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The (Broken) Dream To Wire The Globe
Wednesday, May 1, 2002

With the recent demise of global carriers like Global Crossing and 360Networks, we are seeing the dangers of what can happen when companies begin to, and are allowed to, believe their own propaganda. One of the key components of the telecommunications industry’s propaganda in recent years has been the great riches to be found in emerging markets such as India and China. According to the investment pitches of the late ‘90s, such countries were filled with billions of untapped customers who were just waiting to sign up for the latest advanced telecom services.

But like many of the apocryphal market projections made over the last several years, such a rose-colored view fails to take into account the economic and political realities facing foreign carriers that attempt to establish operations in places like India and China. Now, with many U.S.-centric telecom companies teetering under a mountain of debt the aggressive timetable for bringing advanced telecom services to developing nations is being reevaluated by some global players.

Weathering the Downturn

The telecom meltdown in the U.S. and Europe has had an impact on the developing world. The amount of money available for investment in emerging markets has diminished as carriers scale back their expansion plans and focus on their core markets. “In China, I have seen more foreign carriers that are interested in the market, but they have no money to invest for the time being,” says Min Yi, an analyst in the Asia Pacific Optical Transport group at RHK. Financial difficulties have also forced companies to explore partnerships and joint ventures with regional carriers. Among those recently announcing such a relationship is the wireless company, Qualcomm, which is taking a $200-million stake in Indian telecom, Reliance Industries.

Hidden Challenges

The willingness on the part of these companies to make large infrastructure investments shows the hypnotic allure of many nascent telecom markets. Even for cash-strapped carriers, the potential rewards of gaining a foothold in a market the size of India or China makes them too promising to ignore. Indeed, from afar, a country like India seems like the ideal investment opportunity for a down-on-its-luck telecom company. It is a relatively stable democracy with a sizable educated workforce and a rapidly growing IT industry. Further, the country has one of the lowest “teledensity” rates in the world (the percentage of people in a country that have at least one phone line). At the end of 2000, India’s teledensity rate was around three percent, compared to 11 percent for China and 97 percent for theU.S.

But while such raw statistics reveal an enormous market opportunity they also don’t tell the whole story. According to Russ McGuire, chief strategy officer for the market research outfit, TeleChoice, 80 percent of people who own a PC in India today already have Internet access, and only about four percent of the population can afford a PC and Internet services. The challenge for carriers is in identifying this narrow group of customers and then successfully marketing advanced services to them. Such a task is even more difficult in a country as diverse as India where languages and cultural nuances vary by region, meaning foreign companies face a steep learning curve. Most will be forced to rely heavily on their local partners to help them understand the market. This makes choosing the right local carrier essential.

The Need to Deregulate

Perhaps the biggest risk for multinationals is deregulation. Because India and China have taken more tentative approaches to liberalizing their telecom markets, they have not seen the explosion in new competitors that characterized the deregulation of the U.S. telecom market in the late 1990’s. “While we have seen a rash of new investments and new players, it isn’t nearly as dramatic as it was in the United States from 1995 through 1998,” says McGuire. Such a cautious approach has helped limit exposure to companies like Global Crossing, but it has also severely hindered efforts to attract much needed foreign investment. “Personally, I think if a foreign carrier can solve the government regulation barrier, it has a pretty good chance to win out in an emerging market,” predicts Yi. He adds that getting around these Byzantine regulations can take several years if not more.

Both India and China do have incentives to speed up their deregulation efforts. In India, the need to deregulate is being driven mainly by the country’s growing IT industry. According to NASSCOM, the Indian software industry has experienced a compounded annual growth rate over 50 percent in the last decade. If Indian software firms are to be competitive with their western counterparts, they must have access to advanced telecom services. India has taken several major steps in recent years to open its markets, including opening the international telephony market to competitors in March of 2002. China has been quicker to open its telecom markets, and that process should accelerate since the country joined the WTO at the end of last year, and started hustling to be in compliance.

Questions Remain

Despite such efforts, there remains a tremendous amount of uncertainty about just how quickly deregulation will actually occur in India and China. Much of the skepticism stems from both governments’ historic inability to implement consistent government policies when it comes to foreign investment. “Although the current deregulation in India seems to be going okay, the regulatory infrastructure still does not have the full confidence of all parties. And how this evolves will have a strong impact on the development of the industry,” says Mohsin Majid, a consultant for Analysis, a telecom research firm. Yi notes that China has long treated telecom as part of its national defense system, and foreigners are still forbidden to enter some telecom facilities.

By the end of this year a number of new networks will be up and running in India, which should provide some indication of how successful the government’s current deregulation efforts have been. Already, it is clear that succeeding in emerging markets such as India will require a great deal of patience and trust on the part of foreign carriers. “Telecom infrastructure can’t be built out in a day, and neither can its revenue,” says Yi. “A carrier must make a long-term commitment to a developing market, and my guess is that it will take at least two to three years to see some substantial revenue.”

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