WSJ -- Can Li Ka-Shing Make 3G Phones Ring Up Big Profit for Hutchison ?
November 20, 2002
Can Li Ka-Shing Make 3G Phones Ring Up Big Profit for Hutchison?
By ALMAR LATOUR and MATT POTTINGER
Staff Reporters of THE WALL STREET JOURNAL
In 1999, Li Ka-shing, the Hong Kong billionaire known for good timing and
contrarian ways, abruptly pulled back from the soaring telecom industry.
The conglomerate he controls, Hutchison Whampoa Ltd., sold its stake in
Britain's Orange mobile-phone network and booked a $15.1 billion profit.
Mr. Li's timing was perfect: The telecom bubble began to collapse less than
a year later. But now, with the industry still in disarray, he's plunging back
in and laying down one of the biggest wagers of his career.
Mr. Li has placed a $17.5 billion bet on
third-generation, or 3G, mobile-phone services. They
let users make video calls, take pictures and browse
the Internet. He has already spent $7.6 billion on 3G
licenses in nine countries around the world. His
Hutchison 3G unit has budgeted an additional $10
billion for rolling out commercial service, starting this
year in Italy and Britain.
Yet telecom remains a disaster area, and some analysts believe it has still
further depths to plumb. Financial problems, technological snags and
doubts about the market have persuaded most 3G players to delay or
reduce their plans; Hutchison 3G has had to reschedule its own first two
launches. Dutch phone company KPN NV, which owns 15% of the British
arm of Hutchison 3G, had grown so gloomy about telecom prospects that
in August it wrote down the value of its €1.2 billion ($1.21 billion)
investment in the Li unit to zero.
The 74-year-old Mr. Li has
had spectacular success in the
past going against the flow.
Ranked among the world's 25 richest people, with a personal fortune
estimated at $10 billion, he built his business empire by buying real estate
and shipping container terminals in Hong Kong when other investors were
panicking. For his clout, wealth and shrewdness, Hong Kong tabloids call
him "Superman." Shops in the former British colony sell compilations of his
quotations the way they hawk the sayings of Confucius.
"We don't get too carried away when times are good or get too pessimistic
when times are bad," Mr. Li said in a rare television interview in the late
1990s.
Rivals and executives of Hutchison itself say Mr. Li did get carried away in
the 3G craze two years ago. Many companies were vying for 3G licenses
because they had missed out on basic mobile service, or 2G. Hutchison
hadn't. Besides Orange, it had mobile networks in a handful of markets,
including Hong Kong. The 3G fever sent license bids soaring, the kind of
atmosphere Mr. Li has always avoided. Still, he quickly spent $7.6 billion,
half his Orange profit, on 3G licenses.
Hutchison declined requests for an interview with Mr. Li. Canning Fok,
Hutchison Whampoa's managing director, believes fervently that 3G is a
sound business proposition. He notes that Hutchison has the advantage over
its rivals of being in good financial shape, with plenty of cash to spend on a
system that they expect to become as essential to daily life as the telephone
itself. Mr. Fok objects to calling the investment a gamble.
"It's not a bet," Mr. Fok says. "It's a business plan."
Mr. Li was 12 years old when the Japanese
occupation of southern China forced his family in
1940 to flee a life of meager means in Guangdong
province and move in with relatives in Hong Kong.
The following year, when the Japanese took over
Hong Kong, Mr. Li's mother, sister and two
brothers returned to the mainland, while he and his
father, a schoolteacher, stayed. When his father died of tuberculosis, the son could
no longer afford school but developed a lifelong habit of self-education.
After a series of odd jobs, the younger Mr. Li distinguished himself in his late teens as
a salesman of watchbands and belts for a plastics factory. In 1950, he set up a
company that made fake flowers and other plastic goods. It thrived on strong orders
from the U.S.
