THE GREAT LEAP ONWARED
An American company struck gold in China's wireless market. Will the same approach work in India?
By Abe De Ramos

To get to Alameda, California, one can take a breezy, 25-minute ferry ride from Embarcadero in downtown San Francisco. Alameda is an all-American suburb where the lawns are manicured, the houses are white and Victorian, and the local diner serves enormous burritos. Against this backdrop, one would little expect a lowly building, flanked by an 18-hole golf course and an old Air Force base, to be the headquarters of a company that has struck gold in rural China. UTStarcom will make US$2 billion this year selling cheap phone services to the Middle Kingdom.

From its quiet enclave in Alameda, it is now plotting to conquer the land of Bollywood and the rest of the unwired, developing world. The name UTStarcom (UTSI) is little known even in the mainland, but mention the word Xiaolingtong ("Little Smart") and 33 million Chinese will give you a universal nod and flash their shiny, stylish handsets. Seven in ten of these will bear the purple UTStarcom label. The company started selling them only in 1999, but their popularity catapulted its revenues to more than tenfold in just four years. The fifth year should be even better, when Xiaolingtong users are expected to hit 50 million, more than twice the population of Malaysia. Founded and managed by a group of Chinese-American immigrants, UTSI is one of the fastest growing companies in the world.

The only Caucasian in the top management, Michael Sophie speaks as fast as a sports commentator, and just as passionately when he talks about the Little Smart. As CFO, the native Californian evangelizes about how the technology that runs it, called PAS for personal access system, has an appeal that goes beyond China (see box, "How the East was Won," below). "It plays on the major trend in telecommunications, which is that people want to make a voice call on a wireless basis," he says, his own mobile phone in hand. "If you can be successful in China, rolling out the latest technologies in volumes with an efficient cost structure, you can be very successful globally," he says.

It's a bold, largely unproven move. On one hand, few foreign or multinational companies have made the entrepreneurial bet of making China a launch pad for regional, much less global, product rollouts. On the other, its choice of India as a second market exposes the company to great opportunities but also risks.

China's top-down approach in developing its economy meant it opened up its industries to foreign investors. India's bottom-up approach encouraged domestic private enterprise that meant foreign investors would meet local competition the moment they entered the market. And while India's economy is fast rising, it still lags behind China, with a middle-class population considerably smaller than its northern neighbor. .

A Passage to India

As such, the strategy begs the questions: Can India offer a dZ¹jˆ vu of the euphoric growth that multinational companies experience in China? What lessons from China can be applied as companies go to India and beyond? From Alameda, Sophie looks at the glass as half-full. India's telecommunications demographics, he says, are very similar to China's ten years ago: massive population, teledensity of 5 percent, huge pent-up demand. "India is realizing the benefits of telecommunications. We think it's going to be a very large market," he says.

It's an expectation that's becoming increasingly familiar. Foreign direct investments in India have risen from US$2.3 billion in 2000-2001 to US$3.9 billion in 2001-2002, the latest available official data, and that figure is likely to grow subsequently. In an essay written for Foreign Policy magazine last summer, Yasheng Huang, associate professor at Massachusetts Institute of Technology and Tarun Khanna, professor at Harvard Business School, wrote: "India is not outperforming China overall, but it is doing better in certain key areas. That success may enable it to catch up with and perhaps even overtake China." Its thriving private enterprise, which is lacking in China, can ensure a stable, prosperous future, they argue.

By 2006, Sophie expects UTSI's share of revenues from China to shrink from 80 percent this year to just 50 percent. While he sees China growing 20 percent next year, other markets should grow 100 percent to US$600 million combined, as they will this year from US$150 million in 2002. India should contribute substantially to that, and Sophie says it should overtake Japan as UTSI's second-largest market soon.

