Vietnam Telecommunications Report - Q4 2008

Transcription

1 Vietnam Telecommunications Report - Q Vietnam - BMI Industry View - Vietnam - Q BMI Industry View - Vietnam - Q Vietnam - Telecoms - Oct Executive Summary BMI estimates that, by the end of June 2008, the number of mobile customers in Vietnam had risen to over 51.6mn. Our estimates are based on the latest data to be published by Vietnam's Ministry of Information and Communications (MIC), which suggested that there were almost 50mn mobile subscribers in Vietnam at the beginning of June. According to MIC figures, Viettel, which is owned by the Vietnamese military, continued to lead the Vietnamese mobile market with a market share of around 38%. Viettel has a clear lead over the next largest mobile operators, MobiFone and VinaPhone, which had market shares of approximately 26% and 24%, respectively. We have made some further alterations to our forecast for mobile subscriber growth in Vietnam, in order to take account of much stronger growth in the first few months of We now envisage a growth rate of almost 80% for By the end of the year, we predict that the subscriber base will have risen to over 64mn, and that the mobile penetration rate will have reached 73%. It should be remembered that the figures for the number of Vietnamese mobile customers are based on the assumption that the market contains a large number of inactive prepaid users. Competition and growth in Vietnam's mobile sector has been boosted by the recent wave of tariff cuts, which have been introduced by the various operators. Further cuts may follow in the near future, possibly resulting in a price war. Looking ahead, we now predict that Vietnam will surpass the 100% penetration threshold in 2010, instead of 2011 as previously predicted. By the end of 2012, we envisage almost 136mn customers and a penetration rate of almost 147%. Continued customer growth will be supported by a steadily expanding population, as well as the arrival of increased competition and new investment.

2 Meanwhile, according to Vietnam's Internet Network Information Centre (VNNIC), the number of broadband subscribers rose by 37% in the first eight months of By the end of August, broadband penetration in Vietnam had risen to 2%, up from 1.5% at the end of Recent months have seen accelerated efforts to increase the level of investment in broadband technologies and to encourage further take-up. In September 2008, incumbent operator VNPT launched a campaign to promote its 'MegaVNN' ADSL service to fixed-line users. The promotion, which runs from September 16 to October 30, offered free ADSL modem and registration fees for new MegaVNN users and customers who shifted their indirect internet services to MegaVNN on fixed phone lines. BMI continues to believe that broadband subscriber growth will be strong over the next five years. However, we now predict a lower rate of expansion for 2008, envisaging growth of no more than 100% for the year as a whole. By the end of 2008, we forecast a market of almost 2.57mn broadband subscribers (equivalent to a penetration rate of 2.9%). Vietnam Business Environment Industry SWOT Strengths An increasingly competitive mobile sector Impressive growth in mobile and fixed-line sectors during 2007, with subscribers up by 88.6% and 23%, respectively WTO membership in 2007 makes Vietnam a more appealing investment centre -- stronger growth in broadband market could be the result of this Weaknesses Fixed-line sector remains largely monopolised, under the control of Vietnam Posts & Telecommunications Lack of key strategic investors in the sector's main operators Although communications are relatively advanced in the larger cities, many rural areas have little or no access to any telecommunications services Opportunities Increase in competition in the mobile sector will lead to a sharp rise in growth Government approach to liberalisation of the telecoms industry could see entrance of strategic investors such as NTT DoCoMo, SingTel and Telenor VNPT is the latest to launch fixed wireless service, tapping into rural market and therefore joining Viettel and S-Fone Threats Pace of deregulation is irregular Nearly one-third of Vietnam's villages lie in mountainous areas and are without access to telecommunications services; a delay in network expansion could slow potential growth in fixed-line, mobile and internet sectors Number of inactive mobile subscribers is unknown in what is still a market that lacks transparency and reliable data Poor quality of ADSL services and high prices are combining to hold up broadband growth Industry Business Environment Overview - Vietnam - Q Top

3 Vietnam - Telecoms - Oct Business Environment One year since implementing our revised Business Environment Rankings methodology, BMI reviews the changes occurring across the 16 states covered in our latest overview. From the table it is apparent that the most significant alterations have taken place at the top, impacting the position of the developed markets. This has been attributed to a number of factors including regulatory activities, changes in forecasts since the release of full-year data and the impact of the global credit crunch on local economies. Singapore is positioned at the head of the table, up from third spot a year earlier. The country has performed exceptionally well in issues regarding regulation. The Infocomm Development Authority (IDA), its regulatory authority, has sought to develop other areas of the industry (with mobile penetration rates second only to Hong Kong in terms of the region's market maturity), namely the deployment of a high-speed broadband network. This forms part of a 10-year plan to turn Singapore into a world-leading information and communications hub. Japan remains one of a handful of countries not to have seen its position in the ratings change over the course of the year. Standing in second place, the country has witnessed stagnating growth in its mobile sector. The Ministry of Internal Affairs and Communications (MIC) has suggested introducing new competition to the market, with penetration rates yet to reach 100%, through the award of MVNO licenses. This is a strategy that has widely been in use in developed nations across Europe, such as Germany and France, in order to facilitate greater competition and provide choice for customers. Australia has ricocheted up the ratings table from a lowly ninth position in Q407; the country now stands in third place aided by the significant improvements across its country structure. The Australian economy has defied expectations of a slowdown in Q108, after reporting real GDP growth of 3.6% year-on-year (y-o-y), against the backdrop of global economic uncertainty. Indeed, household consumption rose by 4.3% y-o-y in Q108 period, making the biggest single contribution to overall growth. That said, more recent data is beginning to indicate a slowdown in domestic demand, illustrating that the country is not immune to external factors. Meanwhile, not far off in terms of overall telecoms ratings is Hong Kong, which has jumped up two spots to fourth place. Like the other countries ahead of it in the table, and also fifth placed South Korea, Hong Kong's growth is slowing on account of the saturated nature of the mobile market. As we reach the mid-section of the table occupied by South Korea, Malaysia and Taiwan, these are markets that, while boasting maturity levels comparable to those at the head of

