Asia/Pacific and Japan Telecom CAPEX Growth: Don't Hold Your Breath

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1 Market Analysis Asia/Pacific and Japan Telecom Growth: Don't Hold Your Breath Abstract: Total regional capital expenditure in declined by more than 20 percent when compared with, a decline that will persist in will show no signs of picking up until at least late 2003, possibly early By Brian Low, Bertrand Bidaud and Sumit Malik Strategic Assumption The downward trend in Asia/Pacific and Japan's capital expenditure () in 2003 is expected to continue but at the 10 percent to 20 percent level (0.7 probability). Publication Date: 24 February 2003

2 2 Asia/Pacific and Japan Telecom Growth: Don't Hold Your Breath Overview Total capital expenditure () declined by more than 20 percent in Asia/Pacific and Japan when compared with. The downward trend in will persist into The decline in 2003, however, is expected to be lower, between 10 percent and 20 percent. The decline is particularly important in China, considering the significant growth of the previous years. This decline is repeated in Japan but without the same intensity. India, for its part, has shown an increase in in. Other countries with notable declines include South Korea, Taiwan and Australia. In terms of ratio (' spending compared with carrier revenue), substantial differences also existed among major operators in Asia/Pacific and Japan. For "attackers" such as China Unicom, and for operators in developing markets such as India, a ratio of more than 40 percent is not unusual. South Korea and Taiwan also stood out among the developed economies with ahighratio. However, these ratios have been significantly reduced in, in line with worldwide financial prudence among telecommunications carriers. On the other hand, Japan, which has the highest absolute in Asia/Pacific, also has one of the lowest ratios. Major Findings The Asia/Pacific and Japan region shows substantial variations in trends between countries and operators. For rankings of the Top 10 vendors in Asia/Pacific and Japan, see Table 1. For details on the revenue and figures for the carriers across the region, see Table 2. Table 1 Top 10 Operators by in Asia/Pacific and Japan, Carriers and Country of Origin NTT DoCoMo (Japan) BSNL (India) NTT East (Japan) NTT West (Japan) J-Phone (Japan) KDDI Mobile (Japan) Telstra (Australia) China Mobile KT (Korea) SK Telecom (Korea) FY02 = fiscal year Source: Gartner Dataquest (February 2003) Actual Spending (Billions of U.S. Dollars) 6.98 (guidance FY02) 3.98 (guidance) 3.21 (guidance) 3.21 (guidance) 2.35 (guidance) 1.67 (guidance) 1.87 (FY02) 1.78 (six-month actual) 1.63 (FY02) 1.52 (FY02) 2003 Gartner, Inc. and/or 24 February its Affiliates. 2003All Rights Reserved.

3 3 Table 2 and in All of Asia/Pacific and Japan, - (Billions of U.S. Dollars) Country/Operator Additional Data Concerning Earnings Australia Optus Telstra FY Vodafone China China Mobile (H.K.) Six-month actual 26.7 China Unicom Six-month actual 49.9 China Telecom Six months 30.0 China Railcom MII estimates Hong Kong PCCW Six months 5.7 Indonesia Telkom Nine months 6.0 Indosat Six months 43.9 India 3 BSNL Annual estimate - MTNL Estimates - VSNL Six months - Bharti Six months - Japan NTT NTT East Guidance 17.1 NTT West Guidance 17.8 NTT Communications Guidance 11.7 KDDI Guidance 9.7 Japan Telecom Guidance 16.0 NTT DoCoMo Guidance 19.1 J-Phone Guidance 21.1 KDDI Mobile Guidance 11.0 Malaysia Maxis Mobile Guidance 27.9 Telekom Malaysia Six months Gartner, Inc. and/or its Affiliates. All Rights Reserved. 24 February 2003