It may be easier said than done. Despite its success in China, UTSI has thus far been unable to crack open the Indian PAS market, and this highlights differences between the two giants. Because telecommunications companies in China are largely state-owned, they have acted in line with the communist state's ambition of increasing its teledensity. India, on the other hand, handed out the industry to private hands earlier, and so the carriers can very much pursue whatever strategy they wish. "Teledensity seems to be less of a focus [for them]," says a New York-based wireless equipment analyst. "It's more on, how can we get profitable growth for our company?"

That means the rollout of GSM and CDMA mobile networks, which have higher average revenue per user (ARPU) than PAS. "UTStarcom [tried to] get carriers to use PAS, but they weren't able to do it because they decided to build on the same network," says Tom Sepenzis, wireless communications analyst at ThinkEquity Partners in San Francisco.

As such, says Reena Verma, analyst at DSP Merrill Lynch in Bombay, PAS is not likely to have a big impact in India even if it gets deployed there. "UTStarcom will probably remain a player at the periphery," she says. "At regions where revenue potential is low, where customer requirements are not very demanding, you might see PAS being accepted." And there aren't a lot of these regions, she adds, since local carriers have practically covered every region of the country save for the political hotspot of Kashmir. "I'm not sure whether [the local carriers] will give any big slice of their network demand to UTStarcom."

Furthermore, supposing Indian fixed line carriers do roll out PAS, the incumbent mobile operators are likely to make noise. "I think their biggest barrier to being successful internationally is pressure from the cellular providers in any given country," says Joseph Noel, analyst at Pacific Growth Equities in San Francisco. "Technically, [PAS] is a wireless service, and when you go and deploy into a Mexico or an India, other providers who are already there will say, 'It's not fair that they can come in at a very low cost basis and compete directly against us.'"

It's also uncertain how much PAS can be absorbed into India, which analysts say has a greater proportion of "unaddressable market" - or a population that will never be able to afford any form of telecommunications services - than China. (Sophie estimates this segment in China at just 30 percent of its 1.3 billion people.) "India has a smaller middle class," says an analyst from a US investment bank in Hong Kong. "It doesn't have that group of people, that urbanized population [whose] income can afford PAS services." .

Raincheck on Bollywood

This pretty much casts doubt as to whether UTSI will achieve its 50-50 revenue split between the Chinese and overseas markets by 2006. "It's a bit aggressive at this point, although I think they'd get pretty close," says Noel. "India is a little bit behind schedule from where they wanted, and some of the other deployments are rather small."

Currently, the products UTSI sells in India are limited to broadband equipment, in the form of boxes that transform traditional copper connections into high-speed voice and internet channels. It is selling the same in Japan, where its main customer is Yahoo! BB, an internet company owned by Softbank, which also owns a substantial stake in UTSI. In October, Sophie's guidance pointed to Japan taking up to US$150 million in sales next year, compared to just US$100 million in India - the same size of a contract it signed this year with just one company, Reliance. This signifies that broadband also may not have as much promise as PAS.

Sophie's formula to turn the situation around is "commitment to the local market," he says. "The reason we were so successful in China is we put people in-country, we supported the customers, and that's a lesson we want to duplicate in India and everywhere else we go." Currently, its presence in India is through a liaison office and distribution and manufacturing partnership with a local company. This year, it acquired the R&D center of Moscon, an American-owned company. UTSI already had 40 engineers there, but the acquisition brought that to 150. The center is still operated by Moscon. In the middle of the year, UTSI applied for subsidiary status.

Then again, this application has been slow-going. It was brought to a regulatory committee for "security clearance", a requirement for investing in a sensitive industry. Verma says these cases are routine and usually last two months. UTSI has yet to get an approval. This reflects India's snail-paced move towards reforms. While China accelerated telecommunications liberalization in the late 1990s, India's watershed reform only came last October: the unified licensing system, which enables any telecommunications player to supply any service. In spite of this, analysts say India remains a regulatory puzzle.

