Assignment 1: International Trade – MTN South Africa
MTN’s INTERNATIONALISATION STRATEGY
Incorporated in 1994, MTN Group Limited is a multi-national telecommunications group offering voice and data communications products and services to individuals and businesses. MTN has GSM licenses in 21 countries and internet service provider businesses in 13 countries, spanning three continents. The company has its headquarters in South Africa. At the end of 2010, MTN Group had a turnover/ revenue of ZAR114.7bn equivalent to GBP9.6bn
MTN has already become and can be described as a significant player in the global telecommunications industry. Its dominant presence in Africa and the Middle-East cannot be overlooked.
In 1994, M-Cell, the parent company of MTN, incorporated in South Africa and owned 25% of MTN Holdings. This was the year in which the country democratically elected Nelson Mandela as president; the year in which apartheid was officially ended in the country. Between the years 1995-1996, MTN Holdings underwent internal restructuring as it continued to provide mobile phone access to its customers in South Africa. M-Cell converted to a public company and MTN Holdings bought up the service provider M-Tell.
The years 1997-1999 saw MTN expanding internationally into Africa as it acquired licenses in Uganda, Rwanda and Swaziland. M-Cell also increased its stake in MTN Holdings to 72%. In 2000, MTN acquired a national GSM license in Cameroon while M-Cell acquired the remaining shareholding in MTN Holdings from Transnet. 2001 saw MTN acquiring National GSM 900 and GSM 1800 licenses in Nigeria at the cost of $280 million and launched operations in August 2001. M-Cell acquired CITEC, a tier-one internet service provider (renamed MTN Network Solutions in May 2002) to increase the range of data service provided to corporate customers.
In 2002, M-Cell was renamed MTN Group Limited to reinforce African presence and awareness of the brand. MTN Nigeria also committed to the construction of a 3400 kilometre long countrywide microwave radio transmission backbone called YelloBahn. In 2003, MTN Nigeria secured a $395 million loan to fund further expansion of its infrastructure in the country; and MTN published it’s first sustainability report. 2004 saw MTN celebrate its 10 years of operation recording 10 million subscribers, and in 2005 this figure was increased to 14 million. In 2005, MTN’s total investment reaches GBP630 million as it opened office in Iran in April that year.
In 2010, MTN’s turnover hit ZAR 114.7 billion. The company’s geographical reach was to 3 continents – Africa, Asia (Middle East) and parts of Europe. MTN has commanding shares in operations in 21 countries namely:
South and East Africa (SEA): South Africa, Swaziland, Botswana, Rwanda, Uganda and Zambia.
West and Central Africa (WECA): Nigeria, Cameroon, Benin, Congo Brazzaville, Cote d’ivore, Ghana, Guinea Conakry, Guinea Bissau and Liberia
Middle East and North Africa (MENA): Afghanistan, Cyprus, Iran, Sudan, Syria and Yemen.
It’s Staff strength as at 2010 was 34,558 employees. MTN’s main competitors are varied in the countries its services are deployed. In Nigeria, its largest market, its main competitors are Globacom, Bharti Airtel and Etisalat. While in other parts of Africa they include Bharti Airtel, Vodacom, Orange, Virgin Mobile (in South Africa), 8ta, and Cell C amongst others.
Since its incorporation in 1994, MTN has been driven by its vision to be the leading telecommunications provider in emerging markets. The company’s background in South Africa strikingly began with the end of apartheid and the accession of Nelson Mandela to the presidency of the country in 1994.
Technology has been the biggest driving influence on MTN as it is a mobile telephone and data services company. Indeed technology propels and is the basic lifeblood of MTN.
DRIVERS OF MTN’s INTERNATIONALISATION.
