STAYIN' ALIVE
Can Martin Lee keep LGT's heart beating in Asia's hottest and most competitive 3G market?
By Karen Winton

Seoul. A mobile phone trills an ear-catching tune - Jingle Bells or Bach's D Minor fugue - and everyone distractedly reaches for their pockets. But the voice on the other end isn't a friend. It's a direct marketing pitch man from LG TeleCom. "As one of 4 million lucky subscribers, do you like your service? If not we'll fix the problem, no cost. No? Well then, we'll refund all the money you've spent on us." The subscriber - a housewife, taxi driver, securities analyst, anyone - presses the off button on the most brazen hard-sell currently going in Korea's white-hot telecoms market.

Where else could this desperate pitch by a telecommunications company happen but South Korea? In Hong Kong when price wars get too tough, companies meet secretly - or so rumor has it - remove their gloves and agree on limits. In Korea, they go after each other with cold-blooded fury. Martin Lee, CFO of LG TeleCom (LGT), the third-largest mobile phone provider, keeps a tight rein on marketing expenses and endorses this approach, because he knows it's as necessary as breathing.

Lee also knows something else - that LGT is the cheapest wireless play in Asia in a country that is enjoying renewed foreign investor interest. Showing the same zeal as his marketing department, Lee has taken LGT's Cinderella story around the world. He's taking advantage of the momentary glow that has followed the big inflow of foreign money to Korea's blue chips. Analysts say that Lee has the ear of maybe 30 to 50 global investors, even though LGT is number three in its market, and Korea's two heavyweights - SK Telecom (SKT) and KT FreeTel (KTF) - are still selling at a discount.

But Lee won their attention, and there's a good reason why. LGT took a huge bet on its future by being everything that its competitors are not. There are two ways to invest in 3G telecoms, by building up your network incrementally, or betting the farm. The received wisdom is that the only way to win is to take the big bet (see "Sixt Sense," March 2002), cross your fingers and hope that the technology will stimulate the kind of vast market interest that eventually weds consumer and business needs to 3G m-commerce. Then, you laugh all the way to the bank.

But a few, perhaps more modest, more canny companies, have opted to go incrementally, spending less, improving finances and internal corporate governance, building the internal mechanisms that will allow them to return to the capital markets again and again as they slowly build their networks and market share. J-Phone in Japan, in partnership with its investor Vodafone, is travelling this route (see "Shock Value," May 2002). In Korea - the only other market in the world where the 3G experiment is in full swing - LGT is the exponent.

So Lee has been rewriting LGT's story, month by month, from Frankfurt to Wall Street to Hong Kong. At home, LGT is declassZ¹, desperate, non-core to its chaebol investors, unloved by subscribers - though, lately, not unprofitable. Overseas, it's a kind of doppelganger telco, with its better half emerging. Its balance sheet is the cleanest among its competitors. It has just cut itself loose from its chaebol in a risky demerger, a move that demystified its corporate structure and enhanced transparency (see box, "Demystifying the Stakeholders"). Its profit growth exceeds its pampered peers. Its discounted cashflow looks more promising. And it has won - since year end - a slew of corporate contracts in a highly competitive battle, making it a pioneer of B2B 3G, that untested market with tremendous potential. These deals endorsed its approach, sending its stock price up 50 percent. "LGT has reinvented itself as a wireless business solutions player," says James Kim, the head of telco research at Salomon Smith Barney (SSB) in Seoul, "which should offset its weaker position in the more traditional wireless market." .

Reality TV

Lee seems to find zest in the irony of all this. He's a casual, but sober, dresser and he's soft-spoken but highly articulate. He spent 23 years at Korea's second-largest conglomerate LG Group, before rising to the CFO position at LGT. He was just in time to oversee the change in ownership when LGT's parent, LG Electronics (LGE), tucked the company under the control of LG Electronics Investments, an independent entity, a move meant to put the risk of LGT's 3G telecom bid at arms length from the LG Group. Lee's appearance may be conservative, but he comes across as savvy and blunt about the company's prospects. "Financially we have reached a point where we are able to generate enough cash for coming capital expenditure for growth," says Lee. "We don't need any more outside funding," he says, and adds, ruefully: "I am still concerned about our market perception and market share."

Lee's style is worth studying because he's a breakaway CFO. At times, he seems stuck in a reality TV program that might be dubbed 'CFO Survivor', given the knocks that companies can take in Korea's fierce market. But he has managed to bring the competition to a higher ground, basing the company's future on sound finances and a clear explanation of its opportunities and risks to a global audience.

A telecom company that has its government's unspoken mandate and is the darling of investment bankers hungry for deals may find this easy. But for this third-ranked player it's no cakewalk. As other Asian economies follow the example of Korea's colorful struggle to open its markets, more CFOs from companies in industries with potential for global investment - from telecoms to power - will follow Lee's example to compete and survive.

