Indian government strives to save its dwindling telco industry

Government officials have reportedly been having meetings to figure out how the prospects for Vodafone Idea can be improved and three-way competition can be preserved.

Rumours have been circling the Indian telco space over recent weeks as it appears the industry is sleep-walking towards the death of Vodafone Idea and the creation of a defacto duopoly. One potential outcome in the immediate future would be invoking banking guarantees, a precursor to termination of telecom licences, according to the Economic Times, though this would be a worrying move.

With finance and telecoms ministers meeting in private, the objective could be to preserve a level of competition which is deemed adequate. Three private telcos should be considered the absolute minimum, though this is arguably too few for a nation the size of India. If the status quo is to continue concessions will have to be made.

What is actually being discussed behind closed doors remains to be seen, though reports are suggesting the Indian Government is seeking remedies to the precarious situation. This may well mean deferred or staggered repayments for the €7 billion spectrum bill being faced by both Vodafone Idea and Bharti Airtel.

The seriousness of the situation in India should not be taken lightly, though whether the Indian Government has the foresight to appreciate the damage which could be done in pursuing immediate repayment remains to be seen.

Vodafone Group CEO Nick Reid has repeatedly stated he would not be prepared to invest more capital in the market, or at least the vast sums which are being discussed today. It does appear Vodafone is prepared to wrap-up the joint venture between itself and Idea Cellular. Reid is perhaps looking at the big picture.

Vodafone is under pressure in several markets across the world. In the UK, it is spending significantly to bolster its current market share, while both Spain and Italy are presenting challenging environments thanks to heightened competition. India offers great potential, but $7 billion is a significant investment to remain in the hunt. At some point, executives will have to question when the end is nigh.

The ‘Chase Theory’ is usually associated with compulsive gambling, but it is also applicable here. As one of the simplest forms of gambling, the punter doubles down to recoup losses in pursuit of a theoretical gain. India is a market which offers great rewards due to a massive population and rapid digitisation, but it is proving to be a very costly pursuit. The last thing Reid will want to do is bankrupt his business chasing the hypothetical pot of gold at the end of the rainbow.

If the Indian Government does not introduce some flexibility into its mindset in dealing with the telcos, the market will soon devolve into a defacto duopoly. Admittedly, there are two state-owned telcos still in the fray, but these are providing next to no genuine competition. For a sustainable and healthy telecoms industry in India, the existence of Vodafone Idea should be considered priority number one.

The trickiest aspect of this discussion will be how to maintain credibility as an authority; the Indian Government needs to help Vodafone Idea, but it cannot be held to ransom by divas in the telecoms space.

Indian Supreme Court takes another step towards telco duopoly

The Indian Supreme Court has rejected a plea from Vodafone Idea and Bharti Airtel to defer disputed spectrum licence fee payments, making the collapse of Vodafone Idea a realistic outcome.

While the dispute has been on-going for more than a decade, it has intensified considerably over the last few months. Vodafone Idea and Bharti Airtel are liable for roughly $7 billion each in payments, thanks to penalty fees and interests, and have been attempting to negotiate better terms.

The plea to the India Supreme Court, where the telcos asked for interest fees to be dropped and the sum to be payable over a ten-year period, has now been officially rejected. Vodafone Idea and Bharti Airtel now have until March 13 to make the payments to the Indian Government in full.

The question which now remains is whether the death of the Vodafone Idea business is anything more than a matter of time.

The dispute in question concerns license fees which the telcos are liable for. As part of the licence, the India Government is entitled to a slice of the profits, though what this percentage is and what it is a percentage of is the centre of the argument. As this disagreement has been on-going for more than a decade, the penalty and interest fees have been adding up to an eye-watering amount.

Despite pleas to ease the financial burden of these penalties, the Indian Government and regulator have remained stubbornly resolute. Now it appears in might be a case of ‘cutting off the nose to spite the face’.

The Indian Government has always looked quite self-serving when it comes to working alongside the telecommunications industry. It has seemingly looked at the market as a short-term money-tree, as opposed to a long-term stimulant to the greater economy. Spectrum auctions are another example of this, with the valuable, scarce and limited resource often going unsold at auctions as the telcos complain of the financial commitments.

Now the greediness of the Indian Government is seemingly coming back to haunt it as the threat of competition being dwindled to a duopoly, a very dangerous position to be in, becomes much more realistic.

At the time of writing, shares in Vodafone Idea were down 22%. Vodafone Group CEO Nick Reid has already suggested the business would not be prepared to invest anymore capital in India without assistance from the Government, with the latest ruling adding another nail in the coffin. The financial liabilities being placed on Vodafone Idea could very realistically cause the firm to shut up shop in the near future.

