EGYPT AS AN EMERGING MARKET FOR THE

TELECOMMUNICATION INDUSTRY

Name: Suraj Ramesh

Student ID: 102636

Module: Business Operations in Emerging Economies

Date Submitted: February 17, 2011

Word Count: 3206

 Contents
1. Egypt 3

1.1 Country Analysis

1.2 People

1.3 Economy

1.4 Egypt as an Emerging Market

1.5 Current International Trade

1.6 International Trade in the past

1.7 Government Intervention

1.8 Trade Policies and Trading Partners

1.9 Telecommunication ( Mobile Cellular ) Industry

1.10 Egypt‟s Booming Telecommunication ( Mobile Cellular ) Market

2. Bharti Airtel 11

2.1 About the Company

2.2 Airtel in Africa

3. Trade Theories 12

3.1 Comparative Advantage

3.2 Factor Endowment

3.3 Porters Diamond Model

4. Recommendation 15

4.1 Future Trade for Egypt

4.2 Recommendation to Airtel

APPENDIX 16

Bibliography 19

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1. Egypt

1.1 Country Analysis

Egypt is a country in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia.
Covering an area of about 1,010,000 square kilometers, Egypt is bordered by the Mediterranean
Sea to the north, the Gaza Strip and Israel to the northeast, the Red Sea to the east, Sudan to the south
and Libya to the west. Egypt is a transcontinental country, and a major power in Africa,
the Mediterranean region, the Middle East and the Islamic world. Egypt is one of the most populous
countries in Africa and the Middle East. The majority of its estimated 79 million people live near the
banks of the Nile River, in an area of about 40,000 square kilometers, where the only arable land is
found. About half of Egypt's residents live in urban areas, with most spread across the densely
populated centers of greater Cairo, Alexandria and other major cities in the Nile Delta.

The economy of Egypt is one of the most developed and diversified in the Middle East, with sectors
such as tourism, agriculture, industry and service at almost equal production levels.

The government of Egypt consists of a semi-presidential republic whereby the president is

both head of state and head of government, and of a system dominated by the National Democratic
Party. Executive power is exercised by the government. Legislative power is vested in both
the government and the People's Assembly.

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1.2 People

Population: 80,471,869 (July 2010)

Populat ion Growt h Rate: 1.997% (2010)

Religions: Muslim (most ly Sunni) 90%, Coptic 9%, other Christian 1%

Languages: Arabic (official), English and French wide ly understood by educated class

Lit eracy: 71.4% (The percentage of people aged over 15 years who can read and write)
Male: 83%, Female: 59.4 (2005)

Educat ion Expenditure: 3.8% of GDP (2008)

1.3 Economy

GDP (Purchasing Power Parit y): $500.9 billion (2010) [ World Ranking – 27 ]

GDP Growt h Rate: 5.3% (2010)

GDP Per Capit a (PPP): $6,200 (2010)

Composit ion by Sector: agriculture: 13.5%; industry: 37.9%; services: 48.6% (2010)

Currency: Egypt ian Pound (EGP)

Source: CIA. Data are in US Dollars

GDP (PPP) in US$

6.5
Thousands

5.5
4.5
3.5

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1.4 Egypt as an Emerging Market

Being one the most populous countries of Afr ica and having a good l it eracy rate, Egypt
is considered as an Emerging Market.

CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) is an acronym for
favored emerging markets coined in late 2009 by Robert Ward, Global Forecasting Director for
the Economist Intelligence Unit. These countries are favored for several reasons, such as a dynamic
and diverse economy and a young growing population. The economies that are part of this group are
considered to be very promising because they have reasonably sophisticated financial systems,
controlled inflation, and a soaring young population.

1.5 Current International Trade

We can examine the present situation by analyzing the Exports and Imports. Egypt‟s trade is
characterized by trade deficits. Oil export is central to the Egyptian economy. Heavy machinery,
chemicals, food stuffs and wood products are the major items of import. Egypt has signed several
international trade agreements with partnering countries that govern country‟s international trade.

