NEEDLESS to say, the telecommunications market in Asia has all the traits of a thriving business – fierce competition, phenomenal growth and lower call charges. And subscribers are the biggest beneficiaries.

To move ahead however, findings by Ernst & Young reveal that telco companies that want to maintain high growth across Asia must cross the “digital divide” between wealthier urban consumers and less affluent rural ones.

On the downside, the lack of regulatory consistency across the region is hampering multi-market operators' strategies. And no surprises, the real catalysts for regional growth will be India and China. The scale of their recent successes and potential opportunities dwarf other Asian markets.

“The global mobile market presently has a size of 2 billion people. The third billion will come from Asia. Asia will be an overwhelming mobile growth story, with China and India taking the lead,” says Ernst & Young Global Telecom Markets leader Marc Chaya.

Chaya says that the European telco market has already reached saturation rate, while in Asia, the penetration rate is around 35% to 40%.

In Europe, talk time is about 135 minutes per month, whereas in Asia, it is 250 minutes to 500 minutes per month. People in Asia like to talk.

Chaya says that in Asia, different countries have extremely different paces of growth. For instance, emerging markets like Malaysia, Indonesia, Philippines and Vietnam are now seeing immense subscriber growth. Then there are virgin markets such as Nepal and Bangladesh. Unsurprisingly, China and India will lead the telco revolution in Asia.

Asia’s one billion mobile phone subscribers have been the real beneficiaries of the region’s highly competitive telecommunications market.

“Telecom companies have been experiencing great growth across Asia, but the competitive market has really driven down call charges. Operators have been able to find ways to earn profits, despite the low average revenue per user,” explained Vincent de La Bachelerie, Head of Ernst & Young’s Global Telecommunications Practice.

While many regulators and governments have made great strides in cutting red tape across the Asian telecoms sector, companies still face uncertainty.

This is because regulation across the region is fragmented and regulators need to find solutions targeting the specific needs of the Asian markets.

Chaya says that Asia is very much a GSM story. “In Asia, it will still be more of a GSM story, while in Europe, the trend now is of convergence, the bundling of mobile and television plus broadband. In Europe, markets have matured, and now the operator has to think up of ways to bundle together services to entice subscribers.”

“The next generation of network will see the bundling of data, voice, entertainment. This is now happening in Europe, whereas in Asia, this is only limited to Japan and South Korea. Generally, the needs are more basic. Operators are more concerned about how to keep their customers,” says Ernst & Young partner Susanna Lim.

While Asia will eventually migrate to 3.5G, it will still take time. For instance, 3.5G was first introduced in Europe in 2002, but

it is only taking off now.

Booming challenges

The telecoms sector in India will see tremendous growth over the next decade. The recent increase in limits on foreign direct investment and de-regulation of the industry will continue to attract major international operators.

China is rapidly developing home-grown telecommunications technology. This rapid growth does not come without its obstacles.

Companies operating in China and India still face challenges to do with competition, infrastructure, regulations and business models.

Chaya says in the case of India, the regulator encourages competition and has opened up the industry. “India's penetration rate now stands at 13%. Competition has made the operators extremely efficient and they are able to operate using a low cost business model. Today, India has about eight operators. Last month, they added about 7 million new subscribers.”

For the moment, pricing is an extremely important factor in maintaining Asian operators' profitability.

“In India, some operators charge as low as one rupee for one minute, as these operators are betting on volumes. The operators share the network and outsource their technical facilities, hence enabling them to sell their minutes at very low cost,” says Chaya.

China now has a penetration rate of about 30% and is adding about 5-6 million subscribers every month.

Meanwhile, the challenges would be the existence of vast and sporadic rural land. Chaya says that the challenge would be for governments to increase its investment in these areas and for operators to figure out new innovations that would result in a feasible and profit-yielding business.

Chaya also notes the intensifying price war in Asia.

“Prices cannot go to zero. In India, some operators offer a lifetime SIM card. This means that even if the user has no credit, they can still receive calls. Operators do this because they are trying very hard to keep their customers, but this cannot go on forever.”

“If an operator focuses only on cost, it cannot last. It is not value added, at least not in the long run. For the moment, the mobile needs in Asia are limited to SMSes and calls – so under present circumstances, the operator may still survive.”

M&A upswing

The past three years has seen an upswing in merger and acquisition activity in the Asian telecommunications sector, and that trend looks set to continue.

“There’s a real appetite among regional and global companies to invest in this sector. Western operators are seeking more exposure to the emerging markets and private equity houses believe that some countries offer the potential for quick returns.

Chaya sees a renewed interest in acquisitions across Asia. Foreign operators are more interested to have partnerships, where they provide the 3G know how, while the local partner provides the infrastructure.

Moving forward, Chaya expects competition to heat up, especially with the liberalisation and opening up of markets.

Finding people with the right mix of managerial skills and industry expertise is yet another problem. Chaya says that there is no shortage of entry-level and junior staff in the industry.

“Recruiting and retaining more senior people, who can operate effectively in this rapidly changing industry, has become the number one consideration for Asian telcos.”