Outlook: Hutchison plays at Russian roulette in 3G landgrab gamble

Investment drought; Death duty pain
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The Independent Online

Li Ka-Shing, chairman of Hutchison Whampoa, is arguably the most brilliant and canny of the billionaire financiers to have emerged from post war Hong Kong - and there have been quite a few of these - but has he not wholly lost his marbles with his $16.7bn bet on third generation mobile telephony? Hutchison is a huge enterprise, with more than $20bn of cash and liquid assets at its command, so Mr Li is not exactly betting the ranch with his gamble on 3G, but it's one hell of a roll of the dice nonetheless, and from this side of the tables, it looks as if the odds are heavily stacked against him.

According to figures released yesterday, Hutchison has booked $500m of start-up losses on the venture in the first half of this year alone. For this it managed to sign up a paltry 155,000 subscribers in the UK and 300,000 in Italy. The great bulk of these subscribers have been acquired in the two months since 3 abandoned its attempt to sell the new network as a premium product, and instead started flogging its phones as a heavily discounted, bog standard, voice telephony service. Since then, the phones have been flying off the shelves, but the cost has been horrendous.

A glutton for punishment, 3 is sticking to its original forecast of achieving 1 million subscribers in both Britain and Italy by the end of the year, a target which even when it was set looked optimistic in the extreme and now seems almost wholly incredible. To achieve the target, 3 seems prepared to commit the financial equivalent of hari kiri by discounting even more heavily than it is already and by launching its first ever pre-paid package. With 3's mobile handsets costing upwards of €700 apiece, Mr Li seems to be moving from conventional roulette to the Russian version of the same game. To enter the pre-paid market with such an expensive piece of kit is going to be extraordinarily expensive.

There are a number of possible explanations for Mr Li's apparent bravado. When Orange was launched onto the UK market in the early 1990s, people said much the same thing as they are saying now about 3, and yet Hutchison proved them all wrong. Furthermore, it eventually made so much money out of Orange that the gamble it is now taking with 3 may not be as insane as it seems. There is a perfectly reasonable case, after a spectacular win, for putting half the money back on the tables, knowing that whatever the outcome, you'll still be heavily in the money at the end of the night.

Even so, this is gutsy stuff. Hutchison has already paid a king's ransom for its 3G licences, which it didn't have to with Orange. The market is also more mature than it was then, and infinitely more competitive, with a number of mobile virtual network operators battling for customers alongside the five licenced networks. The regulatory environment is harsher too.

Anyone else in Hutchison's position would already have written off the cost of the 3G auctions and abandoned the quest. Instead, Hutchison seems prepared to spend whatever it takes to buy its way into the market. Yet this is not like battle between Sky and OnDigital for digital pay TV, which involved giving away free set top boxes and where the winner took all. Hutchison is up against four hugely powerful incumbents. They are not about to allow the new kid on the block to eat their lunch.

Mr Li should never be underestimated. It's very much his style to bet against the crowd, and normally he wins. Is this another Li Ka-Shing masterstroke, or are we witnessing the delusions of an overly proud old man who's simply lost his touch? We'll see.

Investment drought

The green shoots of recovery in business investment should by now be clearly visible. Neither the Treasury or the Bank of England assume any overall uplift in business investment this year, but they did expect to see a resumption in growth by the second half. The reality is that investment is continuing to plummet. In the second quarter of this year, overall business investment was down a further 1.1 per cent on the already depressed first quarter, taking it to its lowest level in more than five years. Meanwhile, investment in manufacturing was down a jaw dropping 10 per cent.

These numbers are cause for grave concern. The Chancellor boasts proudly of Britain's superior economic performance set against the rest of Europe, yet while others have continued to invest right through the downturn, British business seems to have almost wholly given up the will to live, slashing investment to the bone.

Instead the economy has been kept afloat on an ever rising tide of household and public sector debt, which in both cases looks destined to reach crisis proportions. Eventually economic reality will out, and it won't be pleasant when it does.

Death duty pain

Death duties used to be an irritant affecting only the very wealthy. With rising incomes, home ownership and house prices, inheritance tax will soon be an issue even for those of relatively modest means. Already the numbers caught by the inheritance tax trap are rising strongly. According to figures cited in a new Which guide to giving and inheriting, the number of estates paying inheritance tax annually has risen by 55 per cent since1998 to 29,500 last year. And that's just the start of it. The Treasury expects inheritance tax, at present a comparatively small source of revenue for the Government, to become one of its biggest single sources of taxation over the next 10 to 20 years.

That makes ministers very reluctant either to give up the tax or even to reform it. Italy's Prime Minister, Silvio Berlusconi, has already abolished inheritance tax and the Bush Administration promises eventually to do the same thing. Yet in Britain even the Conservative Party hesitates to put abolition on its tax reforming agenda. What if we need the money, figures Michael Howard, the shadow chancellor.

So assuming that abolition is a non starter, how could the tax be made fairer? As things stand, death duties are largely a voluntary form of tax. The intention of inheritance tax is to correct the social inequality of the few inheriting large amounts of unearned wealth, yet perversely it no longer works that way. The very wealthy hardly need to pay the tax at all provided they plan adequately by giving most of their money away to their children and others at least seven years before they die. This is an option not open to the growing ranks of the relatively prosperous, for you need a lot of money before you can safely give the majority of it away under the seven year rule and still have enough to keep you in comfort until you reach the grave.

For most people, the main asset will be the family home, and this cannot easily be given to children before death without forfeiting parental occupancy rights. There are other ways of avoiding the tax. For instance, there is already a growing market in equity withdrawal schemes that allow the householder to give away the value of their house while continuing to live in it.

Alternatively, many parents have begun to remortgage their houses so as to provide their children with the means to climb onto the property ladder. Or you could simply buy a house in Italy, where there is no inheritance tax. All avoidance tends to be complex and costly, but it is likely to become commonplace if the Government fails to grasp the nettle of reform.

As recently suggested by the Fabian Society, the most equitable solution would be to switch tax from the estate to the beneficiaries, who would then pay income or capital gains tax on any monies they received in the normal way. For the Government, this would have the added advantage of potentially generating even more revenue than the existing system. On the other hand, it would be complicated to administer and wide open to evasion and avoidance. There are no easy solutions, yet the Government cannot duck the issue for ever.