Sunil Bharti Mittal

1. Sunil BhartiMittal Is he a strategist?

2. Bharti into Retail with Wal-Mart

3. Why Retail? • Late mover • Very limited front end retail stores • Currently, focused on cash & carry

4. Is this how Sunil Mittal operates? • His approach towards Airtel • Choose speed over perfection • First mover • “Get big fast” • The strategy in retail seems to be different!

5. About the Indian Retail Industry • Largest industry in India – employment of 8% and contributing to around 10% of the GDP. Currently at $500 billion • The organized retailing sector in India is about 4-5% and growing. • Next wave of growth expected to be driven by semi-urban and rural India • Large number of retail players • Weak and fragmented suppliers • Regulation – • 100% FDI is allowed in cash-and-carry wholesale formats • 51% FDI is allowed in single-brand retailing

6. Critical Success Factors What are the critical success factors in retail? • Low cost • Scale • Location(s) • Ability to navigate through the system • Regional and cultural differences

7. What's the Rationale? • Achieve low cost via • Develop ecosystem of suppliers • Better supply chain management • Logistics • Bargaining power with FMCG manufacturers • Scale • Leverage JV partner • Location • Bharti Realty • Acquisition of 10 million sqft by 2015 • Low-key entry in a small way in Ludhiana, Punjab

8. What's the Rationale? • This JV is a winning combination. Wal-Mart's logistics skill and Bharti's execution capability will create a potent force in the Indian market • He needed expertise more than money. Hence, Bharti is investing $2.5B • Contrast with Singtel: Money & telecom expertise • Contrast with Warburg Pincus: Money & financial expertise • Contrast with Subiksha • Went for low cost (good strategy, in principle) • Did not have mechanism to achieve low cost • (Assumption: No conspiracy)

9. Airtel DTH

10. Again, not typical • Last mover in DTH. • DTH has adoption problems • Unrelated to Airtel’s existing businesses • What has GSM in common with Satellite DTH from an infrastructure point of view?

11. Television viewing Market Total market - 70 million television homes catering to 400 million individuals

12. DTH Industry • Big four private DTH players has made a head-start. DishTV, TataSky, Big TV and Sun Direct • Intense price war • Weak financials (all are in loss) • Lack of exclusive content issue • Foreign Investment cap – • DTH: Foreign equity cap of 49% and within that FDI component cannot exceed 20% • Cable: Foreign equity cap on cable industry is at 74% with no limit on FDI • Satellite transponder capacity • Quality of service issue

13. The Logic • Current DTH market is 8 million subscribers and expected to grow to 40 million by 2015 • The industry is evolving • Airtel’s DTH strategy • Integrate its operations with mobile phone, internet and TV and bundle these services • Leverage existing distribution channels and customer service • Provide larger dish antenna to provide higher QoS • Customer switching from existing provider might be difficult • But, what about rural market? • Is it a strong logic for being a late entrant in DTH market? Did he miss the opportunity at the beginning?

14. The Rhetoric • Airtel wants to be in all three screens • Mobile • PC • TV • Is it strategic or motto driven? • Or is it the market potential (just as in retail)?

15. Formative business years

16. 1976 to 1984 • Very complex import and export policies, industrial licensing regime. Licenses were required right from manufacturing a pin to manufacturing a car • People who found favor with the government could get industrial licenses. The entrepreneurs had to find out small openings in various government policies and move ahead, every now and then turn lucky. • In 1976, Sunil at age of 18, with a capital of 20K, started making Bicycle parts.  From 1981 to 1984 he took an agency of Suzuki to import portable generators. Imports became very successful. Made a lot of money and more importantly, set up a large distribution system across the country • In 1984 due to lobbying two business houses(who managed to get licenses to manufacture generators) the government decided to ban import of generators. No amount of pleading or lobbying by a young entrepreneur would have made any difference. So overnight there was no business.

17. Valuable lessons learnt ? • Did Sunil learnt his valuable lessons from his initial ventures ? • “These were the times when entrepreneurs were at the mercy of government policy, and you always had to be prepared, sitting in your hot seat, to take a jump and plunge into something else as soon as the government hit you with a change in policy.”

18. Entry into Telecom

19. Why telecom? • Mittal saw the huge gap between potential demand & supply from state run telecom companies • Reforms in telecom sector began in 1980 followed by national telecom policy in 1994 & 1999 • Technology advances in 1990s led to better quality of service at lower tariff rates – beginning of a service which could be marketed to the Indian urban masses, and then rural masses • NTP 1994 attempted to provide telephone on demand & telecom services at affordable prices to the Indian populace, and this policy further encouraged Mittal to get into telephony.

20. Why telecom? • NTP 1999 further reformed the telecom sector with guidelines for internet telephony & broadband • Booming industry in India required high end services like leased lines, ISDN & videoconferencing

21. Outsourcing of Network and IT by Bharti Airtel

22. Unconventional wisdom ? Outsourcing of Network • When every one said network is the critical factor to a telecom service provider Bharti decides to outsource its networks • Do reverse of conventional Wisdom • Does Sunil know the Telecom Business like Baba Kalyani knew Forging ?