4 the table, are held back by the risks to country stability. South Korea and Taiwan face political regional insecurities. North Korea remains the most obvious threat to South Korean politics despite the recent success of the inter-korean summit in October The North, despite its ongoing dialogue with the South, remains unpredictable and heavily armed. Similarly, the Chinese government's threat to invade Taiwan in the event of a declaration of independence remains a major concern for the island. Relations between Beijing and Taipei are likely to be strained by the China's continued military build-up, which has increased the gap in military capabilities between the two. The emerging Asian markets sit at the bottom of the ratings, remaining largely unchanged from a year ago. Indonesia has witnessed a number of new and smaller competitors enter the sector, threatening the market share of larger operators. The lack of growth in the mobile market is a result of high tariffs, beyond the means of most Indonesians. However, with the entrance of smaller operators, and the resulting increase in competition, the Indonesian market is set to grow rapidly in the coming years. Pakistan and the Philippines both maintained their respective rankings of 11th and 12th place over the year. Pakistan has been spurred on by the market's continued growth potential, the excellent performance of investor operators (Warid Telecom and Telenor) and the encouragement of local regulatory authority, the Pakistan Telecommunications Authority (PTA). As for the Philippines, despite launching next generation network services, there has been a distinct lack of interest from consumers. Customers continue to prefer sending text messages, with over 1bn sent a day. This, together with the Philippines heavy reliance on the US economy, has not helped its overall position in our ratings. The country's troubles have been compounded further with oil and food (particularly rice) prices persisting at record highs, and inflation expected to remain elevated for some time yet. This will continue to push costs higher and constrict consumer spending as disposable incomes suffer. Not surprisingly, both PLDT and Globe Telecom are predicting weak 2008 financial results. Making its debut in our ratings is Sri Lanka, which enters in 15 th place, ahead of Thailand but behind Vietnam and Bangladesh. The country has both a mature fixed-line and mobile market, but continues to suffer from high tariffs. Furthermore, there is an apparent lack of competition in the broadband sector, with penetration rates languishing below 1%. Greater regulatory intervention to encourage competition would be welcome, leading to lower prices and a stronger take-up of services. Meanwhile, Thailand sits at the bottom of the table. Developments in introducing telecoms regulatory policies have taken a back seat to the ongoing political situation occurring in the country. While operators have made efforts to deploy 3G services ahead of licences being awarded, this has been pushed aside by the political tensions that have continued to boil over, and potential investors may hold off from entering in the short term. Vietnam Vietnam has moved from 14 th to 15 th position in our latest set of Business Environment Rankings for Asia. The country now sits behind Bangladesh and the Philippines, but

5 ahead of Sri Lanka. In this update, Vietnam receives a lower score in the telecoms market category; this has weakened the country's overall placing. The lower telecoms market score which Vietnam receives in the current update is a refection of increased mobile market penetration and, consequently, reduced opportunity for further growth. Furthermore, much of the recent growth in the mobile sector has been based on the acquisition of prepaid users; in addition to masking high levels of user inactivity, the dependence on prepaid customers has also contributed to weak ARPU growth for the country's mobile operators. Vietnam's telecoms market generally suffers from a lack of foreign investment, with inward investment currently allowed only under certain conditions. Despite the potential for future broadband growth, broadband penetration remains extremely low by regional standards, and investment in alternative technologies such as WiMAX is still in the early stages. Along with its relatively low telecoms market score, Vietnam has a weak score in the regulatory independence category, which is a reflection of the high level of state control over the sector and its leading operators. The country's accession to the WTO should result in further market liberalisation, and we expect to see this start to happen either later this year, or more likely in 2009, when a 33.3% stake in MobiFone is sold to a strategic investor. Under WTO regulations and in accordance with the government's commitments, foreign investors are allowed to participate in joint ventures with domestic companies. A minimum capital requirement has been set out, with VND1.6trn required for a network infrastructure deal, VND500bn for a project spanning at least two provinces and VND160bn for a project covering a single province. The more Vietnam opens up to foreign investment, the more it can expect to attract further investment. FDI pledges amounted to US$47bn from January to August, beating the most optimistic projections. According to Phan Huu Thang, director of the Foreign Investment Agency, FDI disbursement also rose to US$7bn in the first eight months of the year and is expected to reach US$11-12bn for the full year. The top five investors in Vietnam were Taiwan, Singapore, Japan, South Korea and Hong Kong, with top ranked Taiwan having 1,700 projects across various sectors and Singapore having the highest registered capital of US$10bn. Vietnam has attracted high inflows of FDI in spite of its ongoing economic woes. Vietnam's primary attraction is as a base for manufacturing, due to its young -- 50% of the population is under the age of and increasingly skilled workforce. Compared to similar developing countries in the region, wages in Vietnam are highly competitive, amounting to just two-thirds of those found in Indonesia, Philippines and China. With a population of 82 million, Vietnam is also becoming an increasingly popular destination for market-based foreign investment due to its booming consumer market, with foreign retail brands seeking an early foothold. The government has taken extensive steps to attract foreign investment, in particular offering tax breaks and reasonable land rentals in priority areas. Infrastructure has also

6 been improved with plans to build more highways, industrial parks and export processing zones. Table: Business Environment Rankings Limits of Potential Returns Risks To Realisation of Returns Country Telecoms Market Country Structure Independence of Regulator Country Risk Telecoms Rating Rank (Q407 Rank) Singapore (3) Japan (2) Australia (9) Hong Kong (6) South Korea (7) Malaysia (4) Taiwan (5) India (1) China (8) Indonesia (10) Pakistan (11) Philippines (12) Bangladesh (14) Vietnam (15) Sri Lanka (-) Source: BMI Industry Forecast - Mobile - Q Top Vietnam - Mobile - Oct Industry Forecast Scenario Mobile Table: Telecoms Sector -- Mobile -- Historical Data & Forecasts

7 e 2009f 2010f 2011f 2012f No. of Mobile Phone Subscribers ('000) 9,300 18,980 35,805 64,109 87, , , ,793 No. of Mobile Phone Subscribers/100 Inhabitants No. of Mobile Phone Subscribers/100 Fixed Line Subscribers No. of 3G Phone Subscribers ('000) ,360 2,100 3,050 3G Market As % Of Entire Mobile Market e/f = BMI estimate/forecast. Source: International Telecommunications Union (ITU), BMI We have made some further alterations to our forecast for mobile subscriber growth in Vietnam, to take account of much stronger subscriber growth in the first few months of With over 51mn mobile customers at the end of June 2008 (reflecting a growth rate of over 44% for the first six months of the year), we now believe that, by the end of this year, the market will surpass our previous expectation of 56mn subscribers by a large margin. We now envisage a growth rate of almost 80% for By the end of the year, we predict that the Source: BMI Research subscriber base will have risen to over 64mn, and that the mobile penetration rate will have reached 73%. Industry Trends -- Mobile Sector Competition and growth in 2008 has been boosted by the wave of tariff cuts, which have characterised recent operator strategies. Further cuts may follow in the near future, possibly resulting in a price war. Lower mobile service prices are expected to stimulate the growth of dual SIM ownership, as mobile users increasingly take advantage of special offers. Conversely, lower prices will also likely lead to increased customer churn and a higher number of inactive prepaid users. The investment in network expansion and improvement has also had a positive impact on service quality and coverage. Looking ahead, we now predict that Vietnam will surpass the 100% penetration threshold in 2010, instead of 2011 as previously predicted. By the end 2012, we envisage a market of almost 136mn customers and a penetration rate of almost 147%. Continued growth over the next few years will be supported by a steadily expanding population, as well as by the arrival of increased competition and new investment. A number of major international investors -- including Japan's NTT DoCoMo, Norway's Telenor, SingTel

