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Huawei Technologies

2005.10 8
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Te inception of portal websites, the explosive popularity of instant
massaging, and ourishing of Internet search engines like Google and
Baidu, as well as the now common use of commercial C2C business
operations, pioneered by eBay and taobao.com... Te advance of a
new idea has always created a signicant impact on the world at large
and may bring the bearer of that novel idea his or her rst pot of gold.
Opportunities usually lay hidden in the shadows somewhere, unnoticed,
waiting to be discovered, which means that we should keep a sharper eye
out for new business opportunities.
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JAN 2009
.
ISSUE 46 24
The global financial crisis
and telecom operations
By Liu Nanjie
On a global scale, investment and economic
development are proportional to the GDP as a
whole. It is predicted that in the next two to three
years, the GDP of many countries will see negative
growth or a slowdown. Te impact on information
spending varies with the commercial environment,
aecting about 5% of the real economies, which is
quite signicant.
History shows that the shortest lifecycle of a crisis
is at least two years. Whats more, this crisis is so big
that the foundation of the global economy shook
and the tremors have no where near subsided and
will reach places far and wide.
As a traditional sector, the telecom industry is
intertwined with other industries and being in a
transformational period, it is difficult to escape
the crisis. Once the telecom industry gets into a
recessionary cycle there will be stronger impetus
for market share and more needed capital. It can be
predicted that 2009-2010 will mark a very dicult
and crucial period for the entire industry.
Industry chain feels the pain
Te telecom industry follows the typical growth
Far-reaching effects of the
world financial crisis
onsulting rms estimate that total losses
directly related to the current financial
turmoil are in the range of 15-20 trillion
USD, or the equivalent to a drop of 1/3
in the GDP of the worlds major economies (such as
the G-20). Te worst part is that it will take at least a
year for the domino eect to play itself out.
Real estate prices can continue to fall in the U.S.,
China and other parts of the world. Economic
indicators look grim for the U.S. and Europe, and
the Japanese economy also has trepidation. As
investment slows down, so does disposable income,
while living costs rise with inflation, home values
decrease and credit tightens up.
For the past twenty years, the development of
science and technology and wealth creation has been
following the Dow Jones Industrial Average. Most
fast-growing companies (especially IT and telecom
companies) are fed by capital infusion and need a
healthy global economy. With the current downturn
of the macro economy, these fast-growing companies
might get stopped in their tracks.
C
Growing big in niche markets 31
Business model innovations in cloud computing 34
The new social networking arena 28
Do Rei Me An exploration of CRBT operations 36
JAN 2009
.
ISSUE 46
Strategy New opportunities
model of investment and consumption. The U.S.
dollar-based economy has a direct eect on more than
60% of investment and nancing in this sector. Europe
and other developed markets have been hit hard by
the U.S. subprime lending crisis and are stuck paying
the bill for defaulted mortgages and loans. Tese losses
will gradually be seen in the diminished expansion and
growth cycle of some markets in the next few years.
Some operators are involved in subprime lending,
exotic banking instruments, high investments and big
risk taking. Tey raise the prices of their own stocks,
apply for bank loans, and then push their stock prices
even higher to raise more money by leverage. Market
demand is articially exaggerated and amplied which
can cover potential problems. Cut-throat competition,
new licenses, small size, high PE, and financing
diculty can easily pop the growth bubble, especially
during the current crisis.
In many countries, traditional telecom infrastructure
has been excessively developed, and the saturation of
remaining markets has reached critical mass. Bubbles
have also emerged in the traditional operations market.
Ination rates are notably higher in emerging markets
than in developed countries, and ination may get out
of control in some emerging markets. In some regions,
due to slowdown of GDP growth, telecom operators
will have weakened investment ability and willingness
to do so. Only the strong will survive if there is a
negative growth rate of -5%.
Telecom investments largely consist of financial
capital or sovereign wealth funds, with an emphasis
placed on long-term returns. If the markets are stagnant
and the economic downturn is chronic, investors
cannot see expected returns and they will slow down
or stop investing, particularly during transformation in
the early stages of telecom development when balance
sheets are still in the red.
The financial storm will expose the contradiction
in the transformation of the traditional telecom
industry, and the contradiction between the saturation
of per capita access demand and per capita bandwidth
demand. It will correct the course of bad investing
as in the past, bringing more attention to per capita
bandwidth, and cause some market bubbles to burst.
Correct choices will be more crucial with no room for
excessive and inecient investments.
The growth of market demand will slow and
customers wi l l reduce procurement, l eadi ng to
a dramatic decrease in operating income for the
IT and telecom industries. Financial institutions,
large enterprises, and governments are always large
consumers of telecom and IT, spending heavily to
replace equipment and upgrade networks each year.
Te nancial crisis will make the nancial chain tauter
and lead to more complex embedded restrictions.
