3G: Hutch May Have The Last Laugh
Canning Fok is used to the criticism. The managing director of billionaire Li Ka-shing's conglomerate, Hutchison Whampoa Ltd. (HUWHY ), has taken plenty of flack for his commitment to third-generation cellular service. As recently as January, critics said his $22 billion gamble on 3G might be worth as much as a win ticket on a lame horse. Customers from Britain to Australia were grousing about bulky handsets, lousy coverage, and slow data speeds. And Japanese cellular giant NTT DoCoMo (DCM ) was getting ready to ditch its stake in Hutchison's British 3G venture. A repeat of Hutch's brilliant score with Orange, the British cellular service it sold off at a $21.5 billion profit four years ago, seemed like a pipe dream.
But Fok has no patience with the naysayers. "I'm tired of arguing," he says. "The test of the whole thing is whether I can get customers. And I can." In May, Hutch had 1.7 million 3G subscribers -- up 70% in just two months -- and is signing up 20,000 new ones daily. Customers like snazzy new 3G handsets from NEC, NOKIA (NOK ), and LG Electronics, which Hutch either gives away or sells for less than $300 after discounts of up to $600 off the list price. And they like Fok's price cuts, which have brought voice tariffs under 10 cents per minute -- less than half what competitors charge. "We have arrived," Fok declares. "The difficult period is over."
Many analysts agree that Hutch's 3G picture looks brighter. The new phones -- lighter, smaller, and with longer battery life -- have "done wonders for" Hutchison, says Phil Kendall of Strategy Analytics Inc. near London. He says Hutch's subscriber numbers "are starting to rocket," and he expects the company to have as many as 4 million 3G subscribers in Europe alone by yearend. Hutch has also improved coverage and fixed glitches that caused calls to be dropped when switching between older networks and its 3G system -- which should lessen complaints about service. Says Bengt Nordstrom, chief executive of Stockholm mobile researcher Northstream: "This will be a 3G Christmas."
One thing Santa won't have in his bag, though, are 3G profits for Hutchison shareholders. Fok says the company won't break even on 3G operations until next year. And real profits -- after investment costs are paid off -- are years away. That has put a dent in Hutchison's earnings, so Fok has been selling off assets to keep the numbers up. In May, Hutch announced it would shed its stake in a Chinese consumer-products joint venture with Procter & Gamble Co. (PG ) for $2 billion. In June, the company unveiled a plan to spin off its conventional cellular operations in eight countries for an additional $2 billion. And the company is considering a share issue of its mobile operations in India, which might raise $330 million.
The extra cash may come in handy as competition in the key European market heats up. Rivals such as Vodafone Group, Orange, and T-Mobile are starting to offer 3G services of their own and plan to challenge Hutch on service quality and richness of mobile content offerings. Hutch has one big advantage: It has no existing cellular business in Europe to protect, so it can put all its efforts into 3G. Vodafone, by contrast, plans to introduce the service more slowly. "We look at 3G differently," says Peter R. Bamford, chief marketing officer for Vodafone.
Hutch even faces challenges on its home turf. In Hong Kong, Hutch's 3G service has attracted just 84,000 subscribers since launching in January -- although Fok says he's "not in a rush." Like Vodafone in Britain, Hutchison is the cellular leader in Hong Kong and doesn't want to cannibalize its existing business. "I'm making money every day," he says. "Where is the hurry?" That means Hutch will be putting more of its focus -- and the bulk of its new-and-improved 3G handsets -- into markets such as Australia, Britain, and Italy. "I need to build up the business," says Fok. And his chances of doing that successfully look a lot better today than they did just a few months ago.
By Bruce Einhorn in Hong Kong and Andy Reinhardt in Paris, with Kerry Capell in London