Joint ventures are a particularly demanding form of commercial cooperation. They can only succeed if the strategic aims of the partners can be reconciled, and if an attempt is made to realize the available potential for synergy.

Political Change opens Telecommunication Markets

Successful market entry strategies for Central and Eastern Europe
By Dr. Marec Bela Steffens and Elisabeth Sundrum, Siemens AG, Public Communication Networks, Munich

Until just a few years ago, the Central and Eastern European (CEE) telecommunications market was inaccessible to Western companies: the yearning in the East for technological autonomy - and the export controls in the West - prevented any significant volume of trade, but the political wind of change has now blown these markets wide open. While enormous efforts are required to gain minimal increases in market share elsewhere in the world, entire markets in Eastern Europe have suddenly become accessible within a very short time. These new markets demand innovative marketing strategies if the local economics and new business ventures are to thrive over the long term.

Backdrop

For CEE countries the rapid development of a powerful telecommunications infrastructure is a question of economic survival in today's competitive global market.

In market-led economies, communications have a decentralized, horizontal structure. Companies must be able to communicate quickly and efficiently if they are to respond flexibly to the changing requirements of the market.

In the former socialist system, however, the infrastructure provided predominantly vertical channels of communication, which to a large extent satisfied the demands of the party and state and the hierarchical structure of the planned economy [1]. The clear intention was to restrict and control the flow of information. Here, urgent messages often had to be sent by telegram and courier-hardly appropriate for the demands of international competition. Thus, telecommunications as part of the infrastructure has a considerable effect on the overall quality of a country for business and determines how attractive it is to foreign investors.

Demand is also great in the residential sector. People are no longer willing to wait ten or more years for a telephone. Entire communities are still without telephone service at night or on weekends, because the exchanges are manual and are only operated during working hours. Thus, telephone service is also a matter of public welfare. People even die because there is no telephone with which to call the emergency services. (Figure 1)

Demand for investment

Bringing the CEE communication networks up to world level will require huge investments -figures as high as $200 billion by the year 2000 have been mentioned [2]. Nevertheless, the emerging industrial nations of Southeast Asia, for example, have shown that this can be done. Starting from a situation that was initially worse than that in Eastern Europe, they have expanded their telecommunications infrastructures in recent years with massive efforts (Table 1).

International organizations are prepared to help. As things stood in August 1992, the World Bank, the European Investment Bank (EIB), the European Bank of Reconstruction and Development (EBRD) and the EC had granted about $1.3 billion in loans for telecommunications projects. Further resources are available but have not yet been tapped [3]. There is no point, however, to pumping money into obsolete structures; there must be a transfer of expertise and market-oriented thinking.

The fact that the highly developed countries are continuing to invest in networks and new technologies underscores the necessity of CEE countries to also do so. The expansion of the telecommunications infrastructure is an essential condition for economic development and cannot, therefore, be delayed until times are better.

Privatization and competition

Privatization and competition are vital instruments and are to be regarded in CEE countries - unlike the West - primarily from the viewpoint of raising of capital. Most of the usual arguments in favor of a monopoly no longer apply: there is no nationwide provision of basic services that, for example, could be defended in the interests of the inhabitants of rural areas. Institutional openness is in demand.

Here the prospects of success are quite good because carriers will be ready to enter competition for these new markets. Unlike most other sectors of the infrastructure, investments in telecommunications bring immediate revenues and generally remain profitable in the long term. International calls also provide a source of foreign currency.

Privatized network operators will require financial breathing space for further investment. This can be accomplished by first constructing digital overlay networks to serve the needs of the business sector first. Delivering products and services to the ordinary citizen will follow: in the medium term, companies also want to be able to communicate with consumers.

Appropriate regulatory measures must be put into place to ensure that the income from the telecommunications administration (PTT) is not drained off into the national budget or e. g. into the mail service The separability of revenues and the control over it are indispensable prerequisites for the large-scale mobilization of private capital. This applies as much to foreign investors as to the entities within the country itself, which are considering becoming involved in the expansion of the network.

Regulation can also dispel reservations about a loss of national sovereignty during privatization and the authorization of competition. The granting of licenses for certain services and regions offers the opportunity of "...directing private capital into the construction of the infrastructure and at the same time safeguarding the State's influence on the expansion of the infrastructure through licensing conditions" [4].

Competition to get into the market (to get operating licenses) can also have the positive effect of competition on those markets in which direct competition has little practical value (e. g. local telephone service).

