Sunday, May 25, 2008

China 3G and Telecom Consolidation

Thanks to "Curious_Tigre" for posting about China 3G and the upcoming telecom consolidation in China.

Over the years, there has been a lot of debate about UT not being a local Chinese company and that it has not benefited like ZTE or Huawei. While I agree that it did not get benefits these other companies did, its downfall was not because it was a foreign company. It was they bet on 3G heavily and that has been delayed even now. The company had a very niche product (PAS) that basically had one market (China). Even that was not the full cause of the downfall as it was expected and actually holding up better than expected because of the delay in 3G. Another major reason for UTs sharp decline was that the iptv market also has not openned up but that again is not due to UT being a foreign company. Another reason for UTs decline is Softbank's focus on wireless. Again, this is not due to UT being a "foreign" company (in China). Finally, the mis-management of international contracts (such as the one large Indian contract) set UT back even more and that obviously was not because they were not a Chinese company. Add to that the accounting/corporate governance issues and management/board wishy washy strategic plans (which were again not because they were not a Chinese company) and you get to where the stock collapsed.

Lets look at the competition and their R&D budgets. Those are so much more than UT. However, I don't believe UT lacked the resources to develop their technologies. In fact, UT gained from PAS, from China investments, and even China real estate. So, to say others can catch up is not correct either.

The benefits of having the China government bankrole huge projects overseas is a clear benefit to ZTE and Huawei (until corruption charges or anti-China sentiment get brought up). That is definitely a major advantage that UT doesn't have. However, UT doesn't have to win $2b projects or be a $20b revenue company. They just have to build sensible business plans going forward and assess which ones they can compete in (which I believe they are now doing a much better job). After all, UT does have the "advantage" of all the years in R&D, patents, large scale deployments, and even now PAS/PCD cash flows to support the core growth businesses. I don't see startups with that type of advantage.

For others to compete against UT on technology (iptv/ngn), it will take them a lot of time/money that they really have to just consider whether its wiser to just buy UT outright.
Anyway, the point is UT did not go down from $40 to $2 just because they were not a "Chinese" company. Also, investors now should focus on where the company can morph into. If management executes, it really should have years of growth and profits ahead. The stock price is basically a steal regardless of bad economy, technicals, or what not.

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