Emerging market resilience

While 2008 was a horrible year for most communications, technology, and media (CMT) firms worldwide, many Middle East and Africa players – including Etisalat and Orascom –demonstrated above average performance in Oliver Wyman’s Shareholder Performance Index (SPI). Among all regions, the Middle East and Africa, along with Latin America, posted the highest SPI – both with a regional average of 203, almost twice the CMT total average of 107. The calculation of the SPI, which is based on a five-year moving “window” of data, enables consistent comparison of shareholder returns by adjusting for the volatility of returns, differences in local interest rates, and mergers and acquisitions.

Milan Sallaba is Dubai-based partner of Oliver Wyman

CMT firms around the globe collectively shed US$3.1 trillion in market value in 2008, a 43 per cent drop from US$7.3 trillion to US$4.2 trillion – erasing all the gains that had been made since 2003, according to Oliver Wyman.

“A handful of companies were able to navigate the rough economic waters and post outstanding performance in Oliver Wyman’s SPI. Mobile carriers in particular, are clearly gaining value at an exponential rate, and one prime example of the shift is the emergence of telecom powerhouses in the Middle East and Africa,” said Milan Sallaba, Dubai-based Partner of Oliver Wyman. “Our research shows that some consumer segments in this region are leapfrogging regular mobile phones in favour of smartphones, and here subscriptions on a 3G network now account for half of total mobile subscriptions.”

Sallaba added that Internet access via computers also contributed to the wireless Internet growth and the growth rate of laptop sales in the Middle East and Africa is now 10 times higher than for traditional PCs.

A report by Oliver Wyman, entitled Communications, Media and Technology State of the Industry 2009 also highlighted that although there is still ample room for growth in emerging markets, many of the remaining unserved customers live in remote, rural regions that are difficult and expensive to reach. Thus, smart players are beginning to look for second generation valuecreation opportunities, such as differentiated products and services for increasingly sophisticated consumers, services and support for business customers, reverse expansion into new markets, both close to home and in the developed world.

“We’ve seen many emerging-market players who have honed their offerings to appeal to low-income consumers, and they may prove very competitive with today’s frugal consumers. Once they’ve established a position, they might be able to adjust their offerings to attract high-end consumers as well,” added Sallaba.

“Playing defence, by reducing costs to protect your profit margins, doesn’t mean you can’t play offense as well, and that’s largely what distinguishes the top performers. So as geographic and sector boundaries blur, large companies that are flush with cash have the opportunity to redefine themselves through acquisitions, relocated plants, and other strategic moves. An economic crisis is also an opportunity for companies with strong balance sheets to make smart investments.”

Telecom companies (which include the fixed, mobile, and cable sub-sectors) from emerging markets navigated the rough economic waters far better than their peers in developed markets, and they are starting to expand outside their home turf.

Mobile carriers in emerging markets have built significant value in the past few years, as demonstrated by the emergence of telecom powerhouses in the Middle East and Africa. Often building from very small home markets, the top telecom players in the Middle East and Africa had created a combined market value of almost US$100 billion at year-end 2008, led by South Africa’s MTN Group at US$21.9 billion, Morocco’s Maroc Telecom at US$16.8 billion, and the UAE’s Etisalat at US$16.2 billion; all three are aboveaverage SPI performers, as is Egypt’s Orascom.

Kuwaiti operator Zain is highlighted as an example of operational excellence, demonstrating how customer-centric product offerings can increase sales and revenues in a saturated market. Zain, which since 2003 has expanded and grown from a single operation in Kuwait to 22 countries across the Middle East and Africa, now serves close to 60 million customers. While the Kuwaiti operation contributes just three per cent of overall subscribers, it generates about 20 per cent of group revenues and 50 per cent of net profits (as of the first half of 2008). As a result, Kuwait remains a key asset in the portfolio, and Zain actively seeks to defend its position in that market.

Another emerging-market player that has moved into developed markets is Egypt-based mobile network operator Orascom Telecom Holding (OTH). After successfully expanding in the Middle East, Africa, and South Asia, Orascom acquired enough strength and experience to acquire operations in Italy and Greece, and has plans to launch an operation in Canada.

OTH has about 80 million subscribers in the Middle East, Africa, and South Asia, having operated mobile networks in Egypt, Pakistan, Bangladesh, Algeria, Tunisia, and North Korea, after an initial joint venture with France Telecom in Egypt in the early 2000s. OTH, as both a public and family-run business, is operating with a unique governance and operating model.