What’s behind UTStarcom’s slide

Posted by: Bruce Einhorn on March 23, 2006

As China’s wireless telecom industry exploded in the late 1990s and early 2000s, the one U.S. company that benefited the most was UTStarcom Inc. UTStarcom was based in Alameda, California and its stock traded on Nasdaq, but China was by far its most important market. The company focused on selling wireless equipment to China’s state-owned telecom operators, and a few years ago made it onto BusinessWeek’s annual Hot Growth list of small and midsized companies.

But UTStarcom is now suffering because of its China connections. UTStarcom grew thanks to a regulatory loophole: China’s fixed-line operators weren’t allowed to own GSM or CDMA networks; only China Mobile and China Unicom could operate cellular services. However, China Telecom and China Netcom could operate limited types of wireless services as long as they were using the fixed network as their backbone. The cellular operators weren’t happy, but the regulators gave the okay to cellular-lite services. And UTStarcom had just the equipment the desperate fixed-line operators needed.

Now that market is shriveling, though, since everyone expects that the government will be handing out 3G licenses soon and tearing down the Chinese wall between mobile and fixed operators. In response, UTStarcom has tried to diversify by expanding sales in India and the U.S. But the stock has plunged, down 70% since the start of 2005, and yesterday the company announced that Nasdaq was threatening to delist the stock because UTStarcom had failed to meet a deadline for filing its annual report. (UTStarcom says that accounting problems related to an Indian deal caused the delay, and the company is asking for a Nasdaq hearing to prevent the delisting of its stock.) Ironically, the new sector that the company is trying to move into is one that China’s regulators are stifling, not nurturing. UTStarcom wants to sell equipment for IPTV, the TV-over-broadband service that lots of people in the telecom industry hope will be the next big thing. The problem is, China’s telecom bureaucrats and its TV mandarins are squabbling over who gets to call the regulatory shots, and that’s stalled development of IPTV in China. UTStarcom benefited from Chinese regulators in the past. It needs cooperation from the bureaucrats in order for its China business to take off again.

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