23. How Much Did Airtel outsource on Network? • Sept 07 – Extended the contract with Ericsson for $2B. This is Ericsson’s biggest contract award to-date • Ericsson will design, plan, deploy, optimize, and manage BhartiAirtel's GSM network across 15 regional "circles" in India, as well as its pan-India pre-paid platform across 23 circles • Sep ‘07 - BhartiAirtel revealed plans to award a $900 million GSM network expansion contract to Nokia Siemens Networks

24. Goal in 2004Rapid Growth • Airtel wanted to grow From 8.2 million subscribers in 2004 to 25 million by 2007

25. Insight: Breakneck growth means average revenue from Users is going to go down Actual ARPU Data validates this

26. Question Set#1 • How to drive down operating costs faster than rate at which ARPU will go down? • Can Bharti Airtel run the network and IT and still drive down costs? • Should they outsource? • What are the risks? • Is this core, non-core or something else?

27. Question Set#2 • If AirTel keeps Network in house, can it deploy and grow fast enough to keep pace? • Is outsourcing better suited for Growth?

28. Outsourcing: Practice in search of Theory • It is not about “core” vs “non-core” • Rationale • Cost minimization • Resource access • Resource leverage • Risk diversification Paper by: SouravMukherji J Ramachandran

29. OutsourcingDecision Rule • If P market + TC > CP in-house + OC, • activities should be conducted in-house and • If P market + TC < CP in-house + OC, • activities should be outsourced. • Reputation capital can be used as a hedge against opportunism

30. Rationale for AirTel’soutsourcing decisions • Cost minimization • Drive costs down faster than ARPU • Resource access • Ability of network vendors and IT majors to rapidly ramp up capacity (difficult to acquire for AirTel, might delay time to market)

31. Decision Rule Applied • P is expected to be competitive. • TC is non-trivial, at least initially • SLAs that are comprehensive • Oversight bodies from AirTel. • Reduced to extent that the vendors also want this to work. • CP in house is expected to remain above P. • Deciding factor seems to be OC (in house). • Bharti needs to grow employee strength and network management capacities at break neck speed. Learning is impediment, may delay growth and therefore time to market. Vendors are good at this.

32. Risks and mitigation strategies • Risks: • Being held hostage to vendors • If it fails – go back, loss of learning etc. • Mitigation: • Use of reputational capital • Only biggies: IBM, Ericsson, Nokia Siemens, Alcatel-Lucent. • Oversight bodies • Architecture review board • Watertight SLAs

33. Did it work? We think it did : Operating cost as a percentage of average revenue per user is showing a steady downward trend. If P market + TC > CP in-house + OC, activities should be conducted in-house and If P market + TC < CP in-house + OC, activities should be outsourced.

34. MTN DEAL

35. MTN Deal – Attempt I • May 2008 Time frame – First attempt • MTN Group is a South Africa-based multinational mobile telecommunications company, operating in many African and Middle Eastern countries. • The structure had envisaged Bharti Airtel becoming a subsidiary of MTN and exchange of majority shares of Bharti Airtel held by the Bharti family and Singtel, in exchange for a controlling stake in MTN • Pulled out because • Structure proposed by the MTN board would not have been in the interest of Bharti Airtel's minority shareholders and • Obstacle to its plans for growth as an Indian telecom multinational.

36. May 2009 Time frame – Second attempt – $23Bn merger Create a company with Annual sales of $20 billion and 200 million subscribers. MTN would take a 36% stake in Bharti, which would hold 49% of MTN. Bharti would have substantial participatory and governance rights in MTN enabling it to fully consolidate the accounts of MTN Companies continue to operate under their respective managements MTN Deal – Second Attempt

37. MTN Deal - Structure • Bharti had said it would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of 86 rand in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts for every MTN share acquired • In combination with MTN shares issued in part settlement of MTN's acquisition of approximately a 25% post-transaction economic interest in Bharti, would take Bharti's stake to 49% of the enlarged capital of MTN. • Each GDR would be equivalent to one share in Bharti and would be listed on the securities exchange operated by Johannesburg Stock Exchange.

38. MTN Deal – Going Global • Indian market at its peak, Boom in telecom sector but perceived to decline in 2-3 years • BAL as the Indian leader wants to continue to grow • Emerging S Africa Markets very similar to India 6-7 years back. Mobile telephony is in nascent stage. ARPU Higher. • So, great potential to grow into S Africa and the Middle east. MTN in 21 countries. • Increase the reach. Be the Biggest telco in the world. • Limited integration risk as the two companies have almost no overlapping operations

39. Bharti - Synergies • Combined Co to benefit from economies of scale as it would become a leading emerging market telecom operator • MTN's operating experience in • 3G and • Number portability • Help him avoid the clutches of Indian telecom regulators • Rows over the matter of spectrum allocation remain unresolved and the rollout of 3G services is long delayed. • MTN would benefit from Bharti's experience of growing market Share and maintaining operating margins in a highly competitive environment – cost efficiencies

