India's Telecom M&A: The Threat to Vendors
A spate of mergers and acquisitions in India's telecom market in the last year is having a massive impact on vendors, too. From renegotiating existing contracts to shifting their focus to other segments of the market, equipment suppliers are exploring various ways of cushioning themselves from the hit to their telco activities.
At one time, India used to count up to 14 service providers in each of its circles, or service areas. But that number has tumbled to just three private sector players: new entrant Reliance Jio, current market leader Bharti Airtel Ltd. (Mumbai: BHARTIARTL) and a merger of Vodafone India and Idea Cellular Ltd. , which will be larger than Airtel when the deal is done. India is also still home to two government-backed operators -- Mahanagar Telephone Nigam Ltd. (MTNL) and Bharat Sanchar Nigam Ltd. (BSNL) . The consolidation that has already happened has left the industry giants with parallel networks in some areas. As they look to rationalize their assets, vendors are likely to suffer.
"While we were surprised by the rate at which the consolidation took place, this was necessary for the Indian telecom sector," says Ryan Perera, the vice president and general manager of Asia-Pacific sales for Ciena Corp. (NYSE: CIEN), an optical equipment vendor. "As we have seen globally, only the operators with scale and strong balance sheets will survive the market."
While consolidation has been a long time in the making, it has happened at breakneck speed, triggered by the aggressive market entry of Reliance Jio in September last year. Bharti Airtel has acquired Tikona, Telenor, Videocon and the consumer wireless business of Tata Teleservices, while Vodafone and Idea are combining to produce a new industry giant. Reliance Communications Ltd. , India's sixth-largest operator, announced just last month that it would shut down most operations by the end of November. (See India's Airtel to Take Over Tata Teleservices , Vodafone, Idea Strike $23B Deal to Form India's Biggest Telco and Airtel to Acquire Telenor in India.)
But in spite of the consolidation, experts and industry executives believe the market is poised for more growth amid soaring adoption of mobile broadband services. Wireless data usage has also risen this year, according to a report from venture capital firm Kleiner Perkins, up from 200 million gigabytes a month in June 2016 to about 1.3 billion gigabytes in March. A fall in prices and the appearance of lower-cost 4G feature phones have fueled consumption.
To cope with all this growth, telcos are still being forced to overhaul and upgrade their networks. But the pressure they are under means they are demanding much more for every rupee from the vendors. (See India Poised for Transport Network Boom.)
"The three telcos now control 80% of the market, and so, yes, renegotiation of contracts is going on," says a well placed industry insider on condition of anonymity. "Besides asking for a reduction in prices, the negotiations are also centered around demanding additional benefits in annual maintenance contracts."
Advantage big vendors
In such an environment, the biggest suppliers clearly hold the advantage, with the resources to invest in R&D and come up with solutions that will help telcos to lower the costs of building networks. Besides having the scale to support India's shrinking pool of Tier 1 telcos, the largest vendors -- which today include China's Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), Sweden's Ericsson AB (Nasdaq: ERIC) and Finland's Nokia Corp. (NYSE: NOK) -- also have an established and growing ecosystem of partners.
Yet in response to market consolidation, suppliers are exploring opportunities elsewhere. Many, for instance, are trying to expand into the enterprise sector. Others are exploring closer ties with public sector bodies, following the launch of government initiatives such as Smart City and Digital India. The drawback is that vendors in this market often face project hold-ups and delayed payments.
Nor is addressing enterprise customers without its challenges. In parts of the enterprise market, vendors could face competition from cloud service providers, and even the telcos themselves. "Future growth for Indian telcos is going to come from the enterprise space," says Amresh Nandan, the research director of Gartner's communications service provider business.
Nevertheless, not all vendors see consolidation in the telco sector as a major threat. "While market changes are a part of life in this industry, I do not believe the consolidation of the Indian market will affect ECI," says Sajeet Shivashankaran, the president of the vendor's Indian business. "We are increasing our footprint into metro optical networks. This coupled with the automation and analytics provided by our SDN/NFV offering puts us in a particularly good position."
Industry watchers reckon more consolidation may be coming as telcos work on the digital transformation of their operations. Growing competition from cloud service providers could also prompt further merger activity. "These cloud service providers are also targeting the same market that telcos want to expand further into," says Nandan. "We definitely don’t expect all players to survive."
— Gagandeep Kaur, contributing editor, special to Light Reading