No Immediate Profits in Sight for the Indian Telecom Industry: McKinsey

The Indian telecom industry is sick. "A sector that cannot generate profits is not healthy. And we don’t see profits in sight," elaborated Rajat Gupta, managing director of McKinsey Worldwide at a CII Telecom summit organized recently in Delhi.

Sumitra Mahajan, minister of state for telecommunications, released McKinsey's report on the telecom sector, titled "Telecom in India: Winning Through Flawless Business Execution" on the same occasion.

While an investment of $12 billion is required over the next two years to achieve seven percent teledensity by 2005 as per NTP '99 targets, "The path to profitability is still not clear," said Gupta. "Multiple sub-scale players, stiff competition, and a low-price market are the obvious bottlenecks. There are five to six cellular players expected in each circle by the end of FY03, but many players are, and will be making losses. There has also been a steep decline in tariffs across all segments of the market, and the trend is likely to continue, according to the report. If the players continue to cut prices, profitability will continue to be a distant dream. Ironically, all the while, the market is under-penetrated and requires even lower tariffs to take the telecom wave to the next layer. Worse, investments need to be sustained to meet 2010 targets of a 15 percent teledensity, with an investment of $ 37 billion required over the next seven years. That’s asking for a lot, when we see the total investments over the last seven years is pegged at $25 billion. There has to be a macro-framework of success," elaborated Gupta. "Companies will not invest indeterminately if they cannot calculate a viable RoI," he added.

It could have been a fairytale come true. What with the telecom sector witnessing CAGR that were nothing short of dramatic.

Between FY98 and FY02, for example, the fixed line segment had a CAGR of 21 percent and the cellular industry grew at a CAGR of 75 percent during the same time. In revenue terms, the industry grew at a CAGR of 20 percent between FY96 and FY02. Revenue increased from Rs 13,500 crore to Rs 40,000 crore. Investments have also leapfrogged. From an average investment of $1.1 billion in the pre-FY91 era to some $ five billion to $ six billion in FY02. It is a nightmare as the sector is still not profitable. 

The Indian telecom sector is still lagging way behind in terms of teledensity, even when compared to economies with a similar per capita GDP profile. There are several cases pending with the TDSAT and the regulatory authority is being accused of doing all but the right thing. "Right or wrong I paid Rs 500 crore. But the government has now changed sides," said Col.

Virender Kapoor, director, Symbiosis Institute of Telecom Management, who takes up the case of cellular operators.

"Consumer is the king, but the service providers will die. After pumping in astronomic funds, exit is not a viable option, and more funds are being called for just to stay in the fray," he added. "A concerted effort is required to profitably grow the telecom sector," said Gupta. "Enhance investor confidence with a rock steady regulatory hand, expand the market by making services available for all, create a framework for consolidation to occur, unleash the PSU incumbents, and turbo-charge the execution," is McKinsey's prescription for profitability.

TRAI does exactly what its name implies. It is expected to regulate. Licensing on the other hand is the DoT responsibility.

Adjudication in the event of a dispute lies with TDSAT. This fragmentation of decision making leaves TRAI with at best residual powers, and at worst a baggage of DoT miscalculations. The distributed authority structure also makes it difficult and time-consuming to have a coherent policy. "Fragmented market and fragmented licenses are the two legacies of TRAI. And level playing field is of course the headache of the regulator. But we cannot perform miracles. Did anybody ask us before issuing licenses?" questioned MS Verma, chairman,

TRAI.

Availability of services to all needs to be preceded by affordability. "India is a low income country, and the consumer can only pay as much," said Gupta. He brings in a comparison between the CTV markets in China and India to make his point. The retail price of CTVs in China is 33 percent lower than the price in India, while the domestic market for the same is six times higher than that of the Indian market. "Low capex and opex, and a lower regulatory burden will make telecom services affordable, and thus more available, and thereby pull down the Price Elasticity (PE) comparatively," Gupta added. McKinsey also recommends sharing of infrastructure and negotiating equipment costs jointly. "If the operator has to pay the government Rs 20 for every Rs 100 it makes, excluding income tax, affordable pricing will always continue to be a challenge," Gupta said.

"One of the major barriers in consolidation is the somewhat unrealistic expectation of the various players that things will get better," according to Gupta. There are policy / regulatory hurdles as well -- Restriction on ownership of more than one license in a circle, restrictions on spectrum consolidation, and DoT approval for mergers and acquisitions. "There is the need for a regulatory framework for M&A," said Gupta. On the operational and integration front, there are issues of multiple equipment vendors and of OSS and BSS. Incidentally, BSNL is reported to have the largest BSS in the world, and different network technologies (CDMA and GSM). "Most European markets have sustained only three to four mobile players. There are five mobile operators in Holland, four in UK, three in France. But In India, consolidation seems to be a somewhat cultural challenge as well," he summed up.

China achieved a very strong incumbent portfolio through PSUs using strong performance systems. "The Chinese government is willing to support tough decisions. It indicates broad targets, but does not get involved in operations. Advancement is purely based on talent, and tenure is not a criteria," explained Gupta. There is more. "The political and professional future of the CEO is clearly linked to performance, and the management has the authority to downsize. Bonuses of all employees are linked to targets, and there are stock options for top management in IPO'ed companies. Furthermore under-performing cities / circles are denied funds in coming year," Gupta elaborated. 

As usual, the incumbents in our country are rapidly losing market share. "According to global experience, incumbents drive market growth. Its not a zero sum game after all," said Gupta. "Allow the wire-line incumbents to perform as a separate company, get the incumbents professionally managed, compensate on economic capex and opex, focus on enterprise and high end customers, manage regulatory agenda, over-invest in cellular and lessen the bureaucratic hurdles," is McKinsey's advise to MTNL and

BSNL. 

Sudarshana Banerjee



(CNS)