Asia In-Depth

The telecommunications sector in the Asean economies is a profitable industry with some interesting opportunities. There are, however, some significant risks that potential entrants must be aware of and thoroughly investigate before they make any decisions to invest.

For Thai companies, this means deciding whether or not the potentially promising but risky markets abroad are worth the time and attention, particularly when the 3G race is beginning to really heat up at home.

The Asean markets are promising in many sectors, and telecoms are no exception. At the most fundamental level, the markets are growing both because of demographic changes and economic growth. Demographically, Asean nations will continue to see their workforces grow well into the middle of the century, and if GDP growth continues at its current rate of around 5%, more and more people will be in the position to increase their consumption. These fundamental changes amount to more people being able to purchase more products and services, and many of these consumers will spend their newfound money on technology.

Asean economies have seen dramatic rises in mobile and internet usage. Mobile penetration rates exceed 100% in almost all Asean nations, implying mature status. Broadband subscriptions, while still low, have been growing close to 40% per year on average over the last five years and show no signs of slowing down.

But even with many positive undercurrents in the region as a whole, investors should take note of certain business aspects of the Asean telecom markets, especially in mobile services, where almost all of the markets feature heavy competition as players struggle for market share. This competition, coupled with the fact that the majority of customers prefer less profitable prepaid services, has been driving down revenue per user for quite some time.

Further, the majority of the market share in most markets, especially in Indonesia, Malaysia, Vietnam, and Singapore, is controlled by large state-affiliated companies. Not surprisingly, these companies benefit from their government connections by way of favourable regulations. Interestingly, they have also been quite successful in expanding overseas while foreign investors without government backing have had difficulty competing against the major players in several markets.

Hong Kong-based Hutchison Telecom, which operates in Vietnam under the name Vietnamobile, has struggled to gain market share over the government-owned VNPT and Viettel, and is possibly rethinking their involvement in the Vietnamese market.

Perhaps with the myriad mobile players across Asean, the environment is ripe for more mergers and acquisitions. In fact, some of the large telecom companies are already beginning to throw their weight around. In December 2012, Malaysia’s Axiata Group purchased the Cambodian telecom company Latelz and merged it with Axiata’s Cambodian subsidiary Hello, dramatically increasing the company’s footprint in Cambodia.

Such events are not unexpected, since acquiring smaller competitors is one of the chief ways telecom companies have historically been able to continue to grow when revenue growth begins to level off.

In previous years, telecom M&A activity in telecom sector has primarily taken place in the more mature markets of North America and Europe, but since 2007, telecom transactions in the developing world have picked up considerably and now account for close to half of total M&A transactions in the global market.

With such crowded marketplaces all throughout Asean, along with the downward pressure on revenues resulting from fierce competition, expect many more such mergers and acquisitions to take place in the short and medium term.

Although it seems there is not much low-hanging fruit left in the mobile markets across Asean, opportunities do exist in the broadband sector. Broadband penetration rates are relatively low throughout Southeast Asia due to the lack of infrastructure. This, however, will not be the case for long.

In countries such as Malaysia, broadband growth is a government priority and therefore policy there can be quite attractive to the right foreign investor. These government policies have proven quite successful in Malaysia so far, and have contributed to making Malaysia’s broadband penetration rate one of the highest in the region.

Other nations may seek to emulate Malaysia’s success by putting in place policies that allow for more of the population to have cheap access to broadband service, which would lead to markets much more conducive to foreign investment in sometimes touchy areas such as infrastructure.

Therefore, developing broadband infrastructure, specifically the fibre-optic cables and core network equipment, looks to be one of the most promising areas for investment. The large urban areas of Southeast Asia generally have sufficient infrastructure, but the smaller cities are more sparsely covered.

While urbanisation is the trend in the region, the hinterlands are experiencing growth as well. The second- and third-tier cities of Vietnam and Philippines are examples of places where revenue growth could come from spreading coverage to still densely populated and reasonably developed areas that are currently lacking the infrastructure needed.

While promising, infrastructure can be a risky investment that is subject to the whims of not always predictable regulatory bodies. This is why one must pay careful attention to the regulatory environment and seek out those host governments that have made infrastructure development a priority and will accommodate foreign investors.

The majority of the region’s telecom markets are incredibly competitive, with one notable exception: Myanmar. It has one of the world’s lowest mobile penetration rates and internet usage rates, yet the few mobile subscribers who can afford a $200 SIM card are possibly already taxing the limits of Myanmar’s rudimentary infrastructure.

Myanmar’s current mobile network can only support up to 6 million users, which would equate to roughly a 10% penetration rate. This is truly one of the world’s last “greenfield” sites where there is nowhere to go but up.

Infrastructure is badly needed in the country, and the government has made developing all aspects of Myanmar’s infrastructure a priority. Currently, one government-owned cellular operator, MPT, has near-monopolistic power, but liberalisation of the market is on the horizon.

The risks in such an underdeveloped market are many and self-evident, but Thai companies could feasibly look west once the dust settles in the 3G market domestically. Needless to say, Thai telcos should definitely beware of being beaten to the punch in the nearby Myanmar market by their more distant rivals.

The rising level of intra-regional investment is an undeniable sign that Asean is becoming more economically interlinked, and the opportunities for Asean companies will only grow once policies become more conducive to regional trade. These lucrative opportunities are forcing companies to carefully consider their own areas of strength and the resources at their disposal before deciding whether or not they can compete with established local companies on their own turf.

And don’t forget domestic markets; With Thailand’s geographical location right in the centre of this rapidly growing region, Thai companies would already profit from Asean’s economic dynamism by further developing the domestic market, particularly domestic infrastructure.

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