Since 2008 Q3, more than 90% of enterprises
around the world have experienced negative year-on-
year growth. 43% of enterprises have started to cut
IT spending, and 49% of financial institutions have
started to reduce IT budgets. Almost all enterprises
have started to cut expenditures in 2008 Q4. In
2009, all enterprises will invariably cut their expenses.
Due to various reasons, downsizing has begun in
the information industry and around 10% of the
total workforce have lost their jobs, and this is in an
industry where the number of employees has already
been declining.
As governments tighten up monetary policy and
financing costs increase, over-expanded and fragile
links of the industry chain will run the risk of their
nancing drying up. Tis is especially true for newly
established companies that rely on venture capital
and many of them happen to be the anchors of
future supply chains. They will bear the brunt of
25
The global fnancial crisis and telecom operations
Huawei Communicate
JAN 2009
.
ISSUE 46 26
Liu Nanjie: PhD, in Networking and Telecommunication Engineering, winner of the National Youth
Natural Science Fund, and a senior expert in Strategy and Marketing at Huawei Technologies.Dr. Liu has
extensive expertise in such elds as telecom economics (like Bit Economics), business modeling, Internet
service operations, NG-Infocomm, NG service networks, communication ngerprinting (network DNA),
marketing intelligence (MI) & planning, value chain, competition and cooperation.
the trauma. As credit and loans become
dicult to obtain and liquidity drops, the
traditional telecom industry will see slow
development.
Multinational operators must also face
the risks of exchange rates and inflation,
because their revenue is generated in local
currencies. Due to the impact of the US
dollar economy, most countries have
experienced inflation (depreciation of
currencies). As a result, most multinational
operators revenue started to decrease
in 2008, and revenue from operating
companies wil l continue to drop. At
the same time, multinational operators
oper at i onal bas el i ne i s r i s i ng wi t h
associated growing costs. Job-cutting and
other cost reduction measures become an
inevitable choice.
At present, l i ght-asset compani es
are in a better position than the heavy-
asset ones, because the latter have more
links that require cash, and they have
to mortgage their high-quality assets
to get sufficient amounts of cash for
survival. Large quantities of outdated
networks, inventories, accounts receivable,
redundant staff, old product lines, non-
protable businesses, and non-liquid xed
investments will become big burdens for
enterprises with aged assets.
Riding out the storm
In developed countries and regions, as
informatization provides notable support
for (i n devel oped appl i cati ons and a
high penetration rate), broadband and
application growth. Despite the impact
on the real economy, the digital economy
(characterized by low cost and innovation)
wi l l be si gni f i cantl y sti mul ated and
developed, creating new growth spaces and
opportunities for innovative enterprises. In
this scenario, the digital economy becomes
a buer between the virtual economy and
the real economy, and provides a new
impetus for the GDP.
In emerging markets, there is stil l
considerable impetus for the development
of mobile services. But the evolution
from the per capita access model to the
per capita bandwidth model will take
place ahead of schedule because per capita
access is essentially saturated all over the
world. The financial crisis will expose
over-construction in some developing
countries where construction was based on
outperforming the sti competition. Tis
will trigger more rational development
of the telecom industry, and promote
the cohesive development of services
and applications, making it essential to
adjust the traditional capital expenditure
(CAPEX) model.
The cost of debt and inflation will
dramatically increase an operators cost.
Financing will become a precondition
to contract signing for operators both
in developed and developing countries.
Operators wil l al so adopt l ight-asset
operation models, putting greater pressure
on equi pment vendors to adopt new
models like managed service and capacity
service.
Consumers will not give up mobile
voice or xed broadband for now. Internet-
related applications and solutions like
mobile broadband and mobile Internet
devices (MID)/PC-like terminals, will
become the new stars. In the terminal
market, the high-end and the low-end
segments will become the focus; iPhone,
GPhone, and simplified black-and-white
terminals will become primary choices for
most people.
At least in the next three years, the
traditional CAPEX wil l experience a
CAGR of -3% - -4%, which forebodes a
turning point for industry transformation.
When revenue from voice services and
traditional CAPEX cannot cover operators
total cost of ownershi p (TCO), new
services and new investment will become
new opportunities and breakthrough
points.
Si nce t he f i nanci al s t orm began,
Mergers & Acquisitions (M&A) have
decreased with a corresponding drop in the
price of assets. VC/PE rms have reduced
the capital stock. IPOs are dormant. Stock
markets are slack. Trading of cash and cash
equivalents is brisk. At this point, although
M&A takes place between operators, the
outcome is not teaming up to overcome
di f f i cul ti es as wi shed. Because cash
shortage plus cash shortage still equals cash
shortage, and the result of weak plus weak
is death.
