For Vodafone, the tough part is yet to come

For Vodafone, the tough part is yet to come
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First Published: Tue, Feb 13 2007. 06 13 PM IST
Updated: Tue, Feb 13 2007. 06 13 PM IST
 Mumbai:Days after Vodafone Group agreed to pay $11.1 billion to acquire control of Hutchison Essar, analysts have begun questioning whether the British management can impose the cost discipline that is second nature to Indians and Indian companies.
Analysts say it is likely to be a major challenge for Vodafone, with its relatively high overhead costs, to sustain the 34% gross profit that Hutchison Essar now earns on a phone call that brings in 2 cents a minute, a small amount by global standards.
It is also a sign of the changing times that the questions surrounding the deal are not so much about Vodafone’s right to enter the market and compete with Indian enterprises as they are about whether big multinationals can handle that competition.
Indian competitors manage to handle huge volumes and offer bargain-basement prices, while still earning impressively fat margins. On Monday, Asim Ghosh, the chief executive of Hutchison Essar, acknowledged that his company’s new owners would be compelled to focus on cost discipline.
“This is a company that works in 36 countries, has got enormously disparate types of businesses in its portfolio,” he said in a telephone interview, referring to Vodafone. “They understand that one size doesn’t fit all. They recognize that there are learnings from India and teachings to India.”
Vodafone’s investment, which is valued at $19 billion once debt is factored in and if it owned the whole company, is costly, said Naveen Mishra, a telecommunications analyst at IDC India, a market research firm outside Delhi.
But he said that Vodafone could recoup that money if it expanded Hutchison’s existing subscriber base by doing what India’s leading companies do best: keeping costs down relentlessly.
“The CEO of Vodafone is also an Indian, so he has an understanding of the Indian psyche and the people around here, and the managers on the ground will still be Indians,” Mishra said, referring to Vodafone’s chief, Arun Sarin. “He already knows—and, if not, he needs to understand—that 70% of the population is still in rural areas, and their psyche and habits are very different from the urban guy.”
Investors and analysts have been wondering if Vodafone is overpaying for the 67% stake in Hutchison Essar. Another concern is whether a company managed from London can master the art of catering to consumers whose average monthly bill is about $9, or Rs396, according to Wireless Intelligence, a data provider.
That is one reason Vodafone will seek to retain its local managers, said Manish Kedia, a spokesman for the Essar Group, the Indian company that currently owns one-third of the cellphone venture and that was outbid by Vodafone.
Ghosh, for his part, seemed interested in keeping his job, though he said it was a decision for the shareholders. “For us, this is our life,” he said. “It’s not just been a job for us; it’s been a calling.”
An executive at the Essar Group, who did not want to be identified because he is prohibited by company rules from commenting on its plans, said Essar was hoping to work out an arrangement to keep its one-third stake and become Vodafone’s partner—despite having unsuccessfully bid against it for the stake controlled by Hutchison Telecommunications InternationalLi Ka-shing. “We would like to continue,” the executive said. International Herald Tribune
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First Published: Tue, Feb 13 2007. 06 13 PM IST
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