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Vodafone’s canvas looks pretty, but for how long? 4Ps B&M’s Steven Philip Warner analyses the situation...

India, a land of incredible opportunities; India, a land of countless heroic tales; and India, a land of miraculous revivals…. And just as you might have heard the first two many-a-time, there indeed remains something to be said about the country being a perfect playground to modern day phoenixes; Vodafone being an unmistakable proof… and of course, with its recently announced half-yearly financial result standing alibi!

What after being battered in various countries? What after it earned respite as the largest loss-maker in European history? And what after it earned curses for doling out precious shareholder funds in making unnecessarily over-priced acquisitions? Vodafone is back, and how! Its first half-yearly FY 2007-08 revenues announced on November 13, 2007, marked a healthy 8.98% rise over the previous year to touch $34.92 billion and its net profits also touched an encouraging $6.76 billion for the same period. So what’s so special about it all? Well, for the uninitiated, we’re talking about a company here, which for the past five financial calendars was held at gunpoint for having scripted a teeth-shattering $81.75 billion in cumulative losses after a most annoying $44.84 billion net loss during FY 2005-06 alone! And now, returning home with happy tidings for its stakeholders for the first time in over five years comes as a sweet surprise to many. After all this, today, perhaps the Vodafone camp resounds with the words, “Losses? What losses? Wake up!”

So where did the magic come from? Which brilliant strategy led to this tub-thumping revival of a global giant that was condemned by the majority as a disaster-prone machinery, ill-fated and waiting to be pushed over the edge by its condemned past? The answer is not too implausible – India! So where on one hand, it’s the ‘emerging markets shining’ strategy which worked for the British giant, its March 2007 acquisition of a 52% controlling stake in the country’s third largest mobile operator (second largest GSM player in India) Hutchison Essar valued at $11.1 billion. So while the deal, touted as the largest in the telecom arena on the sub-continent, was criticised by many, the only question remains – has the pay-back period begun already? Well, judging by the fact that the multi-billion dollar investment has put Arun Sarin, CEO, Vodafone in charge of 33.61 million customers (as on September 30, 2007), with a 16.45% market share control, the investment under any scanner has proven a fair and promising acquisition as Arun Sarin proudly declared, “Our Indian business is delivering very strong growth. Average net customer additions are running at 1.6 million per month with a customer base of over 35 million at the end of September.”

And moving on, Vodafone’s India story goes far beyond just a massive monthly addition of 1.6 million customers to its base on an average during 2007, and with its revenues rising by a solid 53% in India. And this power of India can also be judged by the fact that while India grew at such a brisk rate, its other growth engine arms only showed a modest growth with revenues growing by 33% in Egypt, 24% in Romania and by 19.6% in South Africa. Further on, the company after getting rid of the ‘Hutch’ brand is now launching a $2 billion re-branding campaign to gain more control over a market which added a mind-boggling 5.75 million customers in the mobile category and is forecasted to grow to 425 million by March 2010 as per Confederation of Indian Industries (CII). Confirming the development, a Vodafone spokesperson told 4Ps B&M, “We are looking at investing about $2 billion in India and have already announced as to how we will go about doing so, and how we will deploy those funds in the country…” Harping on the India growth story, he further asserts, “We have now launched some low-cost handsets with the brand of Vodafone and are providing operator services with it. We would be looking at launching more such services in the future as well. We are looking ahead to further strengthen the brand Vodafone not just in the countries that we are currently operating in but all across the globe. It could be through our services or our alliances…”

Then there is also the fact that with investments upto $25 billion over the next half-a-decade (as per Ernst & Young), the multi-billion dollar investment by Vodafone has certainly come at a right time. With combined revenues of mobile operators slated to grow by 158.6% to touch $33.1 billion (from $12.8 billion in 2006), Vodafone surely has more to take away from India, than it serving as a growth machinery for pushing its global business ahead. Yes, indeed there is some serious (l)earning yet to be taken from the country, and just as we have seen in the past (with Vodafone’s reputation of making investments that really are not worth the efforts and capex), this India story is surely not a repeat of its poor past.