MTN’s vision is to be the leader in telecommunications in emerging markets. This was its main motivation in a recent bid to grab a foothold in India by integrating with either of the two leaders in the Indian telecom sector – Bharti Airtel and Reliance Communications. Such a deal would have moved MTN from being the “…world’s 13th largest mobile operator” (Divya Narain, 2009) to the position of the 3rd largest (in terms of revenue) after Vodafone and British Telecom (Financial mail, 12 October 2009). The deal failed because of pricing, structure and regulatory issues (ibid.). MTN in order to fulfill its vision has an expansion strategy that includes the acquisition of thriving firms in the telecoms industry of countries in which it has permission to operate in. This is precisely the method it used to enter and gain market share in Ghana with its acquisition of Investcom limited which owned Scancom, the operators of Areeba – a thriving mobile operator in the country. In Iran, MTN also acquired 49 percent of the company Irancell now referred to as MTN Irancell in 2005. It is also being mulled that MTN plans to acquire 51 percent stake of rival Vodacom Group in Vodacom Congo. (TeleGeography, 18 Oct 2011). The former “CEO Phuthuma Nhleko said its future expansion would probably take the form of mergers and acquisitions owing to the limited number of licenses on offer (Creamer T. 2008).
Another driver of MTN’s expansion strategy is “fairly” unique product. In its entirety, 3G network is not specific to MTN but prior to 2009 in emerging market mobile operators, it was not very common. As at 2009, India, the world’s IT powerhouse had no 3G network. MTN has this technology and is leveraging it to deploy it to its countries of operation in Africa and the Middle-East.
Another factor that has also played a role in MTN’s meteoric expansion is saturated domestic market. The South African mobile market in which it operated in was getting saturated and as such, expansion was the only way to go. With mobile penetration in South Africa hitting 44.5 million in 2009 (cellular-news, 21 January 2009), MTN had no option but to go international.
The liberalistion policies in the telecom sector of several countries provided MTN with opportunity for its internationalization and market expansion. For example, it took the liberalization of the mobile phone sector in Nigeria with the opening up of avenue for competition with the monopoly state corporation NITEL for MTN and Econet Wireless to initially compete for market share in the country. As more countries open up sectors of their economies for private sector completion, more companies from without can expand into these countries. This has particularly been the case with MTN.
MTN’s marketing strategy derives from its corporate vision to be the leading telecommunications provider in the emerging markets. Its approach to branding is a monolithic brand architecture strategy.
MTN aims to continue offering added value through its services and products. MTN’s strategy is consumer focused and product led. The company is continually developing new products and services which utilize the latest technology.
The company strategy also involves participating actively in sponsoring programs and events that its customers are most passionate about. In Africa and parts of the Middle East where it operates, football is the most prevalent and sought after sport. It is more than just a sport in several African countries; it is a unifying factor in countries with diverse populations and ethnicities. With this in mind, MTN, to reach its customer base through football in Africa, sponsored the 2002 and 2004 Confederation of African Football (CAF) Awards; and was the title sponsor of the 2006 and 2008 Africa Cup of Nations; and in 2010 sponsored and got the exclusive rights to mobile content for Africa and the Middle East as well as global marketing right of the 2010 FIFA World Cup – the highest laurel and tournament in world football.
Also, the company’s recent sponsorship of Manchester United Football Club in order to have exclusive rights to offer mobile content like match highlights, player profiles and ringtones gives it a medium of endearing itself more to its millions of football enthusiasts.
Apart from football, the company also sponsors several sustainability initiatives in countries it operates through the MTN Foundations, this Corporate Social Responsibility (CSR) or Corporate Social Investments (CSI) is aimed at improving the living conditions and wellbeing of its customers to build “the type of societies in which we and our customers can thrive” (MTN Foundations, 2011). The CSR framework initiatives of the company revolve around Health, Education and Culture.
CONSTRAINTS TO MTN’s INTERNATIONALISATION
One of the major constraints to MTN’s internationalization is the presence in the Eastern European and South American markets of more established and prominent global mobile operators. As its former CEO Phuthuma Nhleko stated when talking about MTN’s expansion alternatives, “you also have to take into consideration that South and Central America is already dominated by fairly large players…” (Christy Van der Merwe, 2008). Owing to the scale of presence in the emerging markets of Eastern Erope of large telecom companies as Vodafone, Mobitel, T-Mobile etc. and in South America of Telcel, Telefonica etc. the company MTN is restricted from advancing into these markets in line with its vision for emerging markets. As a result, the best opportunities for MTN then remain the Asian markets as the African market saturates.
