Dr. Tung's Recession Remedy For Hong Kong

The city is luring business with telecom and media deregulation

Hong Kong Chief Executive Tung Chee Hwa has taken a lot of knocks lately. The former shipping magnate has presided over one of the worst recessions in decades. His administration's heavy-handed stock-market intervention raised fears that Hong Kong is abandoning its free-market ways. And to top it all off, archrival Singapore has reacted faster to Asia's crisis by cutting costs and promoting itself as a financial center.

But Tung is showing vision in an area vital to Hong Kong's future: its position as a regional leader in telecommunications and media. The city is deregulating such sectors as cellular phones, fixed-line operators, Internet providers, and cable TV. It's welcoming outsiders and fostering more competition than its Asian neighbors, even at the risk of riling some major oligarchs. The result: a surge in new business from multinationals such as Sun Microsystems Inc. and MCI WorldCom Inc.

NOODLE RIOT. Give Tung credit for trying to restore Hong Kong's position in Asia's communications industry. Until now, Hong Kong has done little, while Singapore used tax incentives to lure the likes of ESPN and The Discovery Channel. To stem the flight and woo new business, Tung has latched onto aggressive deregulation. That's the opposite approach from control-minded Singapore, which owns its two TV channels and lone cable operator. Tung plans to scrap the cable monopoly enjoyed by local conglomerate Wharf Holdings Ltd., whose efforts have not been especially popular with consumers or Western programmers. And he wants to open the market for video services over telephone lines--now a preserve of Hong Kong Telecommunications Ltd.

Just as the telecom, broadcast, and entertainment industries are converging, Tung aims to loosen long-standing reins on them. He is betting liberalization will spur services for consumers, lower telecom costs for businesses and households, and provide companies a staging area for assaults on other Asian markets. On Jan. 1, Tung opened the market for international calls and let consumers use Internet-telephony services previously limited to big companies. Then, on Mar. 1, he opened the way for more competition in the mobile-phone business. Already, the competition has cut phone charges to just $40 a month, down from $90 a year ago, and nearly spawned one riot: Hong Kong Telecom handed out noodles and yogurt drinks to customers in Kowloon, creating a rush so frenzied that police intervened.

Tung's efforts are triggering other activity, too. Hong Kong Telecom plans to launch six new television channels as early as this summer. "Compared to the rest of Asia, Hong Kong is light-years ahead," says Joe Locke, telecom analyst with ABN Amro Holding in Hong Kong. "Because it is so hypercompetitive, this is a place where you will see innovation."

"NATURAL HUB." Cellular operators now offer stock quotes, movie times, even horse-racing results and shopping tips. Meanwhile, local cellular operator SmartTone is working with Ericsson to introduce wireless Internet access. America Online Inc. arrives in the city this fall. And U.S. Internet providers PSINet Inc. and UUNet, a unit of MCI WorldCom, are buying local companies and introducing services. "We see Hong Kong as the natural hub for telecom and technology in Asia," says John W. Sidgmore, vice-chairman of MCI WorldCom. The U.S. giant is rolling out an Internet service provider as it makes the city its regional headquarters.

Such activity shows how deregulation can combat recession. With its peg to the U.S. dollar and market-driven economy, Hong Kong can't copy Singapore's devaluation and government-dictated cost cuts. The only option: open markets to lower costs and draw investment.

The big question is how aggressive Tung will be. His government will soon announce whether it will grant foreign operators the unrestricted right to own and operate their own infrastructure--a dramatic change from laws that require them to lease from competitors like Hong Kong Telecom. That restriction is a deal-breaker for companies like MCI WorldCom, which insist on controlling their networks.

Such liberalization worries some tycoons. Telecom billionaire Li Ka-shing, a longtime Tung ally, has threatened to cancel a $1 billion investment, for instance, claiming the government is hostile to local business. The protests will probably only get louder. But if Hong Kong is to benefit from these reforms, Tung needs to stay the course.

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