Asian Firms Plot Different Strategies In Anticipation of 3G Metamorphosis
June 19, 2001
Tech Center
By H. ASHER BOLANDE
Staff Reporter of THE WALL STREET JOURNAL
The world's telecommunications companies have for years sought growth by plotting conquests on the map of Asia, but the list of contenders in the regional stakes recently has narrowed and taken on a different look.
In the 1990s, just about every large American and European telecom company, from U.S. regional Baby Bells to British Telecom PLC, was chasing acquisitions in East Asia. But unprecedented competition in home markets, huge levels of debt and a climate of investor hostility toward telecommunications companies have conspired to damp enthusiasm for faraway markets, eliminating nearly all from the hunt.
Today, only a few deep-pocketed predators are prowling the Asia-Pacific region with serious ambitions of building transnational empires. And -- if you look at the mobile-telecommunications sector, where analysts expect the most merger and acquisition activity in the next few years -- they are largely native to the region.
U.K.-based Vodafone Group PLC is the only exception on the list of suitors that includes NTT DoCoMo Inc. of Japan, Singapore Telecommunications Ltd., Hong Kong's Hutchison Whampoa Ltd. and the Regional Wireless Company (a joint venture between Australia's Telstra Corp. and Pacific Century CyberWorks Ltd. of Hong Kong).
That most of the companies are indigenous to the region is a sign that the Asian telecom industry has grown up. And its coming of age coincides with a stage in the development of wireless communications when the sector is being overhauled for third-generation services.
Mobile operators face a difficult and costly metamorphosis in the next few years with the leap to 3G mobile data services. No simple upgrade, the Internet-like data services that 3G promises require the construction of new networks. Most small Asian operators aren't financially or technologically prepared to do it alone, which creates an opening for big international partners.
While scale always has been critical to telecom operators, because of the industry's need to offset the high upfront costs of networks, the wireless Internet increases the advantages of having a multinational footprint. The software behind the new breed of data services will be expensive to develop and pioneer, and the companies that can spread those costs over millions of subscribers in different countries will have an edge, by doing the technical heavy lifting once and exporting the engineering to every corner of the empire.
And here, the notion of weighted or proportional subscribers -- the combined number of users in an operator's empire adjusted to reflect its percentage of ownership in its foreign partners -- reveals a sort of pecking-order among players. Some assets have more meaning than others. For instance, DoCoMo has stakes in only three operators in the region, but carries the responsibility of 37.2 million weighted subscribers due to the massive size of its national market. Vodaphone, on the other hand, has 10.4 million weighted subscribers over seven investments -- its stake in China Mobile (Hong Kong) Ltd. earns it a mere 1.1 million weighted subscribers because the U.K. operator only owns 2% of the Chinese carrier, which boasts 51.5 million users.
From a regulatory standpoint, the companies face fewer limits on foreign control than ever before. Although some Asian countries still have onerous restrictions in place, further deregulation over time is widely seen as inevitable, making more expansion possible.
All this means the dominant players of this decade will be better positioned than their predecessors to acquire panregional assets and consolidate telecommunications empires. So far, Asia has been big enough for the five companies profiled here to expand without encroaching on one another's turf, a situation aided by their contrasting styles and priorities.
However, all signs suggest this cozy era is ending. In Australia, for instance, Vodafone and SingTel fought to buy Cable & Wireless Optus Ltd., and by winning, SingTel is likely to become the biggest rival in Telstra's backyard. But the tables could be turned in Singapore if Regional Wireless puts in the winning bid for SingTel's main competitor, MobileOne Ltd.
While other companies likely will jump into the ring, these five telecom operators stand out as the most prominent empire builders. Insight into how they may behave in future acquisitions is gained by understanding their unique agendas and strategies.
Vodafone: the Global Empire Builder
Seven Asia-Pacific markets, 10.4 million weighted subscribers
With the world's biggest subscriber base and the stated ambition of spreading its mobile brand to every corner of the earth, Vodafone is something like the heavyweight champ that every mobile company with pan-Asian ambitions must worry about.
