B2 100 The Fastest-Growing Technology Companies In our annual ranking of tech's supercharged, a company most people never heard of grabbed the No. 1 slot with a not-so-simple feat: It made a fortune in China.
By Om Malik and Michael V. Copeland Reported by Brian Caulfield, Nancy Einhart, Bridget Finn, Matthew Maier, Jeff Palfini, Jonathan Thaw, and Owen Thomas.

(Business 2.0) – Eight years ago, Silicon Valley entrepreneur Hong Liang Lu went to Beijing on vacation, had a lousy experience with the phone system, and got an idea that made him insanely rich. Along the way, he also solved the puzzle that has flummoxed some of the smartest business minds since the Opium Wars--how to crack China, the biggest market in the world. ¶ Lu's epiphany came after he tried to call some friends in Shenzhen, the boomtown just north of Hong Kong. He couldn't get a phone line--a common experience for anyone in China, but a frustrating one for someone who had spent most of his life in well-wired economies. Though he knew next to nothing about how phone networks worked (he had founded a printer software startup that he sold to Kyocera), Lu decided to launch a telecom equipment company. "My mother thought I was insane, and so did most of my friends," he recalls. "But I was right."

Lu, a 49-year-old Taiwanese native raised in Japan and schooled at the University of California at Berkeley, understood the particular scorn Chinese officials held for representatives of "briefcase companies." Those Westerners who stayed only long enough to make a deal didn't appreciate how the Chinese market is different: Off-the-shelf foreign products are much harder to sell than goods that are tailored to Chinese consumers. And listening to customers is easier said than done.

With its corporate headquarters in Alameda, Calif., Lu's company, UTStarcom, made a long-term bet on China, building most of its equipment there. That helped it win goodwill--and its products, which were cheap, smart, and engineered with Chinese users in mind, won customers. The firm has made $2 billion in China since 2000 and now employs 4,700 workers worldwide.

And by all accounts, the company is just getting started. Its contrarian formula is easily exportable: Set up shop in-country, partner with the biggest phone company, and above all, make supercheap products that are minutely customized to local needs. Indeed, Lu is using the same business model in India, Indonesia, and Vietnam.

It's that kind of thinking--taking calculated risks, going where the opportunities are, thinking about what the market really wants--that took UTStarcom to the top of Business 2.0's annual ranking of the fastest-growing tech companies. Its net income has grown 72 percent annually since 2000; this year alone the firm is expected to report $190 million in net profit on $1.8 billion in revenue. Don't think Wall Street hasn't noticed: UTStarcom's stock is up 112 percent so far this year--four times as much as the average stock on the rocketing Nasdaq--to $42.81 near the end of August.

The B2 100 isn't a compilation of companies with the most revenue or the largest market value. As we did when we introduced the ranking last year, we began with a universe of 2,000 publicly traded tech companies in industries ranging from electronics and telecommunications to biotech, services, and retailing. Then, with the help of Zacks Investment Research, we stacked them up against each other using a combination of four financial criteria: growth in revenue, profit, and operating cash flow, as well as stock market return.

This year 60 new companies made the list. Logitech, last year's leader, dropped to No. 30, a victim, says its CEO, Guerrino De Luca, of stiff price competition. But the biggest drop was last year's No. 2 company, California Amplifier. The maker of broadband transceivers tumbled off the list entirely. Likewise, companies in the semiconductor industry fared poorly this year; memory maker Rambus fell from sixth place to 63rd, and wafer-inspection company KLA-Tencor dropped off the list after holding the No. 9 spot last year.

On the upside, supplanting the chip companies were a slew of firms focused on IT outsourcing and data security equipment, such as Affiliated Computer Services, Fargo Electronics, and RSA Security. The biggest gainer? Amdocs, a software company based in Chesterfield, Mo., that sells customer-support and billing applications. It went from last place to No. 5 on the list by branching out from its core telecom customers into banking at the same time it was cutting back its workforce.

UTStarcom, which wasn't on last year's list because it hadn't been publicly traded for the requisite three years, began its rise in 1997, when it made its first major sale in China. While the big global telecommunications equipment makers pitched their fancy products to Chinese phone giant China Telecom, UTStarcom offered a cheap, no-frills box--a digital-loop carrier, which connects a phone company's central switching office to the neighborhoods it serves. China Telecom bought more than 30 units from UTStarcom. The new company raked in $75.6 million that year.

But Lu and his partner, Ying Wu, now the company's vice chairman and CEO of its Chinese operations, saw an opportunity to sell more than digital-loop boxes: They wanted to sell whole phone networks that would be perfect for a developing country like China.

They dubbed their network the Personal Access System, or PAS. Think of it as a cordless phone with extended range so you can carry it anywhere within the city limits. Most Chinese, Lu and Wu had discovered, didn't need cell-phone service, because most never traveled outside their own cities. What they wanted was something that worked like a cell phone but was as cheap as a landline. With inexpensive, phone-book-size transmitters mounted on rooftops as relays, a call on PAS costs about 1.5 cents a minute, compared with 10 cents for a cell-phone call. And as a bonus, a PAS phone also lets its user access the Internet at 128 kilobits per second, twice as fast as the standard U.S. dial-up connection.

UTStarcom has already deployed PAS in more than 600 Chinese cities and villages. Systems cost between $5,000 and $5 million. With that kind of growth, Lu feels vindicated. "Those who didn't go into China didn't make it," Lu says. "We went, and we made it."

Of course, it's risky when a company links its fortunes to those of a single developing economy; fully 80 percent of UTStarcom's revenue comes from China. So the company is racing into other markets, selling similar networks in Thailand, Vietnam, and even industrialized Taiwan. It's also pushing hard into Africa and Latin America.

The most exciting prospect: India, the second most populous place on the planet. Lu wants to sell a device there that lets local carriers offer high-speed Internet service over any medium--copper, fiber, or radio spectrum. A pipe dream? Reliance Infocomm, part of giant conglomerate Reliance India, has already purchased $100 million worth of UTStarcom gear. Says Jagbir Singh, chief technology officer at Bharti Telecom, a local phone company, "The product has features that its competitors don't have, so you get more for what you pay." If it all works out, don't be surprised if UTStarcom dominates our list again next year.