40. MTN Deal – Going Global - Hurdles • Counter Offers by Competition. • RCom was also bidding for Merger with MTN. • Similar deal in Vodacom, which is owned by Vodafone • Unions against it in S Africa • Foreign holding stake is 65+% Limit is 75% • $4Bn for the deal. 3G bid also needs this much • Debt Pressures in short term

41. KEY DATA ABOUT BHARTI

42. 1985 to 1991 – Telephone manufacturing • 1985 - Entered into technical tie-up with Siemens AG of Germany for manufacture of electronic push button telephones 'Beetel‘ and reached a peak sales of 5 million • 1989 - Tied-up with Takacom Corporation, Japan, for manufacture of telephone answering machines • 1990 - Tied-up with Lucky Gold Star International Corporation of South Korea for manufacture of cordless telephones • 1991 - OEM Contract with Sprint, USA for manufacture and export of telephone sets

43. 1992 to 2001 – Formative years of Telecom Major • 1992 - Formed a consortium with SFR-France, Emtel-Mauritius and MSI-UK, to bid for cellular licenses for metropolitan circles under Bharti Cellular. • 1994 - Cellular license for Delhi circle obtained. Launched AirTel next year. Launched cellular services in Himachal Pradesh in 1996 • 1995 - Formed a consortium with Telecom Italia-Italy to bid for cellular and fixed-line services under Bharti Telenet. • 1996 - Telecom Italia, Italy acquired 20% equity interest in Bharti Tele-Ventures.

44. 1992 to 2001 – Formative years of Telecom Major • 1997 - British Telecom joined the consortium by acquiring equity interest in Bharti Cellular. Formed a joint venture, Bharti BT, for VSAT services. Bharti BT Internet, for providing ISP services In 1998. BT consolidated its shareholding in Bharti Cellular to 44% • 1998 - First Indian private fixed-line services launched in Indore, Madhya Pradesh • 1999 - Warburg Pincus, invested in in Bharti Tele-Ventures and acquired a controlling 32.26% effective equity interest in Bharti Mobile (formerly JT Mobiles), the cellular operator in Andhra Pradesh and Karnataka

45. 1992 to 2001 – Formative years of Telecom Major • 2000 - SingTel invested in Bharti Telecom and Bharti Tele-Ventures. Entered into joint venture with SingTel for a submarine cable landing station between India and Singapore • 2001 - SingTel, Warburg Pincus, AIF, IFC, NYLIF and Seejay Cellular made equity investments, of approximately US$ 481.30 million in Bharti Tele-Ventures and through Bharti Telecom • Acquired licenses for eight cellular circles , four fixed-line circles , three additional ISP • Restored the Punjab cellular license, Acquired 100% equity interest of Bharti Mobitel (formerly Spice Cell), the cellular services operator in Kolkata circle and 95.3% Bharti Mobinet • Acquired back all equity from British Telecom in Bharti Cellular

46. 2002 to 2009 – Growth Story • 2002 - Bharti Tele-Ventures files for Initial Public Offering • 2003 - Airtel becomes India’s first mobile service to cross the three million customer mark • 2004 – Outsourced IT to IBM, first-of-a-kind business transformation agreement in global Telecommunications industry • Bharti migrates all 15 cellular licenses to Unified Access Service License • Bharti Tele-Ventures crosses Rs. 5,000 crores revenues for the year - Earns net profit of over Rs. 600 crores for the year

47. 2002 to 2009 – Growth Story • 2004 - Bharti & Siemens join hands to build & manage AirTel networks in three circles • 2005 - Airtel completes its 23 circle all India footprint • Bharti announces agreement with Vodafone marking the entry of the World's Largest Telecom Operator into India • Bharti Enterprises & DE Rothschilds announce a 50:50 JV for export of fresh fruits & vegetables

48. 2002 to 2009 – Growth Story • 2006 – Gets into AXA life and general insurance • 2007 - Partnership with Vodafone to roll-out telecom services in Channel Islands (Europe) • Bharti Airtel awards network expansion contract to Nokia Siemens and Ericsson • Bharti Enterprises and Wal-Mart join hands in wholesale cash-and-carry to serve small retailers, manufacturers and farmers • 2008 - Airtel makes its television debut - Set to redefine home entertainment with Airtel digital TV • Bharti Airtel launches Triple Play with Airtel digital TV interactive – Telephone, Broadband and now TV on a single line • Bharti Airtel and Alcatel-Lucent form Managed Services Joint Venture for Broadband and Telephone Services • “Hello Sri Lanka” says Airtel

49. 2002 to 2009 – Growth Story • 2009 - Bharti Airtel launches Triple Play with Airtel digital TV interactive – Telephone, Broadband and now TV on a single line • Bharti Airtel and Alcatel-Lucent form Managed Services Joint Venture for Broadband and Telephone Services

50. Bharti Group Companies • Bharti Airtel • Bharti Teletech • Telecom Seychelles • Comviva Technologies Ltd • FieldFresh Foods Pvt. Ltd • Bharti Retail • Bharti AXA General Insurance