Excerpt from "Nikkei Business", January 20, 2003



"PHS must be the telecommunication's McDonald's. I've never known any more superior Japanese technologies than PHS!" asserted Mr. Hong Liang Lu, President and CEO of UTStarcom, Inc. McDonald's is obviously the world's largest hamburger chain providing uniform quality foods and service in every country and the "Global Standard" of the fast-food business. However, the number of the PHS subscribers in Japan has already reached its peak of 7 million in 1997 and it still remains as low as 5.6 million after the PHS commercial service started in 1995 in competition with the cellular phone. How can PHS be the telecommunication's McDonald's even its good cost efficiency couldn't be more competitive?

It is really amazing that PHS is now breaking into a dominant system in the most populated country, China, while the Japanese are unaware of such a fact at all.

Eleven Times Subscriber Growth within A Year and A Half

A rather quiet city, Zhangzhou (Fujian province), is approximately 40 minutes car ride by highway from Xiamen which is accessible by a direct flight from Japan. Many pedicabs which can seldom be seen in big cities such as Beijing, Shanghai are going on the streets in Zhangzhou.


China version PHS's advertisement on the
back of the pedicab's chair.
(Appealing its low emission power as good
for health. Zhangzhou, Fujian province)
An advertisement of a Chinese state-owned telephone company, "China Telecom" says "Let's use telephone and Xiaolingtong!" which is painted on the back of the pedicab's chair. This "Xiaolingtong" is the Chinese version of PHS and its advantage is the low rate from the third to the ninth of the rate of cellular phone. Its service started in a rural area, "Yuhan (Zhejiang province)", in 1998 on a small scale, then, it started booming after its subscribers exceeded 1 million in the first half of 2001. An estimated number of subscribers was 11 million as of the end of last year which means that the subscriber growth was eleven times only within a year and a half. It has exceeded the peak of the Japanese subscribers.

UTStarcom is the largest PHS products manufacturer in China, which has the 60% market share. They not only import and sell Japanese PHS PSs (Personal Stations) and CSs (Cell Stations) but also manufacture those products locally under the license of Japanese manufacturers as well. UTStarcom was established in 1995 by a merger of the telecommunication venture company, "Unitec Telecom", founded in California by Mr. Lu and, "Starcom", also founded in the US by Mr. Ying Wu who is UTStarcom's current vice chairman and CEO of China operation.

Xiaolingtong's remarkable growth had a clear influence on the UTStarcom's business results. Their sales in the third quarter of 2002 was US$265.5 million (Approx. 31.86 billion yen), 56% growth from US$170.5 million (Approx. 20.46 billion yen) in the same period in 2001 and the net profit was US$307 million (Approx. 37 billion yen), 63% growth from US$188.0 million (Approx. 22.56 billion yen) in the same period in 2001. UTStarcom's stock price (NASDAQ) exceeds that of just before September 11th, 2001, while most other telecommunication companies' stock price slumped under the worldwide IT recession.

However, Mr. Lu isn't yet to be satisfied with such success. He is so much confident of the business forecast and he says "Estimated Xiaolingtong's subscribers will reach 25 million by the end of this year and we are also targeting 200 million within 10 years."

What is the true reason why UTStarcom succeeded so much in selling PHS in China? Further, who is actually buying the PHS equipment and providing its service is China Telecom and UTStarcom doesn't have a license. Is there any possibility of UTStarcom being penalized by the Chinese government?

Is PHS truly not better than the cellular phone in the Japanese market? Mr. Takenori Ugari, vice president of SANYO Telecommunications Co., Ltd, SANYO Electric Co., Ltd's telecommunication subsidiary, asserted that "The PHS has been developed as "Outdoor Cordless Telephone" to supplement NTT's surplus ISDN line in early 1990s, however, it was mistakenly promoted as a competitive system with the cellular phone which spread a wrong concept."


Effective Use of the Surplus Line

Learned by overseas sales agents of the PHS products, UTStarcom has directed its focus to a huge potential in the Chinese market where PHS's original advantages can be utilized. The Chinese government's decision in April, 2000 to separate China Telecom's mobile communications division to establish China Mobile has led the boom in demand for PHS. After that, China Telecom became to focus only on the wired telephone business.

At that time, cellular phone subscribers had been increasing rapidly. As a result, new wired telephone subscribers decreased. China Telecom which has been making a huge prior investment to the trunk line and switching equipment has become to face a serious problem of infrequent system operation.

Then UTStarcom aggressively proposed PHS to China Telecom in response to its concern of how to utilize its surplus telephone line. PHS would be the most suitable for such a purpose, because it's basically been developed to effectively use an existing ISDN infrastructure.