This no-nonsense but determined approach is evident at LGT's Network Management Center in suburban Seoul. Set on the edge of a busy, eight-lane highway fringed by hi-fi dealers, Hyundai showrooms and dress shops, the center doesn't look like the hub of LGT's technical operations. But inside, row upon row of high-tech telecommunications equipment looms in large metal cabinets in rooms kept cold by high-volume air-conditioners. Rows of monitors in the third-floor control room face a wall that is covered in complex text, blinking lights and a digital map of Korea. The lights on the digital map projected onto the wall flash red, amber and green. There are a few red warning lights blinking and the operators are already rerouting traffic and preparing engineers in the event of a failure. LGT claims it can fix some major problems in two hours.

Amid these spartan surroundings it's possible to sense the company's past, its struggle, and its future potential. Compared to SKT and KTF, which between them are spending more than 2 trillion won (US$1.6 billion) on 3G preparations, LGT has invested only 100 billion won (US$78 million) and plans to spend no more than 300 billion won in annual capital expenditure in response to network requirements from 2003 on.

The difference in the 3G expenditure is in the technology that each network is employing. SKT and KTF plan to use the GSM-based W-CDMA technology for their 3G platforms. W-CDMA involves significant investment in infrastructure but offers greater future capacity. LGT, on the other hand, is using CDMA 2000, which requires network upgrading (the building of 800 additional base stations in the first quarter of 2002 was part of this) rather than new infrastructure, but has limited future capacity. This is a strategy tailored to LGT's third-ranked market size. Lee hopes it will be sufficient to meet the potential medium-term consumer demand for mobile data features such as stock trading and gambling. It is also a strategy that presents LGT as a company with less debt and a healthy looking balance sheet.

The reduction in capital expenditure has certainly sparked interest in LGT from investment analysts who upgraded its stock in the first quarter of 2002 and helped the share price break through the 10,000 won (US$7.80) barrier. "LGT could be a very attractive company if it really saves funds from investing capital on a 3G network," exhorted BNP Paribas Peregrine analysts in an April 2002 report on Asian telecommunications.

Youngcho Chi, a partner at consultancy Accenture in Seoul, agrees that LGT should be better off than its competitors regarding capex for 3G. But the lower expenditure, to be sure, carries risks. "CDMA 2000 is not going to be as widely deployed worldwide as W-CDMA," says Chi. "In terms of buying reliable equipment and upgrading it, there is a big disadvantage in being an operator using less widely applied technology because you're stuck with a few big vendors, maybe only one," he says. But in LGT's case, the vendor will be Samsung Electronics, which developed CDMA 2000 technology in Korea, a provider not likely to gouge its only major Korean client.

3G B2B?

The lower cost route, it turns out, has its advantages. LGT failed to win a 3G license from the first round of government auctions for the more expensive GSM-based technology in late 2000. Cut out from what appears to be the hottest, most expandable technology, it bid and won, in a second round, a license for CDMA 2000 in August 2001. The popular view - prevalent among LGT's former LGE owners - is that this was a suicidal strategy. Why pursue a technology that could be overtaken by the more pliable, sophisticated GSM-based networks? But these objections ignored the lower cost of deployment and the virtue of speed to market. LGT has proven that the private sector is willing to embrace the technology.

As Korea's mobile phone industry reaches saturation point - total subscribers exceed 30 million in a country of 47 million people, a penetration rate of 64 percent or, for every adult aged 18 to 60 years, more than 90 percent - each operator is reaching out to new revenue streams. The race is on to seal exclusive deals with a range of companies, industries and associations - and to make 3G a going proposition in the business-to-business world. Already, it looks as if LGT may be off to a flying start.

In the past six months, LGT announced a series of juicy tie-ups for its mobile m-commerce technology, including car manufacturer Hyundai/Kia, the Korean Digital Satellite Broadcast (KDSB) television network, the Korean Real Estate Association and Samsung Non Life Insurance. SKT and KTF are not far behind, having also got wind of the new market for wireless business. Both have internal divisions examining the possibilities and SKT already has an exclusive alliance with Samsung Motors for vehicle mounted terminals (VMT).

These terminals will beam traffic information as well as instant access to e-commerce and financial transactions to drivers through a wireless modem. The LGT-Hyundai/Kia deal calls for all new vehicles to be fitted with the gadgets by later this year, beginning in August. An ambitious target of 1 million users a day has been projected by both companies for 2003 and 3 million users by 2006.

