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This Aussie Could Connect in Hong Kong

Bruce Einhorn With the recent fifth anniversary of Hong Kong's return to China, a lot of people have been looking back at what has changed since Prince Charles and Governor Chris Patten sailed away from the island-nation in the early hours of July 1, 1997. One thing that's much the same in the former British colony is the sorry state of the city's mobile-phone industry. In the dying days of British rule, it was an overcrowded business crying out for consolidation. Five years after Hong Kong became a Special Administrative Region of the People's Republic of China, it still is.

The overload may finally be clearing, thanks to a 54-year old Aussie nuclear physicist. Ziggy Switkowski has a PhD from the University of Melbourne in nuclear physics and is the chief executive of Telstra (TLS), Australia's dominant phone company. While Hong Kong enjoyed a holiday on July 1 to commemorate its return to the motherland, Telstra announced in Melbourne a deal that promises to shake up Hong Kong's telecom market (see BW, 7/22/02, "Hello, Asia: Telstra Calling").

The state-controlled telecom (the Australian government owns 50.1% of the former monopoly) revealed that it would pay $475 million to buy the 40% that it didn't already own in the city's only profitable cellular operator, Hong Kong CSL. It's acquiring the company from its joint venture partner, Pacific Century CyberWorks (PCW). Telstra had paid PCCW $1.7 billion back in 2000 for the first 60%. That was shortly after PCCW -- run by Richard Li, son of Hong Kong's richest man, Li Ka-shing -- took over CSL from its former owner, Cable & Wireless (CWP).

CONSOLIDATION NOW? Switkowski has made it clear that Telstra is on the lookout to make more deals in Asia. "We are in a buyer's market," he boasts, adding that his profitable company is cash-rich, thanks to its near-complete control of the Australian fixed-line business and its No. 1 position in the country's cellular market.

That's unlike most operators in an industry still shell-shocked from the collapse of the telecom bubble, the Global Crossing (GBLXQ) bankruptcy, and the WorldCom (WCOME) accounting scandal. "We understand many of the Asian markets -- and we have the financial firepower to make sensible steps," Switkowski says.

That could mean Hong Kong's long-awaited consolidation is finally going to happen. With most of its five other cellular companies struggling, clearly not all can survive -- especially given the huge investments needed for the transition to high-speed, third-generation (3G) networks. One possible target for Telstra is SmarTone (STTFF), the city's No. 3 cellular operator, controlled by local property developer Sun Hung Kai. British Telecom has a minority stake in SmarTone, which it has been trying to sell for years. Telstra might be the answer, especially since the Australian company might want to use publicly traded SmarTone as a way to get a stock market listing for CSL.

WHY BOTHER? Some analysts are scratching their heads, though, wondering what Switkowski sees in the Hong Kong market. Duncan Clark, a managing director at BDA Consultancy, points out that the city is a less-than-attractive place for a cellular operator. "Hong Kong has been ripe for consolidation for years," he says.

Even if the shakeout finally takes place, Clark has his doubts about the growth prospects in a city with some of the highest mobile-phone usage rates in the world. Eighty percent of the population is already signed up. "It's saturated," says Clark. "And the economy is shrinking, while unemployment is growing."

Back in Australia, Gartner Group's Nick Ingelbrecht has similar misgivings. "I think that the upside in the Hong Kong market is limited," says the Perth-based analyst. He adds that CSL is going to need "substantial investment in terms of upgrading the existing infrastructure" to get ready for 3G. "I wonder about the logic of it," Ingelbrecht says of the deal.

"BEYOND 100%." While Clark and Ingelbrecht worry about CSL's ability to win more customers in a saturated market, Switkowski contends that plenty of room to grow remains. In fact, he tries not to even use the "S" word. "We don't use language like 'saturation,'" he says. With people likely to have more mobile devices, "we will find that ownerships can go beyond 100%," he claims.

Besides, Switkowski says, there's always China. Having full control of CSL, with or without SmarTone or any other Hong Kong cellular operator, will give Telstra a leg up on the mainland. Owning Hong Kong's premier mobile operator should offer what Switkowski calls "good insight" into opportunities in China, especially across the border in neighboring Guangdong province's Pearl River Delta. "There may be ways that CSL can extend its activities into China," he says.

Perhaps. But again, analysts have doubts. Just as there has been talk over the years about Hong Kong's cellular industry consolidating, so too telecom executives have been endlessly raving about the possibilities of doing business in China, with not much in the way of results.

READY FOR CHANGE. For instance, CSL's first owner, Cable & Wireless, had great hopes that it could parlay its Hong Kong beachhead into big mainland business. The same holds for CSL's next owner, Richard Li's PCCW. But now that China is in the World Trade Organization, it's on the way to becoming far more open to foreign telecom operators.

Clearly, change is finally in the air for Hong Kong's telecom market. How that plays out for Switkowski is hard to say, but his optimism is contagious. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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