China no image

Published on June 7th, 2011 | by Babar Bhatti

6

Zong in Pakistan: Failure or Success?





“If we cannot succeed in Pakistan, we’d better not go anywhere else”. — Chairman Wang Jianzhou, China Mobile after Paktel acquisition

I spotted this article by Zhao Hejuan of Caixin at CNBC website. According to this detailed and well-researched article, Zong has not been as successful in Pakistan as China Mobile wanted it to be. Zhao attributes the problem to business strategy and issues with handling of human resources.

It may be too early to tell if Zong is a success or not. As we know, China Mobile is in this for the long run. As long as they learn from their past mistakes, they have a chance to turn things around. What do you think?

Here’s the full article.

China Mobile has been struggling to build a Pakistani business since buying the domestic carrier Paktel, today known as CMPak and the brand name Zong, in early 2007 – four years after Pakistan opened its telecom market to international competition.

The acquisition marked a proud beginning for the Chinese carrier’s global expansion, which continues today. China Mobile paid $560 million for what was then Pakistan’s fifth-largest mobile operator.

But today, Zong is still in fifth place – at the bottom of the heap among mobile carriers in Pakistan, where the mobile phone penetration rate has stabilized at about 60 percent.

Zong’s user base has increased from less than 1.5 million in 2007 to 6.92 million by the end of 2009, but its major competitors have picked up far more customers, according to the Pakistan Telecom Administration (PTA).

Among the 97.6 million Pakistanis with mobile phones in 2009, PTA says nearly one-third were serviced by Mobilink, a subsidiary of Egypt’s Orascom. The Pakistani subsidiary of Norway’s Telenor counted 22.5 million customers, while Warid Telecom had 18.8 million users and Ufone 18.5 million.

Neither is Zong getting the kinds of revenues enjoyed by its competitors. Among all carriers, PTA says, average revenues per user are about $2.50 per month. But a Zong user generates only an average $1.50 for the Chinese company.

Door Knocking

PTA data obtained by Caixin says Pakistan’s mobile phone user coverage rate was only around 8 percent in 2004 and 22 percent the next year. China Mobile bought into the market when the coverage rate had reached 54 percent. The rate continued growing rapidly as the Chinese company settled into its new territory and, in 2008, launched the Zong brand.

By the time Zong arrived, its four competitors had already secured market positions, and the coverage growth rate had slowed considerably.

China Mobile first knocked on Pakistan’s door in 2005, after the Pakistani government offered to sell a 26 percent stake in Ufone, a subsidiary of Pakistan Telecommunication Co., to the highest foreign bidder.

China Mobile was one of 13 international players that participated in the auction, but lost with an offer of $1.4 billion. The winner was Etisalat of the United Arab Emirates, which paid $2.6 billion.

Afterward, Wang said he had no regrets. “Market pressure would have been too great had we offered a price that was too high,” he said.

Nevertheless, Ufone’s strong performance in the following years brought Etisalat satisfactory returns. According to PTA, Ufone’s subscriber list has grown nearly 11-fold since 2004, stabilizing at around 20 million in 2010.

Negotiations with Nasdaq-listed operator Millicom gave China Mobile another opportunity in 2006. The Luxembourg-based company then had about 10 million subscribers in 16 emerging countries in Latin America, Africa and Asia, including Pakistan.

And at the time, Paktel was a Millicom subsidiary – as well as the worst performer in the multinational’s portfolio.

China Mobile hired China International Capital Corp. (CICC), China’s largest investment bank, as a financial advisor to prepare a bid for Millicom in collaboration with Bain Capital, a private equity firm.

The deal was close to signing, a source told Caixin, and Millicom’s market capitalization was around $5.6 billion when CICC suggested China Mobile offer $4 billion. The advisor had valued the Paktel portion of the company at zero.

The Chinese eventually abandoned the Millicom deal due to concerns about political risks in emerging countries and potential management issues. But in the end, China Mobile got Paktel.

More recently, minus Paktel, the market capitalization of Millicom has risen as high as $15 billion.

