Crouching Telco’s Hidden Dynamism
by Scherzando Karasu
How a new breed of Emerging Market Telco’s are using the skills gained at home to expand internationally - shaking up the telecoms landscape and bringing wireless communications to ever more people.
While 2009 has been a tough year for the Telco industry worldwide a handful of emerging market companies has been posting some outstanding performances.
With eleven of the twenty best performing companies this past year coming from the emerging markets and with four of the top seven drawn from amongst these regions.
Recent rapid emerging market economic growth in India, China, Latin America and the Gulf states has seen an assemblage of regional mobile operators emerge. Using the skills gained at home to expand internationally - shaking up the telecoms landscape and bringing wireless communications to ever more people.
Having navigated the recession better than their peers in the developed markets these companies have expand rapidly outside their home turf, reflecting a new locus in the mobile telecommunications industry.
With a number of these regional players now emerging as stars, companies like: Bharti Airtel of India, America Movil of Mexico, MTN Group of South Africa, Orascom of Egypt, Zain of Kuwait, and Chunghwa Telecom of Taiwan, Etisalat of Abu Dhabi and China Mobile which now has a larger market capitalisation than that of Microsoft.
And there have been some notable new entrants to these players such as Entel a Chilean communications firm that has come from virtually nowhere, Taiwan’s HTC - a former original device manufacturer- (OMD) that has now created a product that rivals the iconography of Apples Iphone in the West in its core Asian markets, with its Touch Diamond handset.
Whilst much of this success has been a function of getting a head-start when penetration rates were low and poised to grow rapidly, but what is distinguishing these stellar performers from their more sluggish Western counterparts?
Iain Fenn a leading Emerging Market Telco expert at the law firm Linklaters contends that their advantages stem from, “A cost base efficiency, nimbleness and their undoubted appetite for risk given the innate riskiness of their home markets.”
“Many of these emerging market players are privately held so they don’t have shareholders to answer to which can make them far more agile.” From his perspective he believes, “we shall certainly see the Emerging Market players becoming far more active throughout Latin America, Asia and even perhaps Eastern Europe”
However he disputes the idea that companies like these will ever be able to expand and seriously challenge major incumbents in Western markets. “If these kinds of companies are ever to consider expanding beyond their home regions, they will have to use debt and in this current climate they are going to find debt very hard to come by”.
In terms of operating in a low cost environment though, “they have a lot of experience in areas that the Western operators simply don’t have”
Perhaps the immense hardship inherent in doing business in emerging markets has served as a Darwinian selection process where the strong emerge as fierce competitors that excel at agility, the ability to see and seize opportunities and to create economic value consistently faster than rivals.
Zain of Kuwait for example have expanded to become a leading mobile and data services operator in Middle Eastern and African countries, and is aiming to become one of the top-ten leading mobile telecom companies in the world by market capitalization in 2011
Once they have conquered their local markets companies like these have strong incentives to expand abroad. Global expansion allows them to tap new markets, diversify risk geographically, and build economies of scale.
Mr Ibrahim Adel, Chief Communications Officer of Zain group told CNBC “The expertise that EM players have gathered in reducing their cost base and increasing their efficiency to address their low-ARPU markets can of course be leveraged for rapid foreign expansion”
“Horizontal expansion into adjacent markets can help realize better synergies are of and part of the strategy of most of these high-growth EM players. I personally see an expansion into “developed” markets to be an option that can be considered opportunistically, more than strategically”
With the high cost of capital forcing emerging market firms to do more with far less such as asset light operational models and aggressively leveraging infrastructure sharing to reduce CAPEX investments.
For example Bharti Aritel India’s biggest mobile operator has an established pedigree in the joint-management of large-scale infrastructure agreements involving an unprecedented 100,000 towers. Should some of these EM operators embark on forays into “developed” markets, the experience in infrastructure sharing negotiations will bode very well.
Providing mobile services in a developing country is a different proposition from doing the same thing in the developed world.
Patchy infrastructure unreliable power supply and the challenge of running the networks profitably when the average revenue per user or ARPU – a key industry metric - is a fraction of what it might be in developed markets and as mobile phones have become cheaper revenues have continued to fall.
The crucible of business innovation has been India, given their rock bottom ARPU’S and comparative advantage in technology. Like much of Indian technology innovation outsourcing is at the heart of this trend.
Bharti Airtel’s information-technology operations are outsourced to companies like Ericsson and Nokia Siemens Networks. This leaves the company to focus on its core competency of marketing and strategy.
Under a process known as “managed capacity”, the carrier simply requests and pays for its capacity in advance at an agreed price, leaving the vendor to handle the business of engineering networks and facilitating base stations etc.
Judicious alliances and infrastructure-sharing has often lead to expeditious expansion, granting company’s access to assets, customers and markets without the need for major capital investments.
African operators face many of the same difficulties as those in India and have devised low-cost innovations of their own. Such as MTN’S pioneering use of dynamic tariffing which adjusts call charges depending on the level of network usage as well as “borderless roaming” introduced by Zain to East Africa. Innovations designed to cater for the relative price sensitivity of customers.