For the Indian telecommunications industry, this would be a disaster.

Telco Market share
Reliance Jio 32%
Vodafone Idea 29%
Bharti Airtel 28%
BSNL 10%
MBNL 0.2%

BSNL and MBNL are effectively being propped up by the Government currently, meaning the market has in-effect three mobile players. There of course used to be much more competition, but thanks to the Reliance Jio pricing disruption, Telenor, Tata and Reliance Communications exited the market, while Vodafone and Idea Cellular merged into a single entity in 2018. Competition is at a very weak point, and it now looks like it will become even more feeble.

If Vodafone was to cash in its chips, Idea Cellular will unlikely be able to revive its business. The merger was driven by survival after all, meaning the collapse of the third major MNO. A market duopoly is not healthy, especially when one of the competitors is already battered and bruised and facing the same monstrous fine as Vodafone Idea.

Bharti Airtel has suffered as much as any other telco since the arrival of Reliance Jio. As India is the domestic market of the telco, it is highly unlikely doors will close, but the Supreme Court decision will also hold Bharti Airtel to payments of roughly $7 billion. As the market heads towards an informal duopoly, the former-market leader could be weaker than ever.

On the other hand, as Reliance Jio only entered the market in 2016 its own spectrum fee bill is considerably less. It is still an uncomfortable amount, though the firm managed to sell off its tower assets to settle the amount. It might be a bit poorer for the saga, but it is in a considerably healthier position than any of its rivals.

The Indian authorities have done what can only be described an atrocious, amateur and absent-minded job of managing its telecommunications industry over the last few years. It seemingly favoured Reliance Jio to the long-term detriment of competition, was unable to price spectrum appropriately for decades, and in this example, is stubbornly demanding its dues. The authorities cannot be held to ransom by a diva-like demands of telcos, but the risk of a Vodafone Idea collapse is very high.

Vodafone Idea looks to be at breaking point, Bharti Airtel doesn’t have two rupees to rub together and Reliance Jio is laughing. The Indian Government is proving to be incompetent at managing a healthy and sustainable telco market.

The death of Vodafone Idea starting to become a real prospect

Vodafone Group CEO Nick Read has reiterated his vow that no fresh funds would be injected into the Indian joint venture with Idea Cellular, painting a dreary picture for competition in the market.

As it stands, Vodafone Idea owes the Indian Government roughly $7.4 billion in spectrum fees, overdue payments and fines. Bharti Airtel is in a similar position, with both telcos pressing the authorities for relief. To date, the authorities are not budging, potentially undermining any commercial objectives for Vodafone in the region.

According to The Economic Times, Read has demanded the Government waive the penalties and interest payments, while also allowing Vodafone Idea to repay the principle sum over a period of ten years. Only if these demands are met, will Vodafone commit to continue the joint venture with Idea Cellular and push additional funds into the market.

This is a very stern statement from Read and one the Indian authorities should take very seriously. Numerous telcos have already left the market, and while it cannot be held to ransom by another, the competition landscape is looking suspect already.

The main issue here is a dispute over licence fees paid on spectrum assets. The telcos and the Government have different opinions on how much should be paid. This argument has been on-going for more than a decade, hence the ridiculous sums which Vodafone Idea and Bharti Airtel are being asked to pay. As Reliance Jio only came into existence in 2016, its own bill is much more palatable.

With extraordinary pressures already being placed on the spreadsheets thanks to the Reliance Jio disruption by undercutting existing pricing models, as well as a drive towards modernising infrastructure, this bill is the last thing the telcos need.

For Vodafone, you can see the predicament. There is a fortune to be made in India, but how much pain and expense can the business go through to realise it. The firm is facing difficulties in several other markets also; how many headaches can Nick Read tolerate at once? India might prove to be one migraine too far.

Indian government backpedals over operator fees

Indian officials have reportedly been told not to take ‘coercive action’ if Vodafone Idea and Bharti Airtel don’t pay their massive bills by today’s deadline.

The news comes courtesy of the Financial Express, which reports that the department of telecoms has decided not to do anything when the two operator groups fail to pay up. And it knows they won’t because they have told it as much, apparently. Last week the Indian Supreme Court refused to review its decision demanding the payment of historical license fees plus fines sand interest.

Reliance Jio, which owes far less because it hasn’t been around for long and is owned by India’s richest man, has paid-up, we’re told. It looks like the pretext for this fresh concession from the government is a fresh round of appeals from the two operators, but the real reason seems to be that they’re increasingly calling the government’s bluff over this cash.