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Exports: $25.34 billion (2010) ; $23.09 billion (2009)

Export Commodities: Crude oil and petroleum products, Cotton, Text iles, Metal products,
Chemicals, Processed food

Export Partners: US 7.95%, Italy 7.26%, Spain 6.78%, India 6.69%, Saudi Arabia
5.53%, Syria 5.3%, France 4.39%, South Korea 4.27% (2009)

Imports: $46.52 billion (2010) ; $45.56 billion (2009)

Import Commodities: machinery and equipment, foodstuffs, chemicals, wood products,

fuels

Import Partners: US 9.92%, China 9.63%, Germany 6.98%, Italy 6.88%, Turkey
4.94% (2009)

Source: CIA

(Refer Appendix A for further information)

1.6 International Trade in the past

Egypt has grown increasingly reliant on imports over a very long period of time, and has, as a result,
maintained an external trade deficit for most of the past 6 decades. The deficit grew considerably
between 1974 and 1984 as a result of President Sadat's open-door policy that encouraged imports,
reaching US$4.86 billion in 1980. This rise was fueled by the infusion of large amounts of foreign aid
following the signing of the Camp David peace accords with Israel in 1978 and the rise in oil
revenue. Imports dropped for a brief period between 1984 and 1986, due to the shortage of foreign
exchange coupled with debt repayments. Since 1986, imports have been on the rise. Thus, with
exports remaining steady at around US$4.5 billion, Egypt has continued to maintain trade deficit.
Since 1998, the government has attempted to discourage imports by tightening trade financing and
controlling the amounts of foreign currency in the country. Coupled with higher oil prices, the policy
of lowering imports succeeded in reducing the deficit in 2000. However, imports are likely to
continue outpacing exports due to widespread lack of most raw materials, especially those needed by
the construction and industrial sectors.
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Egypt imports a variety of goods, especially capital goods such as machinery and equipment,
necessary for its economic and infrastructure development. Food has traditionally accounted for 20
percent of imports, but chemicals, wood products, and fuels are also imported.

Between 1960 and 1980, agricultural products made up the bulk of exports, accounting for 71
percent. That percentage dropped significantly in the 1990s, reaching 20 percent in 1995. On the
other hand, the export of fuel, minerals, and metal rose sharply over that same period, reaching 41
percent in 1995. The export of manufactured goods has also risen since the 1990s. This increase was
due to the growth in clothing and textile production. The value of exports has been steady since 1997,
reaching US$4.6 billion in 1999. The failure to expand exports has been blamed on factors like state
bureaucracy and red tape, lack of competitiveness in the exchange rate market, the shortage of
modern technology, and low industrial capacity. Additionally, the inadequate marketing experience
of Egyptian exporters has left them ill-equipped to compete successfully in the export business.

Being a member of the World Trade Organization since 1995, Egypt has secured better access to
developing markets, but there is rising concern about its impact on the protected sectors of the
economy, namely the industrial and agricultural sectors. The lifting of state protection might make
these sectors more competitive, but could also lead to a huge increase in the country's import bill.

Source: Encyclopedia of the Nations

1.7 Government Intervention

Egyptian government has gradually liberalized its trade regime and economic policies. Under the
leadership of Prime Minister Ahmed Nazif and a new ministerial economic team in place since 2004,
the government has adopted a wide range of significant reform measures. However, the government
needs to continue to reduce corruption, reform the cumbersome bureaucracy, and eliminate non-
science based health and safety standards. In 2004, the Egyptian government reduced the number of
tariff bands and dismantled tariff inconsistencies.

With the need for higher economic and export growth, the Government seeks to eliminate bottlenecks
created by a number of service activities. For example, significant headway has been made in

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reforming the financial sector, which has recently been opened to foreign investment; the
telecommunications sector is gradually being opened to competition, notably in mobile telephony and
value added services. In the mid 1990‟s, the Government opened to the private sector a number of
infrastructure services, such as port services, energy generation and distribution networks. Although
the Government retains control of the existing services infrastructure, most new projects are run as
build-own-operate-transfer (BOOT) schemes to help producers and exporters.

The Egyptian Ministry of Investment has been involved in a series of reform and promotional
programs to improve both local and foreign investment.

Egypt's export policies have become a priority item. To limit hard currency expenditures, government
officials are advocating productive investments, restricted imports, rationalization of consumption,
and implementation of import substitution projects and countertrade measures. The government also
hopes to stimulate exports by removing impediments to private sector exporters and encouraging
freer managerial judgment by public sector companies. The government is emphasizing growth in its
industrial and agricultural sectors while renewing calls for increased investment.

Over the last few years, the government has improved the transparency of the national budget,
revived stalled privatizations of public enterprises, and implemented economic legislation designed to
foster private-sector-driven economic growth and improve Egypt‟s competitiveness.

