France Telecom Fights Lions for Return on Africa OutlaysMarie Mawad and Amy Thomson
When France intervened to thwart an Islamist rebel offensive in Mali in January, residents rushed to call friends and family to tell them what was happening in the west African nation.
As the armed conflict continued, mobile-phone traffic dropped sharply for the country’s wireless carriers including France Telecom SA.
“We get a revenue boost the first few weeks of a political crisis because people make more calls,” said Marc Rennard, France Telecom’s head of Middle East and Africa. “When the crisis goes on longer, we have to lower our costs and postpone some investments.”
Managing a business when violence erupts is just one hurdle for France Telecom, Vodafone Group Plc and other European carriers seeking sales growth in Africa. Wild animals, long distances and customers’ limited spending power all combine to threaten the feasibility of the operators’ endeavors -- yet many are adamant that it’s worth the risk.
The companies, faced with anemic growth at home, have been on a shopping spree to establish themselves in a wireless eldorado with a booming population underserved by telecommunications infrastructure. France Telecom and Vodafone have contributed to 77 telecommunications acquisitions in Africa worth a total of $28.1 billion in the past five years, according to data compiled by Bloomberg.
Mali is only the latest example of unexpected obstacles. A year after France Telecom struck a $2 billion deal to raise its stake in its Mobinil venture in Egypt, the company last month reported a 400 million-euro ($521 million) impairment cost on increased risk there. Civil war in Ivory Coast led to a 9 percent sales drop in the country in 2011, erasing gains made a year earlier.
Still, France Telecom, which entered Africa in 1997 by buying a stake in an Ivorian carrier, isn’t steering away from tense regions, entering Morocco, and the Democratic Republic of Congo and Iraq in the past three years. Its fastest sales growth -- up 5 percent to 4.1 billion euros -- came in the Middle East and Africa last year and France Telecom forecasts that’ll rise to 7 billion euros by 2015.
“There’s always one or two countries we’re in that are going through a crisis,” said Rennard. “Population is growing so fast in Africa, it’s driving demand for mobile phones in such a way that on a 10-year curve, temporary crises are just a tiny glitch.”
France Telecom shares have dropped for five straight years, losing more than half their value since 2008. They declined 0.3 percent to 7.98 euros at 10:03 a.m. in Paris. Vodafone, up 21 percent over the past five years, fell 0.9 percent in London.
In Ivory Coast, as political tension grew during elections at the end of 2010, sales spiked, then plummeted as much as 28 percent in the second quarter of 2011 as civil war raged in the western African country. A year later, Ivory Coast was back as one of France Telecom’s five fastest-growing markets, with a full-year revenue increase of 23 percent to 563 million euros.
It’s not just war zones that test European operators’ resolve to ride out the troughs.
In day-to-day work, France Telecom field agents in Africa handle situations ranging from lion encounters to frequent power outages. The best practice when faced with a lion is to drive on, and a phone tower can temporarily be powered with a generator, so best to carry a drum of fuel in your car for that purpose, according to an internal video by France Telecom’s business-services unit.
Another challenge is customers who aren’t suitable for remote support because they aren’t familiar with technology. That may require the technician to drive 12 hours, plug the cable in, and drive back.
“It’s an expensive place to do business -- you have to spend a lot of money to make some,” said Spiwe Chireka, a Johannesburg-based analyst for researched IDC. “Is it worth it? Definitely, because the penetration is still so low.”
Annual wireless revenue in Africa will rise by 25 percent by 2017, to $70 billion, versus about 2 percent growth each year worldwide, according to consultant A.T. Kearney. Besides a lot of untapped voice customers, Africa holds high potential for carriers looking to sell new services like e-wallets.
France Telecom and Vodafone’s Vodacom Group Ltd. have been the most aggressive Europeans challenging MTN Group Ltd., Africa’s largest wireless carrier, based in South Africa.
Vodafone, the world’s second-largest mobile-phone company behind China Mobile Ltd., arrived in the continent in 1994. That year, South Africa ended apartheid and Vodafone helped found Vodacom, of which it owns 65 percent. The Johannesburg-based company is now South Africa’s biggest mobile carrier.
Mostly through Vodacom, Vodafone operates in countries like Egypt, Qatar, Kenya and Ghana. The U.K. company had sales of 9.6 billion pounds ($14.3 billion) in the Middle East, Africa and Asia -- excluding India -- which made up about 21 percent of total revenue in the year ended March 31. Vodacom surpassed Vodafone’s U.K. unit’s profit in 2010 and outpaced its Spanish operations in 2011.
African earnings could overtake what Vodafone makes in southern Europe in as little as three years, said Nick Read, head of its Middle East, Asia Pacific and African regions. Still, Vodafone faces new challengers in Africa as more carriers look to get in or expand existing footholds, at times aided by local governments looking to encourage competition.
“For probably the last three years, there have been quite systematic price wars as people try to establish positions,” Read said.
The competition prompted mobile carriers to curb capital spending last year. Expenditures in the Middle East and Africa fell 11.3 percent to $18.6 billion, according to researcher Ovum. Ovum predicts investments will pick up again, rising 7.3 percent on average each year to reach $28.2 billion in 2018.
“Carriers are operating in competitive markets with some of the lowest incomes per capita in the world,” said Erhan Gurses, a Bloomberg Industries telecommunications analyst. “As a result, they compete fiercely on pricing, but they leave room for maneuver when it comes to capex.”
Some operators are also trying to share costs partly to cope with thefts and breakdowns tied to the continent’s extreme weather conditions. Last month, executives from Vodafone, France Telecom and carriers including Zain Group agreed to share more towers as well as their maintenance to pool risks and costs, France Telecom’s Rennard said.
Bharti Airtel Ltd. acquired its African business from Zain in a $10.7 billion deal in 2010, with the Indian carrier gaining tens of millions of customers in countries including Chad, Uganda and Sierra Leone. Still, even with the cost-sharing efforts, Zain hasn’t reported a profit since the acquisition and takes a disproportionate amount of Bharti’s capital outlays.
“You’ve got to be committed,” Vodafone’s Read said. “You’ve got to be relentless.”