In the past year, the group completed a lightning series of acquisitions, primarily in Europe, leaving it with stakes in 29 operators world-wide, which collectively have 188 million subscribers.
Its pattern is conquest. It enters new countries by taking a controlling stake in a local mobile operator and swiftly stamps the company into the Vodafone mold. But that approach is seldom possible in Asia, where certain countries still restrict foreign ownership in telecom companies. While Vodafone has its own operators in Australia and New Zealand, for example, it has had to accept minority stakes in South Korea, India and China.
For the moment in Asia, it is targeting only the big fish. "Japan and China is where we should focus in Asia rather than fragment by going into some of the smaller countries that might come along as acquisition opportunities," Chris Gent, the company's chief executive, said in late May. Instead, the company said it preferred to place its emphasis on digesting the companies it already has swallowed -- a decision analysts have praised. Over the next 18 months, Vodafone is expected to search out ways to consolidate costs and unify its subscriber pool before seeking new acquisitions.
Even when in a minority position, Vodafone's priorities are to extend its brand and influence its partners to adopt Vodafone's mobile Internet portal as a transitional step to 3G technology. Ultimately, it hopes to provide subscribers uniform services and rates wherever they roam. "It's very advantageous to have customer data centralized," says Andrew Cole, who follows the group for the Boston consulting firm Adventis Corp.
Yet it remains unclear whether Vodafone will pursue its strategy in Asia if it is unable to expand minority stakes into controlling ones, and if it is willing in certain circumstances to forego the cookie-cutter approach to acquisitions that it has employed in Europe.
Vodafone's financial muscle is without peer, making it a tough opponent to outlast in a bidding war, but other wireless heavy-weights can console themselves that its attention is split with other parts of the world. "There's the U.S., Europe and Asia," says Mr. Cole. As for Asia, it is only "one of the three legs to their stool," he says.
SingTel: the Regional Partner
Five Asia-Pacific markets, 3.2 million weighted subscribers
Where Vodafone approaches acquisitions with a conquer-and-command style, SingTel has adopted a more subtle touch that treads lightly on the region's political and regulatory sensitivities. The former monopoly carrier of Singapore has been investing for growth beyond its borders for years, having early on realized there was limited room for growth at home, a market of just four million people.
Its aim is to become a regional power-house, and financial analysts say even after its proposed 12 billion Australian dollars (US$6.36 billion) to A$14 billion purchase of Australia's second-largest operator, Cable & Wireless Optus, its healthy cash flow and unusually low debt-to-equity ratio mean the group will have little problem raising funds for further acquisitions. Yet the company's executives suggest the operator may move into markets via small stakes rather than seeking complete ownership by executing pricey deals.
The result of this approach means SingTel is able to move into the region's more tightly regulated developing economies, which more control-driven players like Regional Wireless might avoid. Minority stakes in operators -- including Globe Telecom Inc. of the Philippines, Thailand's top cellular company Advanced Info Services Ltd., and India's Bharti Group -- contributed 15% of SingTel's pretax profit in 2000.
The group's executives emphasize that SingTel still can bring strategic advantages to the whole family of operators. The companies it invests in not only benefit from its management expertise but can demand discounts on infrastructure equipment and handsets as a group, says SingTel Mobile chief executive Lucas Chow. "We actively participate in equipment-expansion negotiations in each of these companies," he says. "We benchmark each other."
SingTel executives declined to put a figure on the amount the company hopes to save by buying equipment in bulk, but analysts estimate the discounts for SingTel group could be around 10% after it adds Optus to the mix. Such advantages also will apply to content when mobile data services take hold, he says. In approaching the major record labels for downloadable music, for example, SingTel will be able to offer a subscriber audience of 10 million, because it will pitch on behalf of all its associated companies, Mr. Chow adds.
For SingTel, the biggest question going forward is whether perceptions that it is an arm of the Singapore government, which owns 78% of its shares, will hinder it. While it has shown a willingness to reduce the government stake to take over Optus, many industry analysts blame such political concerns for the group's failure to acquire Hong Kong's Cable & Wireless HKT Ltd. and Malaysia's Time Engineering Bhd. last year.
