Essar's african safari

The company has ambitious plans for mobile telecom services in Africa. Will it succeed?

The view of the race course from his 14th floor office in Mumbai’s Mahalaxmi area is breathtaking, but Rajiv Sawhney would rather utilise the limited time he spends in his cabin (he prefers to be on the road meeting clients) looking at the full-sized map of Africa pasted on his table.

Africa, after all, has been his playground ever since he took over as the CEO of Essar’s telecom business in November last year. “Our African safari has just begun. It’s surely going to be a long and prosperous one,” Sawhney says with the flourish of a veteran tourist guide. His fingers point towards the vast East African region.

But the CEO is clear about one thing: Essar is going to choose its destinations carefully. “It’s pointless to go to markets where there are already five or six players with a population of just 25 million.” It’s also not interested in big acquisitions as “something en bloc often comes with a baggage” and would rather go in for small steps one at a time.

The safari has just begun — it is only into its first year. Essar has, in this period, acquired a controlling stake in Econet Wireless Kenya, which has been subsequently renamed Essar Telecom Kenya, and launched YU, its mobile telephony brand for Africa. More of that later.

Essar’s telecom interests range from 33 per cent in Vodafone-Essar, the second-largest operator of mobile services in India after Bharti Airtel, and 9.9 per cent in Loop Telecom (previously BPL Mobile) to The MobileStore, a telecom retail chain, and Essar Telecom Infrastructure, the country’s second-largest telecom tower company which operates in 12 circles with 4,300 towers(it plans to expand into eight new circles). The tenancy ratio of the tower company is 1.89, which makes it a profitable company as break-even is achieved at 1.70. The group also owns Aegis, a large business process outsourcing company which has 39,000 employees on its rolls.

But in telecom services, it’s Africa and not India where the action is for the group promoted by the Ruias. That’s because Vodafone runs the Indian joint venture and Essar’s role is limited to some strategic directions. The ownership of Loop is not clear as yet. Essar says it’s just a minority investor in Loop and it has nothing to do with the management, but the government isn’t quite sure and feels the company is indirectly controlled by the group through its overseas investment companies. If true, this violates the guideline that no single operator can have substantial ownership of two telecom companies in one circle.

Africa alive
While Sawhney is tightlipped on Loop for obvious reasons, he makes it clear that the strategic roadmap that his top team has drawn up for telecom services is entirely devoted to Africa — a reason why he has appointed a separate management team for Africa which is headed by Jayant Khosla as the CEO. It’s significant that the top team comprises entirely of telecom veterans from India.

Khosla says the reason is simple: The African telecom market is exactly in the same stage where the Indian market was five or six years ago in terms of penetration, tariffs and so on. And it helps if you have a team which has done and seen it all. Khosla was with Bharti Airtel before joining Essar after a brief stint with Future Generalli.

Essar wants to be a substantial pan-Africa player and Kenya, where the YU brand was launched a year ago, is just the first step in that journey. The group has invested close to $450 million in the Kenya deal, including the cost of a nationwide rollout plan. Over the next four years, it plans to invest another $200 million.

By year-end, Sawhney hopes to launch operations in Uganda and Congo by buying into the Dhabi Group’s telecom business in Africa, including Warid Telecom Uganda and Warid Congo SA. Talks to sew up the deal are in the final stages and operations are expected to be launched in the two countries towards the end of the year.

“It’s important for us to spread out across the region to offer subscribers seamless interconnection,” Sawhney says. That’s important as interconnect rates in Africa are as high as Rs 3. Though Sawhney doesn’t name any other country as negotiations are still in a “sensitive stage”, the buzz is that the group is eyeing fresh licences or buyout opportunities in Tanzania, the Great Lakes and Zambia in an effort to offer subscribers seamless connection in the region.

Till that happens, Essar will be unable to tap into the growing number of subscribers, especially businessmen and executives whose dealings cover the entire East Africa region.

Connecting with YU
The brand name YU is strategic in that context. Sawhney says the group had initially thought of using the Essar brand name, but changed its mind as it needed a brand that will cater to regional aspirations, especially in a multi-cultural and multi-linguistic region like Africa (the population in many countries like Congo, for example, is predominantly French-speaking.) “YU is a generic name in that context, and has an instant customer-connect whichever part of the world you are in. Besides, the colour of the letter will change in tune with the colour of the flag in that country. For Kenya, the colours are red and green,” Sawhney says.

Analysts, however, say the process has to be much faster if YU has to make a real impact as the subscribers of rivals Safaricom and Zain can already make or receive calls in neighbouring countries using their number and home tariffs.

Khosla says more than what rivals are doing, Essar wants to cut costs and pass on the benefits to the subscribers — something the Indian market saw a few years back. “The seamless networks will be strategic for our subscribers by reducing the call charges across borders,” Khosla says. This is the lesson the team has learnt from its Indian experience — the price game.

YU has close to 700,000 subscribers in Kenya, an insignificant number in a country that is the biggest economy in East Africa with a population of 38 million, but Essar expects to double that number before March 2010, ahead of initial forecasts. That’s because the mobile penetration rate, which is only around 30 per cent now, is forecast to touch 70 per cent in another three to four years.

The price game
That will happen through competition in a country where fixed market was a monopoly and mobile market a duopoly till as recently as 2007. Though the Indian market saw competition much before, the similarities are unmistakable. So a right pricing strategy has to be the key for Kenya’s fourth telecom operator. Sawhney’s team has been quick to implement the lessons it learnt in India. YU has snapped up a number of subscribers through a special low tariff for the first two minutes of a call. That’s the kind of pricing that will help YU to reach out to the rural markets, which will be the key battlefield going forward.

YU has also launched its prepaid mobile internet services at one of the lowest rates in the marketplace. The interesting feature of this offer is that there is no bundle required to access the rate and is seen as a cost-effective pay-as-you-go service that would make it appealing to most Kenyans.

Besides the cheaper call rates, the company launched free intra-network SMSes. This is a first in the country and could significantly drive up the uptake of its services. Besides the network expansion, the YU network has also recently unveiled a variety of value-added services which includes Dunda — a distinctive caller ring back tone service which allows one to pick up to 5 tones for different people — and Eneza, an electronic top-up service that is completely paper-less for loading airtime. The network also has a convenient, unbundled data service which allows YU subscribers to pay for their data downloads as per consumption at the most affordable rate in the country.

Khosla says the clear customer segmentation model lays ground for YU to challenge market leader Safaricom in the next two years.

Those are brave words, but many analysts say Essar is in for a long haul in a market where three of the four operators have a combined market share of just 20 per cent. Safaricom has an overwhelming leadership with 80 per cent market share, earning around 60 per cent of the telecom revenue in that country. Also, Essar’s expansion in other markets may be tough. For example, Uganda already has four mobile networks up and about and the jury is out on whether or not the market can sustain a fifth entrant.

“We are small but we are new,” says Sawhney. “As the latest entrant, YU doesn’t have a baggage and hence has a significant cost advantage in producing air minutes much cheaper than its competitors. As we consolidate, we will only get better.”

Africa is the final frontier for the world’s two emerging powers, China and India. While India has had strong business links for ages, China has muscled its way in during the last few years. Can Essar help the Indian flag fly high?