Marketing strategies

Vendors entering these new markets must develop viable marketing strategies if they are to succeed. Their main objective must be to gain a competitive advantage, keeping global market forces in mind.

In today's market, technology as a single selling point is not enough. Because all vendors active in world markets offer high-quality technology, it is absolutely essential to consider the criteria upon which carriers' and PTTs' purchasing decisions are based. Vendors need to view customer requirements in their totality and meet these as comprehensively as possible. Network operators do not commit themselves to a single vendor, but they do generally establish longterm ties with their vendors. The choice is made according to political, social and economic factors, which must all play into successful marketing strategies.

Customer Needs

In many cases telecommunications administrations must first build up their skills before they can introduce digital technology. A vendor who is able to position itself as a single source for all needs has a decided advantage over vendors with narrow offerings. This is one of Siemens' key strengths. A system vendor around the world, the company's offerings incorporate local suppliers and subcontractors, including many medium sized companies. The competence demonstrated in project management and aftersales service is a distinguishing factor between competing vendors.

Vendors must also remember that the real customer is their customer's customer -the subscriber. For CEE administrations, customer-oriented business is a new concept, not present under the socialist system. Vendors with experience in market economies can help administrations - often under great pressure from politicians and public opinion - adjust to the new operating environment.

Turnkey projects

The ability to provide turnkey projects is also a valuable marketing asset. The turnkey projects contracted out by DBP Telekom in Eastern Germany have produced unequivocally good results. Turnkey projects are a sign of trust in the vendor, but they require precise definition of both objectives and specifications by the operator. These projects have given Telekom and the vendors invaluable experience on how new and obsolete technologies can be made compatible with one another. That is exactly what the customers in this region expect.

Another vital factor influencing every purchasing decision is the financing option offered by the bidder. National and international sources of funding must be used equally and combined if necessary. Most CEE countries do not merely have problems with foreign currency financing, but, since their capital markets are not yet adequately developed, they even have problems with financing in their local currency when the amounts are large. Added to this problem is the fact that interest rates have been driven up by high inflation.

Since the demand exists and investments in the telecommunications network are profitable in the long term, creative "financial engineering" is called for. "Build - operate - transfer" and "build -lease - transfer" are new institutional opportunities that make increased demands on the vendors and call for cooperation with new partners.

Local presence

Worldwide, one of the most important competitive assets for a vendor is local presence in the market. Customers want to feel that their suppliers are locally based, speak their language, and know their problems. Ibis can be achieved by various means, and the range of options has increased with the change in political systems in Central and Eastern Europe. They range from exporting goods through local sales offices, to establishing licensing agreements with local companies, all the way to developing manufacturing operations in joint ventures or subsidiaries. Each has its own set of benefits and drawbacks.

In many countries around the world, local manufacturing is an explicit condition for the award of contracts. These countries do not simply want to import goods, but they want to take part in a "technology transfer." Savings in currency and increased local employment are other advantages promised by local production.

Joint ventures

Of the possibilities open to vendors, the establishment of joint ventures offers an attractive but challenging way of gaining market share in incipient markets, sharing the risks, and ultimately helping CEE countries develop viable telecommunications industries.

In the capital-intensive electronics sector, low labor costs are less of a factor in moving production abroad than in labor-intensive manufacturing industries. Due to the high and continually rising development costs for new technologies, it is particularly important to gain new market share. Therefore, local production can be a decisive global competitive advantage (Fig. 1).

The Siemens Public Communication Networks Group is therefore represented by joint ventures in almost every CEE country. Some of these have already begun production [5].

Looking ahead

Now that the CEE countries have opened their doors to outside companies, Western European firms are eager to get established in these new markets. While the potential gains are great, the earlier joint venture euphoria has long since given way to a more realistic view. Joint ventures appear to be viable long-term marketing strategies for building infrastructures in countries that have few start-up resources. They also provide a platform for companies like Siemens to become key players in these new markets. But this strategy can only succeed if both partners are willing to commit them selves to long-term goals, rather than seeking quick profits.

