Russian Telcos Look to Asia for Growth
The Russians must know a thing or two about mobile telephony. After all, few countries in the world have seen such a dramatic explosion in mobile-phone usage: The number of Russian subscribers has risen to 170 million today, up from just 1.35 million in 2000. That phenomenal growth has been good news for Russia's leading telecom companies, now among the largest and financially strongest in the world. But there's one obvious downside. Now that so many in Russia have mobile phones, where do the nation's telcos go for growth?
The answer, it turns out, is Asia. In recent months, Russia's leading mobile operators have made their first forays outside the former Soviet Union. They're pinning their hopes on the fledgling telecom markets of southern and southeastern Asia, where Russian companies have recently announced plans to invest billions of dollars.
So far the most ambitious plans are those of Sistema (AFKS.RTS), a Russian conglomerate that owns Mobile TeleSystems (MBT), known as MTS, Russia's largest mobile-phone operator. Sistema has recently been causing a stir in India, becoming the latest international heavyweight to join the Indian telecom race. "Of course, India was always the top priority because of its market size, population, economic growth, and other factors, including a very good [historic] relationship between the Soviet Union and India," says Anton Abugov, a vice-president at Sistema and member of the MTS board of directors.
But India isn't the only place in Asia where traditional political ties are blossoming into contemporary business opportunities. Sistema's leading competitor in Russia, No. 2 mobile operator Vimpelcom (VIP), is busy staking out territory in an even more exotic location, Vietnam, and is eyeing opportunities in underserved markets such as Afghanistan and North Korea.
"We're looking at countries where other people would be scared to go to," says Alexander Isozimov, chief executive of Vimpelcom. "With a very small investment, you're accepting a risk but you position yourself for a future when the country becomes more open. Sooner or later, it's going to happen."
In India, it'll be sooner rather than later. Sistema first signaled its interest in the country last September, when it paid $11.4 million to acquire 10% of Shyam Telelink, a regional mobile and Internet operator in the Rajasthan region of northern India (operating under the brand name "Rainbow"). Not a huge deal, on the face of it. But there was much more to the acquisition than met the eye.
Sistema has since raised its stake in Shyam Telelink from 10% to 51%, with an option to raise it to 74%. Meanwhile, in January, Shyam was awarded licenses to operate in 21 additional regions, as well as Rajasthan, becoming one of nine companies to be awarded licenses that cover the whole country. That gives Sistema a platform to become one of India's major nationwide operators. "We paid a very minor fee for opening the door [to India]," says Abugov. Ultimately, he says, Sistema aims for an 8%-to-10% share of the Indian market.
True, turning little Shyam into a pan-Indian operator will require a lot more than the cost of the acquisition. Sistema has already spent an additional $620 million to acquire the licenses covering the whole country. And longer-term, Sistema has announced that it plans to invest $5 billion to $7 billion to build the necessary mobile infrastructure, one of the largest Russian investments anywhere in the world.
This year alone, says Abugov, Sistema plans to invest $1 billion in the country, with a similar amount slated for next year. Sistema opened its first office in New Delhi on Feb. 12, the first private Russian company to do so since the end of the Soviet era. As well as telecom, the Russian conglomerate is eyeing other investment opportunities in India, from real estate to microchips—areas where it is also a big player back in Russia.
Sistema's bold expansion into India gets positive marks from analysts. "Russia and the CIS [Commonwealth of Independent States] markets are already saturated, so it's a logical step to expand into other countries, and India is one of the fastest-growing," says Maxim Savvatin, an analyst at iKS-Consulting in Moscow. He adds that Sistema's Indian foray "will be very positive for its future development." Currently only around 25% of Indians own mobile phones, but penetration is expected to take off as India's economy develops.
True, Sistema will face stiff competition. The burgeoning Indian market also has attracted the likes of British operator Vodafone (VOD). In February, 2007, Vodafone paid a huge $18.8 billion (BusinessWeek.com, 1/16/07) to buy Hutchison-Essar, India's fourth-largest mobile operator. Vodafone already owned 10% of Bharti-Airtel (BRTI.BO), the market leader.
Barriers to Entry
Huge sums like that are off-putting for other potential Russian entrants into the market. "India is phenomenally interesting, but also phenomenally difficult," says Vimpelcom CEO Isozimov, who declined to bid for licenses in the country.
Sistema's Abugov agrees that the Indian market is "very, very competitive." But he points out that with MTS's 83 million existing subscribers, Sistema is already one of the world's largest mobile-phone companies, so it has no reason to balk at the challenge.
Another formidable hurdle is India's notoriously difficult regulatory environment. Although Sistema has already obtained licenses to operate in India, it has yet to obtain frequencies for all the regions. And allocating spectrum in India is a thorny issue, with licenses awarded based on the order in which companies apply for them. Sistema is seventh in line to receive Global System for Mobile communications (GSM) allocations, which means it may have to wait for more than a year.
But that isn't deterring the company's expansion. It has also applied for frequencies used by the less common code division multiple access (CDMA) standard, and has already been awarded spectrum in several regions. Analysts regard the choice of CDMA as a smart move, enabling Sistema to get a head start on competitors still lined up to get GSM allocations. Abugov also argues that the latest CDMA technologies will surpass GSM, with much faster data-transmission speeds. "GSM cannot bring anything like the speed and efficiency which we can bring to the market," he says.
Boom in Vietnam
Both Sistema and Vimpelcom have benefited from warming political and economic relations between Moscow and countries that staked relationships with the Cold War Kremlin. In Vimpelcom's case, that meant investing in Vietnam. In September, it signed a preliminary joint venture agreement with the country's Public Security Ministry to create a new mobile operator, GTel Mobile, Vimpelcom's first venture outside the former Soviet Union.
GTel Mobile received a license in January, becoming the seventh mobile operator in the country and the first with a major foreign shareholder. Vimpelcom also announced it was preparing to invest $1 billion in the necessary infrastructure, as well as provide technical and managerial expertise. Negotiations over the venture are still in progress.
To be sure, Communist Vietnam may seem a surprising choice. Where else in the world do investors have to team up with the police ministry to provide mobile-phone services? But, notes Vimpelcom CEO Isozimov, Vietnam's sizable population of 86 million means it has huge market potential.
As the nation's economy liberalizes and opens up, economic growth is notching 8% per annum. Half the population is under 30, thanks to a postwar baby boom. And with mobile penetration still at just around 20%, the market is primed for takeoff. "Such a combination of a very young population and a dynamically growing economy creates a very buzzing attitude inside the country," Isozimov says.
Vimpelcom's bet on fringe markets is certainly a different approach from Sistema's safer Indian strategy. But there's one thing the Russian companies agree on: When it comes to developing mobile-phone services in difficult markets with huge potential, Russia has been the ideal testing ground.