By Perry Wu
It has not been a good couple of years for UT Starcom (UTSI). The company used to be a high-flyer. For the past years, the California-based telecom company had been placing most of its eggs in the China basket, and it seemed to be paying off. Only a couple of years ago, the company's stock price was above US$40.

Then the company started to have major issues. Investors learned last year that the company would be late in certifying that it financials were free of misstatement. But that wasn't the only thing. As the old Chinese saying goes, "misfortune tends to happen in clusters (huo bu dan xing)".

This past week authorities in California arrested a local man on charges that he had been making threats against UT Starcom employees, and he had also been involved in trying to pump up the company's stock price through posts on the Yahoo message board. One can only wonder how making threats against a company's employees is supposed to help the stock price.

Even with this arrest, UT Starcom has far bigger issues. UT Starcom really made its name in its making a Chinese market for the Xiaolingtong ("Little Smart") PHS phone system. UT Starcom is one of the major manufacturers for phones that use this system. Xiaolingtong is really a glorified portable land phone, but with enough range that it can act like a mobile phone, within the range of a city. Since it is inferior to real CDMA and GSM mobile phones, such as the mobile phones of China Mobile or China Unicom which can make calls all over China and in many parts of the world, it's competitive advantage lies solely in its price.

This price-only advantage for Xiaolingtong over other mobile phones puts UT Starcom in a delicate position. If the price difference between mobile phones and Xiaolingtong becomes too small or evaporates then people will naturally buy only mobile phones, leaving Xiaolingtong to die. And beginning in the last year and a half, that is precisely what has been happening.

The mobile phone duoplists, China Mobile and China Unicom, have been recently engaged in a price war, and mobile phone plans have become ever cheaper. New "99 Yuan" plans have appeared, allowing the mobile phone companies to penetrate into low-end markets that have thus far been Xiaolingtong's turf.

Herein lies a good rule of commerce. Competing on price makes sense if you are a business operating in a market where prices don't change or even tend to go up over the long-term. That is why discount hotel chains can do well; the services they sell–hotel rooms–tend to have stable prices and may even rise over time. There will almost certainly almost be a price differential between the Ritz-Carlton and say, Motel 168 (an up-and-coming Chinese budget hotel chain).

But in new technologies, merchandise tends to get cheaper over time. If you are competing on price differences, your competitor may have already beat you to a lower price. For UT Starcom, the lower prices on its Xiaolingtong phones may not be lower anymore.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.