Cairo has aggressively pursued economic reforms to encourage inflows of foreign investment, and
facilitate GDP growth. In 2005, Prime Minister Ahmed Nazif‟s government reduced personal and
corporate tax rates, reduced energy subsidies, and privatized several enterprises.

Foreign direct investment has increased significantly in the past few years, but the government will
need to continue its aggressive pursuit of reforms in order to sustain the spike in investment and
growth and begin to improve economic conditions for the broader population.

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1.8 Trade Policies and Trading Partners

Trade policy reform has been pursued mainly under an autonomous programme of trade
liberalization. As an active member of the WTO, Egypt is committed to meeting its Uruguay Round
requirements, utilizing in many cases the permitted implementation period for developing countries.
Concurrently, Egypt has focused on preferential trading agreements as a means for increasing trade
flows, joining regional agreements such as the Common Market for Eastern and Southern Africa
(COMESA) and the Greater Arab Free Trade Area (GAFTA). It has also signed a number of bilateral
trade agreements to accelerate regional trade liberalization. The completion of negotiations for the
Euro Mediterranean agreement with the European Union (EU) will further deepen the process of
preferential trade liberalization and should improve Egypt's access to its largest export market.

1.9 Telecommunication (Mobile Cellular) Industry

The country currently has 58.679 million subscribers in total. Egypt is the second largest market in
Africa with approximately 14.15 percent of the total mobile subscriber market. The operators present
and their market share are –

Operator Subscribers (in millions)

MOBINIL 25.35

VODAFONE 23.32

ETISALAT 10.0

Egypt became one of the first countries in Africa to launch third generation (3G) mobile services in
2007, following the award of the country‟s third mobile license the previous year. The record price
that was paid for the 3G license indicates the potential that is seen in the Egyptian mobile market, and
the penetration rate has increased from 58% in 2009 to 77% in 2010. The 3 operators have launched a
wide range of advanced services, including 3.5G mobile broadband. The country‟s telecoms
regulator, NTRA has announced it may consider offering a fourth mobile operator license.

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This clearly indicates the potential for another operator to enter the market. According to the
Egyptian Cabinet Information and Decision Support Centre, the number of mobile phone subscribers
in the country rose to 55.35 million in December from 53.68 million in November 2010. Around 1.67
million subscribers were added in December, up from 700,000 in November, the centre said.

1.10 Egypt’s Booming Telecommunication (Mobile Cellular) Market

Egypt hаѕ bееn witnessing аn aggressive development οf telecommunication projects, educational

infrastructure аnd bandwidth allocation fοr the past few years.
According to The Egyptian Ministry of Communication and Information Technology, the number of
mobile subscribers in the country exceeded 60 million at the end of August 2010, an increase of
20.3% since last year.
Telecom specialist Mohamed Hamdy said that the mobile market is expected to reach full penetration
in 2013, totaling 82 million subscriptions. “Saturation does not mean „no growth‟ in the market”, he
said, attributing the massive growth to more than one line per user and free bundled packages for the
low-income segments.
In early 2010, Egypt's Minister of Communications Tarek Kamel said that "A fourth mobile licence
could be offered depending on factors such as available spectrum and revenue as well as subscriber
growth".

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There has been a skyrocketing of Mobile penetration rate and it is estimated that it will reach well
over 97 percent by the end of 2014. The number of subscribers is expected to reach 90 million by the
end of 2014. This growth is specially driven by significant changes in the competitive landscape

This clearly indicates the potential for a fourth operator to enter the mobile industry. There is a lot of
potential in the Egyptian Mobile Market and a large segment of the low-income group remains
untapped. Already having its presence in Africa, Bharti Airtel could be a successful bidder for the
fourth operator license in Egypt.

(Refer Appendix B)

2.0 Bharti Airtel

2.1 About the Company

Bharti Airtel Limited is an Indian telecommunications company that operates in 19 countries

across South Asia, Africa and the Channel Islands. It operates a GSM network in all countries,
providing 2G or 3G services depending upon the country of operation. Airtel is the fifth largest
telecom operator in the world with over 207.8 million subscribers across 19 countries at the end of
2010. It is the largest cellular service provider in India, with over 152.5 million subscribers. Airtel is
the 3rd largest in-country mobile operator by subscriber base, behind China Mobile and China
Unicom. Airtel also offers fixed line services and broadband services.

It is known for being the first mobile phone company in the world to outsource everything except
marketing, sales and finance. Its network (base stations, microwave links, etc.) is maintained
by Ericsson, Nokia Siemens and Huawei., business support by IBM and transmission towers by
another company (Bharti Infratel Ltd. in India). During the last financial year [2009-10], Bharti has
roped in a strategic partner Alcatel-Lucent to manage the network infrastructure for the Telemedia
Business.