In Ruiz Vazquez (2009), the following were enumerated as the restraints to internationalization of mobile operators. These have particularly been true in the case of MTN:
a. Financing is difficult to secure
b. Competition might appear quickly if the market opportunity is good
c. Specificity of local market conditions makes assessment difficult
d. Lack of stable regulatory regimes
e. Liberalisation of telecom markets is a slow process
f. Extension of WLL is precluded for lack of backbone infrastructure
g. Low per capita incomes in most developing nations.
Because of the limited scope of this essay, one would only look at a and g as they appear to be the ones that affected MTN most in its expansion drive.
On Friday 9th March 2012, MTN announced plans to invest $1bn to boost its operation in Africa’s most populous country and its largest base of operations, Nigeria. “‘MTN Nigeria will spend $1 billion capex on optimization, building the fiber network, improving transmission capacity, building more base stations and substantially increasing the capacity of its network,’ said Funmilayo Omogbenigun, a spokeswoman for MTN Nigeria” (Nigeriannewsservice.com, 2012). This is in addition to investments it has made in the past to boost infrastructure in the country since setting up some ten years ago. Indeed, investment in the telecommunications industry is usually prohibitive. This has been a major constraint to MTN’s expansion as it has had to move a lot more slowly than it would rather have had its spending capacity been higher.
The success of MTN’s operations in Nigeria saw the prompt entry of other operators to compete for market share. The initial competitor Econet Wireless has been acquired and changed ownership four times over the past decade. New entrants like homegrown Globacom and foreign operators like Etisalat, Bhati Airtel, Zoom, Starcomms etc. all came into the scene to compete for the mobile and data market in the country. This competition for market share has not been limited to Nigeria but also in other African countries where Orange, Bhati Airtel, Vodacom and local network operators have arisen to jostle with MTN in its markets.
Motivations for trade – New markets, new ideas, cheap labour, natural resources and exotic products.
Importance of foreign trade:
1. Optimum resources usage
Thanks to the specializations, the line consisting of unproductive resources can be traded with to another country to get rid of that resource wastage along with ripening fruit. Channelizing of resources ensures that only highest return causing product remain on the list. Well! Once in trade, that waste product is not a “waste”, not anymore, since it’s filling up the country’s coffers and that’s what the economists want.
2. Specialization and labor division
Global level trading leads a country to specialization and labor division. Since some countries know how to carve out raw resources while others know how to carve out a diamond from each out of them. This leads to a situation where the country with resources exports those raw materials trades with the country which is specialized in handling a certain type of product, thus benefiting the both.
3. Price Equality
Once a product gets out to be traded internationally, its prices are dependent on the supply and demand ratio. But once it holds its footsteps in that steep stepping point, the struggle takes the shape of standardization of the product everywhere along with its price. Furthermore, standardized prices further lead to a more stabilized ratio in supply and demand chain.
4. Quality Goods
The international trade is extremely competitive one where there might be more than a dozen other brands promoting the same kind of product, says a true but bitter truth. Therefore, for maintaining the market of the product, a country that’s honest with its economy would really prefer quality over quantity.
5. Multiple Choices
Foreign trade lets the customers gain advantage from the competitive environment since to keep with the expectations of their loyal customers and getting even more, each country would try to devise a solution that’s perfect for consumers. So in other words, consumers get a huge variety to choose from.
6. Generating employment opportunities
Increased labor and resource mobility leads to an even higher demand for new employees, especially the import sector is what which is going to need most of it. And this not ends here just at imports. In fact, it does affect other sectors of the economy also like industries for putting the imported products to good use or service sectors that help in easing the reach of the products to the public.
7. Raising the living standards
Living standards of the inhabitants of a country greatly improve if they are let to lay their hands on awesome imports. Since people have got a choice and that’s of choosing what’s good for them and because of better quality imports, this choice of theirs become even more meaningful.
