Bharti Airtel in Africa Essay

The jury is still out on Africa. The cost of operations is still spicyer(prenominal) than expected, elasticity of demand could fail to kick in, and competition could intensify. But the business metrics are showing early signs of a turnaround. My gut feel is that we gutter make this work. Sunil Mittal, Chairman, Bharti AirtelIn February 2012, Sunil Mittal walked past the illuminated hoardings for Airtels mobile services plastered across the walls of Nairobi airport, and wondered if Bharti would be able to overtake MTN in Africa by replicating the high-volume, low-cost telecom business model that it had pi onenessered for the Indian masses.Founded in India in 1995, Bharti Airtel (Bharti) had rewritten the rules of the globose telecommunication industry. The cellular doer had defied conventional Western telecom knowledge that emphasized high tariffs for wealthy customers, and had instead chosen to concentrate on Indias mass grocery store place, including the rural poor. In orde r to focus on getting customers, the company had made the bold decision to outsource mammoth portions of its operations. By February 2012, Bharti had been Indias market leader for some time, with 183 million customers, and had pioneered a highvolume, low-cost telecom model with tariffs of less than one cent per minute, which had previously been considered unviable.By 2009, growth in India had begun to taper off, and Mittal began to look for clean opportunities. Africa seemed to present just the right option. Its gigantic population of over a billion people with low per capita incomes mirrored Indias demographics. Africas real mobile penetration was 30% and growing rapidly, and high mobile tariffs in Africa, combined with low monthlyminutes of use per customer, indicated that there was room to grow the market not just by add mobile penetration, but also by intensifying usage.1 In June 2010, Bharti acquired the 15 African operations of Bahrain-based Zain Telecom, for $10.7 billio n the largest M&A deal in the global telecom industry for that year, and the largest ever cross-border deal in an emerging market.When they reached Africa, Bhartis leaders discovered that employee morale at Zain was low, work cultures between the two continents differed vastly, and market share revenues and EBITDA were falling every month. Infrastructure was poor, hardware and software equipment was obsolete, access to equipment supplies was limited, skilled technicians were in short supply, and the cost of doing business was turning out to be much higher than Mittal and his team had anticipated. Bhartis initial experiments with leveling tariffs and removing Zains 20% to 30% premiums in its ________________________________________________________________________________________________________________ Professor Krishna Palepu and Research Associate Tanya Bijlani from the India Research amount of money prepared this case. HBS cases are developed solely as the basis for class discus sion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of stiff or ineffective management.Copyright 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.This document is authorized for use only in International Business by Prof. R. Sugant at SDM Institute for Management and Development (SDMIMD) from September 2014 to November 2014.Francophone and Anglophone regions had not increased demand to the extent that they had expected and it was unclear whether dour prices would drive mobile usage in the hinterland of the continent.Despite the challenges, Bharti initiated multiple transformations in Africa, including outsour cing active and passive managed services (networks) for all of its 16 countries outsourcing its IT and call nubble support to BPO1 firms for the first time in Africa revamping its distribution network integrating its brand, and implementing a host of human resource-related initiatives to inculcate the companys DNA in its new operations. Bhartis executives felt that these measures had comprehensively changed the structure of the telecom industry in Africa. Africa was turning out to be far more complex than Mittal and his team had imagined.By February 2012, it had been over a year and a half since the acquisition, and Bharti was leading in revenue market share in 9 of 16 countries, including Zambia as well as some smaller markets like Malawi and Gabon. In Africas other larger markets, such as Nigeria, Ghana and Uganda, MTN, its chief competitor, continued to lead. (Exhibit 1 Bhartis Position in Africa). In Nigeria, Africas largest market, MTN was improving the quality of its network, emphasizing advanced data offerings, rolling out mobile payments solutions, conceptualizing applications such as mobile healthcare, and holding onto its undisputed position as the market leader.If Bharti continued with its India plan in Africa, investing in rural networks and slashing tariffs, and demand failed to hoof up, the company risked losing money. With a $12.9 billion unpaid loan (largely on account of an approximately $9-billion unpaid loan from the Zain acquisition) still lingering on Bhartis counterpoise sheet, Mittal wondered if that was something they could afford. The other option was to wait and watch, leave prices at market levels, and focus on urban and suburban areas, until it was clear that the money had trickled into the villages. As Mittal got into his car and flock towards Bhartis Nairobi headquarters, he wondered what their strategy in Africa should be.Bharti in IndiaThe Early DaysMittal started manufacturing bicycle parts at the age of 18, with approximat ely $200 borrowed from his father, a Member of Parliament from the north Indian state of Punjab. He subsequently imported portable generators, and assembled push-button telephones in India. In 1992, soon after the Indian telecommunications market liberalized, Mittal secured a partnership with three other companies, including Compagnie Generale des Eaux, the precursor to Vivendi of France, to make a joint bid for the first round of cellular licensing in India. Mittal took a three-month sabbatical to prepare for the bid, and spent $220,000 on the presentation, which included aerial photography and satellite imagery2.The Government of India gave the consortium a license to build a cellular phone network in Indias capital letter, saucy Delhi, and Mittals newly-incorporated Bharti Cellular became the first company to launch mobile telephony services in New Delhi, in 1995, under the brand name of Airtel. The company sold equity interest to British Telecom and Warburg Pincus in order to raise the funds it required to acquire licenses to operate in new geographies, and by 2003, Bharti had acquired mobile licenses for 15 out of Indias 23 circles. By 2004, Bharti was a pan-India operator with running operations in all circles.Like many Indian enterprises, Bharti contained elements of a family business.Bharti was Mittals middle name. Mittal was Chairman and Group Managing Director of the company, while his brother, Rajan Mittal, was Joint Managing Director, and a tierce brother, Rakesh Mittal, was on the board of directors. Akhil Gupta, a chartered accountant and a friend of the family was Chief Financial Officer, and later became Deputy Group CEO and Managing Director of Bharti Enterprises.The indorsement Factory ModelIn the early days, telecom was an industry where the complexity was daunting, Gupta said. We were committed to making it a very simple industry. So we equated ourselves with manufacturing. The only variation was that another factory could be manufact uring nuts and bolts, while we manufactured minutes.Bharti learnt the business of telecom from their early European partners, British Telecom and Telecom Italia. Conventional soundness then was that mobile telephony was meant for upper class customers who could pay premium prices. Operators preferred to keep tariffs high, thereby protecting Average Revenue per User (ARPU), considered one of the most important metrics in the business. High tariffs, they felt, discouraged users from talking too much, which in turn, minimized the need for network cornerstone, thereby reducing capital expenditure, and improving return on investment.But Mittal and his team felt that at an ARPU of Rs. 1000 (approximately $222) then considered a minimum requirement for a telecom operator to be profitable their customer base would be restricted to a small segment of wealthy customers in major cities and a few large towns, and decided to turn the model on its head.Gupta explainedThe goal of a manufacturi ng organization is to maximize the number of units produced while maintaining margin per unit. Similarly, we decided that we would expand production of our lead-in output, minutes, keeping margins per minute more or less constant. As we scaled up, we would pass any cost savings we achieved onto the customer by lowering tariffs, which would increase demand further, and would allow us to go deeper into the market andreach lower-income customers. This would result in a rapid increase in minutes and consequently, overall margin.Mittal and Gupta believed that how they utilized existing capacity, and how much revenue they collectively earned from that capacity, mattered most. The focus, therefore, was on growing total revenues, reducing operating expenses as a percent of revenues (opex productivity), and increasing revenues as a percent of cumulative capital expenditures (capex productivity). (Exhibit 2 Bhartis Key Performance Metrics)Outsourcing OperationsA telecom company, it was orig inally thought, would have to be an infrastructure company, a network company, an IT company, and a customer service company rolled into one. But in early 2004, given that Bharti was growing rapidly, expanding into new territories, and entering new businesses like fixed line services and long distance operations, Mittal and his team were forced to question what constituted their core activity. Again, we broke away from traditional telecom wisdom, Gupta said. We had no choice at our back end, we were collapsing.