For all the grief plaguing its telecom business, Vodafone India's pleasant, straight-talking chief executive Marten Pieters still wants to dwell on the ways in which the Indian company is becoming better and need for it to emulate Hindustan Unilever to come across as "more Indian." The message is implicit: India remains central to Vodafone's plans.
One hint of why that is so can be found in the 2012-13 annual report of Vodafone Group — the £44.4 billion (Rs 4,00,000 crore) company that has 404 million subscribers in over 30 countries. India is one of the few among them that is not only showing noteworthy growth, but also expanding profitability
Another hint comes from the results of its India arm for 2012-13 — the best year for India's number two operator in its five years of tumult. Pieters admits India's improving performance — and though he doesn't say so, the overhang of the tax case — might have rescued a bitter separation. "Despite all the other spectrum, tax, fines and fee problems, we remain a growth engine for the global business because we have been able to innovate and perform operationally so well," says Pieters.
Vodafone India's financial showing for 2012-13, announced in May, goes against the receding tide the sector is trapped in. At a time when most telecom companies, including market leader Bharti Airtel, are seeing an erosion in margins, Vodafone has delivered an expansion in its operating margin of 3.4 percentage points, from 26.3% to 29.7%.
"Vodafone was always more urban-centric," says BK Syngal, former chairman of VSNL and presently consultant at Dua Associates, a telecom consultancy. "Having captured high-end customers, they then went to expand reach, whereas Bharti, from day one, went to secure the highest number of users. That is why Vodafone always enjoyed a higher ARPU (average revenue per user)."
For Pieters, the latest margin expansion is a minor milestone as he enters the fifth year of his India stint, making him the longest-serving among the current lot of telecom CEOs in India. It's a stint that has been characterized by legal and regulatory run-ins on the one hand, and the onerous challenge of turning a patchwork of a company into a whole on the other.
When he left Vodafone, the last ones being in its Africa operations, Pieters was on an early retirement. Being in a minefield of an operation was the last thing on his mind.
Turning many Vodafones...
Yet there he was, on a holiday in Spain in early-2009, being wooed back by the UK-based leadership of Vodafone to steer the Rs 20,000 crore operation in India acquired in May 2007. Pieters replaced AsimGhosh, who had been the CEO of Hutchison Essar, the Indian company Vodafone acquired, from the start and had pieced it through a series of acquisitions.
Hutchison Essar started operations in Mumbai in 1995, with the Max Group as its partner. In time, it acquired businesses — and, by extension, circles: Essar Group in 2000; AirCel Digilink in 2003; Loop Mobile in 2005-06. Along the way, it also entered new circles on its own.
In 2007, when Vodafone bought out Hutchison's 67% stake for $10.7 billion, the Indian company was operating in 15 circles. "We were used to an acquisition and amalgamation culture because, with Hutch, we had done it so many times ourselves, albeit on a smaller scale," says Sunil Sood, chief operating officer of Vodafone India and the only member on the management committee from the Hutch days. "So, when Vodafone came in, we knew what to expect."
Pieters' mandate was to structure and streamline Vodafone India, expand it quickly and make it profitable. When he came to India, he encountered circles that worked in silos. And he saw a lot of churn. "Every time I went to meet someone for the second time while we were discussing India, they seem to be gone," he says in jest. "Vittorio (Colao, chief executive, Vodafone Group) had just come in, and he was setting up his team at the time and putting people in place accordingly."
The problem with Vodafone India was that it was not registering as the sum of the many parts that it was. Circle heads wielded control and showed a rich, entrepreneurial streak, but they were not plugged into the bigger picture. Further, there was an implicit conflict of interest in some of the reporting structures and relationships. Much of this arose from what Sood calls "double hatting."
For example, Sood was the director of operations, but was also the business head for the Gujarat circle and had the Rajasthan business head reporting to him. In other words, when circle performance was assessed at an all-India level, Sood was competing against the business head of Rajasthan who was also reporting to him!
...into one whole
The task for Pieters was delicate: preserve the entrepreneurial spirit that had become inherent to the company, while drawing a big picture and inculcating a greater sense of logic to decision-making.
Pieters, the CEO, was well-suited to the task at hand. Employees and industry people who have seen him from close say Pieters is open and accommodating, bereft of the baggage of a high-profile CEO. He can embrace the Indian culture and can yet demonstrate a western exactness in being process-driven. He is nimble in his decision-making, and enables freedom and empowerment down the line.
Pieters split the company into four regions, to be controlled centrally by a chief operating officer and a chief commercial officer. He also formed a 12-member management board, and re-jigged roles played by members. "There was no more double hatting of roles after Marten came in," says Sood. "Earlier, one could have a regional role and be the CEO of a circle. We did what the moment called for."
Centralization was also a key theme in Pieters overhauling the Indian company's technology and reorganising its operations. At the same time, Pieters ensured continuing autonomy for several subsidiaries because, "India maybe one country, but it is almost like as many markets as Europe," he says. "Each one has a different competitive situation, a different customer profile. You need local plans and flavours to approach each market."
In the old Vodafone, this may or may not have happened, says a senior official, who has experienced both phases and who did not want to be named. For example, "Price plans were made on an ad hoc basis," he says. "Now, there is a business case for every product/service."
