US-based telecommunications equipment maker UTStarcom Inc plans to enter China's mobile phone market this month by leasing a local firm's handset manufacturing license.

That would mark a major strategic shift for UTStarcom, the world's largest vendor of equipment and phones based on the limited mobility service Xiaolingtong, or personal handy system (PHS).

"We plan to launch a mobile phone model in China based on the GSM (global system for mobile communications) standard this month," Richard Feng, marketing director of UTStarcom (China), told China Daily.

UTStarcom has filed an application with Chinese regulators for a license to manufacture and sell mobile phones in the country, Feng said.

As its first step into the mobile phone market, UTStarcom would lease local firm CECT's license, insiders said.

It is common practice for new players in the handset market to lease licenses in China as the government is wary of issuing new licenses due to concerns over "excessive competitions."

UTStarcom's entry into the handset market comes at a time when growth of the Xiaolingtong service in China is beginning to show signs of a slowdown.

NASDAQ-listed UTStarcom saw its shares drop after the firm cut its revenue outlook for the fourth quarter of 2004, and the company now expects to post a loss in the fourth quarter.

Previously, UTStarcom had expected a quarterly revenue of US$875-885 million.

The firm blamed the refined outlook on a cut in capital expenditure on Xiaolingtong by Chinese fixed-line carriers China Telecom and China Netcom.

The number of Xiaolingtong subscribers in China in 2003 doubled year-on-year to 40 million, according to UTStarcom.

Last year the number hit the 65 million mark.

However, industry analysts said the dazzling growth is already beginning to taper off.

For example, China Telecom recruited about 1.2 million new Xiaolingtong users per month in the third quarter of last year, compared to about 1.8 million per month in the first quarter of 2004.

An entry into the domestic mobile phone market would help UTStarcom pick up some slack from slowing Xiaolingtong revenues, said Elaine Su, an analyst with research firm GFK Asia.

"Besides a general market slowdown, UTStarcom is facing fierce competition from other vendors such as Huawei Technologies and ZTE Corp which are stealing its share of the Xiaolingtong phone market," she said.

"Mobile phones would offer a new profit driver for UTStarcom,"

Su forecast China's handset market to maintain double-digit growth this year to reach approximately 77 million units, which will offer huge opportunities for new market players like UTStarcom.

Beijing-based research firm Analysys International said in a report yesterday that sales of mobile phones in China are expected to reach 100 million units by 2007.

"The market is far from saturation point," the report said.

Wang Yuquan, president of consulting firm Frost&Sullivan (China), said it will take time for UTStarcom to make a profit in China's already overcrowded mobile phone market.

"UTStarcom has done a good job in business transitions by investing a lot in new businesses such as IPTV (Internet Protocol TV) and softswitch. But it takes time for such businesses to catch on and become major profit drivers and sweeten investors," he said.

However, the long-term prospects of UTStarcom remain quite rosy due to the firm's "investment in the future" policy and business diversification strategy, the analyst said.

(China Daily January 18, 2005)