Asia-Pacific countries are beginning to emerge from the severe economic problems that have gripped them for two years, and mobile phone carriers are finding they desperately need cash to expand services.
Thailand, Indonesia, Malaysia and the Philippines took the hardest economic hits after the Thai baht in July 1997 plummeted and set off a regional chain reaction that ruined economies. Early signs of recovery have appeared in Asia, with several countries recording economic growth in the first quarter, though experts believe it may take two years before the Asian flu is fully cured.
Though mobile-phone subscriber growth has remained relatively stable in the affected regions thanks to prepaid service, the economic downturn has left operators with low stock valuations, poor cash flow and employment problems.
The majority of Asia-Pacific mobile-phone operators purchase equipment overseas, which increases their capital costs because of their devalued currency. This lack of cash and high capital expenditures have put operators in a quandary: As the demand for wireless services rises, operators need to increase capacity in their networks or migrate to digital service.
“There is competitive pressure to expand capacity and migrate to digital,” said Raymond Ho, Gartner Group’s mobile communications analyst in Hong Kong. “Cash is the big problem … The demand for service can improve cash flow, but not significantly in a short period.”
As a result, many operators in the region are beginning to restructure and consolidate their businesses. Philippine cellular operator Pilipino Telephone reported sharp first-quarter losses amid declining revenue and heavy provisions for unpaid bills. Revenue from its mobile-phone-service operations fell 12 percent while operating expenses increased 35 percent. Reports indicate the company is looking to merge with competitor Smart Communications Inc. to save on costs and capital expenditures. Telekom Malaysia Bhd, which suffered in 1998 from bad debts, high operating costs and lower profit, is in the midst of aligning its cellular operations to save on costs and achieve better economies of scale.
Experts say carriers can’t raise money locally because the liquidity in their markets has disappeared, requiring them to look abroad for financial resources to expand services. While foreign companies have been sniffing around for months, eager to buy in at cheap prices, executives have been leery of the economic instability.
Foreign investment has begun to take off in countries like South Korea, since President Kim Dae-Jung has quickly pushed through radical financial reforms. British Telecommunications plc, Bell Canada International Inc. and financial services firm American International Group are among the newest foreign investors in South Korea’s mobile phone companies. Korea Telecom Freetel said it is looking for a financial investor willing to purchase up to a 20-percent stake in the carrier. Singapore Telecom Inc. has taken 20-percent stakes in Philippine operator Globe Telecom and Advanced Info Service in Thailand.
A recent survey from A.T. Kearney, a global management consulting firm, indicates corporations around the world are increasing their foreign direct investment plans as they acknowledge more stable global economic conditions.
Asia as a whole is relatively more attractive than it was six months ago, and markets such as Malaysia, Hong Kong and the Philippines have regained their positions in the top 25 most-preferred investment destinations, said the semi-annual survey of top executives of Global 1000 companies. Furthermore, 51 percent of senior executives investing in the Asia region indicate the Asian crisis has created acquisition opportunities for their firms.
Demand for wireless services in the affected regions is expected to strengthen. Gartner Group and the Strategis Group predict strong growth for the Asia-Pacific region in the months and years to come. Ho believes growth in the affected regions will increase rapidly in the latter half of 1999 as the economy begins to recover.
“In a lot of these countries, we are talking about low telephone-penetration rates,” said Rick Brecher, shareholder and co-chair of the National Telecommunications Practice with law firm Greenberg Traurig in Washington, D.C. “As the economies recover, there is going to be a demand for service in the short term. Wireless technology has the advantage to be deployed much more rapidly than wireline technology.”
The Strategis Group indicates South Korea was one of the world leaders in wireless-phone growth during the first quarter, adding 3.4 million subscribers. The carrier’s growth correlated with economic growth, though big handset subsidies also played a role.
“There was a dramatic turnaround in the Korean economy in the first quarter, and this clearly impacted cellular growth,” said Elizabeth Harr Bricksin, director of international wireless publications for the Strategis Group. “GDP increased by an annual rate of 4.6 percent in the first quarter, after contracting by 5.8 percent for all of 1998.”
In Southeast Asia, Gartner Group indicates prepaid services fueled the growth engine during recent quarters. The Indonesian market grew 29.4 percent in the first quarter though the country’s troubled economy only slightly improved. All three of the Indonesian Global System for Mobile communications operators heavily marketed prepaid services, and by the end of the first quarter, 54 percent of Indonesia’s subscribers were prepaid, said Ho.
“Indonesian subscribers dropped in early 1998, but rebounded again at the end of the year because of prepaid and second-hand handsets,” said Ho.
More than 50 percent of the Philippine cellular subscribers are using prepaid services, while Malaysian operators Celcom and Telekom Malaysia launched prepaid services in late 1998, attracting the majority of new subscribers during the fourth quarter, said Ho.
