several names appeared frequently in the list of these companies' shareholders: Zhang, Li and Tan Chunling.

Sichuan Mobile became We Think's largest customer, but the Zhang-Li venture also did plenty of business with Sichuan Telecom.

We Think increased its capitalization to 5 million yuan in October 2004, with Zhang and Li increasing their share of the capitalization to 2.25 million yuan each through non-patented technology. The phrase "non-patented technology" refers to a mobile operator data service analysis system developed by the pair called Comprehensive Evaluation System for the Operational Strength of Mobile Operators.

Zhang and Li's said the system's sales revenues would rise to 6 million yuan the first year, 12 million yuan the second, and then climb to 20 million yuan, 26 million yuan and 30 million yuan respectively over the following three years. This forecast allowed them to assess intangible assets of their technology at 4.51 million yuan.

Similar technology assessments-for-investments are described in documents at other companies run by Zhang.

Service and content providers who wanted business on China Mobile's network platform had to go through the Sichuan Mobile Data Department and Mobile Music Base. We Think waltzed through the door through Zhang's connections at Sichuan Mobile.

Annual operating revenue rose to tens of millions of yuan by 2005, and in 2007 We Think reported 72.4 million yuan in revenue and net income totaling 27.1 million yuan.

These days, We Think has lost its sheen. Unpaid bills were found recently taped to the company's Beijing office gate, which is shut tight. Caixin noticed Zhang's name on one bill.

Another company registered at the address of We Think's Sichuan branch – Sichuan Heze Technology Co. Ltd. – is in the business of communications equipment consulting and equipment sales. Established in 2004, investors included Zhang, Li and Tan.

Tan was originally a director at Sichuan Television. He later opened an advertising company whose major clients were Sichuan Mobile and other telecom operators. Li and he were the shareholders.

Tan's main gig was an independent digital music support platform company for the Sichuan Mobile Music Base called Myoo Music Entertainment. He started it in 2005 and, with Li, bought the company in 2007 just as Sichuan Mobile Music Base was starting to provide mobile music services.

Myoo is currently near to launching an initial public offering on China's Growth Enterprise Market. It's already completed two rounds of fund-raising.
Wang Feng, an executive at Bond Advertising, said he invested more than 10 million yuan in Myoo. But the recent shakeup in the telecom world, the detention of Zhang, and the exposures of shady business ties linking Tan, Li and others has left him feeling uneasy about the investment.

Wang has good reason to be nervous. It appears the listing plan of Sichuan Mobile Music Base's most important service provider Myoo now hinges on the outcome of the cases against Zhang and the rest of the telecom insiders who found a way to the pot at the end of the rainbow.

1 yuan = 14 U.S. cents