No Place Like Home

China Mobile tried to open the Pakistani market door with the same key that worked in China. But the key didn’t fit because each market functions under a different regulatory framework, with a different business environment.

For example, China’s telecom market is monopolized by state-owned China Mobile and two other carriers, while Pakistan’s market is open to price-cutting competition.

A PTA report said the Pakistani mobile industry generated $2.8 billion in total revenues in the 2009-2010 fiscal year, up 11 percent from a year earlier, even though tariffs decreased up to 20 percent.

Pakistan is also one of the few countries that heavily taxes telecom operators. And Pakistani mobile phone subscribers are typically price-oriented, say industry experts, with a habit of chatting on the phone for long periods of time.

Another difference is that mobile phone numbers are freely transferable in Pakistan, allowing customers to switch service providers at will. So if Zong tries to raise prices, its subscribers are likely to leave for another operator with a better tariff.

This business environment means user coverage rates are crucial for operator profits in Pakistan, and so far Zong’s rate has fallen far behind its rivals.

China Mobile tried to win more Pakistani customers by applying a rural market strategy that succeeded in China. It was Wang who had won China Mobile a huge rural customer base starting in 2004 – a move that’s underpinned the company’s high growth rate for years since.

But the strategy failed in Pakistan, partly because rural land needed for telecom bases and equipment is not cheap. Rural property in China, on the other hand, costs far less than urban parcels. In addition, carrier network operations and maintenance have been impeded by weak infrastructure in Pakistan, especially in rural areas.

China Mobile’s lackluster performance in Pakistan can also be attributed to human resources. An investment banker familiar with the company told Caixin that China Mobile executives rejected the advice to retain a Pakistani management team after buying Paktel, and instead dispatched a team of Chinese managers to oversee operations and control critical areas such as human resources and finance.

“The first batch of people sent to Pakistan came from domestic provincial branches of China Mobile,” the banker said. “They did not have good language skills, and therefore encountered serious communication problems.”

China Mobile gradually withdrew its Chinese managerial staff starting in 2009 and switched to a localized approach. The Zong marketing staff, whose job includes overseeing an army of signboards in Islamabad, is now entirely Pakistani.

Tags: , ,


About the Author

Founder and Editor of TelecomPk.net



6 Responses to Zong in Pakistan: Failure or Success?

  1. shahzad says:

    Three point

    1:poor network quality

    2: managerial decisions

    3: Drawback in marketing steps

    Suggestion:
    1: Need Repeator basd solution.

    2: give the decisions power to local in
    management.

    3: use the media local level,
    approach, in rural area.

  2. Pingback: china mobile phones prices in pakistan | Mobile Phones Information Blog - Free Tips and Resources on How TO!!!

  3. KIFAYAT says:

    most of the population in Pakistan live in rural areas and the infrastructure of zong in rural areas is very poor. I think the low price of internet package offered by zong will surely increase its suscribers subject to the provision of EDGE services in rural areas by the zong.

  4. Pingback: Zong in Pakistan: Failure or Success? | Tea Break

  5. Midhat says:

    …while Pakistan’s market is open to price-cutting competition…

    Really?

    Last year there were reports of collusion and price fixing by telecom operators and the competition commission Pakistan took action.

    Only that the commission was disbanded due to the expiry of the ordinance and was later revived, and I am sure the matter has been buried like everything else

    http://lirneasia.net/2010/02/pakistan-competition-commission-appears-to-have-mobile-telcos-on-the-ropes/

  6. Mudassar says:

    Well..the article is well written by Zhao, a very detailed analysis. Management issue is something creating issues for Zong and hindering it to grow. Currently Zong has crossed some 10.6 million subscriber base and i feel it will take it few more years to show a healthy figures on report.
    Baber you know our market is actually standing at some 60 to 70 million SIMs in actual with lots of room still available in the remote areas but no company wants to invest anymore keeping in view the taxation and lowest call rates. unless things get changed, the status quo will remain the same and Zong will remain a fifth operator till then.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to Top ↑
  • Get Updates In Your Inbox







  • Connect WIth Us