Bleeding the Millions of Li Ka-shing

BY LEE HAN SHIH
Jan 06, 2009
*Special to asia!

With his investment in 3G technology bleeding red ink, Li Ka-shing makes sure he pays his lieutenants well to keep it afloat.

"We'll never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, Microsoft. The fraudsters are trying to con you or they're trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don't get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them," he said.

Perhaps it is lucky for Li that most analysts are enamoured with EBITDA and tend to accept Hutchinson's numbers at face value. But even then, they have other concerns, primarily about whether the 3G business is still viable.


The telecommunication business is arguably the most competitive and volatile on earth. Companies that are in the forefront of the business can, in a year or two, find themselves overtaken by smaller rivals armed with newer and better technology or better products.

The telecommunication business is arguably the most competitive and volatile on earth. Companies that are in the forefront of the business can, in a year or two, find themselves overtaken by smaller rivals armed with newer and better technology or better products. Motorola, once the No. 2 phone maker in the world, is a good example. The American company fell on hard times when it failed to come up with equally popular products after the best-selling Razr ran its course. Things are so bad that when Motorola tried to sell its phone division earlier this year, it found no takers.

Where Motorola goes, Hutchinson seems likely to follow, but with a different twist. Li is not a technology man and relies on input from his many highly paid tech gurus for decisions in high-tech business. In 1999/2000, Hutchinson was caught in a hostile bid against Vodafone of Britain for Germany's Mannesmann. The bid was launched soon after Hutchinson had agreed to sell its UK phone business to Mannesmann for shares, making it the biggest shareholder of the company. Vodafone's bid raised Mannesmann's share prices and, after it went through, Hutchinson pocketed billions of dollars in profit from the sale of its Mannesmann shares. That was the first time Li had done such a high-profile deal, and a spectacularly successful one, too, which led the British and American media to praise him as an international businessman with great foresight. Thus encouraged, Li decided to take the profits from the deal to build a much bigger telecom business on the 3G model.

3G gives faster connectivity and multiple services. The problem is that most consumers do not seem to want them, or not at the price charged by the providers. In Europe, mass-market commercial 3G services officially began in March 2003 when 3 (a Hutchinson unit) launched the services in the UK and Italy. Studies by the European Union Council predicted that within two years, 80% of the population of Europe would be using 3G. As Hutchinson was the biggest 3G provider in the EU, its future looked very bright indeed.

Unfortunately the rollout of 3G was delayed by a number of factors, primarily the huge cost of additional spectrum licensing fees since 3G in most countries does not share the same radio frequencies as the much cheaper 2G. Today, there are nearly 4 billion mobile-phone users, and barely 300 million of them are 3G subscribers. This is hardly surprising. In the five years that 3G has been in the market, technology has moved beyond it to 3.5G and 4G, as well as other wider and cheaper modes of communication such as wireless broadband. When these services are commercialised, 3G could be as good as dead.

But try telling that to Li Ka-shing who still insists that 3G may "become our most profitable and fastest-growing business". This sounds like the 80-year-old multi-billionaire is digging in for a last ditch fight in the biggest gamble of his life. Of course, the people doing the actual fighting would be Canning Fok, Dennis Lui and Susan Chow. Every year, or even every month they can hold the 3G business above water means that it gives Hutchinson more time to stave off the evil day when it will have to write off the billions it has put into the business. Compared to the stakes involved, what Li has paid them is pittance indeed.

 

 

 

 

 

lee han shihLee Han Shih is the founder, publisher and editor of asia! Magazine.

 

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