Vodafone has previously indicated it might just pull out of the country entirely if the bill is not at least reduced and the Indian telecoms market has undergone dramatic change and consolidation in the past few year, with Jio emerging as a dominant force. The government has put itself in the position of effectively destroying its telecoms industry with a series of missteps and the incumbent operators seem to be betting it lacks the will to robustly chase the debt. This decision indicates they may well have a point.

Indian Supreme Court rejects telcos appeal over government bill

The billions owed by Vodafone Idea and Bharti Airtel for historic license fees must be paid after the Indian Supreme Court rejected their appeal.

The two massive operator groups appear to be running out of options, having spent the latter half of last year first contesting the fees, then begging for clemency and then finally threatening to exit the market if they’re given no relief over their massive financial burden. Typically the Supreme Court is where you turn to when you’ve tried everything else, but in this case it was that same court that enforced the fees last year.

Reuters reports that it’s specifically petitions seeking a review of last year’s order that have been rejected, indicating that the Supreme Court has seen nothing since then to persuade it any mistake was made. In today’s money Vodafone Idea owes £3.9 billion and Bharti Airtel $3 billion. This decision is sure to bring a fresh wave of existential angst from the beleaguered operators.

So what next? There will be talk of further petitions and that sort of thing but it looks like the Supreme Court is not for moving. That just seems to leave the political angle. The money is owed to the government, so it’s presumably within its power to at least ease the burden. In most countries MNO competition is considered vital to a healthy telecoms sector, but the way the Indian government has acted since the creation of Reliance Jio suggests otherwise in India.

China Mobile reportedly chasing cloud JV with Vodafone Idea and Bharti Airtel

Reports have emerged suggesting China Mobile is attempting to create a joint-venture in the Indian market to capitalise on the growing cloud segment.

Although these are nothing more than rumours for the moment, Live Mint has suggested senior officials from China Mobile have been in separate meetings with both Vodafone Idea and Bharti Airtel to set-up a joint-venture to tackle the cloud market.

“The top executives of China Mobile met senior managements of Bharti Airtel and Vodafone Idea separately in December,” stated an anonymous source. “China Mobile is interested in the Indian market and wants to come as a holding company with either of these two companies or even both.”

China Mobile has been aggressively growing its presence in the Chinese cloud market, though now it appears to be looking overseas for increased opportunities. India will of course look like an interesting opportunity, not only because of the size but the current market dynamics.

It is not overly complicated to understand the potential of India cloud market. As the second-most populous country on the planet, there are plenty of customers, though the drive towards digital has been very aggressive in recent years thanks to the disruption of Reliance Jio, effectively democratising digital. Attention has largely been paid towards the fight for consumer subscriptions, though the cloud market has also been growing.

As it stands, Bharti Airtel has a cloud services unit in ‘Airtel Business’, while it is also expanding its data centre footprint through ‘Nxtra Data’. Vodafone and Idea brought together their business units following the overarching merger between the telco parent companies and have also been working closely with Microsoft in recent months. Finally, Reliance Jio has a cloud business which was launched in August.

But it is the untapped potential which is getting foreign corporations excited. The digital economy is in its embryonic growth stages today, and the right investments could lead to significant gains in the future. Unfortunately for the Indian telcos, the current financial climate is not particularly helpful to speculative investment or aggressive expansion.

The Indian telcos are almost broke. A three-year long pricing war has crippled the spreadsheets, while the spectrum licence fee bill from the Government is eye-wateringly large. The Indian telcos are not in an attractive financial position, but this presents bargain opportunities for foreign investors who have deeper pockets.

China Mobile certainly fits into that category, and this could be a very co-beneficial relationship. China Mobile want to spread its cloud wings abroad through its investment arm, China Mobile Investment Holdings. India has an opportunity and the Indian telcos do not have the cash to capitalise on the potential today. Chinese money would certainly be welcomed to fuel the initial venture into the Indian cloud.

Interestingly enough, this could also have an impact on the geo-political tensions which have dominated the news for months.

The US does not like China, this is somewhat of an understatement, and it has been pressurising the Indian Government to break ties with Chinese infrastructure vendors. The emergence of a joint-venture, partly funded by a state-owned Chinese telco is not likely to have a positive effect on the already strained relationship between the US and India.

Indian telcos are ‘cap in hand’ in front of Government

The digital economy in India is accelerating at an almost unprecedented speed, but this is a market which is far from being in a healthy position.

To state the telcos are in a precarious position would be considered one of the biggest under-statements of this or any other decade. In an attempt to reverse their fate, the telcos have reportedly approached the Indian Government to plead for some sort of assistance.

