Vietnam is set to take center stage as one of Asia's most dynamic wireless markets in 2008. Home to nearly 50 million residents who still do not own a mobile phone, the emerging Southeast Asian tiger is planning to privatize three mobile carriers, has several pending greenfield and network upgrade contracts and is one of Asia's fastest-growing economies. The market added over 22 million new subscribers in 2007 - more than the additions in the past three years combined - and is set to generate over $4 billion by 2013.
While the phenomenal subscriber growth is attracting fanfare from potential foreign suitors of state-owned MobiFone, Vinaphone and Viettel, there are still many pitfalls facing these and other players in the years to come. Notably, Vietnam's operators will have to content with a crowded seven-player market, heavy capital spending and an incessantly falling ARPU.
While Vietnam's pending privatization does indeed represent one of the region's last, best opportunities to capitalize on organic subscriber and revenue growth in the region, foreign investors take a caveat emptor approach.
Vietnam's mobile market penetration rate hit 44% at the end of 2007, and it has clearly distanced itself from other emerging markets in the region such as India, Indonesia, Pakistan and Bangladesh. The country has propelled itself in front of its giant neighbor to the north (China closed 2007 at 41.7%). We expect that expanding coverage and intense competition from a seven-player field will push the penetration rate toward the 100% range over the next five years, when Frost & Sullivan predicts that Vietnam will have close to 92 million subscribers. With the market being nearly 90% comprised of GSM users, any mandatory base cleaning or other regulatory registration initiatives could lower this total as Malaysia experienced in 2007.
A surge in revenue will accompany Vietnam's surge in subscribers as the mobile market garnered $2.8 billion in revenues in 2007, a fourfold increase from the 2003 value. Revenues will also continue to expand, albeit an increasingly lower market ARPU will mean that revenue growth will grow at a slower growth rate than subscriber growth rate.
Vietnam's market ARPU fell dramatically in 2007 to $6.50, down by 41% from the 2006 average level. As the market continues to expand, Vietnam will see ARPU approaching the $3 level by 2013, which will raise red flags for investor profitability. F&S predicts that Vietnam's wireless market will post $4.1 billion in revenues by 2013, representing a CAGR of 8%.
Vietnam remains one of the last markets in the region with state-owned mobile incumbents, but this will change in 2008 as all three such operators are set to offer private equity stakes to strategic investors. The move has attracted the attention of several global operators and private equity firms, including France Telecom, Vodafone, Telenor, Comvik International, Telekom Malaysia, SingTel, Chunghwa Telecom and NTT. Initial signals from the government indicate that Mobifone will be the first operator to offer a partner up to 20% of its equity while listing its shares on the local stock market as early as May, with Vinaphone and Viettel to follow later in the year.
Despite challenges facing Vietnam's wireless market, which are endemic to many emerging wireless markets in the world, private stakes will make good additions to operator's portfolios.
Market challenges
Vietnam's unprecedented growth will also bring new challenges to operators in the wireless space as market strategies will shift toward catering to low ARPU users.
Viettel has been able to take a commanding lead of the local market largely due to its attention to mobile coverage. Despite launching mobile service only in 2003, Viettel quickly became the operator with the most base stations, which allowed it to reach out to previously uncovered subscribers and boast of better signal quality in zones that already had mobile access. We expect Viettel to maintain this leadership into next year and not only reinforce its market position but also pose a severe challenge to other operators.
The low-ARPU challenge is also an impending issue in the country, especially given that many operators are already reporting aggregate ARPUs below $5, with a fall below the $3 threshold within the forecast period. The fact that the market has so many operators vying for subscribers complicates matters.
Operators are increasingly being goaded into promotions to lure new subscribers and price is usually the weapon of choice to compete. HT Mobile, for example, jumped into the market by offering free in-network calling and messaging until September and giving any subscriber who brings in a new customer free 500 voice minutes, 100 text messages and 10 ringtones.
With a seven-player field forcing such intense competition, maintaining low operational and capital expenditures will be very difficult, which we believe will force market consolidation in the near future.
With privatization looming, Vietnam's mobile market is still very much in a state of flux. The industry will continue to add large numbers of subscribers, but the market is facing several uncertainties regarding future levels of competition, operator profitability and technological deployments.
Despite these, all three of the companies that are slated to be privatized are in good position in terms of scale and familiarity in the market and are likely to outlive the newer market entrant, which shields them from some market conditions to some extent. Stakes in the Vietnamese operators will provide excellent growth avenues for investors. And while caution needs to be taken in dealing with a low ARPU environment, both the capital investment and operational experience will greatly hasten the speed of maturity of Vietnam's mobile sector.
Marc Einstein is senior industry analyst at Frost & Sullivan