A similar change is seen in how employees are rewarded. "Rewards and recognition were decided by how valuable you were to the management and if there was a risk of losing you," the official says. "No proper market survey or benchmark was undertaken like the Hewitt study that is followed actively now."
Adds Ashok Ramchandran, director - human resources, who joined the company three months before the handover from Hutch to Vodafone: "With Marten came an era where decision-making required data proof and structure." Ramchandran feels Vodafone has managed the transition well—preserving the good and improving on the rest. "Across these years, leadership styles have moved from the earlier predominantly entrepreneurial to a stronger basis for decisions, while retaining the bureaucracy-busting speed," he says.
During this time, Vodafone also became a pan-India player, acquiring licences for the seven circles it was not present in. It stepped up investments — systematically. "Purse strings were loosened and rollout targets started being measured in population coverage. Suddenly, we were adding 1,000 sites a month," says Sood.
In the days of Ghosh, each site's profitability and existing users were evaluated before it was put up. In the new scheme of things, population was used as a proxy for potential. So, if the population was sufficient, a site was set up, irrespective of whether there were mobile subscribers yet or not. "That is also when much of our rural penetration happened," adds Sood.
Ringing in the new
Such expansion led costs to balloon. Compared to urban areas, the incremental cost per rural subscriber is greater as the distance over which the optic fibre must be laid is more, the number of users per tower are fewer, and the average spend per customer are lower. All this happened in the backdrop of Vodafone battling abrasive competition that had more than halved call rates and was poaching intensely, enduring fines, buying pricey third generation spectrum, contesting an income tax case, and battling to renew licences.
Pieters looked for new ideas to improve business performance. One of these saw Vodafone join hands with its two main rivals, Bharti Airtel and Idea Cellular, to form Indus Towers — a jointly-owned company that would provide tower services to all three. Such collaboration was unheard of and everyone in the industry pegged it for failure — the operators would act at cross purposes. Today, Indus is the largest tower company in India, with about 1,10,000 towers, while competitors struggle.
With the voice business becoming commoditized, Pieters felt margins resided in business customers. However, these customers wanted holistic solutions - landlines, network services for computer connectivity and mobile phones. Vodafone entered the businesses of fixed-line services and managed services. Although Vodafone's revenues from this business segment are lower than those for Bharti, it is now able to make a 360-degree pitch.
Bharti versus Vodafone is a comparison that is often drawn. Homegrown versus MNC. Outsourced versus self-managed operations. Churn at the top versus Pieters. Although Bharti is lately being squeezed on the operating margin front, it's making money at the net level, unlike Vodafone. At the operating level, analysts compliment Vodafone for what it has done.
"Vodafone's execution in the market has been excellent," says an analyst who did not want to be quoted as he is not authorized to comment on specific companies. "Its margins tend to be lower because it makes a royalty payout for the brand and some other expensing."
This analyst says that Vodafone is benefiting now by retaining execution, unlike Bharti, which outsources to a greater degree. "This gives Vodafone the flexibility to defer certain expenses and manage some reporting, which Bharti cannot," he adds. "The execution shows because the company, especially now, is eating into Bharti's revenue share and growth."
Calls waiting
For Pieters, his Indian telecom trek is far from over. "When I go back from here, I go back to my early retirement," he says. "But when you leave, you want to leave behinds a nice, neat package for the next person," he says. The package that Vodafone India is today has many edges. One, there's the tax issue, which is caught in government crosshairs. Two, it has to balance its spectrum needs with pricing. Pieters has always said, on record, that Vodafone needs more airwaves and it is willing to buy at a reasonable price.
In the November 2012 auction, besides the companies that had lost licences, Vodafone was the only company to participate and buy airwaves in service areas where it was not essential for it to buy. Three, renewals of its 20-year licences, which begin in 2014 with the three metro circles that drive its profits (Mumbai, Delhi and Kolkata) and are currently in litigation. The government wants companies to pay market price for the spectrum currently held by them to renew these licences, but industry says this is too stiff.
"Between Bharti and us, we have 60% of the share in Mumbai and Delhi," says Pieters. "If you allow these to be shut, the cities will go dark, you won't be able to make calls. Even decision-making will come to a standstill."
To break the impasse, and staying true to Pieters' policy of pursuing legal solutions as well as engaging with government arms, Vodafone has offered to pay Rs 4,000 crore for spectrum to renew two licenses. This is about one-fourth of the reserve price in the last auctions in March 2013, which saw no takers.
Next on his agenda is to sell Vodafone India's shares to the public, which will simultaneously achieve two things for it: find an Indian partner to meet government norms for a minimum 26% shareholding — its current 11% partner, Piramal Enterprises, intends to exit in 2014 — and give the company a greater Indian feel. In this regard, Pieters is gunning for the Unilever model, whose Indian subsidiary, Hindustan Unilever, is increasingly seen as a homegrown company in its own right.
For now, even as it increases its contribution to the parent's balance sheet, Vodafone India is still feeding off it. Pieters hopes he can change the direction of that as he works to make Vodafone India "future fit" before walking away to another early retirement.
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