8. Economic development
A country’s economy is highly facilitated by imports and exports. That’s because the imports provide that nation with better and more advanced technologies as well as capital goods with the help of which economy’s all sectors get more chances to grow and increase their influence while decreasing their dependencies on each other. On the other hand, exports can provide you huge income that can either be used to power up a national level project or something else.
9. Natural Calamities
Although, the human is weak and is unable to stop natural calamities but that doesn’t mean he’s unable to minimize its disastrous effects. Natural calamities like famine, floods, earthquakes, etc. lead to the shortage of goods that are essential to sustain life. That’s where foreign trade comes in as a savior and lets the affected country exchange the resources for the foods and medicines to recover from the effects as quickly as possible.
10. Maintaining payment solution balance
During the trade, the country has to keep the payment processing in quite a balance. Or better said, keeping imports as low as possible and putting most of its extra resources as export. The main reason behind that concept is obvious since the greater number of imports causes a huge drain on country’s economy. If its imports grow out than it can handle, then the economy of the country collapses, and that’s not a good thing for sure.
•1630, Thomas Mun: “…to increase our wealth…sell more to strangers yearly than we consume of theirs in value”
2. Absolute Advantage
•1776, Adam Smith. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it
•If two countries specialize in production of different products (in which each has an absolute advantage) and trade with each other, both countries will have more of both products available to them for consumption
3. Comparative Advantage
•1817, David Ricardo – Even if one country has an absolute advantage in producing two products over another country, trading with that other country will still yield more output for both countries than if the more efficient producer did everything for themselves.
•The country with the absolute advantage in producing both products would still produce both products, but less of the one they would trade for, allowing them to essentially allocate more resources to producing the product that they’re comparatively most efficient at producing
•Assumes many things: ?Only 2 countries and 2 goods
?No transportation costs
?No price differences for resources in both countries
?Resources can move freely from producing one product to producing another product
?Constant returns to scale
?Fixed stock of resources
?Free trade does not affect production efficiency
?No effects of trade on income distribution within a country
•There are some descriptions of potential outcomes of relaxing some of these assumptions, but I’ll leave this as a thought exercise for you, the reader
4. Heckscher-Ohlin Theory
•1919, Eli Heckscher and 1933, Bertil Ohlin – Comparative advantage arises from differences in national factor endowments, such as land, labor, or capital, as opposed to Ricardo’s theory which stresses productivity
•1953, Wassily Leontief – The Leontief Paradox – theorized that since the U.S. has abundant capital compared to other nations, they would expor capital-intensive goods and import labor-intensive goods. Data showed that was not the case.
•Therefore, Ricardo’s theory seemed to be more predictive.
•However, controlling for technological differences (e.g. eliminating them) does yield a predictive model based on factor endowments
5. The Product Life-Cycle Theory
•1960?s, Raymond Vernon – attempts to explain global trade patterns. First, new products are introduced in the United States.Then, as demand grows in the U.S., it also appears in other developed nations, to which the U.S. exports. Then, other developed nations begin to produce the product as well, thus causing U.S. companies to set up production in those countries as well, and limiting exports from the U.S. Then, it all happens again, but this time production comes online in developed nations. Ultimately, the U.S. becomes an importer of the product that was initially introduced within its borders.
•Weakness – Not all new products are created in the United States. Many come from other countries first, such as video game consoles from Japan, new wireless phones from Europe, etc. Several new products are introduced in several developed countries simultaneously
6. New Trade Theory
•1970?s – Via the achievement of economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods. Further, the ability to capture economies of scale before anyone else is an important first-mover advantage.
•Nations may benefit from trade even when they do not differ in resource endowments or technology
•Example – If two nations both want sports cars and minivans, but neither can produce them at a low enough price within their own national markets, trade can allow each to focus on one product, allowing for the achievement of economies of scale that will increase the variety of products in both countries at low enough prices
•Example – Airbus spent $14 billion to develop a new super-jumbo jet. Demand is estimated at 400-600 units over the next 20 years, and Airbus will need to sell at least 250 of them to become profitable in this line of business. Boeing estimates the demand to be much lower, and has chosen not to compete. Airbus will have the first mover advantage in this market, and may never see competition in this market segment.
