Asia - operator consolidation

Accenture: Asian operator go regional

Early this year, Maxis announced a $1 billion investment plan in India between 2008 and 2013. About a month later, Chunghwa Telecom unveiled a $3.9 billion, five-year spending package in investments in Southeast Asia. These are just two examples of a shift in Asian telecom operators' strategies: inorganic over organic, regional over local.

Telecom operators are looking at expanding overseas to develop new revenue streams and to compensate for slowing growth in their country of origin. Most telecom operators in Asia's more developed markets are now planning to step up their investments in overseas acquisitions over the next five years. In short, the Asian telecom operator of 2013 will be regional.

The prey becomes the hunted

Historically, APAC telecom markets have been the targets of global players following the opening of the telecom markets around the world. In the late 1990s and early 2000s, operators such as BT, Orange and Telenor saw the potential of the industry in Asia, and took to extending their operations to grab a piece of the growing pie. They brought with them their expertise in handsets and wireless technology, and penetrated the Asian market using their global brand name and financial power. At the same time, Asian giants such as Telekom Malaysia and SingTel started their international expansion to emulate the global players.

Today, with the maturing markets in Singapore, Hong Kong, Malaysia and Taiwan, players in the region employ similar tactics to gain an edge over their local competitors, to build scale and to avoid becoming acquisition targets. Equipped with best practices in operational efficiency, network deployment and industry experience, the Asian players have chosen to buy up stakes of other telecom companies in neighboring emerging markets. Specifically, they have targeted markets with low penetration rates, large customer bases and a growing economy. Countries like India (Maxis), Thailand (Chunghwa Telecom) and Indonesia (Maxis) have been the preferred destinations for such investments.

This regionalization trend is only beginning and will amplify over the next five years. With the penetration levels in the wireless space reaching or exceeding 100% in developed Asian markets, the need for new revenue streams becomes crucial. By venturing into new geographies, Asian telecom operators will be able to grow their customer base, diversify revenue streams, achieve economies of scale, and therefore, ensure a sustainable and increasing flow of returns for the future.

Approach to regionalization

The main path to regionalization is to exploit the same areas of business in different geographies. Asian players are buying up stakes of telecom operators in attractive, emerging markets (defined by low penetration, high revenue growth) to leverage their expertise in their local markets and to fill in the gaps in wireline infrastructure in the new markets, using emerging technologies. Operators like Maxis are also concerned about the levels of investments they can achieve. Targeting emerging markets is, therefore, a way to combine limited investments with high potential returns. Some of these markets in Asia are in the investment phase (capital intensive) while others have started to rake in the profits.

Emerging markets that are further along the maturity curve are Thailand, Indonesia and the Philippines. Emerging markets that have just started to shine are India, Vietnam, Pakistan and Bangladesh while those that will shine soon include Laos, Cambodia and Sri Lanka.

Despite the risks inherent to investments in developing markets (e.g.lack of regulatory transparency, low spending power, bureaucracy, limited talent pool), Asian telecom operators will continue to grow in their neighboring countries.

Another approach to regionalization that will become more prominent by 2013 is for telecom operators to seek strategic partnerships in complementing domains to embrace the convergence wave. Opportunities in the entertainment space (IPTV, mobile TV) provide telecom companies with countless possibilities in the bundling and reshaping of their products and services.

Operators will redefine their space as they acquire niche players (a model that media companies such as Indonesia's Global Mediacom have already adopted with their investment in China's Linktone), and build alliances to create new product portfolios to enhance their existing mix.

Is Africa the next target?

As Asian telecom operators look at future regionalization opportunities, they will realize that potential acquisitions or green field investments in Asia will decrease, either because the size of the investment level is too high (e.g. China, India) or because markets have become too competitive (e.g. Thailand, Indonesia). When this happens, expanding beyond Asia will become crucial to their growth.

Three potential geographies for telecom investments besides Asia are the Middle East, Eastern Europe and Latin America, where the economy is growing and political stabilization is under way. These markets already serve as the playground of European giants such as Vodafone, Orange and Telefonica, offering limited opportunities for Asian players that do not have the required scale. They are also the platform for new competitors on the global scene. For instance, Middle Eastern telecom operators are now venturing beyond their regional markets. For example, Dubai Etisalat is considering investments in Vietnam and India.

In this context, Africa can become a good investment target for Asian telecom operators in the near future, particularly in the more stable countries of Mauritius, Tanzania and Ghana. Ghana has already taken a number of steps to improve their institutions and infrastructure to attract foreign investments.