By the end of 2000, the sun seemed to be setting on the Hutchison empire in India, or at least on its Orange1 brand. Hong Kong-based cellphone operator Hutchison Max Telecom,2 which owned the popular Orange brand in Mumbai (India) might soon have to give it up in favor of the city's second operator, BPL-France Telecom.
France Telecom, which acquired worldwide rights for the Orange brand in May 2000 from Vodafone3, was planning to enforce its ownership of the brand in India in a bid to cash in on the popularity of the brand.4 France Telecom was keen on using the brand via its joint venture with BPL5 in Mumbai. Said a France Telecom official, "We are likely to retain the brand for this part of the world. A final decision is likely to be taken early next year". Analysts felt that the Orange takeover could come as a severe blow to Hutchison in Mumbai, as the company could lose its leading position in this market. Hutchison would have to re-invest huge amounts in building up a new brand and giving it the same level of credibility that Orange enjoyed.
Analysts also felt that Hutchison, which had controlling stakes in cellular operators in other circles like Delhi, Calcutta and Gujarat, would have to develop a new brand for these circles.6 The company might be hit particularly hard in Delhi, the second largest cellular market in the country. The Hutchison Group had initially planned to launch the Orange brand in Delhi, in May 2000, through its 49 per cent holding in Sterling Cellular. This was later delayed to October 2000.
It became clear that the Orange launch in Delhi had run into rough weather. Sudarshan Banerjee, CEO, Sterling Cellular, agreed that there was a delay in the Orange launch in the Capital, but attributed it to an expansion in its network. He Said, "We might launch Orange some time next year in Delhi." The Orange brand was also to be launched in Kolkata, where The Hutchison Group held 49 per cent in Usha Martin. But France Telecom, the foreign equity partner of Hutchison's Mumbai rival, BPL, seemed to be raising objections over the use of the Orange brand name outside the Mumbai circle.
Sandip Das (Das), Chief Operating Officer (COO), Orange, claiming he was ignorant about France Telecom opposing the launch of the brand in other cities. He commented, "It was upto the equity partners in the New Delhi and Calcutta ventures to decide on whether to launch Orange or not."
The Making of an Empire
Hutchison had a presence in the cellular market in India since 1995. In December 1999, Hutchison picked up a 49% stake in Delhi-based cellular service provider Sterling Cellular. Since then, another 2% seemed to have been acquired by a Hutchison associate company.7 The rest was held by the Essar group, which owned almost the entire stake in Aircell Digilink, the cellular license holder for Haryana, Rajasthan and Eastern UP. In 1999, when the Essar group approached financial services company GE Capital Services for a loan of Rs 650, crore to pump into its cellular operations, it could manage to get the money only after the loan was guaranteed by its partner, Hutchison. Analysts felt that Essar had already agreed to take the backseat in the venture. In early 2000, when Business World contacted Asim Ghosh (Ghosh), Managing Director and CEO, Hutchison Max Telecom (India), he refused to comment on whether the Ruias would let Hutchison be the dominant partner in the cellphone services relationship.
But an Essar official commented, "Under the arrangement, Essar will not pull out of the telecom ventures for now, but Hutchison will call the shots. Essar will end up playing only a passive role in the arrangement." Essar officials held that the company had entered into a tacit agreement with Hutchison that Essar would exit from the telecom business in favor of the multinational when these telecom companies would go for an initial public offer (IPO) in the not-too-distant future.
Hutchison would first acquire half of Essar's stake in these companies and then Essar would go to the primary market with an 'offer for sale' to offload the rest of its stake to the general public. That would leave Hutchison as the majority owner of the cellular telephone companies. However, foreign companies weren't allowed to hold more than 49% stake in Indian telecom outfits and Hutchison already owned 49% of Sterling. Under such circumstances, Hutchison would not be in a position to acquire more shares and majority control. But, Hutchison had circumvented the 49% limits way back in 1998 itself.
While picking up Max India's 41% stake in Hutchison Max Telecom (Max retained 10%), Kotak Mahindra Capital Company and Hutchison Whampoa's 100% subsidiary CGP India floated a new company, Telecom Investments India where Kotak owned 51% and CGP 49%. Telecom Investments then took over Max's 41% stake. A similar deal could perhaps be struck with Essar. Again, analysts felt that with the government in the process of reviewing the 49% limits set on foreign ownership in telecom, Hutchison might not have to resort to such complicated ways of upping its stake in Essar's telecom ventures.
It seemed that the rationale behind Hutchison building up such a huge customer base was to help it get seamless connectivity across states and bring down prices, something that operators in individual circles would not be able to do. The fear among Indian operators was that they could end up as marginal players. Bharti Telecom and BPL were already planning to put forth a united front against Hutchison. However, Hutchison was also cash rich.
