U.S. Wireless Companies Champing at the China Bit

Few companies could be more eager than those in wireless phone equipment and services to see the U.S. lift trade barriers to China. With passage of Permanent Normal Trade Relations last week, China is inching toward membership in the

World Trade Organization

.

The opportunity is enormous. The world's most populous country -- with 1.2 billion people -- has seen mobile-phone use triple in the last three years, without direct competition from international carriers.

China already has cellular roaming agreements with 680 telecom operators in 42 countries, according to Cindy Yoon of

The Asia Society

, a New York-based nongovernment organization. But under the new trade agreements, foreign entities will be permitted to have majority control of joint-venture phone companies. Equipment makers will also be able to increase ownership in China-based ventures and will also see tariffs fall on parts imported to those factories.

Which companies are best poised to take advantage of new Sino-American business relations? "Those businesses that recognize and appreciate long-term commitments," says attorney Russell Chin, chair of the Asia Practice Group at law firm

Holland & Knight

. "The Chinese have a long memory."

Telecom-equipment manufacturers such as

Motorola

(MOT)

and

Lucent Technologies

(LU)

have been doing business in China for more than 15 years. Such companies have an obvious head start on how to conduct affairs in a society where personal relationships are more influential than formal business and legal infrastructures, Chin explains.

"A company like Motorola has made investments in

Chinese society, by hiring and training their people," Chin says. "They've made investments in capital and in human capital." Lucent, meanwhile, has eight joint-ventures in China, three wholly owned operations, seven regional offices, and 3,500 employees. "They've done things right," Chin says of both manufacturers.

Cisco Systems

(CSCO) - Get Report

doesn't have manufacturing facilities in China and doesn't report specific numbers for its China exports, but a spokesman says: "We're extremely excited about the market and how we're doing there.

A normalized trade status with the U.S. is a really good thing for market access."

Meanwhile,

Qualcomm

(QCOM) - Get Report

, long in on-again, off-again talks with Chinese representatives to do business there, released a statement Friday in support of PNTR. In February, Qualcomm signed an agreement with the Chinese government that allows it to provide local companies with the technology necessary to manufacture products using Qualcomm's code division multiple access (CDMA) technology. "Qualcomm is very pleased by the

House

vote in favor of PNTR with China and the positive prospects for China's entry into the World Trade Organization. PNTR approval is key to expanding United States exports to China," the statement reads.

While many are eyeing the benefits to large U.S. companies, some are pointing out the promise the Chinese market holds for smart upstarts as well. "Big companies can stumble over themselves, while small ones

can be light and nimble and think outside the box," Chin says.

UTStarcom

(UTSI) - Get Report

is one of those companies, analysts say. Headquartered in Silicon Valley, the company manufactures and installs network access systems for wireless and wireline services, with 99% of its revenue generated in China. "UTStarcom is a relatively new and lesser-known name in the overall market --

But we feel that UTStarcom is in an ideal position to capitalize on a significant revenue opportunity in China," writes analyst Sam May of

US Bancorp Piper Jaffray

.

Merrill Lynch

led UTStarcom's IPO in March; Piper Jaffray was co-manager.

UTStarcom, with 850 employees in China, knows how to navigate the Chinese system, says CFO Michael Sophie. The company is familiar with the three stages of approval necessary to sell its equipment to China Telecom, which currently dominates 90% of the country's telecommunications business. First, companies such as UTStarcom must present and test equipment before the

Ministry of Information and Industries

, which was recently split from China Telecom and can be likened to the

U.S. Federal Communications Commission

. After receiving MII permission, foreign companies must win approval from the

Post and Telecommunications Administration

on the provincial level and, finally, from the

Post and Telecommunications Bureau

on the local level, Sophie explains. The local PTBs, of which there are 2,400 nationwide, issue orders and pay bills.

"You're at a disadvantage on the equipment side if you can't create a local presence. You need infrastructure to supply the customers and that's not something that can be duplicated very quickly," May says, adding that the MII is likely to grant permission to companies that offer new technologies. China, he explains, is using state-of-the-art equipment and is adding capacity this year for 20 million new fixed-line and 25 million mobile-phone users. "A phasing down of tariffs on bringing material into China allows companies to be more competitive and increase profits," he says about PNTR.

On the carrier side,

VoiceStream Wireless

comes to mind because the operator is partly owned by Hong Kong investment group

Hutchison Whampoa

(HUWHY)

. "Any company with a relationship with Hutchison Whampoa has a leg up on the competition in China.

Owner Li Ka-shing and his family are so well entrenched over there," Chin says, "VoiceStream

would do well." VoiceStream doesn't have any operations in China now, or future plans should China receive PNTR, says VoiceStream president Robert Stapleton.

China is hoping to increase mobile-phone subscribers from 36 million last year to 54 million this year, reaching a total of 90 million by 2003, says Yoon of Asia Society. And under the WTO agreement, telecom carriers will be allowed to step up their ownership stakes in local telecom operations to 51% by 2004. China has an enormous, increasingly open telecom market that offers huge opportunities for U.S. telecom businesses -- if, that is, they can avoid the infamous American pitfalls of ethnocentricity and expectations of immediate gratification, experts say. Chin suggests that large U.S. companies should set up a separate arm to do business in China. "Let them run with it. Don't expect to hold them to the same standards of accountability as

other offices," he says. "It's two different games."