[1] Steffens, M. B.: Das Telephon in den sozialistischen Laender ForschungSgTUppe Teleforkommunikation (Hrsg.), Telefon and Gesellschaft, Band 2, Berlin: V. Spiess 1990, p. 199 to 213

[2] Nulty, T. E.: Stimulating vitality and innovation. telecom report international 16 (1993), No. 4. pp. 10 to 13

13] Berlage, M.: Schnoering, Th.: Telekommunikation in Osteuropa: Bestandsaufnahme und Entwicklungstrends, Bad Honnef: WIK 1992 (contribution no. 93)

[41 German Minister of Post and Telecommunication, Dr. Schwarz Schilling at the Conferences of Post Ministers. Bonn. July 2-3. 1992

15] Baur, H.: Catching up in communications. telcom report international 16 (1993), No. 4, pp. 14 to 18

16] Hatch, E. N.: Die Finanzierung von Telekommunikationsnetzen in Entwicklungslindern. Munchen (1989). p. 102

[7] Lagleder, L Schrader, L Building networks through joint ventures. telcom report international 16 (1993). No. 4. pp. 22 to 26

Things to consider when establishing joint ventures

Joint ventures are a particularly demanding form of commercial cooperation. They can only succeed if the strategic aims of the partners can be reconciled, and if an attempt is made to realize the available potential for synergy.

The demand for investment is considerable: "For the construction of a manufacturing facility for 100 000 digital line units per year, an investment of about $ 5.25 million in currency in fixed assets is required (not including land and buildings). To this must be added the financing of the current assets with about $ 8.64 million." [6]

It is often difficult to evaluate the contribution of both sides of a partnership, especially due to the lack of market transparency in terms of real estate and buildings. What is more, the question of ownership of real estate in CEE countries is in many cases not clear. Therefore it is necessary to make sure both parties are protected against claims from former owners.

Of course, the best possible precautions must be taken for risks of all types, for example, to protect oneself from a rival company becoming the owner of licenses contributed to the joint venture in the event the local partner company is privatized.

Legal certainty and protection against expropriation are indispensable conditions for direct investments abroad. Even customs duty, tax, loss carry-forward and depreciation options have some effect on the concrete form of the joint venture. The legal standards in this field however are subject to frequent changes. This calls for extreme care in drawing up the contractual basis of the joint venture.

These agreements control, among other things, the purpose of the business, the capital introduced, the procedure when capital is increased and the application of international bookkeeping guidelines. Rules of procedure for the management, a licensing agreement, a business plan, a supply contract, and possibly a repurchasing agreement must all be included in the contract. The business plan plays a central role: it is updated if the business situation changes, e. g. large orders are received.

Also very important is the licensing agreement, as it defines the selling rights for Siemens products. In almost every country, the joint venture partners and governments have high expectations on this point: they want to supply the domestic market from local production, but at the same time they want to export to neighboring countries, which also have Siemens joint ventures. In the interests of a level playing field, Siemens grants no exclusive licenses in CEE countries.

Since it is impossible to take precautions against every conflict of interest in contracts and guidelines, joint venture partners must also be culturally compatible.

Companies wishing to start joint ventures in CEE countries must be aware that one of the major obstacles is the local capital market, which is only in its infancy. The joint venture can take up practically no credit in domestic currency for financing, and even PTTs have great problems with capital procurement in the home market. Interest rates are much lower abroad, making direct deliveries from abroad less expensive than buying from a joint venture, since the PTT itself cannot refinance to a sufficient extent. The industrial policy put forward by the government for the promotion of joint ventures, technology transfers, and so on does little to help under these circumstances.

In terms of price, joint venture products (and this applies to the entire region) may not be any less expensive for the PTT than buying direct from abroad. Difficult initial conditions and production in comparatively small quantities lead to higher costs than production in Germany, for example. The lower labor costs do not fully compensate in such a technology-intensive product as EWSD. A joint venture can, however, achieve clear cost benefits in the service sector (service and installation and customer training) which is becoming more and more important for success in large-scale technology projects. In these areas especially, local joint ventures can function as a contact partner with the customer and demonstrate competence.

Experience shows that the Siemens Joint ventures in the Czech Republic, Hungary, Poland and Romania, all of which have already started production, achieve the same quality standards as Siemens factories in Germany.

In contrast to its other CEE joint ventures, where Siemens holds a minority share, Siemens Telfongyar Ltd. in Budapest is a wholly owned subsidiary. Together with the Hungarian state company Telefongyar Siemens first formed a joint venture in 1990. At the request of the Hungarians, Telefongyar was later taken over, with Siemens AG Austria now holding a 66 % stake in the company, with the remainder held by Siemens Ltd. Budapest.

Telecom Report International 16 (1993) No. 4 (© 1993 Siemens AG)