"The most fundamental thing any investor would be looking for is to have some stability so they can plan, and that hasn't been the case in India," says Mohsin Majid, consultant at Analysys, a telecommunications research firm in London. "Once the government puts in place its current plan of a unified licensing system, maybe that challenge will be improved upon and won't represent such a barrier anymore, but for now it is a very significant barrier."

Sophie acknowledges these hurdles. "In India, there's just a tremendous amount of turmoil," he was quoted as saying in an investor forum in New York in November. "This whole thing on [whether] wireless [was] legal or not, was being challenged," he says, referring to PAS. "That's been finally upheld. They're trying to overcome another area, to provide some kind of compensation to the GSM operators that paid quite a bit of money for frequencies" in case PAS was rolled out in areas already covered by their networks."

The World At Once

And what of its global strategy? Sophie thinks UTSI can use its success in China as a springboard to other markets, and indeed, early signs of PAS deployment are more encouraging than in India. It is already selling PAS to Vietnam, Thailand, Taiwan, Haiti and Mali, and Sophie expects to announce a contract in Latin America by year-end. Analysts have also caught wind that UTSI may win a contract in Mexico, and in Indonesia, the world's fourth most populous nation. Of its projected US$2 billion sales this year, 20 percent will come from outside China.

Analysts believe PAS is well suited for nations with demographics similar to China. "UTStarcom has a market that's very real," says Sepenzis. "Other people have taken notice and are now trying to compete there," he adds, citing Nokia's recent move to create a lower-cost offering over existing GSM networks. "PAS has been around longer, so they've got proven technology at this point and should enjoy a better position [in marketing] the product."

The question is how UTSI can scale its operations, as it will enter 2004 with several months worth of backlog. What's more, the company suffered a major shortage in the summer of two critical components that it can only import from Japan. If it can't meet this much demand in the mainland, how much more can it support its overseas expansion? "That's a problem," says an analyst at an investment bank in New York. "Some of the shortage may just be from the rapid pace they were growing at, and probably they were suppressing their own expectations and so they didn't plan for enough components. But if they're able to get better visibility, they should be able to line up the sources."

Sophie acknowledges it's a failure in reading the market. The company forecasts conservatively, he says, because "you always have the risk that something will go wrong." Little did he know that the policy itself would be the cause of that trouble. "We were pleasantly surprised. The demand exploded so fast, [our suppliers] just could not keep up with the demand." Relief came during the Sars outbreak, when travel restrictions within China delayed installations as well as final product acceptances (after trials) by the carriers.

Now, the company is building inventory "so you can quickly respond to the demand that comes in", says Sophie. It is not, however, on a hiring binge because "there's a tremendous talent pool in China, so we can hire very quickly". Still, these do not resolve the issue that the chips critical to UTSI's equipment and handsets are concentrated to a handful of suppliers.

"They'll have to be very careful in their demand for those chips, and it's something that just has to be managed," says Noel of Pacific Growth Equities. In short, while UTSI has clearly gained credibility with investors from its success in China, it has a lot to prove with its overseas strategy.

Still, analysts are not yet ready to write India off. For one, the broadband business should sustain its momentum there. Its contract with Reliance, for example, would have UTSI install the boxes in residential and commercial buildings. This, in itself, has a lot of room for growth. "Reliance's broadband initiatives are being looked forward to with a lot of excitement," says Verma of Merrill Lynch. Bandwidth, she adds, has always been a constraint with the incumbent operators, and none has so far provided speed of access. "It remains an issue on existing networks, so if Reliance is able to tackle that issue, it will be a big plus."

Also, there may be a future of PAS in India yet. UTSI has installed a trial PAS network for MTNL, one of the incumbent fixed line operators, and Inder Singh, analyst at Prudential Equity Group in New York says in a recent report that "it could lead to a commercial deployment in a few quarters." Certainly, the fast-talking Sophie has a never-say-die attitude. "We're still very excited about the wireless opportunity," he says. And that excitement may just reverberate and rouse sleepy Alameda.

Abe De Ramos is execuive editor of CFO Asia.