Vodafone's Indian DilemmaBy
Delhi - Ruchira Sharma should be any mobile-phone company's dream. She has two cell-phone numbers and endless gossip to share with friends and family across the country. Problem is, she's in India, where calling rates are less than a penny a minute, by far the lowest in the world. So her carrier—Vodafone Essar, a unit of Britain's Vodafone Group (VOD)—isn't making much from her gabbing. "It's fantastic," says the 19-year-old student. "I spent 330 rupees [about $7] in October, and I talk for hours."
Fantastic for her, but less so for a key Vodafone strategy. In May 2007 the company paid $11.2 billion for 67% of what would become Vodafone Essar. The Indian operation was the centerpiece of an ambitious expansion in emerging markets to make up for slowing sales in Europe. Vodafone, though, didn't factor in a price war that in October culminated in 50% cuts in rates and a switch to per-second billing (instead of one-minute increments—a big saving for people who make short calls). "Emerging markets can no longer offset problems at home," says Emeka Obiodu, an analyst at Ovum, a telecom advisory firm in London. "There's now too much competition for easy growth."
Vodafone's Indian unit has lost $64 million on some $10 billion in revenues since the purchase, and that was before the latest round of price cuts. Costs, meanwhile, will keep rising. Most new customers are in rural areas, where providing service is more expensive. And villagers use their phones sparingly, so Vodafone's average revenue per user in India has fallen to $5.30 per month from $8.79 two years ago.
To be sure, Vodafone, which owns 45% of Verizon Wireless, still has the biggest sales of any cell carrier worldwide. The company on Nov. 10 announced that first-half net profits had doubled, to $8.1 billion. But its emerging market operations have hit a rough patch. Vodafone expects its Qatar unit will lose $55 million this fiscal year, while its Turkish subsidiary lost $118 million in the six months ended in September. As a result of those setbacks and falling margins elsewhere, CEO Vittorio Colao doubled a cost-cutting target for the year ending next September, to $3.3 billion. While India remains promising, Colao told reporters in London, "the competitive intensity will remain until consolidation."
Another worry for Vodafone is a potential $2 billion tax hit. At issue is whether the purchase of the Indian unit, which had been held by a company registered in the Cayman Islands, is subject to Indian taxes. Vodafone declined to make any executives available for an interview, but a spokesman says the company is confident it will prevail.
India hasn't been a total disaster for Vodafone. The company is No. 3 in the market and is signing up some 2 million newcomers a month, about 90% of Vodafone's customer additions worldwide. With so much growth, getting less money from each user doesn't hurt as much as it might elsewhere, and Indian cell-phone companies can still eke out a profit before factoring in costs for expanding their networks. While expansion costs will likely climb next year as carriers introduce 3G networks, the superfast service "could be a big winner," says Katja Ruud, an analyst at Gartner Research (IT). "In the short term, though, they need to find a way to buffer the costs of rural expansion."