Li Ka-shing's Long Shot--or Sure Thing?

His Hutchison Whampoa is betting $16 billion on 3G

Li Ka-shing may look like a gambler. After all, from a humble start making plastic flowers he became Hong Kong's savviest businessman--and one of its wealthiest, with a net worth exceeding $10 billion. But Li didn't build his global empire of port facilities, supermarkets, and cell phones by putting his money on long shots. So why is his main operating company, Hutchison Whampoa Ltd., staking $16 billion on a new third-generation mobile-phone network in Europe? "We are not betting," insists Canning Fok, Hutchison's managing director and Li's right-hand man. "We have a fully funded business plan."

To hear Fok tell it, 3G is a sure thing. Hutchison's British service--branded "3"--will launch on Oct. 2. It's the first major test in Europe of the new telecom technology, which promises cell-phone users superfast downloads from the mobile Net and superior voice service to boot. With spiffy new handsets from NEC and Motorola Inc. and a slew of what Fok promises are razzle-dazzle uses for the new gizmos, 3 expects to have 100,000 British customers by yearend and 1 million by the end of 2003. Then in November, 3 will launch in Italy, followed by Sweden, Austria, and a half-dozen other countries next year.

Still, there are plenty of skeptics who think Li may have finally put his money on a losing horse. After all, no one knows yet if consumers will pay up for the high-speed, always-on video and multimedia offerings that 3G makes possible. In an attempt to create some buzz, Hutchison has signed deals worth a total of some $200 million for rights to show highlights from football matches in Britain and Italy. But how much will people be willing to pay to watch goals by David Beckham or Gabriel Batistuta on their handheld phones? And before they start paying for content, consumers need to plunk down $250 to $750 on a gee-whiz handset.

Sure thing or not, the launch is key to Hutchison's future in telecom. Since selling its stake in British cellular carrier Orange PLC for a rich premium in 1999, telecom assets have fallen from 40% of the group's total to about 20% now. Fok says he wants to stay in telecom because unlike Hutchison's more predictable operations, the field offers the potential for rapid growth--and a good chance to sell out for a hefty profit, a la Orange.

But one of Hutchison's partners in Britain, Dutch telecom giant KPN, isn't convinced. In August, the carrier wrote down 86% of its $1.4 billion investment in the venture, saying it no longer views its involvement as "strategic." Fok's reaction? He hints he may buy KPN's 15% stake. And he says there's no need to write anything down--which some analysts say is overly optimistic. "Operators are still too ambitious about their rollout plans, expectations for number of subscribers, and the revenues they'll generate," says Michelle de Lussanet of Forrester Research Inc.

That's the case the skeptics make. Others say that if anyone can beat the odds, it's Hutchison. "I think the market will be shocked" when it sees the company's 3G rollout, says Michael Carr, who runs investment banking for Goldman Sachs (Asia) and has done deals for Hutchison. Since Hutchison doesn't have any second-generation networks in Europe, it can go after customers without worrying about cannibalizing its existing base. That means 3 may be willing to undercut rivals' prices on voice calls, since 3G delivers lots of high-quality voice capacity at little extra cost to the operator. "It's not difficult to imagine that Hutchison will be attractive to subscribers fed up with the poor quality of service on 2G networks," says Richard Windsor, a telecom analyst at Nomura Securities in London. Hutchison will probably charge a flat monthly fee for a fixed menu of 3G services, then charge extra for premium features.

It wouldn't be the first time Hutchison has taken on stronger rivals and won. In the face of widespread skepticism--and fighting off two entrenched rivals--it built Orange from scratch in the 1990s. Key to its strategy: low prices and simple, flat-rate tariffs, which helped it win 3.1 million customers by 1999. Best of all, Hutchison cashed out of Orange at the peak of the telecom boom, pocketing nearly $20 billion in profits when it sold to Mannesmann. That windfall gave Hutchison the cash it needed to get into 3G--and left it free of the debts that hobble other European carriers.

Li always seems to know when it's time to cash in his chips--or double down on his bet. In 2000, Hutchison got $5.9 billion for its share of U.S. cellular carrier VoiceStream Wireless--which it had bought for just $1.3 billion. And in Li's latest move, Hutchison and a partner, Singapore Technologies Telemedia, bought a 62% share of Global Crossing Ltd. for just $250 million--a pittance compared to the $22.4 billion in assets the telecom carrier declared when it filed for bankruptcy in January.

Hutchison's broad portfolio provides the cash it needs to keep growing. It's the world's biggest port operator, with berths from Hong Kong to Rotterdam. Similarly dull businesses, such as utilities and bottled water, throw off a stream of profits to fund the risky 3G bet. Those boring businesses may also offer synergies: In August, Hutchison bought Dutch drugstore chain Kruidvat Group for $1.3 billion, giving it a total of 1,000 stores in Britain. And it plans to sell 3G phones and service plans in Kruidvat's Superdrug stores and its existing Savers chain. Despite the advantage of having a retail outlet for 3, Fok says that the retail investment stands on its own.

Hutchison is hedging its 3G bet in other ways. To work out the kinks before blitzing the public with ads, Fok plans a low-key launch for about 1,000 British customers, increasing to some 10,000 by the end of October. Instead of the 12,000 base stations Hutchison had envisioned by the end of next year, the company will build just 6,000. All told, Fok has shaved capital spending in Britain from $7.8 billion to about $5 billion. And in Italy--where Hutchison also expects 1 million subscribers by yearend 2003--the company has cut capital spending to $4 billion from a planned $5 billion. Fok expects 3 to show positive cash flow by 2005.

Once 3's ad blitz starts, it will be positioned not as simple telecommunications but as a premium-priced lifestyle product. "We're not in the phone business," Fok insists. "We're selling the smallest video, the smallest TV, the smallest computer--and you can use it to talk." Li and Fok, of course, are betting they can use it to make money.

By Mark L. Clifford in Hong Kong and Andy Reinhardt in Paris, with Kerry Capell in London and Kate Carlisle in Rome

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