What They're Doing Right in Asia

As they wonder how they will ever pay off those billions in new debt, U.S. and European telecom executives might occasionally cast envious glances at Asia. Things aren't perfect there: Asian phone stocks have taken a beating along with their Western counterparts, and some companies have blundered strategically. But overall, a mix of state capitalism, zippy markets, and lucky breaks is making for a much livelier telecom scene--and possibly providing a few lessons in survival to harassed telecom managers elsewhere.

Take Korea Telecom, the biggest telco in South Korea, with sales of about $8 billion. Despite a rough ride during the Asian crisis, the company, which is still 58% owned by the state, is now in a solid position. European telcos are groaning under the expense of buying ruinously high-priced licenses for next-generation cell-phone networks. Not so in South Korea: The Seoul government has charged Korea Telecom and SK Telecom Co. modest fees of under $1 billion for the right to build these so-called 3G networks, which will vastly enhance the power of the wireless Internet. And because they only had to pay 50% up front and the balance over 10 years, Korea's operators don't have to hurry to build new networks. "The 3G license was affordable," says SK Telecom Vice-President Song Hyo Sup. "Besides, we won't rush into 3G unless relevant delivery technology is fully ready."

Song figures most future financing for 3G networks can be generated through cash flow, of which he has plenty. In 2000, SK posted record profits of $750 million: This year looks just as good, now that the number of mobile players in South Korea has gone from five to three, and pressure on prices has eased.

COMING SOON. Korea's telecoms are not alone in their good fortune. Japan's NTT DoCoMo Inc., provider of the i-mode cell-phone service, still is tops on the planet when it comes to providing the wireless Net to subscribers. It is planning to launch 3G service in Tokyo in late May.

Nor are the success stories confined to Korea and Japan. Most Asian telcos have manageable debt loads, so margins aren't getting squeezed by high debt-service costs as they are at telcos elsewhere in the world. Many of the overcapacity problems that were experienced during the financial crisis of the late 1990s have been winnowed away, as robust demand for wireless and fixed-line computer service has returned. Says Hong Kong-based Bear Stearns Co. telecom analyst Jonathan Shaw: "The key message is, we don't have the same problems as in developed markets."

Ironically, many Asian companies owe their healthy balance sheets to the tough times of the late '90s, when most Asian telcos were too busy recovering from the crisis to contemplate costly infrastructure upgrades. Now the combination of low debt and brisk growth in demand is producing some strong results. In Thailand, where mobile-phone subscribers could double this year, to 7.3 million, the country's two mobile operators, Advanced Info Service and Total Access Communications, should each post revenue growth of 35%. Taiwan's leading mobile operator, Taiwan Cellular Corp., could see a 50% increase in cash flow, predict telecom analysts at Morgan Stanley in Hong Kong. In the Philippines, Fernando Zobel de Ayala, co-vice-chairman of Ayala Corp., figures margins at its cellular operator, Globe Telecom, improved from 46% in 1999 to 53% last year.

All good news. Yet the Asia market has some flops as well. Late last year, for example, the Taiwan government's plan to privatize 33% of Chunghwa Telecom bombed when investors took a hard look at the company's eroding market share in both fixed and wireless services. Taipei managed to sell just 2% of Chunghwa's shares. In Malaysia, the initial public offering of wireless operator Time dotCom, controlled by businessman Halim Saad, was an embarrassing flop.

MIXED RESULTS. A 50% drop in Asian telecom stocks in the past 12 months has also made initial public offerings especially dicey. Why the drop? Investors fear a slowdown in local economies and, in some countries, increased pressure on margins.

China is the best example of the good-news-bad-news syndrome. The number of mobile-phone subscribers more than doubled last year, to 85.5 million, and is set to reach 132 million by the end of 2001. On Apr. 9, China's biggest wireless provider, China Mobile, reported a staggering 276% jump in profits, to $2.18 billion.

Yet the company also warned that margins would fall to 50%, from 58% in 2000, over the next 5 to 10 years. Analysts are also concerned about competition from No. 2 wireless company China Unicom Ltd., which has whittled China Mobile's market share from 86.6% to 77.5% between 1999 and the end of last year.

At least in China there's room to grow: About 7% of China's population walks around with a mobile handset. That's not the case in Hong Kong, where cell phone penetration is 76%, making for one of the most competitive markets for wireless voice services in the world. Only one of six mobile providers, Hong Kong CSL Ltd., is profitable.

So industry executives predict consolidation in Hong Kong later this year, when the government auctions its 3G licenses: The expected price, combined with the roughly $200 million cost to build out a new system, is prohibitively high for some players. And banks are reluctant to lend big bucks on 3G plans that may not pay off until a distant date. "Today's financing for 3G is nearly impossible, whether it's in Hong Kong, Singapore, or France," says Craig E. Ehrlich, group managing director for Hong Kong mobile operator SUNDAY Communications Group Ltd. Ehrlich had to pull out of bidding for a 3G license in Singapore at the 11th hour after failing to obtain needed financing of about $250 million. SUNDAY still intends to participate in the Hong Kong auction later this year, and has financing lined up.

SUNDAY may have missed a chance, but arguably the most publicized disappointment in Asia has been the performance of Hong Kong tycoon Richard Li's Pacific Century CyberWorks Ltd. The group paid $29 billion in cash and shares for Cable & Wireless HKT last August, betting that the telecom operator would be a cash cow for Li's Internet ambitions. But in early April, PCCW reported an $886 million loss for 2000, including a $667 million charge on its Internet investments--and a writedown of all the goodwill associated with the HKT purchase. The stock has dropped 83% in the past year. The core telecom operation will be lucky to achieve single-digit growth in the face of falling revenues from international services and heavy competition for wireless, data, and broadband.

SUDDEN DROP. Another stock to take a bath: Singapore Telecom, which now wants to purchase Australia's Cable & Wireless Optus, the country's No. 2 cellular operator. Although the deal goes a long way toward achieving Singtel's regional ambitions, its stock plunged more than 20% in the four days following the announcement in late March. Investors feared SingTel was overpaying.

Hardly a vote of confidence. But to put SingTel's woes in perspective, consider this: It's sitting on billions in cash, and if the Optus deal goes through, its debt will still be only 22% of equity. SingTel needs a new sense of strategic direction, but it certainly has the resources to make a move. Many a U.S. or European telco executive might wish for such strength.

By Frederik Balfour in Hong Kong, with Moon Ihlwan in Seoul, Dan Nystedt in Taipei, and Michael Shari in Singapore

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