“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness...”
Charles Dickens’ opening to the novel “A Tale of Two Cities” rings true as the current state of India’s telecom industry. The first vision of India is as the biggest remaining emerging market in the world, rapidly modernizing and going through an industrial revolution bringing about huge opportunities in digital commerce and trade, where local players are bringing in foreign expertise and capital.
But the second vision of India is also there, one with all the disadvantages of an emerging market: fluid and often contradictory regulations; a rent-seeking government, predatory-looking state trying to claw back billions out of the mobile operators; and an industry which is not profitable with its current rock bottom prices.
Investment surge this year
This year, despite India being hit hard by the coronavirus, there has been a surge of investments into Indian telcos. Bharti Airtel’s fundraising of over $5 billion has been overshadowed by a remarkable $20 billion plus spurt of investment into the leading mobile operator, Reliance Jio. Much of Jio’s new money has come direct from U.S. tech multinationals.
Facebook opened the surge in late April with a $5.7 billion investment in Reliance Jio Platforms. It was soon joined by a stellar list of investors, including Intel, Qualcomm, and financial names including KKR, Silver Lake, Vista Equity, and the UAE's Mubadala. Then came close to $4.5 billion from Google.
This will mean that around a third of Reliance Jio Platforms is currently held by investors. The total sum invested in this remarkable clutch of announcements is not far off half the total Foreign Direct Investment made in India in 2019.
The surge of investment comes against the backdrop of souring sentiment of the Indian telecom sector’s viability. India’s mobile landscape has seen rapid consolidation in recent years. It had more than 10 operators a few years back, now it has three. Behind the current market leader Jio, Bharti Airtel and Vodafone Idea have both been struggling financially, with Bharti, which has also raised money this year, better positioned to weather the storm.
The annual income of Indian mobile operators, at around $17 billion, is basically flat.
Vodafone has publicly declined to invest further into its Indian entity. Behind its wavering commitment to the Indian telecom market were two basic issues – one that Jio’s entry had made the mobile business unprofitable, and secondly the company was dealing with an inconsistent and maybe third-world regulatory environment in which mobile operators could find their licenses threatened by capricious, massive new demands for extra payments – in other words, “country risk.”
Vodafone has been hinting it may pull out of India completely, worn down by a tax dispute with the government. This is part of a wider tax issue in which the state wants outstanding tax payments of $13 billion out of the Indian mobile sector.
Why is India investment booming?
What is it about India, with its myriad problems and contradictions, that still excites foreign investors?
One factor is just size. India is undeniably the biggest emerging market opportunity now that China, effectively closed anyway, is maturing. India has recently crossed the $2 trillion level for its economy with ambitions to grow to $5 trillion. The next biggest opportunity, Indonesia, is five times smaller.
There is no doubt that India, along with its rapid economic growth rate, is going through a very fast technological transformation. But not maybe so fast to warrant such special attention. As far as mobile telecom is concerned, the pace is not actually that much faster than in smaller emerging markets across Southeast Asia. According to the GSMA, just over half of India’s population has a mobile phone, and mobile internet penetration is just over a third of the population; this last figure the GSMA forecasts to rise to 46% by 2025.
The investment money is really a bet on Mukesh Ambani, the CEO of Reliance Jio and the richest individual in India.
In fact, the buzz around Indian telecom really focuses just on Reliance Jio. Much of the new investment is at heart a vote of confidence in the vision of Ambani and his management skills in bringing that vision about.
Known for big bang launches along the lines of Elon Musk, Ambani has in less than five years made Jio the biggest mobile operator in India, with around 400 million subscribers and still growing. He bet big on a greenfield 4G network at a time when more conservative telcos were still struggling with 3G. Reliance has invested $20 billion plus in the Jio network and rapidly gained market share by making voice free and data exceedingly cheap.
Ambani sees the industry in a much broader way than a normal telco. Jio wants to be involved in e-commerce and running data centers, in manufacturing some parts of 5G infrastructure, in AR/VR glasses, and across a host of retail businesses.
That’s what attracted this new group of investors. They are not putting their money into a mobile operator as such, they see Reliance Jio Platforms as a facilitator for their own goals in India.
For Facebook, Jio may offer a way, among other things, of getting the WhatsApp payment system into India. India is WhatsApp's biggest market, with around 340 million users. In addition, Jio offers Facebook a way to collect data about Indian users. Facebook will now have access to location data thanks to Jio as well as on how consumers spend their money.
For Google, Jio provides a base for the company's ambitions to make a new, more affordable Android phone. Jio has been the driving force behind the KaiOS operating system. It fits very well with Jio, through whose 4G network poor Indian villagers can livestream video for free on their KaiOS budget phones. Arguably, now is the time for something a bit more advanced but which still sits below standard Android smartphones.
Too big to fail?
The lack of profitability of the Indian mobile industry as a whole has been somewhat ignored in all this. Even for Jio, the operating model was clearly not sustainable, and it had amassed a huge debt pile, making the situation increasingly untenable. The key reason why Jio had been touting around for investors was because it needed to reduce its debt.
With all the new investment, Jio has succeeded in doing that. But while it is true that data charges in India are creeping up slowly, they will need to rise from less than $2/per user per month to at least $3/per user per month for the industry to become more viable.
Reliance Industries, the parent company, has the largest market cap of any company in India, at close to $200 billion, so from the investors' point of view Ambani can be seen as now too big to fail in India. Reliance can also help the U.S. companies navigate the byzantine corridors of India’s policy and regulatory institutions, and the partnerships will effectively provide risk cover.
The China factor
One reason to invest now was to get there before the Chinese. In the Indian smartphone market Chinese manufacturers already have been spectacularly successful, and through OPPO, vivo and Xiaomi they now dominate the market, having pushed out the local Indian players.
While supplying telecom services is more difficult than selling phones, there is now a new twist. The clash in Kashmir between Chinese and Indian troops in late June has produced both a wave of patriotic rejection of Chinese brands and products, and also a government move to restrict use of a lot of Chinese smartphone apps.
There now exists a window of opportunity for American businesses to supplant the Chinese in this market.