8 and France Telecom -- have all shown an interest in bidding for a stake in Vietnam's second-largest mobile operator MobiFone. Furthermore, Russia's VimpelCom is also expected to expand its presence in Vietnam, through its 'GTel Mobile' joint venture with the Vietnamese government. It should be remembered that the figures for the number of Vietnamese mobile customers are based on the assumption that the market contains a certain number of inactive prepaid users. Meanwhile, our forecast for Vietnamese 3G customer growth is based on the assumption that the first commercial deployments of 3G services will occur in In the early stages of 3G deployment, we do not expect consumer demand to be strong, and envisage just 100,000 subscribers by the end of The cost and availability of 3Gcompatible handsets are expected to be the main obstacles to 3G growth in the early years of our forecast. However, the government has made 3G development a priority, and we believe that this will encourage stronger consumer demand in the latter years of our forecast. We predict over 3mn 3G customers at the end of 2012, which would equate to around 2.2% of Vietnam's mobile user base. It should be noted that these figures are lower than those predicted in our previous update. Industry Forecast - Fixed Line - Q Top Vietnam - Fixed-Line - Oct Fixed-Line Table: Telecoms Sector -- Fixed-Line -- Historical Data & Forecasts e 2009f 2010f 2011f 2012f No. of Main Telephone Lines in Service ('000) 6,480 9,300 11,440 13,028 13,970 14,796 15,620 16,272 No. of Main Telephone Lines/100 Inhabitants e/f = BMI estimate/forecast. Source: International Telecommunications Union (ITU), BMI research. Our current forecast for the growth of Vietnam's fixed-line market over the next five years is based on an estimate of 11.44mn fixed-lines at the end of This figure, which is equivalent to a penetration rate of just over 13%, is based on data provided by the country's Ministry of Posts and Telematics (MPT). In this update, we have not

9 introduced any new changes to our forecast, which predicts that the market will expand by almost 14% during the year, helping to raise penetration to almost 15%. Industry Trends -- Fixed Line Sector Continued fixed-line growth in Vietnam has been encouraged by the 15-20% tariff cuts, which were applied to fixed-line and public card phone charges in June The effects of these cuts are expected to continue being felt in the immediate future. However, towards the end of the decade, we predict a slowdown in fixed-line growth, as increased mobile substitution and the proliferation of VoIP services results in weaker demand for fixed-line services. The slowdown will partly reflect Source: BMI Research fixed-line saturation in urban areas of Vietnam, while rural parts of the country will be more inclined to take up mobile telephony. Vietnam's fixed-line incumbent, Vietnam Posts and Telecommunications (VNPT), is expected to retain its dominant position in the market. Despite this, traditional PSTN fixed-line subscriptions account for only around 77% of the total market, with the remaining fixed-lines being based on fixed-wireless services. The proliferation of fixedwireless services, especially in rural districts, should contribute to a loss of market share for VNPT. Our current five year forecast envisages a significant slowdown in the rate of fixed-line growth, particularly in the latter years of our forecast. We predict that fixed-line penetration will surpass 17% in 2011, and increase only marginally to 17.6% in Industry Forecast - Internet - Q Top Vietnam - Broadband - Oct

10 Internet Table: Telecoms Sector -- Internet -- Historical Data & Forecasts e 2008f 2009f 2010f 2011f 2012f No. of Internet Users ('000) 10,711 14,684 18,551 21,428 24,123 26,385 27,563 28,322 No. of Internet Users/100 Inhabitants No. of Broadband Internet Subscribers ('000) ,294 2,569 4,757 8,236 13,037 18,341 No. of Broadband Internet Subscribers/100 Inhabitants e/f = BMI estimate/forecast. Source: International Telecommunications Union (ITU), BMI Once again, we have made some minor alterations to our internet Industry Trends -- Internet Sector user and broadband subscriber forecasts for Vietnam. Our latest adjustments take account of new figures published by Vietnam's Internet Network Information Centre (VNNIC). The VNNIC suggests that there were just over 18.5mn internet users in Vietnam at the end of 2007, which equated to 21.4% of the total population. By the end of August 2008, the VNNIC suggests that the number of internet users had surpassed 20.34mn. According to the VNNIC, the number of internet users Source: BMI Research increased by over 36% in 2007 and by 9.6% in the first eight months of Although we continue to believe that internet user growth in Vietnam will remain strong over the next five years, we have nevertheless lowered our growth expectations for 2008 overall. We now predict that the number of internet users will expand by around 15.5% in 2008 and will rise to over 21mn by the end of the year. By the end of our five-year forecast, we anticipate a market of around 28.3mn internet users, equivalent to over 30% of the population. Meanwhile, the VNNIC has said that the number of broadband subscribers rose by 37% in the first eight months of 2008, reaching 1.773mn. This new growth occurred on the back of the impressive 150% growth recorded in As with internet user growth, we continue to believe that broadband subscriber growth will be strong over the next five years. However, we now predict a lower rate of growth for 2008, envisaging growth of no more than 100% for the year as a whole. By the end of 2008, we forecast a market of almost 2.57mn broadband subscribers, which is equivalent to a penetration rate of 2.9%.

11 Although growth in 2008 will be much lower than in 2007, we do not envisage such a steep decline in growth in 2009 and Indeed, for those two years, growth is expected to remain between 70% and 85%. By the end of our forecast in 2012, we anticipate a market of just over 18mn broadband customers; this is equivalent to a penetration rate of almost 20%. The strong broadband growth in the latter years of our forecast will be supported by a number of developments, not the least of which is the considerable investment which is currently occurring in the broadband sector. However, increased competition is also expected to increase the affordability of broadband services. The arrival of new broadband service providers, some of them international operators, will help to stimulate competition. Furthermore, the launch of commercial WiMAX services -- expected sometime in the next few months -- should also help to boost broadband take-up. Market Data Analysis - Mobile - Q Top Vietnam - Mobile - Oct Market Data Analysis Mobile The latest data from Vietnam's Ministry of Information and Communications (MIC) suggests that there were almost 50mn mobile subscribers at the start of June Of this figure, some 90% are understood to be prepaid customers. This high proportion of prepaid subscribers means that mobile ARPU in Vietnam is about US$6 per month, one of the lowest rates in Asia. Nevertheless, as BMI has noted in previous reports on the Vietnamese mobile market, obtaining reliable and detailed data on the number of mobile subscribers served by Vietnam's six mobile network operators remains a challenging exercise. None of the operators publish data on their own subscribers, while the MIC only publishes data on an occasional basis. Q208 Vietnam Mobile Market Share,

