How will the US economy downgrade impact telecom business?

The current economy turmoil in the U.S and some of the European countries is likely to have a short term impact on the telecom business.

The world is yet to come out of the impact of the global recession in 2008 that affected the ICT sector. There were reduction in job and salary. Due to the economy meltdown, Asian countries experienced drastic fall in investments from the US and European countries.

There was also a drop in import of telecom equipment and software and a lack in investments for R&D, leading to a lack of new devices in the market. In India, 3G also came in at a time when the economy was barely out of recession; the huge cost of 3G and BWA spectrum thereby putting additional pressure on Indian mobile operators, though this led to a big boost of income to the national exchequer. However, overall the impact to the telecom industry was minimal, as compared to other sectors.  


India and China recovered much faster than other global economies to bounce back to a steady growth rate by mid-2010. Shipment of mobile devices and sales of handsets have been growing steadily globally. According to CyberMedia Research, the Indian mobile handsets market is expected to grow by 25 percent in volume in 2011, with sales of nearly 12 million smartphones, while the overall Indian telecom services and mobile handsets is set to grow at the rate of 16.7 percent in 2012 to touch revenues of $63 billion in 2012. The growth is expected to be led by 3G, BWA, IPTV, IPVPN, VoIP and mobile VAS. The MVAS industry in India is set to touch $10.73 billion by 2015, led by 3G and mobile broadband uptake. India domestic IT, ITes, and IT products market is set to touch $133 billion by 2014.


China, which is currently seeing great success in its deployment of TD-LTE is also growing at a steady pace, with Chinese equipment vendors like Huawei and ZTE are doing good business with export of telecom equipment. The Chinese mobile sector is witnessing a steady growth of 15 percent per annum, with strong 3G uptake as well. Non-voice revenue contributed to 40 percent of the total industry revenue, while VAS services contributed to 25 percent of the total industry revenue. Total revenue contributed by the telecom industry in China for Q1 was RMB 277.08, an increase of 13.6 percent since last year. Japan, which was the fourth country in the world to introduce LTE, led by DOCOMO, has an estimated market size of $200 billion for mobile operators alone, with $20 billion in network investments.

The Middle East, which was also hit hard by the recession, has been seeing gradual, but steady growth for its telecom industry, with broadband figures set to grow by 25 percent, with mobile operators in this region driving new revenue streams through fixed mobile broadband services. Mergers and acquisitions and industry consolidations are also set to play a major role in 2011-12 in the Middle East. Many transactions including the Airtel-Zain deal and Etisalat-Zain deal have kept the telecom sector in this region stable. 3G and the introduction of new services as well as the growth of MVNOs in the region are also expected to give a boost to the Middle East telecom market in the coming months.


The Africa telecom market, which has about 400 million subscribers till date, is expected to generate $12-15 billion by 2012, in terms of telecom revenues, led by data and rural voice services, according to market research firm, McKinsey. Telecom services in the continent contributed $40.5 billion in total revenues in 2009. With Airtel Kenya and Safaricom competing to expand urban and rural wireless and fixed line network in Africa, and introduce 3G services shortly, this market is also expected to grow. As the number of mobile subscribers and demand increases in this region for new services like m-banking, many new telecom operators are also looking to invest in this market. Airtel has tied up with Ericsson, Huawei, Comviva and IBM to expand its managed services and network infrastructure in this region recently, and invested $1 billion to expand its network operations in 16 African countries.


However, profits for telecom handset manufacturers and equipment vendors globally, have seen a drop due to unbalanced growth  with high demand in South Asia, but a drop in demand in the recession-recovery-mode US and UK. Among these, Nokia and Huawei have taken the biggest hits, with Samsung and Apple gaining increasing market share globally, and Ericsson managing to stay stable.


While the ICT world has seen a number of surprising deals in 2010-11 concerning strange bedfellows with the likes of Microsoft-Skype, Microsoft-Google, Microsoft-Nokia, Airtel-Zain, and more. One reason for the increase of such unlikely deals in 2010-11 may have been due to the recession, wherein M&As and consolidations prove cost-efficient and resourceful in terms of sharing R&D for better output. Globally, ICT companies like IBM, Cisco, HP, Avaya and Alcatel Lucent have been steadily cutting down on their human resources strength, which is also a remedy to save costs. Bharti Airtel in India recently merged its mobile, fixed line, broadband and DTH divisions, cutting down staff and bringing in centralized control, in an effort to cut rising costs.


Fears of another global economic slowdown may lead to a further tightening of assets by downsizing staff and merging units of a company. While this may be good news in terms of increased industry collaboration and M&As, a slowdown in R&D spend and a drop in demand for telecom software and equipment may lead to a decline in emerging technologies like 4G and LTE – as well as slower 3G adoption in Asian countries, like India. While the smartphone and tablets market is on a rise, with total smartphone shipments in 2010 were 302.6 million units, up 74. 4 percent from 2009, according to IDC, and is expected to grow exponentially in the next few years, recession may well see a drop in these numbers as well. The BPO industry, which has seen marginal recovery from mid-2010, may also suffer yet another jolt, with MNCs withdrawing resources and investments in emerging nations. Mobile advertising, which is still low globally, investors still not having totally recovered from recession, may plummet even further, in case of another global meltdown.


Though the US economy downgrade by one agency is subject to debate, the American economy’s reliance on China will have a telling impact on the stability of dollar. Fluctuation in dollar will put more pressure on telecom equipment prices. The pace of consolidation will increase in a crisis hit economy.


The good news is that experts in the telecom industry are seeing no reason to fear a threat as yet. With steady investments in R&D, growing handset sales, increased demand for telecom equipment and software and growing telecom services, it is business as usual in this part of the world.


By Beryl M

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