Bharti Airtel in Africa

Q1) What are the managerial opportunities and challenges that firms face
when they wish to enter emerging markets? What are the key success factors?

Emerging markets in the recent years have become the integral players in
current world economy. For any business the next big opportunity seems to
rest with the emerging markets as the growth slowed down in US and
Europe. As there are growth opportunities so are enormous challenges
associated with these opportunities.
Strong growth opportunities: Superpowers of the world emerging from
recent recession are likely to face slower growth. The recession of 2008-09 is
far behind but the aftereffects still linger and are
expected to keep markets on the
edge in the near future. However the
emerging economies are still on the
track of strong growth and most
have rebounded well from the
recession years. Also as these
economies are mostly export driven,
hence pose opportunities with strong
inflows of capital and investment.
Near future growth is forecasted to
be strong and in fact it has been predicted that the next 70% of the
worlds growth in the next several years will come from emerging markets.

Increasing income and decreasing poverty: Economic mobility in the

emerging markets is leading to economic stability. Poverty has fallen
drastically in several countries like India and Brazil and per capita income
has been constantly increasing. Overall inflation has drastically reduced
hence creating potential markets for growth.

Challenges for the firms:

Vastly different political and economic conditions in the emerging
economies can be an issue. Like Africa has different policies and
regulations in majority of the countries hence making it challenging to
run a business in consolidation.
Cultural differences within a single economy requires efforts from the
businesss side and also drives up cost of hiring suitable talent.
Other issues like weak associations, safety and corruption can be a
potential dissuader to the investors whereas it also makes the working
environment challenging.
With vast geographies, these markets have more differentiation in
terms of overall growth potential for any business.

Key Success Factors:

Investing in proper market analysis: Firms must carefully assess their
potential markets-sometimes addressable might be smaller than the
total market. Segmenting and targeting should be done judiciously.
 Tailoring and suiting the local conditions: Many aspects of the firms
offering might need an update according to the local taste and
preferences to better serve the target customers.
Developing local infrastructure: This can lead to economies of scale
and hence cost reduction
Building local key stakeholder relations is of utmost importance to
invest for lonf term profitability.

Q2) Critically examine the factors that led Bharti Airtel to acquire Zains
operations in Africa. What are potential sources of synergy?

For several months Zain group had been looking for a suitable buyer for its
assets in Africa and on the other hand Sunil Bharti Mittal had been looking
for an African venture for two years. He tried to negotiate with MTN twice
but it didnt work out. In 2010 Airtel finally acquired Zain Telecoms
operations in 15 countries excluding Sudan and Morocco. Following factors
led Airtel to acquire Zain telecom:
This acquisition gave Bharti Airtel its much desired presence in Africa
making it worlds 5th largest wireless company
This acquisition broadened Airtels reach which was earlier restricted
to Asia and Indian ocean region
Bharti Airtel got access to 470 million African population, out of which
only 1/3rd carried mobile phones, hence imparting huge potential for
growth
Airtel estimated the combined business to have $13 billion value
The combined business was expected to have around 180 million
customers, generating EBITDA of $4.7 billion estimated on $12.4
billion revenues.
Bharti was a nearly debt free company by the end of 2009 with net
D/E of 0.05 and hence there was low financial leverage
Bharti had used the high volume low cost model successfully in India
and become the market leader. With Africa sharing similar traits as
India , the market was expected to respond in the similar way
Capex with Indian operations had started to decline, Airtel had free
cash flows and so it decided to invest in potential high growth market
Penetration levels in Africa were only 33% with ARPU of around $8-
$12 as compared to $4 in India

Potential sources of synergy:

Lot of benefits in form of value added services from Zain telecom and
potential for greenfield expansion
 Airtel inherited some very useful services in Zains product portfolio
like ZAP, which would let Airtel drive the digital revolution in Africa
Africa was the next big market for telecom hence expanding there
would widen Airtels risk portfolio

Q3) What factors led Zain to sell? Would a strategic alliance have been
feasible between Bharti Airtel and Zain?
Zain was performing extremely poor in Africa. Even after putting all the
efforts it was not able to sustain and was up for sale for quite some time.
Zains Africa relative EBITDA was low and falling every month. The morale of
employee at Zain was very low which was affecting their performance. The
company was making losses and Bharti was paying a good amount for the
acquisition. Zain was aware of the ways the business works in Africa and
could foresee that the deal offered by Bharti was quite good. For Zain it was
a very fantastic deal and the best they were getting. Zain made $10.7billion
from this deal.
As per our understanding a strategic alliance would not be possible because
there were not many complementary things between the two companies
which could be leveraged with the alliance. In fact, after the takeover Bharti
changed the way the operations used to work at Zain to the outsourcing
model. An Alliance would have been possible if the companies could leverage
from each others strengths but in this case the strengths were not
complementary to the extent that the alliance could have been successful.