4 4 Asia/Pacific and Japan Telecom Growth: Don't Hold Your Breath Table 2 (Continued) and in All of Asia/Pacific and Japan, - (Billions of U.S. Dollars) Country/Operator New Zealand Telecom New Zealand Full year 15.0 Vodafone New Zealand Philippines PLDT Six months 28.7 Globe Telecom 0.21 NA NA 0.45 NA NA Full year 44.7 Singapore SingTel 2.89 NA NA Nine months 9.0 South Korea KTF NA Six months NA KT Full year 18.0 LG Telecom NA - NA SK Telecom FY Hanaro Telecom Nine-month actual 28.7 Taiwan Chunghwa Telecom 6.04 NA NA Six months 20.5 Far EasTone NA NA NA 5 NA Taiwan Cellular NA Guidance NA Thailand AIS Six months 4.4 DTAC 0.46 NA NA Six months 2.4 TelecomAsia Six months 52.3 Additional Data Concerning Earnings NA = Not applicable VSNL = Videsh Sanchar Nigam (Ltd.) MTNL = Mahanagar Telephone Nigam (Ltd.) BSNL = Bharat Sanchar Nigam (Ltd.) PLDT = Philippine Long Distance Telephone KTF = Korea Telecom Freetel 1 estimate 2 For PCCW, the results do not incorporate results for HK Telecom 3 Results for indicate the period from April through March 4 Annual estimate 5 Earlier estimated at NT$10.06 billion Notes: For companies whose financial year ends in March XX, the results are mentioned under the year (XX-1) in the table. For the rest, the results are mentioned under the same year as the financial year. Source: Gartner Dataquest (February 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 24 February 2003

5 5 Japan remains the country with the largest in the region. Its total in was US$19.50 billion. Its, when compared with its estimated figure of US$22.23 billion, showed a decline of about 12 percent. NTT DoCoMo, the operator with the highest, has announced its intention to reduce that number in the future. From its high in, China's is expected to decline by more than 27 percent in. Indicative estimates from carriers show a similar trend for China's operators' high ratios in and have dropped substantially in. But concerns still exist over the sustainability of its relatively high ratio. This finding is significant given this decline was due in no small part by externalities to the business (in particular, the restructuring of China Telecom), rather than financial prudence. India is the third-largest country in terms of and the only one showing any increase in. Expected in is US$4.90 billion, compared with US$4.35 billion in, representing an increase of more than 10 percent. Developed countries such as South Korea, Taiwan and Australia all showed a decline in in compared with, and initial indications from operators in these countries show no signs of any increase in for Taiwan and South Korea until lately have had two of the highest ratios, although recent efforts were made to reduce both the and ratios in both countries. Operators in the Rest of Asia, including Singapore, Thailand, New Zealand, Philippines, Indonesia and Hong Kong, have not escaped the wrath of the worldwide gloom surrounding the telecommunications market either. Many operators in these countries announced a major curtailing of in, and the same is expected in Selected Markets and Operators Analysis China China's market has gone through a typical "boom bust" cycle, and 2003 will see further readjustments southward in. Any expected upturn in is not expected until the later half of 2003, possibly early China Telecom's inability to raise anticipated capital at the close of its initial public offering (IPO) has increased the possibility that the company will further review its plans in China Mobile's guidance, or estimates, of a of US$4.1 billion in 2003 represents a decline of approximately 9 percent when compared with the estimated spending of US$4.5 billion. (The actual total for the first six months of was US$1.78 billion.) 2004 will see a further drop, with an expected of US$3.8 billion. China Railcom has also announced plans to cut its to US$0.69 billion in China Netcom, which planned to go public in 2003, faces pressure to perform from conservative financial management and may review its own plan. Japan in Japan remains the highest in the Asia/Pacific, hovering around the US$21 billion mark over the past two years. This is low compared with its high of US$27.2 billion in. In 2003, Gartner Dataquest expects further decline in. Operators in Japan have one of the lowest ratios in the Asia/Pacific region, which is typical of a mature, highly competitive market with low operator margins. We see this low ratio trend reinforced in 2003 because of concern over the country's deflation Gartner, Inc. and/or 24 February its Affiliates. 2003All Rights Reserved.