According to local press, the telcos have requested the creation of new funding mechanisms with lower interest rates, a refund of accumulated input tax credit, as well as the removal of goods and sales taxes on licence fees, licence fee, spectrum usage charges and the payment of spectrum charges. The telcos are also requesting cell towers be reclassified as plant and machinery for input tax credits.

In short, the telcos need a lot of help as well as regulatory reform if the market is to become sustainable for the long-term. The Department for Telecoms has said it will listen to the ideas of industry until Tuesday (January 7), before making a decision.

The Indian telecommunications industry is perhaps one of the most interesting around the world, but this is as much because of the precarious path being trodden as it is for the potential cash bonanza.

India has the second-largest population in the world, a rapidly growing middle-class of digitally enthusiastic millennials and an economy where GDP is growing more than 6% annually, compared to a global average of 3.01%. India is a flourishing market, though this success is clearly coming at a cost for the telcos.

One of the reasons the digital economy is aggressively expanding in the country is the cost of connectivity. When Reliance Jio entered the market in 2016, it democratised access to the World Wide Web for Indians. The aggressive pricing strategy forced competitors to lower data tariffs, making the digital economy accessible to all. More than three years later, the average cost of a GB is still unsustainably low at $0.26.

Thanks to the socio-economics of India, data tariffs will never reach (or shouldn’t reach) the levels of Western Europe or the US, though prices do need to be at a level which offers the industry the ability to generate ROI. $0.26 per GB does not, and this is one of the reasons the telcos are facing the financial strangleholds of today.

This is a problem which the industry created for itself, and also one which the regulator simply watched develop. However, it should also be noted annual payments for spectrum are crippling the telcos. The telcos insist the Government is charging too much, though a court ruling is forcing the telcos to pay up, playing them under financial duress.

Whether the Government listens to the pleas of the telcos remains to be seen, though it should be noted action needs to be taken. The majority of competition in the country has already been eradicated thanks to the pricing war, and with two of its three major telcos facing financial calamity, the future of the hangs in the balance.

Unless some serious bureaucratic and regulatory changes are made in India, perhaps the most likely outcome is a monopolised market. This is not a situation anyone involved would like to see emerge.

India risks US wrath after Huawei thumbs up

India’s decision to allow Huawei to participate in 5G trials is certainly a win for the vendor, but it does add further strain to an already tenuous relationship with the US.

As a country, India has gone through an incredibly aggressive digital transformation in recent years. Reliance Jio democratised the digital economy, bringing the benefits of mobile internet to hundreds of millions who were priced out of the equation in bygone years. This is incredibly promising for the people of India and the Indian economy, but it also pushes the nation into the spotlight.

Thanks to an increasingly wealthy and digitally competent society, India is looking like a goldmine for other nations. Every country will want to secure a lucrative trade relationship with India, and for the US, it represents another battleground for China in the race for supremacy in the digital economy.

Aside from fighting the ‘red under the bed’, attempting to convince India to ban Huawei is a step towards eroding the Chinese telecom champions dominance on the technology world of today, and China’s influence on the 5G world of tomorrow. The US has already warned of the consequences of India working with China, and in particular Huawei, it has threatened to severely limit visa applications from the country, but India has seemingly ignored these threats.

India is heading towards becoming a tier one digital nation, but with this success comes the challenge of making friends. Countries will push, bicker and threaten to secure more valuable trade relationships, as well as try to get the upper hand over rivals.

India is walking the line of diplomacy, and unfortunately it is a very precarious trail. And such is the animosity between the US and China, it becomes very difficult to be friends with both.

Country Export Import
USA $44.3 billion (15%) $22.8 billion (5.5%)
China $14.8 billion (5.1%) $68.8 billion (16%)

India Exports and Imports value and percentage of total

As you can see there is a delicate balancing act in play. It is not as simple as choosing one superpower over the other, as one trade partner is the most valuable globally in each column.

Looking at the exports, heading towards China are a lot of raw materials. Iron ore accounts for 9.9% of the total exports to China, refined copper 12%, refined petroleum 3.7% and granite 3.6%. While these might not be considered the growth prospects of the economy, these industries are still incredibly valuable and employ significant numbers in the rural regions.

In terms of exporting to the US, diamonds account for 19% of exports, while packaged medicines make 14% of the total. What is worth noting, is that these numbers from the OEC do not include the service industry, the largest contributor to the Indian economy.

If a country was to value its relationship with partners on the value of exports, the US is the financial winner, however the industries which China underpins are likely to be larger employers in the country. The nuances become a bit more complicated, and that is before the import column is considered.