Q4) What are the key risks and challenges that Bharti Airtel faces in Africa?
There were several risk and challenges that Bharti Airtel faces in Africa. The
same are mentioned below:

Morale of employee at Zain was low

Infrastructure was poor. Hardware and software equipments were
obsolete
Access to equipment supplies was limited
Skilled technicians were is very short supply
Cost of doing business was coming higher than expected by the
company
Nigeria was Africas largest market and in that market MTN was
improving the quality of its services and providing other value added
services such as mobile payment solutions, conceptualizing
applications such as mobile healthcare to hold its position of market
leader
The plan that the company was following in India i.e. investing in
rural network and slashing tariffs was getting risky if because there
 were chances that the demand fails to pick up. This was a very big
risk.
Launch of mobile number portability in 2012 was also a challenge to
retain the customer base
Talent shortage in Africa was a big challenge and getting the talent
from India to work in Africa was getting difficult. The aspirational
countries of people working in India was Europe or America. Other
than this in India they were getting better opportunities thus to bring
them to Africa was costing lot more than expected. The roles were
tailored for them to be meatier and aspirational.
There were lot of cultural differences in this company and the way
people work in Africa was different from the way they work in India. In
Africa people like to maintain their work-life balance but in India
people are more hardworking. Because both Indians and Africans
were working simultaneously because of these cultural differences
there was issue in the bonding between the employees which was
ultimately hampering the productivity and the growth of the company.
Leadership style of people in Africa was different from Indians which
also posed challenge in bringing the synergy.
The logistics system in Africa was poor and it took lot of time in
transporting material from one place to another. At some places the
material was being transferred by using helicopters or elephants. The
entire logistics was posing a challenge as the cost of transportation
was rising.
The country was exporting almost all the construction material such
as cement etc. and thus the cost of setting up a tower in Africa was
almost 60% - 70% higher than in India.
The core business strategy of Bharti was posing a challenge in Africa
because outsourcing was difficult. Bhartis partner firms were based
in Middle East but none was headquartered in Africa. These firms
were comfortable in doing business in Africa in transactional basis not
on contract basis.
In India single company, Indus Tower was formed for tower sharing
but in Africa Bharti had to set up 16 different corporate entities to do
the same which increased the complexity of the operations.
Distribution challenges were also very daunting as monopoly was
there in this field.
One of the biggest risk and challenge was very low loyalty of
customers as they use to carry multiple sim cards with them and use
to change their preferences in no time based on the status of the
network.
Q5) Is this a successful acquisition? Use the C3 model to evaluate the venture.

Corporate advantage: After Airtels arduous encounters with MTN, even

Bharti-Zain deal comes with its fair share of problems: high acquisition rate
paid by Bharti to acquire an entity that was loss making, objections by
minority stakeholders as well as Govt of Congo and Gabon, cultural misfit
etc. But with all these hardships there was a huge untapped market and
potential for growth and profitability. This deal imparted Airtel its much
coveted global recognition making it the 7th largest mobile group in the
world .

Competitive advantage: The competitive advantage from this deal is that

Bharti is getting a settled network base in Africa and is getting very close to
reaching its EBITDA target from this deal. By this deal it increases its
network span and increases the customer base of the company by
customers who will give 36M in revenue and are spread across 15 African
countries from Sierra Leone to Madagascar. If Bharti could successfully use
its business model in Zain that it will have a great edge over the competitors
and as the African market is quite competitive it is important to expand to
beat the competition.

Business strategy: Airtel wanted to replicate its high volume low cost telecom
model in Africa as it had previously done in India. The fact that African
demographics replicated India in many ways gave way to believe its
possibility.

Implementation/Control: Airtel had all the plans in place for creating a

market out of the huge African population. Regims and regulations were
taken care of according to the various geographies and cross cultural work
environment was maintained to culminate cultural differences.

So in all it was a successful acquisition.