Riots and Fear
In the late-1960s, political upheaval in China spilled over into Hong Kong, sparking riots and widespread fear
that Beijing would take over. Mr. Li didn't think China would make that sort of move, but he saw how the
panic had depressed the real-estate market. He threw as much money as he could into Hong Kong property in
1967. When the turmoil subsided, property prices shot up.
As he expanded his property interests, Mr. Li didn't follow the tendency among other budding Chinese tycoons
in Hong Kong to aim for lower-rent portions of the commercial landscape. In auctions for land and prime
real-estate projects, he took on the British firms that dominated the city's choicest assets. In 1979, for $127
million, he bought control of financially troubled Hutchison Whampoa, the city's second-largest
British-controlled conglomerate. The transaction stunned the market and heralded an end to British domination
of Hong Kong business.
Panic again seized Hong Kong in the early 1980s when London began negotiating with Beijing about returning
the colony to Chinese rule. Mr. Li bought four berths at the city's Kwai Chung shipping container terminal for
a bargain price. That was the foundation of his ports business, now the largest in the world, with 30 container
terminals from Panama to Rotterdam.
Through Hutchison and his other conglomerate, Cheung Kong Holdings Ltd., Mr. Li controls the city's largest
chains of grocery stores and electronics shops, as well as its biggest mobile-phone company, second-biggest
drugstore chain and an electric-power utility. People in Hong Kong joke that it's impossible to do anything
without making Mr. Li richer. He also has controlling stakes in Canadian oil wells and European drugstores, as
well as a smaller stake in the U.S. online ticket agent Priceline.com. Hutchison Whampoa, which covers the
bulk of his empire, had revenue last year of $11.4 billion.
Mr. Li hasn't stumbled often, but he did with his first mobile-phone venture. In 1991, Hutchison bought a
small British phone company and renamed it Rabbit. It offered simple mobile phones that allowed users to
make but not receive calls. Few customers signed up and the investment was eventually written off.
The experience gave Mr. Li cold feet about a concurrent $160 million investment Hutchison had made in a
more sophisticated mobile network in Britain that it dubbed Orange. In 1993, Mr. Li ordered his lieutenants to
sell out of Orange before it had even launched service, according to more than one person working for him at
the time. Hutchison couldn't find a buyer, however, except for one rival who offered a mere $100,000. Mr. Li
found the offer so insultingly low that he changed course and went determinedly into mobile telephony.
Hans Snook, a German-born executive put in charge of the British investments, says he proposed to Mr. Li
spending an additional £700 million, or $1.11 billion, on Orange, and won permission in 10 minutes.
By 1999, Orange was the fastest-growing operator in Britain, with 3.5 million users. Some Hutchison officials
wanted to expand the service to Germany with a major acquisition. Instead, Mr. Li went for a big return on his
investment by selling Orange to Mannesmann AG of Germany. (Vodafone Group PLC later bought
Mannesmann and sold Orange to France Telecom SA.) Today Orange is the largest wireless operator in
Britain.
Shortly after selling Orange, he and his team began hatching plans for Hutchison 3G. For once, he wasn't
swimming against the tide. It was 1999, stock markets were booming, and banks were falling over themselves
to lend money to telecom companies. The 3G melding of the Internet and mobile-phone industries promised to
be a winning combination. When European governments began auctioning 3G licenses in early 2000, the
frantic bidding for a slice of 3G bandwidth and operating rights sent prices soaring.
Like most other players in the telecom industry, Mr. Li and his lieutenants were swept up in the hype. A flurry
of bullish 3G research circulated among managers and directors. An internal magazine ran a series of
breathless articles on the technology, including one that called 3G "the biggest step forward in communications
since the telephone itself was invented 120 years ago."
"There was never any question in anybody's mind 3G wouldn't take off," says a senior Hutchison official who
declined to be identified by name.
But the pricey 3G auctions tested the limits of Mr. Li's enthusiasm. In Germany, Europe's largest and
potentially most lucrative market, Hutchison was bidding jointly with Dutch phone company KPN for a 3G
license. As the auction neared its conclusion, Joop Drechsel, then head of KPN's mobile operations, received a
phone call late one night at home in Netherlands. It was from Mr. Fok, Hutchison's managing director,
announcing that Hutchison was pulling out, exercising an exit clause that no one really expected it would use.
Hutchison declined to comment on the incident.
Convinced it needed a 3G license in Germany anyway, KPN ended up shelling out $10 billion for one -- double
what it had planned under its deal with Hutchison. Overwhelmed by debt from the auction and other
acquisitions, the Dutch company was later forced to sell assets and turn to the market for more cash.