In November 1999, it sold its 44.8% stake in Orange to Mannesmann. When Vodafone acquired Mannesmann, Hutchison got 5% of Vodafone's share capital. In March 2000, the company sold 1.5% of these shares for $4.7 billion (Rs 20,445 crore). It was part of this money that Hutchison was using to fund its expansion in India. All the other Indian telecom service providers, put together, did not have that kind of ready cash.
Mobile Mania
By the end of 2000, mergers, acquisitions and alliances had become the order of the day in the cellular phone market. Commented Atul Chopra, Managing Director, New Delhi based investment bank, Asia Pacific Capital, who was involved in some of the telecom deals, "You can either acquire or get acquired. There is no third option."
In March 2000, Business World wrote, "Once the dust settles down in less than 18 months, the number of players in the business will come down from 22 to five or six". The probable long-term players could be Bharti Enterprises, BPL, Hutchison Whampoa, Reliance and the Tata-Birla-AT&T combine. MTNL could also be a significant player with its launch of mobile services under the brand name Dolphin in Delhi and Mumbai. Analysts felt that with 1.58 million subscribers (as compared to 26 million fixed lines), and less than 0.4% of the world's 400 million mobile users, there should not be a scramble for the market.
"The entire mobile business in India has been notionally valued by investment bankers at $ 4.5 billion (INR 22,500 crore) which is nowhere near the valuation of say, the country's software business. So why this madness?" asked one. Mobile operators hoped that India would follow the rest of the world in opting for more cellular phones. The consistently falling call rates and a number of new services that mobile operators were offering was expected to drive the boom in the market. The impact of some of these developments was already being felt.
The mobile market was expected to grow at a phenomenal 66% in 2000 and add one million new subscribers to touch 2.7 million subscribers by April 2001. In 2000, the mobile market was worth Rs. 2000 crore in terms of revenue and was expected to cross Rs. 5,000 crore by 2002. The mobile market was also expected to become huge in the near future and waiting to carve out their share of this pie would be a handful of players. Once the foreign companies were allowed to hold 100% stakes in Indian mobile firms, foreign majors with deep pockets would expand the market much faster.
The major players in the cellular phone market, other than Hutchison Max Telecom, were Bharti Telecom, Essar Teleholdings, BPL Mobile/BPL Cellular, RPG Cellular/Cellcom, Spice Cell/Spice Communications, Fascel/Celforce and Birla Tata AT&T.
TABLE I
MAJOR PLAYERS IN THE CELLULAR MARKET
Companies Stakeholders %
Bharti Cellular Bharti Televentures
Bharti Telecom 56
44
Bharti Mobile Bharti Televentures
Telia 74
26
Sterling Cellular (Essar Cellphone) Essar
Hutchison Max 51
49
BPL Mobile France Telecom
BPL Cellular Holdings 26
74
BPL Cellular BPL Cellular Holdings
AT&T 51
49
RPG Cellular RPG Group
Vodafone
CellNet
Others 68
20
11
1
RPG Cellcom RPG Group
Vodafone 51
49
Spice Cell Modicorp
Distacom
AIG 45
43
12
Fascel Hinduja Group
Kotak Mahindra Ltd.
Hutchison Max 40
11
49
Birla AT&T Aditya Birla Group
AT&T 51
49
Tata Cellular Tata Group
Bell Canada International
AIG 64
27.4
8.6
Welcome Orange
In early 2000, a bright orange bloom over cities like Mumbai, Delhi and Kolkata was giving sleepless nights to Sunil Mittal (Mittal)8 and Rajeev Chandrashekhar (Chandrasekhar)9. In February 2000, Hutchison Max Telecom introduced Orange in India. The brand "Max Touch"10 was replaced by Orange. This was for the first time that a globally recognised cellular service brand was available in India. Said Ghosh, "What that means to our subscribers is that they will now benefit from the technology advantages that Orange has. Orange is refreshing, honest, straightforward, innovative and friendly. In continuum, we will incorporate these brand values in our services at an accelerated pace".
The change in the brand logo and culture was reinforced with a fresh round of campaigns. The mass media plan included print, outdoor and cable television. The brand was positioned as one which was not for the elite or techno-savvy geeks alone but for down-to-earth, 'real' world people who wanted to be spoken to honestly and directly. Commented Ghosh, "Orange had inspired Max Touch ever since the inception of Max Touch. Orange is the logical extension and replacement of the brand Max Touch which had always imbibed Orange values."
The earlier uniform of a formal black trouser-suit with a scarf was replaced with an orange shirt and black skirt with the supervisors having the option of wearing a black jacket with an orange handkerchief. The men wore a white shirt, black trousers and an orange printed tie. Officials of Hutchison Max Telecom felt that France Telecom's purchase of Orange would not have any immediate impact on the Orange brand in India. Hutchison Max Telecom had already acquired the rights to use the Orange brand in India and so the question of 'cracks in Orange' did not arise.