Regional Wireless (Telstra/PCCW): Newborn Regional Empire Builder
One Asia-Pacific market, one million subscribers
Seeking to challenge SingTel for pan-Asian position is Regional Wireless, a joint venture created in February by the former monopoly carriers of Australia and Hong Kong. But it is launching that challenge with the opposite strategy -- a control-above-all approach that analysts say might give it too narrow a range of options to move quickly.
According to Dick Simpson, the venture's chairman and the president of Telstra International, the venture's initial strategy is to acquire controlling stakes in a few mobile operators in important Asian markets.
"As we establish that concept and prove that concept ... then you move out with that concept into nonwholly owned properties," he says, adding that the company has no interest in snapping up minority stakes left behind by British Telecom or others looking to quit the region.
The goal has more in common with Vodafone's aims than SingTel's: a unified pan-regional network under a single brand. "What's important for the customer is that they have a seamless capability, so the experience is the same whether you're in Sydney or in Hong Kong," says Mr. Simpson. What exactly the brand name will be hasn't been decided yet -- Regional Wireless is only a generic temporary label. The venture is interested in acquisitions in both developing countries, with their subscriber growth potential, and developed countries, where there is a greater likelihood of revenue from new mobile data services, he says.
Despite the optimistic term "Regional" in its name, the venture is starting out with just one asset, CSL Ltd., Hong Kong's second-largest mobile-service provider. (Telstra Corp., the controlling partner with 60% of the joint venture, didn't include its Australian mobile unit, Telstra OnAir, in the new company.) However, Regional Wireless already has put in a bid of approximately US$1.2 billion for MobileOne Ltd., the No. 2 cellular company in Singapore, which is up for sale.
While Telstra is cash-rich, with a war chest of more than A$10 billion to support a buying spree, analysts point to an imbalance between its financial strength and that of its partner, PCCW, as a potential trouble spot in the joint venture. PCCW has an estimated US$5 billion of debt on its balance sheets. The Australian company has made the joint venture the focus of its overseas push, but it has made it clear that it could expand on its own if things don't go smoothly.
Analysts say Regional Wireless' biggest challenge is its lack of an anchoring base. While CSL is a solid property, to be regional a company needs strength in one of Asia's heavyweight markets -- Japan, South Korea or China -- where acquisition opportunities come infrequently.
NTT DoCoMo: the Technology Apostle
Three Asia-Pacific markets, 37.2 million weighted subscribers
NTT DoCoMo has risen to global fame by creating the first money-spinning mobile data service in the world, its colorful i-mode service, which allows more than 20 million subscribers in Japan to access games and picture messaging. Not surprisingly, i-mode is also the focal point of its international strategy.
What makes the company's strategy unique is that its investments don't aim to give DoCoMo regional or global domination as an operator. Instead, they aim to make i-mode the portal that top wireless carriers around the world adopt as their "software" for mobile data. That might be just as valuable. While it is still just a theory, analysts predict the more lucrative side of 3G will be in the content and the relationship with the customer.
As a result, DoCoMo's strategy can be explained as a way to buy leverage in the form of minority stakes, says Mark Berman, an analyst who covers the company for Credit Suisse First Boston Securities (Japan) Ltd.
"Their approach is to approach the blue-chip network [operator] in each of the countries that they want to get into," he says. Because DoCoMo buys into successful companies, it has no interest in replacing the management -- it would rather the management succeed, only armed with i-mode.
What is the benefit? DoCoMo becomes something like a software company, reaping unspecified royalties and shares of revenue for use of its i-mode platform and billing technology -- assets it has taken the time and money to develop in Japan. It also sees the global recognition of its i-mode brand rise, and, assuming i-mode helps the companies earn more profit, the Japanese operator's investment also rises in value.
With annual net profit of US$3 billion and growing, plus an ability to borrow funds at extremely low interest rates, DoCoMo has the financial heft to pursue the most aggressive acquisition programs, Mr. Berman says. "Basically, the company is a cash machine," he says.