•New trade theory is not at odds with Comparative Advantage, since it identifies first mover advantage as an important source of comparative advantage
•Debate – should government provide subsidies that spawn industries such that companies can gain first mover advantages? Later chapter (and blog post) covers this.
7. National Competitive Advantage – Porter’s Diamond
•1990, Michael Porter – seeks to answer the question of why a nation achieves international success in a particular industry. Based on four attributes: ?Factor endowments ?Basic factors – natural resources, climate, location, demographics
?Advanced factors – communication infrastructure, sophisticated and skilled labor, research facilities, and technological know-how
?Advanced factors are a product of investment by individuals, companies, and governments
?Porter argues that advanced factors are the most significant for competitive advantage
?Demand conditions – if customers at home are sophisticated and demanding, companies will have to produce innovative, high quality products early, which leads to competitive advantage
?Relating and supporting industries – If suppliers or related industries exist in the home country that are themselves internationally competitive, this can result in competitive advantage in the new industry.
?Firm strategy, structure, and rivalry ?Different nations are characterized by different management ideologies, which can either help or hurt them in building competitive advantage
?If there is a strong domestic rivalry, it helps to create improved efficiency, making those firms better international competitors
•Porter also notes that chance (such as new breakthrough innovations) and government policies (such as regulation, investments in education, etc.) can influence the “national diamond”
Implications for Managers
•Location – productive activities should be done in the location in which it is most efficient
•First-mover implications – “the idea is to preempt the available demand, gain cost advantages related to volume, build an enduring brand ahead of later competitors, and, consequently, establish a long-term sustainable competitive advantage”
•Policy implications – lobbying for or against free trade or government restrictions.
•It’s in a firm’s best interest to invest in upgrading advanced factors of production; for example, to invest in better training for its employees and to increase its commitment to R;D
•Businesses should lobby for investment in education, infrastructure, and basic research and any policy promoting strong domestic competition
Cellular-news (21 Jan 2009) Retrieved from www.cellular-news.com/story/35620.php
Creamer, T. (2008) MTN mulling acquisition prospects in South-East Asia. Engineering news. Retrieved from http://www.engineeringnews.co.za/article/mtn-mulling-acquisition-prospects-in-south-east-asia-2008-03-19
Divya, N. (2009) Strategy Analytics: Future Holds challenges for MTN. Retrieved from http://africa.tmcnet.com/topics/othercountries/articles/67689-strategy-analytics-future-holds-challenges-mtn.htm
Financial Mail (12 Oct 2009). MTN mulls growth strategy. Retrieved from www.bizcommunity.com/article/410/78/40863/html
MTN foundation (2011) MTN Foundations. Retrieved from http://www.mtn.com/Sustainability/csi/Pages/csi.aspx
Nigerian News Service (2012) MTN says to invest $1 bln in Nigeria network. Retrieved from http://www.nigeriannewsservice.com/nns-news-archive/news-blocks/mtn-says-to-invest-1-bln-in-nigeria-network
Ruiz Vazquez, Juan (2009) Analysis of market entry strategies of European wireless operators into underserved markets: the case of Telenor. Retrieved from http://www.vernimmen.net/ftp/Analysis_of_Market_Entry_Strategies_of_European_Wireless_Operator_Into_Underserved_Markets.pdf
TeleGeography (18 Oct 2011) MTN considers Vodacom Congo Acquisition www.telegeography.com/products/commsupdate/articles/2011/10/18/mtn-considers-vodacom-congo-acquisition/
Van der Merwe, C. (2008) MTN still looking for consolidation opportunities. Engineering News. Retrieved from http://www.engineeringnews.co.za/article/mtn-still-looking-for-consolidation-opportunities-ceo-2008-08-28