12 According to MIC's figures, Viettel, which is owned by the Vietnamese military, continued to lead the Vietnamese mobile market at the start of June with approximately 19.5mn subscribers and a market share of around 38%. Viettel has a clear lead over the next largest mobile operators, MobiFone and VinaPhone, with 13.4mn and 12.1mn customers, respectively. Both MobiFone and VinaPhone are owned by incumbent operator Source: BMI VNPT. Meanwhile, according to the Ministry, fourth-ranked S-Phone had 3.14mn customers. BMI estimates that, by the end of June 2008, the number of mobile customers had risen to over 51.6mn. Viettel continued to have a market share of almost 38%, while MobiFone and VinaPhone had 26.2% and 23.6%, respectively. We estimate that S-Phone, with 3.25mn customers, had a 6.3% market share. It should be noted that the estimated market shares of S-Phone and smaller rival VPT Telecom are both smaller than we have suggested in previous updates. This is partly the result of actual subscriber numbers being lower than predicted, however, market leader Viettel has significantly enlarged its subscriber base in recent months, and this led to a loss of market share on the part of the smaller operators. Our YE07 figures show Viettel had a 29% share of the market, ahead of MobiFone and VinaPhone on 28% and 25%, respectively. Together, Vietnam's three GSM operators controlled over 82% of the mobile market at the end of By the end of June 2008, we estimate that the joint market share of these three operators had risen to nearly 88%. Meanwhile, in our last report, we noted that the number of CDMA subscribers had reached 6mn at the end of 2007, up from just below 2mn at the end of By the end of June 2008, we estimate that Vietnam had almost 6.4mn mobile CDMA subscribers. Although the CDMA subscriber base is expected to continue growing, growth is predicted to be less rapid than for GSM customers. As a result, the CDMA operators are likely to see a continued loss of market share to the larger operators. Table: Vietnam Mobile Market, June 2008 Operator No. of Subscribers (mn) Market Share (%) Viettel MobiFone VinaPhone S-Fone VPT Telecom HT Mobile Total

13 Source: Operators; MIC; BMI Based on our estimated total of 51.66mn customers at the end of June, Vietnam had a mobile penetration rate of 59%. The market saw rapid growth in H108, having expanded by over 44% since the start of the year. By the end of August 2008, second-largest mobile operator MobiFone reportedly had 21mn mobile customers. MobiFone hopes to take this total to over 25mn by the end of 2008, far exceeding the 20mn customer target set earlier in Despite the continuation of rapid subscriber growth, the high proportion of prepaid customers increases the likelihood that the sector contains a high level of inactivity. Future moves to discount inactive mobile users could result in a significant fall for the penetration rate. Vietnam's MIC recently pledged to conduct an audit of all operators' counting methodologies over deciding whether a SIM card is active or not. Another factor contributing to the relatively high penetration rate is the large number of multiple SIM cardholders which are thought to exist within Vietnam's mobile market. This phenomenon is largely a consequence of the high level of market competition and the plethora of promotional campaigns that exist. By the end of 2007, MobiFone and VinaPhone, both controlled by VNPT, had a combined subscriber base of 19mn. By the end of June 2008, the two VNPT-controlled operators had expanded their combined subscriber base by nearly 36%. During 2007, MobiFone and VinaPhone deployed 6,000 new base stations. VinaPhone aimed to add a further 5,000 base transceiver stations (BTSs), in order to achieve its target of 9,000 BTS by the end of In May 2008, VinaPhone awarded a contract to UK vendor Aircom International in order to provide it with network planning and design services. Furthermore, in December 2007, both MobiFone and VinaPhone began reducing their call charges by as much as 25-28% in order to safeguard and expand their market shares. Accordingly, activation fees for post-paid mobile subscribers fell from VND136,364 to VND109,000, while monthly subscription charges remained the same at VND54,545. Call charges are being reduced by 20% on average for post-paid subscribers, while, for prepaid subscribers, the charges are being cut by nearly 30%. In December 2007, it was announced that VNPT had entered a partnership with Motorola to expand and enhance VinaPhone's GSM network in major cities, including Hanoi and Ho Chi Minh City. Motorola was contracted to install over 650 cell sites and provide optimisation and maintenance services. Then in June 2008, it was announced that Motorola had signed further contracts worth US$28mn for the expansion of VinaPhone's network in twelve northern provinces of Vietnam. Under the agreement, more than 1,000 cell sites will be deployed. Motorola is also understood to be co-operating with VinaPhone in order to expand GPRS coverage and provide EDGE service in major metropolitan areas. MobiFone has said that, in 2008, it expects to earn total revenues of VND16trn (US$1bn) and return a profit of VND6.65trn. In order to achieve these goals, the company will

14 continue to expand its coverage area and increase its service quality in all localities and cities throughout the country. It plans to raise its number of BTS to 10,000 by the end of the year. MobiFone is understood to be preparing for an IPO. It is thought that approximately one-third of the company will be floated, with the government retaining a 33.3% stake with the final third going to a strategic investor. The IPO is expected to be the first of several planned privatisations in Vietnam's telecoms sector. Norwegian telecom company Telenor has continued to fuel speculation about its possible entry into Vietnam's mobile market. BMI believes that the privatisation of MobiFone is seen as one possible route of entry to the sector for the operator. Telenor has had a representative office in Vietnam since If Telenor does make a bid to acquire a stake in MobiFone, it is unlikely to go unchallenged. It is expected that Singapore Technologies Telemedia (STT), which controls 75% of Asia Mobile Holdings, and as such controls a 40% stake in Indonesia's second-ranked mobile operator Indosat will also make a move to acquire MobiFone assets. STT expects the sale of MobiFone's stake, originally slated for 2008, to be delayed until Although Viettel, MobiFone and VinaPhone continue to dominate the mobile sector, Vietnam's three CDMA operators have recently enacted policies that are designed to expand their current minority market shares. S-Fone, which has South Korea's SK Telecom as a shareholder, is also said to be considering a cut in tariffs in line with market trends. In April 2008, the smallest of Vietnam's CDMA operators, HT Mobile, began migrating customers away from its CDMA network towards GSM technology. Those customers staying with HT Mobile will receive a new GSM handset. However, those who choose to retain a CDMA service will be switched to S-Fone's network. HT Mobile decided to implement the transition after failing to reach its target of luring 1mn customers by the end of Meanwhile, new operators are poised to enter Vietnam's mobile market in the coming months. In January 2008, it was reported that the MIC was ready to grant a licence to Global Telecom Corporation (GTel) to offer mobile services. GTel is backed by Russian giant VimpelCom, which is said to be prepared to invest up to US$1bn into the GTel mobile network over the next few years. In July 2008, VimpelCom said that it had acquired a 40% stake in GTel-Mobile for US$267mn. State-owned GTel and subsidiary GTel TSC hold the remaining 51% and 9%, respectively, although the Russian operator is considering buying a further 9% from its Vietnamese partners and has pre-emptive rights to do so. An MIC official confirmed that GTel had asked permission to supply GSM-based mobile services and that the Ministry was working on the necessary formalities, adding that GTel will be licensed to use the 1800MHz frequency. Over the next five years, VimpelCom plans to invest US$1.8bn in GTel-Mobile. The new operator aims to have 20mn mobile customers by 2013.

