Sunday, May 2, 2010


Last week, there was negative news regarding India's department of Telecommunications restricting the purchase of communications equipment from Chinese manufacturers. Obviously, this would impact UT a great deal in India, one of their focus regions aside from China and Japan.

The knee-jerk reaction from posters on the message board is to spin-off UTs India operation. That UT should indegenize with respect to India. That it should move all hardware and software manufacturing to India.

Lets look at some current facts....

UT in India - 1. UT is the most trusted vendor in broadband/iptv for 3 years in a row.

Why didn't a pure non-Chinese company like Ericsson or Alcatel win these awards? Is all the effort that UT put in with their India operations out the door due to the new Chinese board members?

2. UTs director for South Asia/India Vijay Yadav leads a team of about 125-150 in India that was not affected by the recent restructuring. Mr. Yadav seems to be well connected/intune with the India market.

3. "We are also working to increase India’s contribution to the global operations of UTStarcom. For example we already have extension of our Global R&D team of BB based in Gurgaon, India, and the Escalation Centre for Asia Pacific is also based out of Gurgaon. This year we have established Centre of Excellence for IPTV in Gurgaon, India, and over the coming years we hope to contribute more to the global IPTV product line of UTStarcom from India."

So, I assume that atleast the software interface and network management are performed by Indians already and not Chinese workers, which is basically the requirement of the Indian government for security clearance.

Company makeup - UT is listed as a US company with still mostly non-Chinese investors. In fact, the largest holder is Shah Capital, headed by an Indian. It is interesting to note that the investment deal that brought Chinese investors included Shah Capital.

At this time, the China market with 90% of the employees and potential for their revenues are much more important than India and Japan. Japan is not a major issue due to Softbank as a major shareholder as well as Lu's connections there. The arguments for UT not truly being a Chinese company works the other way as well in India. IF it is critical to indegenize UT further, Shah will definitely have input.

Outsourcing - UT has considered opening a manufacturing plant in India but recently went with outsourcing firm Sanmina.

How important is the hardware manufacturing compared to the software? If it is, UT having outsourced its manufacturing will have an easier time to move manufacturing to India if necessary as they don't do it themselves anyway. In any case, Sanmina is not a Chinese company.

Partners/Joint Ventures - Should UT spinoff or move software/hardware manufacturing everywhere they decide to do business and there is a security concern (which is probably every government). Of course not. UT has shown it will partner in Latin America and even in individual bids in China (with NSN). UT also partnered with IBM in India before.

Value - What would a spinoff be worth? Until recently, the street valued UT at book value and even now less than cash on hand. The business in India is simply not worth spinning off at this stage. Can a local Indian company develop iptv and compete with UT like ZTE and Huawei in China. No, UT spent a decade and hundreds of millions on their iptv system.

Summary - As a shareholder, I obviously want UT to succeed in their venture in India. So do the board and other large institutional investors. Is it better to be indegenous with respect to India? Of course, but to what extent? Just as Huawei has to decide to what extent they will do so, UT management/board has to decide as well. I just don't think a spinoff makes sense at this time for several reasons, one important factor being how this security issue is really implemented by the Indian government and how it impacts companies like Huawei/ZTE. The company was already planning to add an Indian board member and the local management/team that they have put in place/previous "accomplishments" show they know their way around the local Indian market. If this situation is really hampering them in India, then I would expect the leadership to take additional steps.