HONG KONG-On the face of it, Hutchison Whampoa is a great success story. The company is among the leading international wireless operators and part of the giant Cheung Kong (Holdings), which in May announced after-tax profits of US$8 billion on a market capitalization of around US$85 billion. Only two years ago, Hutchison’s sale of the U.K. Orange network raised a spectacular US$14.6 billion.
Yet in Hutchison’s hometown of Hong Kong, analysts believe wireless profits have eluded the company for 16 years, even though it has grown to become the largest local cellular operator with 1.7 million subscribers and 32 percent of the market. The company launched the world’s first commercial CDMA network in October 1995 and followed it with GSM 900 MHz and 1800 MHz networks. Hutchison already provides 2.5-generation (2.5G) service via an IS-95B network and is launching soon a 64 kilobits per second (kbps) General Packet Radio Service (GPRS) offering. A partnership with NTT DoCoMo has contributed high-quality Internet content. Yet Hong Kong’s competitive, low-cost market has made wireless a consistent loss-maker for Hutchison’s local subsidiary.
Part of a dynasty
This underperformance sits uncomfortably with the record of the Cheung Kong group’s venerable founder Li Ka-shing, 73, a charismatic man who is an icon to investors throughout the Chinese-speaking world. Li, who has no college degree but at least eight honorary doctorates, began his career in 1940 by manufacturing plastic flowers and roses to become one of the world’s wealthiest Chinese tycoons. Li has two sons-Victor, who is managing director and deputy chairman of Cheung Kong (Holdings), and Richard, who is chief executive officer of another significant telecommunications player, Pacific Century CyberWorks (PCCW).
Until the early 1990s, Hutchison could be seen as just another player attracted by the rapidly expanding cellular sector, but the company’s Orange network in the United Kingdom made it a global force. Hutchison in 1993 sent a German manager, Hans Snook, to Britain to fix its ailing Rabbit network, based on the CT2 handsets that could make, but not receive, calls. After launching GSM service in 1994 and improving customer service, Snook rapidly expanded the renamed Orange network. In 1999, it was sold to the Mannesmann group at a massive profit and was later acquired by Vodafone Group as part of its hostile takeover of Mannesmann. It is now owned by France Telecom, which recently decided to rebrand all its mobile holdings under the Orange name.
Hutchison’s current European operations are centered on third-generation (3G) technology, with licenses in the United Kingdom through a partnership with Canada’s Telesystem International Wireless (TIW), NTT DoCoMo and KPN Mobile; in Italy through its subsidiary H3G Italy; in Austria through wholly owned Hutchison 3G; and in Sweden through subsidiary Hi3G Access.
In the United States, Hutchison Telecom took a substantial shareholding in VoiceStream, the largest GSM operator, but later sold it to Deutsche Telekom. A year ago, Li Ka Shing said he was “very much” interested in a 3G license in the United States, pointing to the group’s strong cash position because of the U.K. Orange network sale-an advantage in the global economic downturn.
In Paraguay, Hutchison has acquired Communicaciones Personales, a start-up launched at the end of 2000 to operate a 1900 MHz GSM network.
In Israel, Partner Communications, 34 percent owned by Hutchison and operating under the Orange brand, is the country’s sole GSM network, with 1.1 million subscribers. A consortium comprising Hutchison Whampoa, Chase Manhattan and Eurocom, an Israeli telecom group, have expressed interest in competing for 50.01 percent of state-controlled Bezeq Israel Telecom, due to be opened to tender this year.
In Ghana, Hutchison owns a majority stake in Celltel, which has a nationwide cellular license, and provided AMPS equipment originally used in Hong Kong for additional capacity.
Indian success
Hutchison has been in India since 1995, partnering with local companies to operate Hutchison Max Telecom in Mumbai. Hutchison also owns 49 percent of three operators, including Sterling Cellular in Delhi, Usha Martin Telekom Limited (UMTL) in Calcutta, and Fascel (operating as CelForce) in Gujarat. The four GSM 900 MHz networks have a subscriber base of around 788,000, which is 26 percent of the Indian cellular market.
Hutchison is listed on the Australia Stock Exchange as HTAL. The company has a CDMA network operating under the Orange brand name in Sydney and in Melbourne, with approximately 102,200 subscribers at the end of March. Spectrum licenses have been acquired for 1800 MHz and 2.1 GHz spectrum and will be used to deliver 3G products and services on a new network in late 2002 or early 2003 in Australia.
In May 2001, Hutchison Whampoa, HTAL and Telecom Corporation of New Zealand formed a strategic alliance focused on 3G products and services in New Zealand and Australia.
In 1991, Hutchison Telecom, with a local partner, launched Malaysia’s first peninsular-wide paging service, initially centered on Kuala Lumpur. The service has more than 9,000 subscribers in Kuala Lumpur and other parts of Malaysia, a 15-percent market share.
Crucial 3G
Despite the impressive international scope of Hutchison’s operations, the company’s future may depend mainly on the success of its critical 3G plans, for which the company has already hired more than 1,000 staff.
In the “honeymoon period” of 3G, when Hutchison had just acquired 90 percent of a 3G license in the United Kingdom in May 2000, Hutchison Whampoa Group managing director Canning Fok Kin-ning said: “We will be the most exciting thing in your life. We will change your life totally.”
However, since then, huge auction costs, delayed technology and uncertain revenue value of 3G may have modified this perception. Hutchison sold its interest in German 3G operator E-Plus to KPN Telecom, along with 35 percent of its British Universal Mobile Telecommunications System (UMTS) venture to joint venture partners KPN Mobile and NTT DoCoMo for US$3.2 billion in 2000, reducing its exposure to 3G costs.
Hutchison also has sought to share its U.K. 3G wireless mast sites with Vodafone, Orange, One 2 One and British Telecommunications, but this has attracted scrutiny from the European Competition commissioner. A plan to share 3G costs with UMTS licensee Orange U.K. has also attracted a possible legal challenge.
In Hong Kong, where Hutchison must look for profits sooner rather than later, the company has been highly critical of the Office of the Telecommunications Authority’s (OFTA’s) plan to force 3G operators to open 30 percent of their networks to network service providers (NSPs), which do not have to build networks.
The requirement is “extremely unfair” and will introduce “… distortions of true market behavior,” said the company in a response to telecom regulator OFTA’s consultation paper. The payment of royalties rather than a straight auction system is “non-transparent and economically inefficient.”
Nobody knows whether it will be easier to make 3G profitable in Hong Kong with its baffling regulations, or in Europe, with its pricey spectrum. Either way, it will be of great concern to Hutchison and its future success.
