Financing to redraw battle lines in mobile industry

Source: http://www.nation.co.ke/magazines/smartcompany/-/1226/594008/-/soc057z/-/index.html

The global financial crisis is set to change the face of competition in the mobile phone industry as players’ finances are squeezed and China moves in for the kill. At the continent level, a number of changes are expected as big mobile operators seek to consolidate their dominance as they cut back on spending.

“There could be a lot of change this year,” says Thomas Sonesson, the managing director of Ericsson East Africa, one of the largest network building companies globally. Locally, Ericsson controls about 51 per cent of the market with Zain, Orange and Yu networks operating on its infrastructure.

Credit squeeze

In Kenya, the financial crisis has slowed down competition with two of the four cellular companies said to be in dire need of funds — and lots of it — to make any meaningful impact in the market. Safaricom dominates the market, controlling about three quarters of mobile subscriptions and dwarfs all in profitability.

International lending is not forthcoming, not just for the cellular phone operators but for most corporates, given the credit squeeze in the global market that has forced lenders to tighten their purses. This trend is slowly catching on in Kenya’s banking industry with a marked slowdown in lending, especially in the last quarter of 2008.

Most banks have recorded reduced uptake of loans and this is set to tighten further as the effects of the global credit crunch begins to hit home. Globally, the credit squeeze has seen even governments postpone borrowing, with Ghana and Kenya delaying issuance of sovereign bonds worth more than $800 million (about Sh64 billion).

It is worse for corporates as the expected economic slowdown means reduced consumption of their products and services. Banks, ever more risk-averse, have read this as increased credit risk, and are reluctant to lend as they seek to balance growth and risk exposure.

And in all this confusion, the Chinese government has seen an opportunity to deepen its interests in Africa. “The Chinese government is giving financial backing to its corporates who in turn are offering to do network set-ups for mobile companies that are in short of funding,” says Mr Sonesson.

“For companies like ours that is not an option as we do not have similar backing. This will definitely change competition with Chinese companies becoming a preference.” Another factor determining financial backing for local operators is the internal competition within the company portfolios. With a squeeze in the amount of funds available, cellular phone operators have been forced to review their policies on allocating funds.

Licensing of G3

“Companies will migrate their capital to the country within the region with the best returns,” says Nicholas William, Ericsson regulatory affairs director for sub-Sahara Africa. “Kenya will need to improve its environment to make it more competitive if it is to attract investment.”

Ericsson managers say Kenya needs to cut down on taxes levied on mobile industry, ranging from excises duty on airtime, Value Added Tax, to duties on importation of machines and equipment. And to level competition in the current fluid environment, they suggest the government should rethink its policy on licensing of the more robust technology network: 3G.

Currently, it is only Safaricom that operates 3G, a superior network to the 2G that’s being used by the other three operators. The problem has been the $25 million fee (about Sh2 billion) for a 3G licence. Safaricom paid for it in 2007. Ericsson proposes that to ease the pain for the other three operators and level competition, the government should consider spreading $25 million over the lifetime of the licence.

“The amount should be ‘lend’ to the users at interest rate equal to a Treasury bond of similar tenure to the intended repayment period,” Mr Williams says. Electricity distribution should also be addressed. Lack of power especially in the rural areas has been the greatest challenge to mobile phone operators’ expansion.

The alternative has been to use generators to power substations, which takes up operation costs by 25 per cent. MTN Nigeria is said to the largest single buyer of oil in Nigeria to fuel its over 10,000 generator-backed base stations. “The country that will be ahead on that and will have a head start in attracting investment and also in addressing problem of rural connectivity,” says Mr Sonesson.