It is unclear whether the wireless communications industry will be recession proof in the Asia-Pacific region if certain currencies there continue to fall taking economic growth with them.
Beginning with the devaluation of the Thai baht in July, currency values have spiraled downward by as much as 30 percent in Thailand, Indonesia, Malaysia and the Philippines. Currency rates in these regions fell dramatically last week in wake of Hong Kong’s stock market plunge Wednesday. Analysts say they have yet to see an indication that the devaluation crisis will end soon.
Thailand, Indonesia, Malaysia and the Philippines hold a large pent-up demand for wireless telecommunications services. As such, the regions have been a hotbed for investors, carriers and equipment manufacturers. Thailand and Malaysia ranked 14th and 15th, respectively, on RCR’s Top 20 list of international cellular markets, with only 4 percent and 9 percent penetration.
Some manufacturers, whose business is supplying system enhancement equipment, are feeling the brunt of the devaluation crisis. Allen Telecom Inc, which has a large presence in the Asia-Pacific, said it is watching the affected markets closely. With several offices in Southeast Asia, the company supplies antenna products, repeaters, fiber optic distribution services, amplifiers and other system enhancement products.
“What we see happening is a tightening of purchases, especially those already budgeted. As late as third quarter, business has been pushed almost to first quarter 1998. System enhancement programs such as repeater equipment, in-building coverage programs in shopping malls and tunnel projects are being stopped right now,” said Jerry Stupka, Allen Telecom’s vice president of international sales and marketing. “We’re worried it’s a situation like Mexico, which caused us to lose 50 percent in revenue for a period of one year. We’re worried recovery will be slow. Our business is reliant on an existing network.”
Offsetting the problems in some of these regions is Allen Telecom’s strong growth in stalwart areas like South Korea and Hong Kong. Though these countries have experienced fluctuations in the stock market, analysts say their economies remain strong at this point.
Basic network buildout in the affected regions doesn’t seem to have slowed. For instance, Motorola Inc. last week signed a major contract with P.T. Telekomunikasi Indonesia to provide a 1.9 GHz Code Division Multiple Access wireless local loop system there.
Nokia Telecommunications, its Indonesian distributor and P.T. Telekomunikasi Selular signed an agreement in early October to expand Telkomsel’s Global System for Mobile communications network in Jakarta, Indonesia. Nokia said the delivery is valued at more than $50 million.
But since most of the operators purchase equipment and infrastructure overseas, the devaluation crisis will increase their capital expenditures in the coming years, said Loy Chee Leng, director of the Strategis Group’s Asia-Pacific office in Singapore.
This is especially the case for operators that failed to lock in their capital expenditure contracts before the devaluation crisis, he added. In all, capital expenditure in the region will fall and overall network expansion among new operators, licensees and existing carriers will slow, though the magnitude of the reduction is unclear.
“Telecommunications equipment/infrastructure manufacturers in the U.S. or Europe will definitely feel the pinch,” said Leng.
David Roddy, chief telecom economist with Deloitte & Touche Consulting Group Inc. in Atlanta, characterizes the currency problem as a blip in the market for wireless businesses.
“Generally, the total market for wireless telecom, handsets or infrastructure is a gold mine of the century in East Asia. It blips up and down. This is certainly one of them in terms of re-adjustment of currencies and slower currencies. The large manufacturers, Ericsson, Nortel, Motorola and Lucent, are reporting huge successes so far in East Asia,” said Roddy. “The economic fundamentals are very, very good … To what extent currency re-alignment and stock market alterations affect economic fundamentals, most economists so far are not seeing a decrease in economic growth rate. There’s a huge pent-up demand for telephone service.”
In an indirect reaction to the currency crisis, the Philippines and Indonesia are postponing or cutting back on the award of licenses, said Kari Roe, managing editor of Bethesda, Md.-based International Technology Consultants Inc.’s telecom market report on China, India and the Pacific Rim.
The Philippine government, which had once considered licensing 12 mobile phone operators, now is considering only five or six operators. Indonesia’s licensing process is postponed, although it awarded some licenses in the summer. Companies in Malaysia and the Philippines planned initial public offerings but have postponed them because of market conditions, said Roe.
“Anytime you have that kind of volatility, it raises real or perceived risk, and in this case, there is significant currency exposure insofar as repatriation of earnings,” said Rob Frieden, professor of telecommunications at Pennsylvania State College. “There’s a general market risk if interest rates are going up, and if currencies are plummeting. Then these particular investments as candidates become less attractive than other wireless investments in less volatile areas.”
“The big financial investors just get too nervous. Investors will shy away from situations they might perceive as currency risks,” said Roddy. “One of the difficulties is that there is a tidal wave of spectrum in the U.S. and a tidal wave of worldwide telecom investments … Investors are looking for really solid economic opportunities.”
One economist quoted in the New York Times predicted a “painful two years ahead until investors feel confident that the policy for correcting the problems is in place.”
With all the fear surrounding Southeast Asia, investors, particularly in the United States, tend to link mainland China and Hong Kong with the currency crisis, said Roddy. This accounts for the reception China Telecom Ltd. received when it began trading on the Hong Kong market, said ITC’s Roe. Though China’s economy is steady and the country is beginning to open the door to foreign investment, the stock, though popular, “did not get the reception that people really expected,” she said. As of last week, China Telecom was trading ahead of the upper limit of the pricing range.
“Southeast Asia started to go, and [investors] didn’t understand it. It’s guilt by association,” said Roddy. “Hong Kong and mainland China will be unaffected going forward. It’s the biggest market on earth for telecom equipment and service providers.”
Roddy is equally optimistic when it comes to subscriber growth in the crisis areas. He believes consumers will continue to buy wireless service despite economic uncertainty because of the demand for basic telephone service. So far, there is not much indication that demand in these areas is slowing.
“In some cases, East Asian markets may be better for wireless carriers than places like the U.S., not only because there is so much more pent-up demand, but those governments are going a little bit slower in dumping spectrum into the market. In the U.S, we have a glut of wireless phone spectrum. It came so fast, and now we have companies going bankrupt before launching service.”
Richard Siderman, a telecom analyst with Standard & Poor’s in New York, is optimistic, too. “In the growing stages of cellular, the market is less vulnerable to having [its] purchasing power impacted by economic events. In a lot of areas that have bad landline [service], people pay a lot of money to get cellular. I don’t know that economic levels will stop people from purchasing.” Even during the worst of times in Mexico, people still used their cellular phones, he said.
But Strategis’ Leng cautioned that with economic
uncertainties, subscribers may be prudent in their spending. And if they consider cellular phones luxury items, “they are unlikely to pamper themselves” with them. Additionally, carriers will have to spend more money to subsidize handsets to keep prices constant. As such, increasing handset prices will increase entry costs for subscribers, deterring them from buying service, said Leng.
“The length of this currency crisis and economic uncertainties will be an important determinate,” said Leng. “Governments or regulators may step forward to help these operators if they feel the operators are providing a substitute for basic telephony service.”