Again, under the National Telecom Policy, BPL would not be able to utilize the Orange brand name in Mumbai.11 Analysts felt that there would not be any major conflict of interest in use of the Orange brand in Mumbai. Said one, "I don't think that BPL or France Telecom would be interested in getting into that issue at this stage. May be never. Unlike some other telecom companies in India, BPL wanted to promote its own brand and not of a foreign partner. Suddenly, I don't see any reason for them to change that stand now."
Analysts also felt that the primary focus of France Telecom, through Orange would be to consolidate operations in Europe. Commented one, "What they (France Telecom) decide to do with their non-European properties or businesses is not clear as yet. France Telecom has been lying low in India and Hutchison, on the other hand, has been expanding its operations with a great deal of interest. Hutchison might, at a later stage, plan to sell off its Asian properties to a separately spun-off and publicly-traded "New Orange" if they fetch the company as much as it has in Europe--around $ 7,000 per subscriber against around $ 2,500 per subscriber Hutchison itself has spent on expansion."
Orange is Squeezed
In May 2000, when France Telecom acquired Orange, two top officials from Orange met senior Hutchison India officials in Israel at a convention. They made an offer to pick up a significant stake in Hutchison's India operations, which was by then planning to launch the Orange brand in New Delhi after having made a big splash in the lucrative Mumbai circle. The offer was made a second time shortly thereafter, but Hutchison India officials turned it down, saying that they were in no mood to sell, and that they would eventually effect a merger of all the circles by taking their Indian partners along.
After the offer was turned down, a team of Orange officials visited India and said that the Orange brand licensing agreements needed to be reworked and a higher royalty would now have to be paid by Hutchison for use of the Orange brand. Hutchison officials seemed to have rejected a higher royalty payout. They said they enjoyed the rights for Mumbai and also had the option to launch the Orange brand in some "other properties" in India. It was pointed out that the only way out could be to go in for arbitration. However, nothing has moved on this front so far.
In late 2000, in a significant departure from their earlier stand, Hutchison officials hinted that Orange was not a brand they would die for. They also hinted that Orange might not be the brand they would eventually go ahead with. Analysts also felt that it might not make sense to push a brand to which they could not claim all-India rights.
In late 2000, in response to The Economic Times' query on whether Orange representatives had negotiated a stake buy-out with Hutchison, a Hutchison spokesperson said, "There has been a great deal of speculation about Orange and Hutchison, since Hutchison sold its stake in Orange to Mannesmann over a year ago.
There has also been speculation and rumours at Orange branded businesses. Yes, there have been representatives from Orange in India. We have nothing further to add at this time." In early 2001, there was speculation that Hutchison might withdraw Orange from all parts of India, including Mumbai, replacing it with a new global brand by the end of 2001.
There was also speculation that BPL might use Orange in Mumbai. However, BPL decided not to use the Orange brand in Mumbai, even after the current user Hutchison choice to give it up. Said Chandrashekhar, "BPL is a very strong brand there (Mumbai) and there is no question of our replacing it with any another brand.
Our philosophy is clear: we do nothing, which doesn't enhance value for us." Analysts also felt that BPL was a fairly strong brand and replacing it in Mumbai or anywhere else in India, with any other brand would make little sense for the company. "I don't think BPL should be very keen on Orange. When its own brand is so reputable, why should it pay royalty to use the brand? For the rest of India also, BPL may not like to spend a lot on promoting the new brand," said a Mumbai based analyst.
But Not Hutchison
Hutchison's honeymoon with the Orange brand in India could soon be over but it would still remain a dominant player in the cellular phone market. In December 2000, the company announced that it was planning to consolidate its cellular telephone assets in India and list them within a year or eighteen months. In early 2001, oblivious of the threat looming large over its Orange brand, Hutchison was gearing up for a new competitor, MTNL in the aggressive Mumbai market. Said Das, "The company plans to launch a slew of marketing initiatives to promote the Orange brand in the near future."
To support the print campaign, the company planned to launch an ad campaign and ground promotions. Mr. Das said, "Competition may come and go. We are not worried about new rivals. We will be exploring new marketing options this year like any other year." In Feb 2001, Orange announced significant cuts in their tariffs. As per their new standard tariff plan, the outgoing and incoming calls would cost Rs. 2.80 and Rs. 1.60 respectively, as against Rs. 4 earlier.
For Hutchison, the road ahead was tough and future uncertain. Cut-throat competition, its squabbles with France Telecom over royalty payments and other issues had begun to squeeze out Orange's vigor. The million-dollar question was, whether Orange would survive and bounce back.