15 3G In October 2007, the Vietnamese government granted permission for the MIC to license four 3G mobile network operators. In addition, five mobile operators will be granted permission to undertake mobile WiMAX trials. The decision followed more than a year during which the MIC was understood to be preparing the 3G licensing criteria. Applications for licences from domestic operators are scheduled to be heard in 2008 but, at the time of writing, the process had still not begun. A number of major foreign operators have expressed an interest in investing in the development and deployment of 3G networks in Vietnam. Japan's NTT DoCoMo, which opened an office in Hanoi (its fourth overseas office) in September 2007, sees the annual 30% growth rate of the Vietnamese telecoms market as a big draw. These sentiments are similar to those expressed by French incumbent France Telecom. According to reports, both MobiFone and VinaPhone are expected to upgrade their infrastructure to 3G. MobiFone has completed a two-year 3G trial and is in the final stage of submitting a deployment proposal with Ho Chi Minh City and Hanoi, the first cities expected to deploy services in 2008, possibly in partnership with France Telecom. Meanwhile, VinaPhone concluded a similar trial with Nokia in Danang in August As for Viettel, S-Fone and Hanoi Telecom (HT Mobile), all three are understood to have requested UMTS licences from the Ministry. It is unlikely that all six of Vietnam's existing mobile operators will win licences. Indeed, the government looking to award four 3G licences at the most. It has been proposed by the Radio Frequency Department that each of the four 3G licences be granted 2x15MHz frequency division duplexing slots in the MHz and MHz bands, and a 5MHz time division duplexing slot in the MHz range. The MHz band is to be reserved for further UMTS applications, and the RFD envisages that each network will be granted a minimum 5MHz block. A lack of content and the cost and availability of 3G handsets will all present impediments to growth in Vietnam's 3G market, with BMI now estimating no more than 100,000 subscribers in the first year of 3G deployment. However, in spite of 3G, there is a real threat to growth in the Asia Pacific region as a whole, and it comes from WiMAX, which can cover huge distances and which is able to provide wireless internet access in the most remote towns and villages. Five operators are currently trialling WiMAX services; these include VNPT-owned Vietnam Data Communications (VDC), in Lao Cai Province; Vietnam Multimedia Corporation (VTC), in Hanoi and Ho Chi Minh; FPT Telecom; EVN Telecom and Viettel. The latter three are testing both wireline and mobile WiMAX services. Market Data Analysis - Fixed Line - Q4 2008

16 Top Vietnam - Fixed-Line - Oct Fixed-Line The latest fixed-line data for Vietnam relates to the end of Vietnamese fixed-line incumbent, VNPT, had 8.8mn fixed-lines at the end of 2007, out of a total telecoms subscriber base of 27.8m. BMI estimates that traditional fixed-line services provided by VNPT amounted to 77% of the country's total fixed-line subscriber base with 2.64mn customers using fixed wireless services provided by operators such as Viettel and S-Fone. By the end of 2007, we estimate that the fixed-line customer base amounted to 11.44mn, which is equivalent to a penetration rate of 13.2%. Unusually for telecoms markets in Asia, the Vietnamese fixed-line sector still offers growth opportunities. Vietnam's government is determined to increase the speed with which VNPT's virtual monopoly in the fixed-line sector is broken. In December 2006, the Ministry of Posts & Telematics awarded a national wireline licence to FPT Telecom. FPT's fixed-line service will be based on a next generation network, which will support the provision of IP-based voice telephony, as well as high-speed broadband and IPTV. In mid-2007, FPT reportedly had 200,000 ADSL customers. The operator aimed to attract an additional 50,000 subscribers by the end of 2007, with broadband services offered in 10 provinces. In addition to controlling the greater part of the local voice telephony market, VNPT was, until 2002, the only body authorised to offer long-distance and international services. However, both Saigon Postel (a privatised former subsidiary of VNPT) and mobile operator Viettel have since begun offering domestic and international VoIP services. VDC also introduced its own prepaid and post-paid VoIP under the brand name FoneVNN in 2003 and, in November of that year, became Vietnam's first provider of virtual private network (VPN) services. In an effort to expand its fixed-line customer base, VNPT chose Swedish vendor Ericsson to supply equipment to accommodate 200,000 additional fixed-line subscribers in Vietnam's central region. The deal is part of the second phase of a project to expand reach and capacity in the area. The first phase began in August 2006, when Ericsson won a contract to install 600,000 lines. In August 2008, it was reported that Vietnam Telecom National (VTN), a VNPT subsidiary, planned to deploy Fujitsu's high speed optical WDM as the transmission backbone of its next-generation network. VTN manages the domestic infrastructure of the incumbent state-owned operator VNPT. The company will deploy the WDM in a trunk-

17 line network traversing approximately 3,000km in Vietnam's southern region, linking 21 provincial capitals. The network is scheduled to be completed by early Meanwhile, the Ministry of Posts & Telematics has pledged to develop the country's fixed-line infrastructure, especially in rural areas. Behind the government's plan to invest in fixed-line telephony is its desire to ensure a balanced and sustainable development of traditional voice telephony services alongside mobile telephony. One reason why the government aims to support the funding of telephony in rural areas is the difference in revenue terms between fixed-line connections in urban and rural areas; whereas an urban wireline subscriber will typically generate an average monthly revenue of close to VND50,000, this figure falls to VND30,000 in more remote parts of the country. Fixed Wireless With the limited availability of traditional fixed-line infrastructure and around 70% of Vietnam's population living in rural areas, an increasing number of Vietnamese telecoms operators -- including mobile operators -- are introducing fixed wireless services. Facing high levels of saturation in already crowded urban mobile markets, fixed wireless access (FWA) has been seen by Vietnam's mobile operators as a way of supplementing revenue streams. Fixed wireless services can be launched on existing mobile networks and therefore incur few start-up costs. They are seen as a cost-effective way of providing telecoms services to low-income households. Mobile market leader Viettel has around 70% of its subscriber base living in rural areas; this indicates the importance of the operator's fixed wireless business unit. Viettel's post-paid service, HomePhone, was launched in August 2007, a few days after its prepaid service. By offering special discounts, it is expecting to increase the number of customers subscribing to HomePhone. Although press reports have suggested that Viettel had over 13mn customers at the end of 2007, this figure is thought to include both mobile and fixed wireless customers. Discounting its 11.9mn mobile customers, this would leave Viettel with just over 1mn fixed wireless customers at the end of the year. Vietnam's fixed-line incumbent VNPT also offers a fixed wireless service called GPhone. The service operates over VinaPhone's GSM network and is charged at fixed-line prices, making it affordable for low-income households. GPhone was launched in two phases, with services initially being launched in eight provinces and cities (including Lau Chau, Thai Nguyen, Ha Tay, Quang Nam, Quang Ngai, Can Tho, Hau Giang and An Giang) in June 2007, and the rest of the country during August VNPT had outlined a target of 100,000 GPhone subscribers by the end of 2007, but raised this to 500,000 new customers by year-end. Market Data Analysis - Broadband - Q4 2008