But unlike its more voracious peers, Do-CoMo's approach is slow and careful. It wants the right partner in countries where it perceives an opportunity for i-mode: mainly markets with high levels of disposable income. For example, it has been in talks with the biggest South Korean wireless operator, SK Telecom Co., on the purchase of a 15% stake for nearly a year. "They're, conservative and they'll always be conservative. I don't think that's going to change," he says.
Hutchison: the Shrewd Trader
Five Asia-Pacific markets, 1.9 million weighted subscribers
Hutchison Whampoa operates one of the world's biggest and most widely scattered collections of mobile companies. Why so scattered? Because as a conglomerate, it wants just one thing from the telecom sector: a return on investment, wherever it can be found.
"Hutch just has a great knack -- maybe from their days of being a trading company," says Luis Leon, an investment banker with HSBC. Unlike a telecom company that thinks in terms of broad strategy and territorial accumulation, Hutchison has a keen eye for undervalued properties -- and "knows when to go in and get out," Mr. Leon says.
It also is hitching its fortunes to third-generation wireless businesses, according to Canning Fok, the group's deal-making managing director. "This is the direction of our company," Mr. Fok says. "We would not invest in a 2G business -- it's got to have a 3G angle to it."
Mr. Fok sold off a successful U.K. operator, Orange PLC -- now part of France Telecom SA -- to Germany's Mannesmann and U.S.-based Voicestream Wireless Corp. to Deutsche Telekom AG because they were soon to become outdated 2G assets, he says. His timing was impeccable, too -- Hutchison profited handsomely by selling high, before mobile valuations nose dived at the end of last year.
The company still embraces 2G in cases where there is still room for growth, as in India, a developing market with low penetration of voice services. It has been creeping across the Indian map by taking 49% stakes in a series of city and provincial operators, and is expected to bid for new licenses to be issued in July.
Hutchison enjoys a flexibility that groups such as SingTel and Regional Wireless don't have; it doesn't rely on telecom-company acquisitions to grow, so only bites when the price is right. Mike Warren, a Goldman Sachs analyst who follows the company, says Hutchison will move "wherever they see a visible opportunity to create value for their shareholders and generate a decent investment return. I won't say Asia has any more importance than, say, Europe. They're not afraid to go into Africa or Latin America."
As with Vodafone, 2001 is expected to be a year of consolidation for Hutchison. The company must bear the cost of building 3G networks in the U.K., Italy, Austria and Sweden. And although the group has huge cash flows to back up its 3G expenses and possible future acquisitions -- and boasts some US$25 billion on its balance sheet -- it is uncertain how much money the conglomerate is willing to commit to the telecom sector.
Penetrating the China Market
All five operators share one headache: China. That single mobile market -- as big as all others in Asia combined excluding Japan -- is a must for any company that wants to be panregional or global. "If you get China right, it doesn't matter what happens with the rest of Asia," says CSFB's head of regional telecom research, NiQ Lai.
Yet it remains off-limits to meaningful participation. The two domestic mobile operators have overseas-listed units, but only small percentages of the shares are publicly traded. Even after China joins the World Trade Organization, foreign operators will only be able to own up to 25% of mobile providers for three years, with the limit rising to 49% thereafter.
The real limitation on entry may be licensing, though. With only two big operators in the market, the cost of getting any management control by buying shares would be enormous, says HSBC's Mr. Leon. Vodafone, for example, acquired an approximately 2% stake and a seat on the board of China Mobile Communications Corp.'s listed arm but had to pay a whopping US$2.5 billion for it.
But the market is set for even more expansion -- and opportunity. Analysts in Beijing expect a third wireless license to be issued either in 2002 or 2003. That challenge could prompt joint action by more than one of the regional contenders.
One possibility is a joint move by Hutchison and DoCoMo, who are partnered in Hong Kong and the U.K. The Japanese company recently boosted its stake in Hong Kong's Hutchison Telephone Ltd. to 25%, and the two companies joined together in a consortium to buy a 3G license in the U.K. China may be next. Hutchison, which is active in other business areas in China, has been forging cooperative ties with both of the mainland's mobile operators, and with DoCoMo in tow, it could dangle more cash plus the i-mode portal.
Write to H. Asher Bolande at hyam.bolande@awsj.com1
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