From September 2002, LGT will kick off a two-way interactive television service with Korea's KDSB network. Viewers will be able to control what program they watch and when, rather than sticking to the regular line-up. Meanwhile, the Korean Real Estate Association and Samsung Non Life Insurance deals will see the issuing of wireless PDAs to 300,000-plus sales agents, which will be linked to the LGT mobile network. The PDAs, manufactured by Samsung Electronics and LG Electronics, will be in use by sales agents across the country from July.

"LGT is creating and leading this new wireless market. There have only been a handful of major contracts and LGT has captured almost all of them," says SSB's Kim. "When LGT announced the deal with KDSB that's when the share price surged from 8,000 won (US$6.24) to just below 12,000 won (US$9.36)," he says.

Cleaning House

All of these initiatives have hinged on business strategy and investment, activities where Lee has been a focal player. The boost in the stock price after the clinching of those deals, however, had just as much to do with Lee's management and presentation of the company's internal structural changes. First and foremost, LGT pushed out a profit for the first time in four years, hitting 628 billion won (US$488 million) from gross revenues of 2.1 trillion won (US$1.7 billion) with an Ebitda margin of 35 percent, reversing a 440 billion won (US$340 million) loss in 2000.

The profits were a direct result of better operating and balance-sheet management. Principally, Lee drove a 39 percent year-on-year reduction in marketing expenses from 614 billion won (US$477 million) in 2000 to 373 billion won (US$290 million) in 2001. Two rights issues on the Kosdaq also netted more than 460 billion won (US$340 million) and were, says Lee, "a big help to our balance sheet and helped us make a profit as well as pay for the 3G network improvements." In other words, Lee used part of the proceeds to recapitalize, allowing some of the cash that would have been used to service debt payments to flow to the bottom line. He used most of the rest to fund necessary increases in the number of LGT's base stations.

The first order of business was the retirement of some of LGT's long-standing debt. At the end of 2000, LGT's debt had soared to 1.4 trillion won (US$1.1 billion), its highest ever. At the end of last year, it was down to 1.3 trillion won. Lee wants to reduce it this year by at least another 200 billion won.

So far so good. Lee has continued debt repayments by using free cashflow garnered from savings via his program of stronger internal controls. "We have enough cash to repay the debt, cover capital expenditure and pay interest," says Lee. "Last year, we were the only telecoms company able to reduce our debt and we did this because we had free cashflow," he says. "My gut feeling is that 1 trillion won is more than enough debt for us. But the cost of debt now at about 7 percent is cheaper than the cost of capital. So in future I'll think strategically about the point at which the debt level will balance out for LGT to make the maximum value," he says.

CFO Sophisticate

Two further moves helped fund LGT's capital needs - and convinced analysts that Lee is one of Korea's more sophisticated CFOs. From the beginning of last year, an installment payment plan for mobile phone subscribers was introduced. This increased the level of LGT's accounts receivables. To offset the increase, Lee authorized the issue of asset backed securities. LGT securitizes the accounts receivables and sells them to public investors via securities companies, thus reducing the accounts receivables on the balance sheet.

The second scheme is to sell off fixed assets such as real estate to securities companies, which then on-sell them to private investors. LGT pays interest - through rent if the asset is real estate it occupies, for example - and after three years buys the assets back at a depreciated rate.

His approach, noted by LGT's four-strong investor relations team, is testing. "He wants us to find more efficient ways to run the business and always challenges us to follow this path," says Kevin Kim, senior manager for LGT's office for strategic management/IR. Kim explains that in the past 12 months LGT has outsourced 800 employees to three separate call centers and that even the number of employees in LGT's finance department has been cut by 20 percent at the behest of the CFO. "What he's doing is good for LGT. He achieved the turnaround - and it's a big turnaround - with our whole company making a huge effort behind him," says Kim.

In anticipation of the demerger, and LGE's disenchantment with LG's telecom investments, British Telecom (BT) reduced its investment in LGT last year to 16 percent from 23 percent. By Korean law, foreign investors can own 49 percent of the company. Today, Lee is travelling the world to drum up more stout-hearted investors. His travel schedule these days rivals a foreign minister's.

The effort appears to be paying off. SSB's Kim says: "We are seeing a lot more interest in LGT." He adds: "I talk to about 50 investors on a regular basis and among those, there is genuine interest from 10 to 20 percent, whereas in the past it was from maybe 5 percent."

Certainly, it's worth the fight. Since January 1999, Lee has had one hand firmly gripping LGT's balance sheet, and the other beckoning potential shareholders. The knife edge he walks has held firm in the past year as he has raised LGT's revenues, profile and share price, and overseen its out-performance of the Kosdaq composite index every quarter since March 2001. Despite short-term panic at being left to fend for itself, the pared down, reinvented telco seems to be galvanized. Global investors, don't be surprised if the next call on your mobile is Martin Lee.

Karen Winton is a senior writer at CFO Asia based in Hong Kong.