Necessity being the mother of invention emerging markets act as a kind of laboratory, a catalyst for development given factors such as huge diversity, political instability, widespread poverty and cut-throat competition.
The wealth of innovation seen in India and Africa demonstrates that the Western operators are not always best at running networks in these kinds of environments.
In terms of regional growth and expansion the Middle East and African Telco powerhouses have been especially dynamic building from a very small home markets and creating close to £100bn in market value.
Orascom Telcom headquartered in Egypt now has about 80 million subscribers in The Middle East, Africa and South Asia and has even operated networks in the badlands of Iraq. The company has now set its sights on North Korea in a joint venture announced with their government in January of 2009. As their Chairman and Chief Executive Naguib Sawiris said at the time, “We believe this market will open its doors, it might unite with South Korea and the yield could be very very high”
Given the success of their regional expansion the group decided that it had acquired enough strength and experience to make inroads into Europe. Acquiring operations in Italy and shortly after in Greece. So far it has built a solid platform to embrace the next level of challenges and the company has plans to launch a green-field operation in Canada.
An increasing number of companies that have cut their teeth in emerging markets now see value creation opportunities outside their country and region and whilst they may not be household names yet. These players find their world-class experience in serving price-sensitive customers invaluable as they survey broader investment opportunities.
Strategies and Opportunities
Emerging Markets aggregate market value has grown at a Compound Aggregate Growth Rate (CAGR) of 18% for the past 5 years and although there is still ample room for growth in the vast markets of China, India, Indonesia and much of Africa, many of the remaining potential customers inhabit remote rural regions that are both difficult and expensive to reach.
And as penetration rates have grown and competition increased, Latin America and Eastern Europe for example are virtually saturated. At 83% and 117% respectively (source Merrill Lynch Wireless Matrix) and with Asia not far behind and there has been talk of consolidation in the Middle East.
Consumers in emerging markets are also highly discriminating buyers despite their low disposable income and price sensitivity. To succeed in serving these customers, firms honed in this environment must relentlessly innovate to offer desirable products at low prices.
The best of the emerging market companies excel at fighting two front war-holding local rivals at bay at the low end of the market while battling multinationals at the high end.
So smart players are looking to segment for second generation value-creation opportunities such as new and different products and services for their increasingly sophisticated consumers, enhanced services and support for business customers and most trenchantly reverse expansion both close to home and in the developed world. As Ibrahim Adel Chief Communications officer of Zain group told CNBC, “It is essential for these operators to preserve their share of value. Internet access market represents the next largest potential. Operators need to think of “addendums” to their business models”
Chungwa telecom of Taiwan for example operates in a market which is often seen as a bell-weather for emerging markets, as an industrialized urban country with 100% penetration levels for mobile phones Chungwa has to stand out in a fiercely competitive market by extending innovations and has partnered with financial institutions, universities, online music companies adding all kinds of content to its traditional communications offering.
ZTE, historically a leading Chinese handset manufacturer for China Mobile has built on this expertise to move into other markets. With Vodafone contracting them to build low cost handsets for Vodafone companies in Egypt, South Africa and Romania.
America Movil -the Latin American market leader- has brought its prepaid subscriber model to the US, targeting a lower-end customer than the contract providers such as AT&T, T-Mobile, and Verizon.
America Movil’s Tracfone subsidiary offers only pre-paid cell minutes, with no credit check, no service contract and no hidden fees as the company says, “No surprises”.
Whilst prepaid is a small segment overall at less than 20% of total American wireless subscriptions Tracfone has managed to secure a 28% share of this market with 10.5 million subscribers.
As Telco firms deploy 3G networks consumers are also accessing the internet through Smartphone’s. Which now make up an estimated 15% of global cell phone sales, up from 3% in 2004 growing to an estimated 120 million in 2008. Three times the rate of regular cell phone shipments.
There is evidence that customers in emerging markets are leapfrogging regular mobile phones in favor or smart phones in startling numbers. In the Middle East and Africa subscriptions on a 3G network now account for half of total mobile phone subscriptions.
In emerging markets, where both local and foreign investors have made massive investments in network infrastructure growth potential still abounds. Given their huge and often underserved populations, who are quickly turning into sophisticated, albeit low-end consumers this new cellular infrastructure opens up possibilities for service providers to leverage these new assets.
Having honed customer offerings to appeal to low-income consumers these new upstarts may prove very competitive especially amongst the more frugal western consumer. Once these new entrants have established a beachhead, how long will it be before they use their customer-centric approach to move higher up the value chain?
The history of Emerging Market companies examining developed markets and other emerging regions of the world not only for customers but also for investments is now an entrenched feature of globalization.
If their telecoms giants follow suit their low-cost model and proven innovation could give them a clear competitive advantage— helping bring mobile phones within reach of the remaining 3 billion of humanity without.