M&A has gone f rom of f ensi ve to
def ens i ve, f rom s i ze expans i on and
business diversication to the acquisition
of more wi nter cl othes to make i t
through the cold, bleak times. M&A
deals concluded after the crisis began are
generally cash transactions and prices are
very low. Almost like a pawn shop where
the seller cant redeem the merchandise.
Te seller gets cash for selling high-quality
assets cheap, while the buyer obtains a
mortgage or cash equivalent that they can
let appreciate and cash, namely a mortgage
of a long-term loan. This is the basis
behind the universal depreciation of the
entire industry including the reduction of
market capitalization.
I n t he pa s t f e w y e a r s , t e l e c om
equipment vendors have posted a decrease
in gross profits, which, to a great extent,
resulted from the migration costs required
by the development of G/U networks. In
JAN 2009
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ISSUE 46
Strategy New opportunities
27
a sense, it signifies the relative economic saturation
of markets. Mobile penetration rates are quite high
in many countries. Competitors can only increase
overall market capacity by trading in the market or
encouraging new investments.
In the next few years, the financial positions of
operators and equipment vendors will not allow this
phenomenon to go on, and there are no more technical
or business reasons to convince operators to adopt a
migration policy to improve competitive conditions.
CAPEX, i ncl udi ng s uppor t i ng i nf r as t r uct ure
investment will notably decrease.
Only companies with robust business models
that provide present and future value for customers
can survive. At this time, customers need valuable
services more than ever and most valuable services and
applications are now Internet applications. Revenue
from Internet-related services will show stronger
growth and anti-recessionary features during this
financial crisis. These services include digital media,
digital media entertainment, digital property rights
trading, digital advertising, search, e-commerce,
wireless Internet, MID, intelligent Internet devices
(IID) and mobile broadband communities.
The i ndustry i s experi enci ng fast, fi ery, and
profound changes that go beyond our expectations.
We are living in the age of Web 2.0, where users are
contributing content and networking socially. Telecom
operators should take note and follow the trend to
weather the storm.
During the crisis, operators will need to focus on
revenue generating units (RGU). Only Internet-related
services can yield high revenues at a low cost. Operators
will cooperate with more partners in the value chain to
share costs, and team up with successful dot-coms to
gain revenue and create more data applications to meet
new enterprise customer requirements.
Opportunity in adversity
Te nancial crisis will expedite the transformation
of the tel ecom i ndustry, resul ti ng i n the qui ck
transition from the per capita access model to the per
capita bandwidth model. As a result, the concept of
information consumption and the digital economy
will be fully validated in the market. Through years
of cultivation, market demand has exceeded growth.
Informatization has become essential to the bottom
line and to peoples lives.
Tere is still solid market demand. In particular, a
large number of capital-driven startups hold immense
power for content creation on the Internet where there
is no governing body. Tey are creating fresh demand
all the time and there is no substantial decrease
in their demand for broadband Internet. During
previous crises, some history-making companies
emerged. Google rose during the end of the IT
bubble period, and Apple survived and prospered
by evolving its product line and promoting Internet
services. To ambitious people, a crisis actually spells a
rare opportunity or as Napoleon once said, I create
opportunity.
Governments worldwide have unveiled economic
incentives. Implementing governmental investments
and consumer stimulation policies requires the
assurance of information networks and IT systems.
Consumer spending and retailing are moving away
from brick and over to click. Among traditional
industries excluding pure resource industries, only
digital industries receive little or no impact and still
achieve growth.
New information consumption models, mobile
broadband, and Internet applications will become the
highlights of growth. New-business handsets (terminals)
also show a greater value for users. For example,
Internet voting and online campaign advertisements
accounted for nearly half of the total spending during
the 2008 U.S. Presidential Election. Telecom has
certainly entered an age when sales are driven by
services and terminal applications.
Although the financial crisis is extending from
developed markets to emerging markets, operators can
be well positioned to protect themselves by promptly
changing business models and gaining more revenue
from information consumption. In China, a 4 trillion
RMB (approx. USD583 billion) government plan
can help oset the impact of reduced telecom and IT
spending. Chinas industries are still in the preliminary
stage of informatization and there is still significant
space for development and imagination.
History reminds us that a number of new-type
enterprises and new business models will emerge after
each crisis. The mobile broadband Internet industry
will shine during this period of innovation. Creating
new businesses and grasping new opportunities are
very likely to be the recipe for success.
During the crisis, to address increased operating
costs and outdated networks, operators need to
streaml ine their organizations and cut back on
investment and spending. Meanwhile, they need to
cooperate with dot-coms and seek new opportunities
to expand business scope, shifting from telecom
services to information services.
If operators can eectively avert risks and roll out
new valuable solutions at the right time to create long-
term service value exclusively, they can turn difficult
times into an opportunity.
Editor: Xu Peng xupeng@huawei.com
The global fnancial crisis and telecom operations