In terms of the goods coming into India from China, 13% of the total ($8.84 billion) are telephones (landlines, smartphones and feature phones). The OEC estimates that machinery (including consumer devices and computers) accounts for $38.9 billion of the Indian imports from China, perhaps due to the affordability of Chinese brands. These imports will be a significant factor to continue the drive towards the digital dream.

These statistics become important when you consider the other countries who are being heavily pressured by the US to ban Huawei.

Take the UK as an example. The UK has a valuable trade relationship with the US (11% export, 7.5% import), but it also does with China (5.6% export, 9.5% import). The US might account for more currently, but this might be down to the longevity of the relationship; China could be a more profitable market for the UK in the future.

Germany is also in a similar position to the UK. US and China account for 8.4% and 7.1% of total exports, and 5.7% and 10% of imports. In Italy, the US exports and imports are 9.3% and 3.8% of the total, while it is 3.4% and 7.2% for China. These are all countries which are resisting President Trump’s demands to ban Huawei.

What is worth noting is that there are countries which do not seem to be walking the fine line of diplomacy in the same manner. Australia, as an example, was one of the first to ban Huawei and to place its relationship with China at risk. According to the OEC statistics, China accounts for 35% of exports while the US only takes 3.5% of the total. In terms of imports, 24% come from China with only 10% heading across the Pacific from the US.

There is no hard and fast rule to explain why some countries have been swift to ban Huawei while others are sitting on the fence. Competition and reliance on the firms 4G equipment will be part of the reasoning, but the overarching implications on the relationship with China should not be ignored.

The conflict between the worlds two superpowers is incredibly complex, and there is certainly credibility to the argument that it is more than one country pushing back in the name of ‘national security’.

India greenlights Huawei as CEO warns of a tough year

The Indian Government has said it will not exclude Huawei from its 5G trials, as the country sets a 2021 deadline to launch commercial service.

The last week has certainly thrown out some mixed signals from the under-fire Chinese infrastructure equipment vendor. In a New Year’s message to staff, Rotating Chairman Eric Xu suggested revenues over the course of 2019 increased 18% year-on—year, though 2020 will see much more difficult market conditions. The news emerging from India is a win, though 2019’s twists and turns have created a very difficult playing field for Huawei.

In India, Government officials stopped short of stating Huawei would be allowed to sell equipment to the telcos when commercial services are up-and-running, but this is as good as the vendor could have hoped for to date. Huawei will be permitted to work alongside Indian telcos to build business and usecases for the up-coming 5G euphoria.

Although this is an incredibly attractive market for equipment vendors, the number of subscriptions and vast geographical spread paint the potential for huge profits, this is not a market without problems. The disruption caused by the introduction of Reliance Jio and its aggressive pricing are forcing competitors into financial embarrassment, while the Indian Government has never completely figured out the spectrum conundrum.

Spectrum is an incredibly valuable resource for the telcos, and while it is very common for there to be complaints about the price, most of the time cheques are signed bitterly. This is not the case in India, where 40% of spectrum licences have gone unsold through auctions since 2010. For such a valuable, and scarce, resource to remain unclaimed, the Government must be asking too much for licences.

In recent weeks, the Government has said it would ignore industry complaints and persist with the current pricing regime for the 3.3-3.6 GHz spectrum band. What impact this tussle between Government and industry has on the 2021 deadline for commercial 5G services in the country remains to be seen.

That said, the sheer size and aggressive nature of India’s digital transformation journey over the last three years makes this a very attractive market for any of the equipment vendors. Though Huawei may well need a boost if Xu’s 2020 pessimism is accurate.

In the New Year’s message, Xu suggested to staff that revenues for 2019 could be up as much as 18% to $121.72 billion, though the first half of 2020 is likely to demonstrate slower growth. The continued presence on the US Entity List is likely to have a significant impact on the consumer division, as the newest Mate 30 smartphone is currently being sold without any Google services installed on the device, or the latest version of the Android OS.

The smartphone segment has proven to be very profitable for Huawei in recent years, as it proved to be one of the few OEMs who could grow sales during a global slowdown. Huawei is currently ranked second in the global market share for smartphones, though this will be almost impossible to maintain as the realities of US friction hit home. It would not be surprising to see monstrous loss of market share outside of China.

While this does not paint the most attractive of pictures, Huawei has proven to be a resilient company. The US ban seems to be having little impact on the operations of the firm, Huawei has manoeuvred its supply chain quite effectively, and more countries seem to be ignoring US demands to implement bans.