Bharti Airtel – Pioneers of a Successful Model

The story of Bharti Airtel Limited is the story of success and efficiency.  What is the root of their success? Is their competitive advantage is sustainable? Is this a case of the best personnel, the best strategy, the best infrastructure, or something else? With competitors like Tata, and others, how does a mobile operator maintain an advantage  in the telecom sector of India, and the rest of the world?   Let’s take a look:

HUMBLE BEGINNINGS.

Bharti was founded in 1976 as a manufacturer of bicycle parts. Today they are one of the most respected business is in the  arena of  mobile telecom operators.   In addition, still provide financial services, a retail operation, and foods according to Bharti’s website.     When Bharti originally decided to answer the telecom market,  the goal was to take advantage of the large customer base and the emerging market status to India offered.   However, such a market cannot be served effectively with existing products, services, or business models;  instead, the grim prediction tends to be very low margin businesses which requires minimal capital expenditures and operating expenditures. Without offering an  Extremely low-cost  and low-margin business model, it would have been impossible to  launch a sustainable telecom product in India.  The ambition of Sunil Mittal, chairman of Bharti Enterprises, in the early 2000s was to offer point-to-point mobile telecom service that is cheaper than the cost of a postage stamp.  Mr. Mittal  is a original founder of the bicycle parts manufacturing company, and  has maintained role  as chairman and CEO without pause.

A NEW TELECOM MODEL

In a typical operation is planned for a telecom provider, or any phase focuses on network requirements above all else. This is traditionally the largest capital expenditure, but also becomes the basis for any company’s competitive advantage as the business grows. Since the early days of telecom, the basis of this exercise is a projection of how many minutes were used on a network. Then, the company also needs to project where those minutes will begin geographically and where they will end up geographically, or in technical terms what are the origination and termination points of these minutes. Based on the traffic projection, a company can typically figure out the bandwidth required, the point of interconnection required, and the equipment required. For obvious reasons, this exercise needs to be done extremely well because if the network is under belt, then the customers will experience poor quality and network outages, and if the network is overbuilt then the company will have too much CapEx to manage and will find it very difficult to make a profit. The trick to doing this exercise with the intense level of accuracy requires is a wealth of historical data.  So if a company has seen a 1% annual increase in its traffic from New Jersey to London every year for the past 10 years, for example, if it’s a pretty safe bet to predict that your network requirement will grow by 1% next year.  The ILECs and PTT’s have that luxury, but at its inception Bharti did not.   Sunil Mittal, chairman of Bharti Enterprises,  understood the challenge, and realized he had to do something different.

Here is how he did it:

One of the first rules of any competent business manager is to understand the core competencies of the company. In the case of Bharti Airtel, its core capabilities were understanding customers’  needs and building brand value.   Nowhere in this short list of competencies is forecasting and engineering expertise, despite the fact that these competencies were at the core of every other telecom player.  Mr. Mittal  had a choice to make: attempt to stretch the core competencies of Bharti Airtel t these additional competencies, or to stick to his game plan and find other companies to supplement the skills that Bharti lacked  at the risk of deploying a largely untested model within telecom. He chose the latter.

“When the proposal was originally put on the table,” said Mittal, “most of our board members’ jaws dropped, and they thought we had gone crazy.”

After significant due diligence process,  Bharti Airtel chose to  higher some of the well-known global equipment vendors and service providers to ensure quality services, including: Ericsson, Nokia, and Siemens, which were  the key telecom network-equipment vendors at the time.   Also, it deftly chose IBM to build and manage the IT network.  But the art of these partnerships was not in the name brands they hired, but in the business structure that govern these relationships.   Each of these vendors were paid as service vendors, not operational vendors. Whereas a typical equipment manufacturer would sell the various routers and compression equipment needed to run a telecommunications network, after the sale the vendor need only support that equipment when it breaks which is a service that was typically sold as a maintenance contract which was added to the price of the sale. The transactions between Bharti and its vendors  use an entirely different model: service only.

The vendors for telecom network management were paid only for the capacity utilized by Bharti Airtel, not for the equipment.

As a result, its fixed costs in capital expenditure  were essentially converted to a variable cost based on usage of capacity and revenue from services.  Some call this the “virtual corporation”

According to Vijay Govindarajan, Professor of International Business at the Tuck School of Business at Dartmouth,

“Bharti Airtel offers mobile telecom service at $.01 to $.05 per minute, perhaps the lowest in the world. Despite very low prices, Bharti has enjoyed compounded annual growth in sales revenues of 120 percent and growth in net profits of 282 percent per year between 2003 and 2010. Its market cap has steadily grown over the same period and stood at around US$25 billion as of April 30, 2010.”

Bharti Airtel’s innovative business model has now become the norm not just in India’s telecom industry but also in the telecom industries of several other emerging and developed countries. The company is an example of how innovation can originate from a poor country — a shining model of reverse innovation.”

This strategy paid off handsomely over the course of the last five years as the backbone of the entire worldwide telecom network has moved quickly from a TDM protocol to a voice over IP (or VoIP) protocol.  As many of its competitors were writing off hundreds of millions of dollars worth of TDM and other legacy telecom equipment, Bharti simply revisited its existing vendors and added some new ones to keep up with this cost-saving trend.

Last June, with Bharti’s acquisition of Zain, Bharti took its biggest steps to date  to export its business practices and methodologies. The deal,makes Bharti the world’s fifth-largest mobile-phone operator by subscribers.   More importantly, it gives Bharti the access to Africa,  which it has sought for many years, allowing it to tap a market with  similar attributes to  the Indian mobile industry, which Bharti now dominates.

“The acquisition provides Bharti with meaningful growth opportunities in Africa, which still has relatively low mobile phone penetration, and an opportunity to improve Zain Africa’s relatively lower EBITDA margins,”

– Standard & Poor’s credit analyst Mehul Sukkawala.

As recently as this week, Bharti is working with three partners deploying (roughly) the same model to expand its domestic mobile network in India from 2.5G to 3G. These partners include familiar names from its earliest days in telecom: Nokia, Ericsson. In addition, Bharti has added Huawei Technologies to Roll Out 3G.   read more…

By way of disclosure, Bharti Airtel is a client of the data division of our company: GW Tracker. Bharti is one of the 16 largest telcos in the world which use this product. This did not impact my article.

© 2010 David Schropfer
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