Ringing Off the Hook in China

Sci-fi technology? Nope. UTStarcom's ultracheap wireless service makes use of existing networks

Taiwan-born, Berkeley-educated Hong Liang Lu admits to having had negative stereotypes of mainland China before he first visited there in 1990. "As a kid, I was brainwashed by Chiang Kai-Shek," he says. But rather than a dour land of communist automatons, he found a vibrant populace badly in need of decent phones. Then, as now, less than 10% of the Chinese had a land line, and service was so poor that Lu would have to pick up the phone dozens of times before he got a dial tone. "Before that trip, I hadn't really thought about doing business in China," he says. "Afterward, I felt it made no sense to do business anywhere else."

That was the first of two big decisions that have helped make Lu's UTStarcom Inc. perhaps the world's hottest telecom-gear supplier. The second was taking a chance on a technology called Personal Access System (PAS), which was developed in Japan but never caught on there. PAS uses phones that offer wireless calling. But unlike cellular systems, PAS allows users to send and receive calls only from a limited area and doesn't offer roaming. By combining UTStarcom gear with existing infrastructure, phone companies can deploy PAS for just $100 per subscriber, roughly half the price of cellular systems.

The combination of an underserved market and an inexpensive product that meets its needs has made PAS-based services -- marketed in much of China as "Little Smart" -- a runaway hit. The big Chinese phone companies, including China Telecommunications Corp., have signed contracts with UTStarcom worth more than $1 billion in the past year. As a result, Alameda (Calif.)-based UTStarcom is prospering like it's 1999. It has blown past Wall Street's expectations in each of the 12 quarters since its initial public offering in March, 2000, and it has upped guidance on revenues twice this year already. In the first quarter, sales soared 80%, to $330.5 million, and profits more than doubled, to $37.3 million. For the year, profits are expected to reach $168.7 million on sales of $1.7 billion, according to brokerage Pacific Growth Equities. "Our biggest problem is keeping up with demand," says Lu. So far this year, the stock price has risen 45%, to about $29.

Lu's approach stands in stark contrast to that of many of his beleaguered telecom rivals. While others set off to build gee-whiz technology for the great broadband future, Lu focused on existing customer needs. The former Kyocera Corp. exec raised $220 million before the IPO -- $166 million of that from Softbank Corp., whose CEO, Masayoshi Son, worked with Lu in an Oakland (Calif.) ice-cream parlor during college. Today, Softbank owns 23% of UTStarcom, partly because Western venture capitalists weren't interested in an outfit selling a once-failed, low-end technology to China's masses.

The big Chinese phone companies were also lukewarm at first. Throughout much of the 1990s, Lucent Technologies was their main provider of telecom gear. "[Lucent] could go in with a private jet and see the President of China," says Lu. "We were nobody." Lu was relegated to cold-calling telecom officials in China's hinterland. But sales began to mount in 1998, after UTStarcom began pitching PAS as a cellular alternative. With no charge for incoming calls and with outgoing ones costing just a quarter of the cellular rate, sales took off, particularly among blue-collar folks who didn't travel much and didn't need roaming. Today, there are 12 million PAS subscribers in China. Given that PAS was recently O.K.'d in Beijing and Chongqing, there will no doubt be millions more soon. Lu has also inked deals in Vietnam, Panama, and India -- which has 1.1 billion people but only 35 million phones. "It's a market that's going to explode," says Lu.

That's not to say there aren't risks. SARS is a serious threat to China's economy and could put the brakes on sales. And cellular rivals are moving to lower their prices, which could boost competition. Still, 48-year-old Lu has proved his ability to make the best of bad situations. Now, his efforts are being noticed by suitors. "The rumor is that he has been told: 'You tell us the price, and we'll pay it,"' says JMP Securities analyst Sam Wilson.

And Lu says he was shocked when more than 100 Wall Street analysts showed up for a company briefing on May 21. When he started out, Lu could barely get his calls returned. Now, it seems as if the whole world is on the line.

By Peter Burrows in San Mateo, Calif., with Dexter Roberts in Beijing

— With assistance by Dexter Roberts

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