By JONAH GREENBERG
(Virtual China News, June 5) UT Starcom, a U.S.-based telecommunications and infrastructure producer, fell victim last week to an internal debate at China's high-technology regulating agency. The question was whether to guarantee the largest state-owned telecommunications operator future market share in the national wireless service market, an executive at the company said Friday.
The setback marked the second time in two months that a U.S. company has been directly affected by regulatory uncertainty in China. Over the past two weeks,
shares of Qualcomm nose-dived when Beijing intervened in infrastructure development plans in China that would have used technology that Qualcomm owns patents for.
Then, last Thursday, shares in UT Starcom (ticker: UTSI) dropped 48 percent when the company told the public that the Ministry of Information Industry (MII) ordered local and provincial telecommunications operators to hold off on future contracts for a certain type of city-wide wireless network and phone equipment that UT Starcom offers. Shares continued to hover around $20 per share Friday, compared to around $38 Wednesday, showing no sign of recovery.
60-Day Review
"We understand roughly why it dropped, but we don't understand why it dropped so much," said Hong Lu, president and chief executive officer of UT Starcom, whose sales have been focused on mainland China.
Concern has been brewing among analysts and investors that China will keep foreign telecommunications and infrastructure makers on a short leash in order to promote the development of domestic companies, and this type of awareness may have compounded the stock drop.
According to Lu, who said UT Starcom learned of the 60-day "review" period from a customer in China, only potential sales -- and not previous sales -- of its trademark Personal Access System (PAS) wireless network equipment will be affected.
"During this period of time they would not want any new contracts to be signed, but we are still shipping any contracts already signed," Lu said, adding that the statement was very clear that customers in China would have to honor previously signed contracts.
Complete Package
UT Starcom has signed sales contracts with more than 30 cities in 12 provinces throughout China for its PAS line of wireless equipment, which uses the Personal Handyphone System (PHS) technology. PHS functions much like a very powerful cordless phone: it offers a higher data transfer rate than a cellular phone, but it can only be used within the confines of a single area or city.
The company's PAS product sales in China include a complete package of hardware and software that the company makes itself, and also handsets that are procured from Japanese manufacturers, including Pneumonic, Sharp, Kyocera, Sanyo, and JRC. The MII review is not focused solely on UT Starcom's products, but on all wireless network equipment that uses the PHS technology.
"The technology is not an issue, it's been approved," said Lu, adding that similar products are also offered by Lucent and the Chinese company Zhongxin. At the core of this issue is the MII's concern that high adoption of PHS networks in Chinese cities will cut down on the market share for other wireless networks using different technology, such as GSM, the most common wireless network in China.
Battered Stock
"The reason is that the wireline operator (China Telecom) is requesting a mobile license," Lu said. China Telecom is officially not supposed to dabble in wireless service since China Mobile split off from it earlier this year. Future competition between China Mobile and its former parent China Telecom are on the horizon, Lu said, but the terms and the time-frame have yet to be decided by the MII.
"The government is giving them a mandate that they can compete with
each other a certain time after they split," he said, adding that it could be three to five years. With the development of locally entrenched and locally administered PHS networks, China Telecom could potentially lose market share when and if it finally offers national wireless service with a different technology.
UT Starcom's stock price remained battered even Friday despite a simultaneous announcement Thursday that UT Starcom signed a US$35 million contract with First International Telecommunications Corporation of Taiwan (FITEL) to build out PHS networks in the Taipei area.
Protectionist Elements
Despite the fact that Thursday's deal with FITEL shows spreading adoption of the wireless technology -- as well as UT Starcom's international market power -- investors were overwhelmingly focused on the regulatory setback.
What would otherwise have been a milder reaction might have been worsened by building concern in the U.S. over the last two months that CDMA development, another wireless technology, will be prevented in China by protectionist elements in the regulatory power structure.
China Unicom, the country's second largest telecommunications carrier, originally planned to build future networks using CDMA technology (code division multiple access), for which Qualcomm (ticker: QCOM) owns the patents. But stock in the San Diego-based company has halved since April, when the company's contracts with China Unicom first came under official intervention.
"Unfortunately, in this type of market environment people are concentrating on the negative news," said one analyst in New York City who follows company. "We were not expecting that type of reaction," said the analyst, who conceded that regulatory uncertainty has enormous potential to affect the market. "The problem is investors don't know how long the ban or the potential ban could last," he said.
3G is Next
While admitting that he and others at UT Starcom were surprised by the market reaction, he said they were "still very confident" of their operation. Lu pointed out that the company has other product lines that are not affected by the official review.
Among them are IP switches, and hardware and infrastructure equipment using the WCDMA standard, or "wide-band" CDMA, which is the technological platform that will support the widely anticipated third generation, or 3G mobile networks in China.
The company only targets smaller cities for the development of its PAS products, because people in the far-flung reaches of China are less likely to require nationwide service.
Ninety-five percent of people don't move out of their home city, Lu said. Cities already on board with UT Starcom's PAS networks are well spread out over the country, including provinces such as Sichuan, Guangdong, Zhejiang, Fujian, Shandong, Shaanxi, Yunnan, Liaoning, Hebei,
Guangxi, Ningxia, and Hunan.
"We are very hopeful that they will allow us to continue doing it in the smaller cities," Lu said.
To reach Jonah Greenberg email: jgreenberg@virtualchina.com