18 Top Vietnam - Broadband - Oct Broadband According to Vietnam's Internet Network Information Centre (VNNIC), the number of internet users in the country had risen to mn by the end of August This is equivalent to 23.4% of the total population. The number of internet users grew by 26% in 2007 and by 9.6% in the first eight months of Meanwhile, according to the VNNIC, the number of broadband subscribers rose by 150% in 2007 and by 37% in the first eight months of By the end of August, broadband penetration in Vietnam had risen to 2%, up from 1.5% at the end of The rapid take-up of broadband services illustrates the growing popularity of such services within the country. However, it is notable that two-thirds of Vietnamese broadband subscribers are from Hanoi and Ho Chi Minh City. Holding back faster growth is the fact that ADSL services remain expensive and service quality remains poor, with slow speeds and unstable connections beyond the largest cities. The high level of PC ownership in Vietnam means that demand for internet and broadband services is expected to remain strong. According to a survey conducted by Alcatel-Lucent, some 95% of Vietnamese households have access to a desktop PC, of which 16% are planning to purchase a laptop. Furthermore, growth in broadband demand is set to soar, as the Vietnamese government has been investing heavily in developing the broadband sector, announcing its commitment to inject VND100trn (US$6.3bn) in order to raise penetration rates significantly. Also, since joining the WTO, a number of highprofile global companies have relocated their operations to Vietnam, and the employment of local staff has boosted incomes. The result has been that a significant number spend between US$10 and US$20 on their home internet bills, accessing multimedia content including games and downloads. Increased competition is also expected to encourage increased broadband usage. Vietnam Internet Market

19 In June 2007, VNPT increased its fixed-line network capacity with the help of Nortel Networks, in order to introduce enhanced broadband services and tap the great potential for further broadband growth. As a result of this investment, VNPT's northsouth fibre-optic network capacity was doubled from 20Gbps to 40Gbps. The move formed part of VNPT's plans to cater for 600,000 high-speed internet customers by Source: VNNIC the end of VNPT set itself the conservative target of 1.5mn broadband subscribers by the end of 2009, a figure which was, in fact, surpassed in April In February 2008, VNPT revealed that it planned to invest US$1bn in broadband development in The investment will be used to raise existing capacity to 200Gbps by mid-2008, rising to 300Gbps at a later date. Furthermore, the investment will fund the expansion of VNPT's broadband network over the next two years, aimed at providing coverage in previously underserved regions. The new investments will also allow VNPT to connect a larger number of public high schools and government offices. In September 2008, VNPT launched a campaign to promote ADSL MegaVNN and fixedtelephone users. The promotion, which ran from September 16 to October 30, offered free ADSL modem and registration fees for new MegaVNN users and customers who shifted their indirect internet services to MegaVNN on fixed phone lines. Users were also given free internet accounts of VND100,000 (US$6) for two months. Customers using both MegaVNN service and fixed phones received a free service for three months. Along with its domestic internet services, VNPT provides data networking services to large corporate customers through a partnership with UK operator Cable & Wireless (C&W). In September 2008, VNPT subsidiary, Vietnam Data Communication Company (VDC), announced an extension to its partnership with C&W for the delivery of IP VPN services. According to the agreement, C&W will offer on-net IP-based VPN services to VDC's customers. As part of the deal, C&W has upgraded its point-of-presence (PoP) network node coverage in both Hanoi and Ho Chi Minh City. In addition to expanding its ADSL network capacity, VNPT has been trialling WiMAX services in the cities of Hanoi and Ho Chi Minh. This follows the operator's earlier success with WiMAX trials in Lao Cai. However, VNPT is not the first operator to test WiMAX, with both Viettel and FPT Telecom having been carrying out similar trials. In addition to developing WiMAX services, Viettel is also a major provider of internet services to business customers. In June 2008, Viettel launched a major sales promotion campaign targeting businesses with leased-line services. The company said it would waive installations fees and user fees for a month for new leased-line subscribers. The

20 total package would save customers VND60mn (US$3,680). In addition, the firm said it would give new subscribers a free web domain, ten addresses and a hosting service for one year. In March 2008, Saigon Postel Corporation (SPT) became the sixth operator to be awarded a WiMAX licence by Vietnam's Ministry of Information and Communication. SPT is affiliated with mobile operator S-Fone. Three of the other five operators to have been awarded similar licences also have links with the country's mobile sector: VNPT is responsible for mobile operators VinaPhone and MobiFone, while Viettel and EVN Telecom also provide mobile services. Meanwhile, the fourth WiMAX licensee, Vietnam Multimedia Corporation (VTC), offers mobile digital TV services among other broadcast services. Finally, FPT Telecom is already licensed to offer fixed-line voice and internet services; so far, however, it has been licensed to only carry out trials of wireline and wireless WiMAX services. The connection between WiMAX licensees and the mobile sector also indicates that WiMAX has become more closely entangled in mobile wireless technology rather than under the guise of a fixed network wireless technology, in which it was originally conceived. SPT has indicated that it will test WiMAX services in the 2.3GHz to 2.4GHz band across Ho Chi Minh City and one of the neighbouring provinces of Tay Ninh, Binh Duong, Dong Nai, Ba Ria-Vung or Long An. The majority of other operators' WiMAX trials are also being conducted in Vietnam's two major cities, Hanoi and Ho Chi Minh City. Table: Vietnam -- WIMAX Triallists Operator Vietnam Post and Telecoms (VNPT) Vietnam Multimedia Corporation (VTC) WiMAX Licence Date Mar-06 Mar-06 Pilot Launch Trials carried out in Hanoi, Ho Chi Minh City and Lao Cai Trials carried out in Hanoi and Ho Chi Minh City FPT Telecom Mar-06 To carry out trials of both wireless and wireline WiMAX EVN Telecom Jan-07 To carry out trials of both wireless and wireline WiMAX Viettel Mar-06 To carry out trials of wireless WiMAX Saigon Postel Corporation Mar-08 Trials to be carried out in Ho Chi Minh City and one neighbouring province Source: BMI In February 2008, the Ministry of Information and Communication awarded a licence to CMC Telecom to provide internet services in Vietnam. The operator, an affiliate of CMC Corporation, will reportedly be the 10th internet service provider in the country. CMC Corporation, which set up CMC Telecom in 2007, will offer its services through its partnership with CDMA operator EVN Telecom. The chairman of CMC Corporation confirmed that, if licensed, CMC would consider launching WiMAX broadband wireless services and stated that US chip manufacturer Intel would support deployment. However, in order to launch services, any WiMAX provider must currently be at least 51% state owned. Given that CMC is less than 51% state owned, it would require a change in regulations for it to be able to offer WiMAX services. Along with its licence to provide internet access, CMC Telecom also gained two further licences -- one for online services