"High quality mobile communications service can be provided by effective utilization of the existing infrastructure with minimum additional investment. It is beneficial to both service providers and subscribers.", Mr. Wu insisted its merits. However, China Telecom doesn't have a license for mobile telephone service. Can it really run the business without a license in China where the government holds an absolute power?

Mr. Wu replied to this question that "Chinese government's judgment depends on how useful it is for the Chinese people. Once, a government official who is in charge visited me to ask about the situation and he fully understood my detailed explanation."

In short, the government policy and interpretation of the law may vary as time goes by in the developing country such as China where the social system is changing very frequently. It doesn't miss an opportunity and take a risk to make a decision based on usefulness rather than lawfulness of the business. The reality is the Chinese government tolerates Xiaolingtong as "An Extension of the Telephone Network".

However, for the Japanese manufacturers who don't know this type of information, it may be difficult to take a high risk. It is an easy way to become a partner with a company who has good connections in China such as UTStarcom. SANYO and Kyocera were first to get an opportunity. SANYO's sales for CSs only in this fiscal year will be US$417 million (Approx. 50 billion yen) and Kyocera expects US$333 million (Approx. 40 billion yen) sales in the same period.

Xiaolingtong may remain only a "Chinese Standard" and cannot become McDonald's even it continues to grow? Another Taiwanese company "FITEL (First International Telecom Corp.)" can answer to this question. FITEL which was formerly providing "Pocket Bell (Paging)" service started the PHS service in Taipei and its vicinity in 2001 after receiving operator's license from the Taiwanese government.

Further Expansion to Taiwan and Africa

Mr. Ching Yuan Wu, president of FITEL, said that "I knew very much about the PHS's situation in Japan, however, the frequency is limited, so I decided to apply for the license as a future investment." Immediately after that, he received a news of the Chinese Xiaolingtong's success. He visited China and confirmed its profitability and then decided to start the PHS business.

His prediction proved right. Cellular phone's penetration already exceeded 100% in Taipei. PHS was greatly successful because its low rate which is the third of the cellular phone. The number of subscribers reached 480,000 by the end of last year which equals the increase of nearly 10% of the market share within only a year and a half. This is because the service area population is approximately 1 million. "If I didn't visit China I might have missed this opportunity," said Mr. Wu.

Taiwan is not the only case. Mr. Yasuo Nishiguchi, president of Kyocera Corporation said that "A good example of success in China which attracts world's attention is stimulating the worldwide spread of PHS." Business discussions have already been started in many other countries including Vietnam, India, Africa. The success in China has a possibility of creating a new "Global Standard".

( "Nikkei Business" is the flagship general business magazine of Nikkei Business Publications(NikkeiBP). NikkeiBP is the largest and most trusted source of business and technology news in Japan.)




Mr. Yasuo Nishiguchi

Before the PHS commercial service started in 1995 in Japan, we gave a demonstration of the PHS trial system to the Chinese telecommunications authority in Shanghai. At that time, I was firmly convinced that PHS was quite suitable for the Chinese market and that greater needs for PHS could be expected in the Japanese market.

Penetration of fixed-line telephony is still low. There are many dual-income families in China where both are out of home for many hours, which lowers the frequency of home phone usage. Then I thought that the demand for PHS must be great if it's to be deployed as an extension of the fixed-line telephone network even outdoors.

Basically, a cellular phone system is designed for high-speed mobility in a wide area. However, PHS has been developed based on the idea to supplement the existing fixed-line telephone network. PHS allows more people to communicate at the same time and at high speed in densely populated cities than does the cell phone due to PHS's high spectral efficiency. From the first, it was believed that these two systems could coexist in the market, each satisfying different needs.

Nevertheless, high exclusive switch price and excessive sales competition of the terminals at almost free have put the Japanese PHS market on somewhat unnatural course. The Chinese PHS market has been growing naturally to supplement the fixed-line telephone network by utilizing its existing switch to reduce initial investment cost.

Some Japanese manufacturers are not aggressive in China because the Chinese government has not issued the PHS license yet. However, if the management correctly understood the PHS's essence of "an extension of the fixed-line telephone network", such erroneous conclusions may not be reached.

Rather, examples of good success of PHS due to its original advantages in China could trigger other countries' interest in this system as well. Now the PHS market is spreading to other countries including Vietnam, India and Africa. Other than Taiwan, which already started its commercial service, and in Japan, where PHS originated, it has been reevaluated as an easy and high-speed wireless access system. We expect PHS business sales in 2002 of 40 billion yen (Approx. US$333 million) and possibly 60 billion yen (Approx. US$500 million) for 2003.

Problems such as an incomplete system or a confused market are not unusual for China which has only ten years experience as a market economy. If excellent technologies exist in the market and those have a possibility of growth, it's quite natural to take positive business strategy to those as the management. I believe that proper utilization of these excellent Japanese technologies really depends on top management's policy.

(Exchange rate : US$1.00 = 120 yen)