On Hold
Today, most 3G-license holders have put the service on hold and say that technology already on the market
can satisfy most customers' desires for now. Japan's NTT DoCoMo Inc. has been offering 3G services for
nearly a year but has persuaded only about 140,000 people to subscribe, about a tenth of its original target. In
the U.S., mobile-phone operators have yet to roll out 3G networks, though they have started offering new
services such as e-mail and video games.
All large European wireless operators acquired 3G licenses in various markets, but none have rolled out the
technology. They say that 3G handsets aren't yet available in large quantities, while networks are still riddled
with bugs. Operators also believe they haven't yet milked their current wireless GSM networks for all they're
worth (GSM stands for Global System for Mobile communications). Text messaging is picking up, and
services such as picture messaging, e-mail and video games for mobile phones, all possible on today's
technology, have hit the market only in the past few weeks.
Europe's largest wireless operator, Vodafone, will not launch 3G services until late next year and doesn't
expect any such services to go mainstream until 2004 or later. T-Mobile, the wireless unit of Deutsche
Telekom AG, will launch 3G late next year, but for the moment is heavily promoting picture messaging on
current wireless networks. And while they plan to roll out 3G in their respective home markets next year,
Telefonica SA of Spain and Sonera Corp. of Finland this summer closed their joint 3G-only operations in
Germany, saying the two companies could not earn back their investments there in the foreseeable future.
Mr. Li remains committed to rolling out the service -- dubbed "3" -- in Britain and Italy first, followed by
Australia, Denmark, Hong Kong, Ireland, Israel, Austria and Sweden. At a meeting in August at Hutchison's
Hong Kong headquarters, reporters were shown a model of the palm-sized phones to be offered with the
service. "This is the smallest video camera, the smallest TV and the smallest computer," gushed Mr. Fok, who
heads Hutchison 3G. "The damn thing can talk, too." A Hutchison spokesman compared the arrival of 3G with
the arrival of color TV.
Hutchison hopes to persuade executives to use their mobile phones to tap into video-conference calls. It also
sees a big market for sending video clips of sports highlights to phone subscribers. For example, the company
thinks people watching games in stadiums will call up instant replays, which would include advertising.
Hutchison 3G's British unit plans to offer subscribers footage of selected goals in English Premier League
soccer matches seconds after they have been scored. The company also hopes to provide users with clips of
matches, match commentaries, archival material, still photographs and match results.
The marketing has been split between business clients and consumers in other ways. The pricing of "3"
handsets between about $600 and $900 in Italy seems to aim for a business user. In Britain, though, Hutchison
plans to market the costly handsets partly through a chain of discount pharmacies, Superdrug, recently
acquired by Hutchison. "It's like trying to sell a Rolex in a corner store," says Richard Hyman of branding
consultancy Verdict in London.
Analysts find the mixed message confusing. "I don't know which direction they are taking," says Matthew
Lewis, telecom analyst at Daiwa Europe in London.
In a modest way, the "3" marketing drive was launched in Italy earlier this month when a Web site started
taking orders for 3G phones. The company says it will start delivering handsets, made by NEC Corp. of Japan
and Motorola Corp. of the U.S., to Italian customers by December. The prices for voice calls are much lower
than those of established mobile-phone operators in Italy, but customers would still have to fork out for the
expensive "3" handset.
Late deliveries of handsets and technical snags already have prompted the company to delay the launch of its
British service, originally scheduled to start in mid-2002. The 3G handsets need to be tested on more than
1,000 different parameters before hitting the market, compared with some 300 different tests for conventional
mobile phones. Traffic between mobile networks of different generations is still rough. The handover of calls
placed on a 2G network to a 3G network, and vice versa, needs more testing and fine-tuning, meaning more
dropped calls until the bugs are worked out.
Given the glitches, Hutchison has set itself tough goals. Company officials say they hope to have two million
subscribers in Italy and Britain by the end of 2003 and to break even on 3G in 2005.
Write to Almar Latour at almar.latour@wsj.com and Matt Pottinger at matt.pottinger@wsj.com
Updated November 20, 2002
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