21 provision and one for internet content provision. However, the operator is not currently allowed to build its own telecoms infrastructure. As part of its partnership with CMC, EVN Telecom is responsible for investing in transmission infrastructure, while CMC is to invest in IT and communications services, which will provide services for the customers of both groups. CMC has stated that its strategy is to focus on large corporate clients and governmental organisations, a strong sector for internet use in Vietnam, as 89% of companies are estimated to have internet connections. Meanwhile, in March 2008, ISP One-Connection Internet (OCI) launched an online advertising site, something it claims will give companies a chance to take full advantage of video and online advertising. As a concept, online advertising has not yet developed in Vietnam, but it is a potentially large market, and one that OCI thinks will grow by 50% each year from 2008, potentially reaching VND600bn by the end of Regulatory Development - Vietnam - Q Top Vietnam - Telecoms - Oct Regulatory Environment Vietnam: Regulatory Bodies And Their Responsibilities Regulatory Body Ministry of Information and Communications (MIC) 18 Nguyen Du Street, Hanoi, Vietnam Tel: Fax: Web: Responsibilities The Ministry of Posts and Telematics of the Socialist Republic of Vietnam is the state administration in charge of policy making and regulatory matters in posts, telecommunications, information technology, electronics, internet, radio transmission and emission techniques, radio-frequency management and national information infrastructure, management of public services, as well as of control over, on behalf of government and as stipulated by laws and regulations, the state capital in posts, telecommunications and information technology enterprises. Its main functions include: submitting to the government drafts of laws, ordinances, regulations, strategies and development plans on posts, telecommunications and information technology; giving guidance in implementation of laws, ordinances, regulations, as well as development strategies and plans related to posts, telecommunications and information technology; regulating the access to and the interconnection between public switched

22 telephone networks, specialised and private networks; regulating the electronics and information technology industry development plan; regulating charges and tariffs in the fields of posts, telecommunications and information technology; planning, assigning and allocating radio frequency spectrum; controlling and monitoring radio frequency spectrum and radio equipment; organising radio frequency, satellite orbit registration and co-ordination; granting licences in posts, telecommunications, radio frequency and internet; regulating the quality of posts, telecommunications and information technology networks, plants, products and services; regulating numbering resources, codes, domain names and addresses used in the fields of posts, telecommunications and information technology; conducting international co-operation activities in posts, telecommunications and information technology; and, inspecting all activities and settling all regulatory breaches in the fields of posts, telecommunications and information technology. Legislation And Market Liberalisation The government's telecommunications policy is formally set out in a decision of the Prime Minister, Decision No.158/QD-TTg of 18 October 2001, which ratifies Vietnam Post and Telecommunications development strategy until 2010 and Orientation until The policy Decision provides a comprehensive range of sector development objectives and targets, along with key underlying strategies for their achievement. The government's telecommunications policy recognised the current weakness of the legal structure governing the telecoms sector. In line with its policy, the Government ratified the Ordinance on Post and Telecommunications (the 'Ordinance') on May The Ordinance took effect on October and has replaced the Decree No.109/1997/ND-CP dated November on network and telecommunications services. The Ordinance is expected to achieve two primary aims: the consolidation of the legal structure into a single law -- which means the repeal of the set of contradicting laws and regulations -- and to modernise the legal structure and address the important issues that arise in a competitive market structure. The functions of Vietnam Posts and Telecommunications (VNPT) are set out in Decree No. 51 (Decree No. 51/CP ratifying the Statute on VNPT). VNPT is active in all aspects of telecommunications, including infrastructure ownership and operation, and provision of telecommunications services. Regulation

23 The regulation of the telecommunications sector in Vietnam falls under the responsibility of the Ministry of Posts and Telematics (MPT), which fulfils the dual role of policy maker and regulatory authority. The key functions and responsibilities of the organization of MPT are outlined in the Government Decree No. 90/2002/ND-CP of November The Decree sets out a wide range of functions and responsibilities under four different groupings. It is noted that MPT exercises regulatory control over both post and telecommunications. The MPT has responsibility for drafting laws, ordinances and policies on telecommunications, issuing decisions, directives, rules and technical standards, managing international treaties on telecommunications and radio frequency and issuing and revoking permits in accordance with regulations. The direct regulatory body over internet activities in Vietnam is the Vietnam Internet Network Information Centre (VNNIC). The VNNIC is a non-profit affiliation to the Ministry of Posts & Telematics, established under the Decision No. 372/QD-TCBD dated April of the DGPT (which later became the MPT). The purpose of the VNNIC is to carry out the functions of managing, allocating, supervising and promoting the use of internet domain names, addresses and autonomous system numbers (ASN) in Vietnam. VNNIC also provides internet-related guidance and statistics related to international activities on the internet. Licensing And Spectrum Vietnam's Ministry of Posts and Telematics (MPT) is responsible for all licensing related to telecommunications services. Prior to Vietnam's entry to the World Trade Organisation (WTO), foreign telecoms operators were prevented from making direct investments in Vietnamese telecoms operations. Instead, Business Co-operation Contracts (BCCs) served as a transitional investment model in the telecoms sector and ensured that the provision of all telecommunications services was based on a system of revenue sharing with local companies. Since joining the WTO, however, Vietnam's MPT has allowed a number of local telecoms companies to enter into joint ventures with foreign partners for the provision of a wide range of communications services, including fixed voice telephony, packet-switched data transmission services, circuit-switched data transmission services, telex services, telegraph services, facsimile services and private leased circuit services. For non-facilities-based services, the foreign capital contribution to these joint ventures must not exceed 51% of legal capital. Despite these continued restrictions which govern the licensing process, it will be permissible for wholly foreign-owned firms to provide registered telecoms services to Vietnamese organisations and individuals once Vietnam has been a WTO member for two years. Furthermore, three years after Vietnam's WTO accession, foreign companies will be allowed to establish local branches and provide telecoms services, under the condition that the chief representatives of the branches reside in Vietnam. In order to provide fixed or mobile voice telephony services for which no network infrastructure is required, foreign partners will be allowed to participate in joint ventures with Vietnamese telecoms firms, with a capital contribution of up to 51%, within the first three years of Vietnam's WTO membership. Once that initial three-year period has passed,