However, there are many challenges that lie ahead of the global titan. The first one being of course, that it’s still a long way from overtaking the numero uno spot from Suni Bharti Mittal’s Airtel which today is undoubtedly the leader when it comes to minting bucks from the GSM business with 48.87 million customers under its roof. Also, there remains the challenging fact that while Bharti Airtel’s subscriber count has increased by 16.9 million in the past nine months, Vodafone (previously Hutch) has only seen a modest appreciation of 9.25 million! So while we hear of Vodafone’s vision to capture 25% market share by 2012 (from the current 16.45%), the battle on the Indian frontiers appears to have just begun! There is also an issue on the policy front with spectrum allocation issues with CDMA players camp (led of course by Reliance Communication’s Anil Ambani) crying hoarse over the favouritism shown to GSM operators by the Department of Telecommunication (DoT).

And it comes as a no surprise that after Bharti Airtel’s Chairman, Sunil Mittal and Idea’s promoter, Kumarmanglam Birla, Vodafone’s Arun Sarin too repeated the favour to the Prime Minister, expressing concerns over the non-transparent methodology followed religiously by the DoT in framing policies related to precious spectrum allocations on November 10, 2007. As Arpita Pal Agarwal, Associate Director, PwC, agrees and expresses her concerns over the spectrum allocation issue to 4Ps B&M, “The entire thing has to be more transparent, as at present it is very ad-hoc, within such a short span, every body is coming out with a new directive of their own and hence it is difficult to know which is the final authority on how many subscribers can go per spectrum.” The situation gets rougher for Vodafone as its plan to increase its presence to all the 23 circles in the country is at a standstill as Harit Shah, Telecom Analyst, Angel Brokings, feels, “Vodafone is awaiting allocation of spectrum in seven new circles for which they are done with all the formalities but are incapable to operate because they do not have spectrum so that is of the utmost importance for Vodafone to become a pan-India player with presence in all 23 circles...”

Sure enough, a lack of spectrum can prove a killer negative externality nullifying the very positive earnings forecasted by Vodafone in its global revival, which at the moment is mainly hinged on attainment of a scintillating growth in India as Vodafone has planned its huge investments in the country in anticipation of securing atleast 15MHz bandwidth. However, if the Communication Ministry’s norms are put into practice, it would get no more than 6.2MHz spectrum; clearly proving a deathblow to all its hopes! Additionally, if DoT allows Reliance Communications, HFCL and Shyam Tele to offer services on both the platforms, then Vodafone will bear the maximum risk, owing to the recent mammoth investments in the country. Bundling is another strategy that Vodafone would be looking at to reduce its costs. However with bundling only being present in the CDMA segment in India, this move seems a far cry for now as Harit Shah agrees and tells 4Ps B&M, “Although in the other countries bundling is very common in the GSM space however, in India it is seen only in the CDMA segment. And this will be one key test for Vodafone in India. It would help in tying down customer with the service provider for a longer period of time as there is contractual period involved like six months or an year. Vodafone has a vast experience of many markets in terms of bundling and should be making use of its experience in India as well.”

Then there is also the lack of infrastructure in the country which makes it difficult for Vodafone. As per a recent forecast by TRAI, the country will require about 350,000 telecom towers by December 2010, as against 125,000 in 2007, calling for a 180% appreciation in facilities! Vodafone’s task to gain a hold over 25% market share by 2012 also appears daunting as per Macquaire Research which stated that the attainment of a comprehensive 25% market share appears “a bit unrealistic without help from M&As.”

Hence, the giant’s strategy to ensure a sustained growth should be three-pronged – strategic alliances, cost lowering measures like sharing of infrastructure, and finally, expansion of its distribution & network coverage within the country as Harit Shah declares, “Strategic alliances such as with Nokia and Siemens is what Vodafone needs to expand speedily. Thankfully, it has done that in the past few months.”




Vodafone’s recent deal with Chinese handset manufacturer ZTE may also mean that it will get the low-cost handsets to India (which would start from a price range of Rs.850), thus enabling it to gain more ground in the country. However, what makes matters complex for Vodafone as compared to other players on the Indian turf is that the huge consideration which it paid for acquiring a strategic control in Hutch and its streamlined returns focus prevents its from walking that extra mile by even playing the price reduction game to attain higher market shares.

With India making a record of sorts by attaining the world’s lowest call rates (of about $0.02-0.03 per minute of usage time), high revenues will have to be got with increased volumes. So, with the pug out of the scene for Vodafone, traversing on Indian roads will only get tougher by the day... And for the moment, all that can be said is that, Vodafone has arrived and is willing to take on fights with Indian players! Question is – is it armed enough?

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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