6 6 Asia/Pacific and Japan Telecom Growth: Don't Hold Your Breath NTT DoCoMo, the country's largest operator with a of US$9.4 billion in, cut its to US$8.3 billion and US$7.0 billion in and, respectively. It has a ratio of 19.1 percent in compared with 19.9 percent and 21.6 percent in and, respectively. The slow uptake of its third-generation service is expected to lead to a further revision of its plan for While broadband growth, deployment of metropolitan dense wave division multiplexing (DWDM) and competitive pressure will help sustain the market, financial prudence will be the order of the day for many of Japan's operators. India This market has often been perceived as the "next China" in among telecommunications equipment vendors, and with some justification. An industry undergoing structural reform and increased competition suggests good market potential. BSNL's ratio averaged more than 68 percent over the last three years, which raises questions over its ability to sustain this spending level. On the downside, high marketing and sales costs incurred recently among these operators in an increasingly competitive market will erode their margins. This will put pressure on their in 2003, although infrastructure deployment is still in its infancy. The government's recent proposal and subsequent announcement to merge MTNL with BSNL will bring a period of soul-searching, much like what has happened with China Telecom. Reported lackluster earnings will bring added pressures on operators to curtail their in Taiwan, South Korea and Australia These mature economies experienced less pressure from competition to improve their infrastructure than from shareholders and financial analysts to improvetheirfinancialratios.nowhereisthispressuremoreevidentthanin Taiwan and South Korea, where all operators, based on available information, have shown a declining ratio. Far EasTone in Taiwan has the highest ratio, at 54.1 percent and 37.8 percent in and, respectively, however this is expected to show a decline in. Government efforts in South Korea to stimulate further spending from carriers is expected to have little effect, but wideband code division multiple access (W-CDMA) deployment should help keep at a level similar to. The two major operators in Australia, Telstra and Optus, have also shown a declining trend in ratio. Telstra's ratio has declined from 40.7 percent in to 18.1 percent in, while Optus has also seen its ratio decline from 32.8 percent in to 15 percent in. Looking forward to 2003, Gartner Dataquest expects to see greater pressures to improve the profitability of operators in these countries, and this means more pressure on and, therefore, a greater reluctance to spend Gartner, Inc. and/or 24 February its Affiliates. 2003All Rights Reserved.

7 7 Rest of Asia Thailand, Philippines and Indonesia are either undergoing structural reforms to their telecommunications industries or are facing increasing pressures and concerns over moderate earnings in recent years. The negative impact of these structural reforms and the subsequent competition will further eat into their moderate earnings. While the is low when compared with major operators in Asia/Pacific and Japan, given their low revenue base, their ratio remains relatively high, with the exception of Thailand. Globe Telecom in the Philippines and Indosat in Indonesia have an excessively high ratio, raising once again the question of sustainability of this ratio in The exception is Thailand, which has a low ratio for most operators, primarily because of the concession fees they pay to the government toward network use. Incumbent operators in Singapore, Malaysia and New Zealand are leading the way in terms of financial prudence in management and spending. SingTel has reduced its ratio from 35.2 percent in to 9.0 percent in (although this shot up to 60.5 percent in ), while Telekom's Malaysia has fallen from percent in to 15.9 percent in. Telecom New Zealand's ratio has been hovering around the 20 percent mark, well within what we consider to be the "10 percent-to-30 percent viability mark" in terms of long-term sustainability. Conclusions The Gartner Dataquest study of trends in the region has highlighted two key outcomes, which can be summarized as follows: The Asia/Pacific and Japan region, in terms of, cannot be treated as a monolithic whole, given the substantial variations between countries and operators in the region. Each operator operates in a unique context and faces unique challenges that cannot be easily quantified in terms of a common sales and marketing proposition will be difficult in terms of spending, with lower levels expected in most geographies. Key Issue What factors will shape service provider capital expenditure plans? 2003 Gartner, Inc. and/or 24 February its Affiliates. 2003All Rights Reserved.

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