24 foreign operators will be authorised to choose their own local partners when establishing joint ventures and will be allowed to raise their capital in the joint venture to 65%. Meanwhile, for virtual private network services and value-added telecom services, some large foreign partners will be permitted to independently provide those services using the network infrastructure of a local operator. Currently, foreign partners wanting to provide such services must select Vietnamese partners and contribute up to 70% of capital in the joint venture. For satellite services, the Vietnamese government is committed to expanding the number of companies involved in this field, but only once Vietnam has been a WTO member for three years. In addition, the government will allow foreign partners to connect to underwater optical cable networks, of which Vietnam has membership. Licensed companies will be authorised to sell transmission lines to international telecoms service providers, which have network infrastructure (such as VNPT, Viettel, EVN Telecom), and also to virtual personal network and IXB service providers such as FPT, VNPT, Viettel and EVN Telecom four years after the date of Vietnam's WTO membership. Regulatory Developments In May 2008, it was reported that Taiwanese incumbent Chunghwa Telecom planned to set up a US$30mn 'internet data joint venture' with Vietnam's military run cellco Viettel. The move forms part of Chunghwa's efforts to expand overseas. Chunghwa is Taiwan's largest operator, leading each of the fixed-line, mobile and broadband markets by number of subscribers. Chunghwa has said that it hopes to expand its business through overseas investments as saturation at home leads to an inevitable slowdown. The operator has said it will use Vietnam as a base from which to enter other countries such as Laos. In the new venture, Viettel will own a 70% stake while Chunghwa will take the remaining 30%. According to reports published in February 2008, Vietnam's Ministry of Information and Communications (MIC) is to hold an exam to select which networks are most capable of providing 3G services. All seven 2G licensees are eligible to enter. These are MobiFone, VinaPhone, Viettel Mobile, S-Fone, EVN Telecom, HT Mobile and non-operational newcomer GTel. The MIC has said it will grant just four licences. Incumbent VNPT, which runs VinaPhone and MobiFone, and military-owned Viettel, are both said to be worried about failing the test through a simple mistake. An MIC spokesman said that the cellcos will be tested on around 200 standards, which it is currently defining. The MIC has said that it will seek comments before compiling the official examination contents and will deliver the exam documents in March Competitors will then have two months to complete the exam documents. The ministry will consider the exam documents in May, and it will grant 3G licences in Q208. According to the MIC, winners will be granted 15MHz of frequency division duplex (FDD) spectrum and 4MHz of time division duplex (TDD) spectrum. However, any winner that fails to launch 3G services (presumably by a set date) will be fined and risk having their frequencies withdrawn. In March 2008, VNPT announced that the country's first commercial telecoms satellite would be launched on April Vinasat-1 is capable of handling more than 10,000

25 telephone, internet and data transmission channels. People living in remote areas will be among those to benefit most, as the satellite is expected to provide them with access to modern telecoms services for the first time. Speaking at a briefing ceremony in Hanoi on March 12, VNPT Deputy General Director Nguyen Ba Thuoc said the successful launch of the satellite would be of great importance to Vietnam's socio-economic development. Worth more than US$200mn, Vinasat-1 will be positioned at 132 degrees East Longitude in a geostationary orbit and has a design life of 15 years. Company Profile - Alcatel-Lucent Technologies - Q Top Vietnam - Telecoms - Oct Company Monitor Case Study: Alcatel-Lucent Technologies Alcatel-Lucent Technologies was formed in late 2006, merging France's Alcatel and Lucent Technologies of the US. The two companies have a shared history, stemming from their relationship with US fixed-line giant AT&T. Lucent was formerly owned by AT&T, which also owned an extensive telecoms manufacturing business outside the US. This was sold in the 1920s to ITT, which in 1986 sold its European telecoms operations to CGE, Alcatel's parent company. However, the merger of the two companies has not been easy. With 77,000 employees and operations across 130 countries, combining the two entities is a huge task and one that Alcatel-Lucent appears to be struggling with. Since its merger, the Franco-American company has had to issue two profit warnings, while its shares have tumbled, following a string poor financial results. In Q108, the group announced a net loss of EUR95mn on sales of EUR3.864bn. Revenues from carrier services -- by far its largest business -- were down by 4.9% y-o-y to EUR2.7bn. Overall, revenues were down by 0.5% y-o-y and 26.2% q-o-q. However, market analysts are forecasting revenue rises of 4% to 6% q-o-q for Q208. Table: Alcatel-Lucent Q108 Financial Breakdown By Business Group (EURmn) Revenues Q108 y-o-y Chg (%) q-o-q Chg (%)

26 Carriers 2, of which Wireline 1, of which Wireless 1, of which Convergence Enterprises Services Other 103 Total 3, Source: Alcatel-Lucent Alcatel-Lucent's objective for 2008 will be to continue with its three-year plan, aiming to improve gross margins, reduce operating expenses and turn around underperforming businesses. For the full year, it estimates revenue growth to be in the low to mid-single figure range, on account of the deterioration in the euro-us dollar exchange rate. Approximately half of its revenues are in US dollars or dollar-linked currencies. Asia Pacific Drives Growth In terms of its operations, Alcatel- Revenues By Region Lucent still derives the majority of ( Q108) its revenues from its two traditional markets, Europe and North America, which accounted for 33% and 35% of sales, respectively, in Q108. Asia Pacific accounts for 17%, with the remainder coming from the rest of the world, namely Latin America, Middle East and Africa. At a time when Alcatel-Lucent's gross margins are being negatively affected by what has previously been described as 'an unfavourable product and geographic mix', Asia Source: Alcatel-Lucent Pacific has come through to support growth in the market. The region reported a sales increase of 8% (in local currency terms), on a par with North America and higher than Europe (2%). Asia Pacific growth comes on the back of a number of contracts in major markets, such as a deal to supply China Mobile with mobile equipment and services at a cost of US$1bn. Under the terms of the agreement, Alcatel-Lucent will provide the operator with mobile core network solutions, wireless network solutions and equipment, including those for China's home-grown 3G mobile service standard TD-SCDMA. The deal significantly dwarfs the US$865mn network expansion contract awarded to rival Nokia