Harry----Brazil's wireless/wireline mkt...NEC under-bidding everybody......
Latin American Update: Brazilian Privatization Delays -- A Hidden
Benefit
May 1998
Norman C. Lerner
In January, there was substantial optimism about the progress being
made in Brazil. The Telecommunications Law had been passed. The new
regulatory authority--ANATEL--had been established. Plans were
underway to reorganize the 26 Telebr+s companies into three regional
wireline and nine A-band cellular-wireless companies, all to be
privatized by June of this year; to privatize the long-distance and
international carrier, Embratel; and to complete the award of the cellular
B-band licenses.
The earlier optimism, however, is becoming somewhat clouded. It's not
that these events will never occur, but it's a question of when they will
occur, since each of these expected events is being delayed because
various Brazilian groups are exercising their expanded legal rights to
delay the changes they oppose. For example, the Telecom Workers Union
has filed lawsuits in several states against the division of Telebr+s'
wireline and cellular A-band into separate operations. Moreover, judicial
delays were cited as the reason for the Avantel, Hutchison Cowan, and
Telet groups withdrawing their B-band bids. That was the groups'
response to the government's requirement for a 20-percent increase in
the bids already submitted--an adjustment in the exchange rate decline
during the lengthy delay in awarding the remaining concessions. A
separate complaint had also delayed the award to Telebr+sil/Merrill
Lynch to develop the terms and conditions for the Telebr+s sale.
Despite the government's claim that all B-band awards will be completed
this month and that these other issues would not delay the scheduled
privatizations, industry sources believe that the earliest privatization
date could be after the October 1998 presidential election, possibly
slipping into 1999, because of the planned World Cup competition and
year-end holidays.
Does this all suggest a sense of despair for Brazilian progress? It has
only been the great expectations for the Brazilian market that have
prevented even more potential investors from giving up. Speeding up the
B-band awards suggests that the government may be getting the
message: There is a limit to investor patience. Perhaps now we can
expect more deliberate and efficient action by the government and the
judiciary.
Nevertheless, there may be some benefit hidden in these delays.
Consider recent data from the Ministry of Communications: Wireline
telephony is expected to grow from 19.5 million accesses at year-end
1997, to 22.7 million by the end of this year, an increase of more than 16
percent, with an additional 14.5 percent expected through 1999. Even if
Telebr+s cannot completely satisfy the country's current waiting list of
more than 13 million, to the extent that it has time to expand toward
these objectives, the Telebr+s value--and consequent bid prices for the
privatized wireline companies--can only be enhanced.
On the wireless side, the Ministry expects mobile telephony to increase
by about 52 percent this year to 9.1 million subscribers. Moreover, by
2003, the demand is expected to grow to almost four times the 6 million
subscribers in 1997. Since these numbers reflect the capacity available
with increased competition, they may be somewhat overstated.
Nevertheless, the inevitable market growth that will occur within any
delay will certainly increase the value of the A-band companies and
perhaps the potential license value of B-band, too, although this may be
offset by possible A-band advantages if they are privatized well before
B-band systems are operational.
The delay also provides the opportunity for refining technology-based
competition in Brazil, particularly among the various wireless options.
Thus, cellular, PCS, and other wireless local loop (WLL) technologies will
have the opportunity to demonstrate their relative cost-effectiveness
between and among applications, carriers, and subscriber applications.
Brazil is an important test area for this. Since there are no restrictions
or prescriptions for specific wireless technologies, the initial AMPS
analog systems are evolving into various digital systems. About half the
country has A-band TDMA, while there is increasing interest in CDMA
applications for both bands.
NEC do Brasil is an example of the domestic industry's ability to take
advantage of the situation, especially with the Telebr+s companies. In
March, it was awarded a contract by Telesp for a 1 million-line IS-95
CDMA system in Sao Paulo and by Telerj for a similar system of 660,000
lines in Rio de Janeiro. It also has recently contracted with Telebahia
for a 25,000-line system in Salvador, the capital of Bahia. At a price of
$120 to $130 per line (U.S. dollars), NEC underbid Alcatel,
Batik/Samsung, Ericsson, Lucent, and Motorola for the larger systems.
The administrative delays in the privatization process should allow the
Telebr+s carriers to test and evaluate these newer technology
applications now, without the additional delays likely with new
management and ownership. This will allow for an objective assessment
of the relative costs and benefits of competing technologies and
applications that can benefit subscribers, carriers, and equipment
manufacturers. At the same time, this "window of expansion" will likely
foster development of Brazil's own manufacturing capability. NEC, for
example, appears to have the quality and pricing that makes it extremely
competitive, not only domestically, but for export expansion through its
other Mercosur trading partners.
It would seem, therefore, that there may be some hidden benefits within
the otherwise disappointing delays. |