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2.2 Airtel in Africa

On 8, June 2010, Bharti Airtel, in the largest ever telecom takeover by an Indian firm, completed a
deal to buy Kuwait-based Zain Telecom's businesses in 15 African countries for $10.7 billion. The
transaction is the largest ever cross-border deal in an emerging market and will result in combined
revenues of about $13 billion. The deal would provide Bharti around 40.1 million subscribers to its
already 125 million-plus user base.

Airtel currently has its presence in Kenya, Ghana, Uganda, Malawi, Zambia, Tanzania, Niger, Sierra
Leone, Burkina Faso, Gabon, Chad, Congo B, Madagascar, Seychelles and Nigeria.

(Refer Appendix C for News Article)

3.0 Trade Theories

3.1 Comparative Advantage

A country has a comparative advantage over another in the production of a good if it can produce it at
a lower opportunity cost: i.e. it has to forego less of other goods in order to produce it.

Egypt possesses a number of comparative advantages that positions it positively as a promising

market for ICT and media convergence. Its infrastructure potential, talented ICT professionals,
efficient service providers and empowering regulatory framework are only some of the factors that
make the potential shift to a converged communications sector much easier. By deregulating the
market and attracting investments, NTRA is paving the way for the steady growth of the industry.

3.2 Factor Endowment

The Heckscher-Ohlin Factor Endowment theory states that international and interregional differences
in production costs occur because of differences in the supply of production factors:

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Commodities requiring for their production much of [abundant factors of production] and little of
[scarce factors] are exported in exchange for goods that call for factors in the opposite proportions.
Thus indirectly, factors in abundant supply are exported and factors in scanty supply are imported.

The continuous improvements in infrastructure by the Egyptian government, availability of skilled IT

workforce, high literacy rate, governments support to industries and the geographical location of
Egypt are factors that favor the establishment of a Telecommunication industry.

3.3 Porters Diamond Model

Porter's diamond model suggests that there are inherent reasons why some nations, and industries
within nations, are more competitive than others on a global scale. Porter's model includes 4
determinants of national advantage, Factor Conditions, Demand Conditions, Related and Supporting
Industries and Firm Strategy, Structure and Rivalry.

Applying Porters model to the Telecommunication industry in Egypt, let us analyze each of the above
determinants –

Factor Conditions –

They are human resources, knowledge resources, physical resources, capital resources and
infrastructure. Each country has its own particular set of factor conditions. Having a literacy rate of

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71.4 percent, Egypt has a reasonable percentage of skilled workforce. The required capital is
available through funding from Barclays Bank and other institutions.

Demand Conditions –

It is the demand in the home market that can help companies create a competitive advantage. We saw
the increase in number of mobile subscribers in Egypt over the last few years. There has been a
tremendous increase in the mobile penetration rate and it is estimated that this growth will rise in the
future years. The rising number of mobile users is a clear indication of increasing demand.

Related and Supporting Industries –

They are important of the growth of any firm. Supporting suppliers help the firm to successfully
compete in the market and to innovate. Egypt is currently having 3 mobile operators who have
created a successful chain of suppliers. The acquisition of Zain Telecom in Africa by Airtel will great
support Airtel to establish in Egypt. Airtel can outsource a part of its operations to companies like
Ericsson which provides Network solutions and IBM for IT solutions.

Firm Strategy, Structure and Rivalry –

The structure and management systems of firms in different countries can potentially affect
competitiveness. Likewise, if rivalry in the domestic market is very fierce, companies may build up
capabilities that can act as competitive advantages on a global scale

Airtel will face competition from 3 existing operators. It should have a strategy to attract new
customers to gain a significant portion of the market. Since Airtel has the support of an existing
African Telecom company, it can use a low cost strategy to attract the low income segment customers
who form a major part of the increasing number of mobile subscribers. The competition and rivalry in
the market will enable the company to innovate, develop new technology and hence improve its
strategy.

Government –

Government can influence each of the above four determinants. The Egypt government is
encouraging Foreign Direct Investments and it has opened its telecommunication sector to
competition. The NTRA has announced that it will consider issuing a 4th operator license. The
support from the government will significantly help Airtel to establish itself in Egypt.
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4.0 Recommendation

4.1Future Trade for Egypt

Egypt has been reliant on imports and has witnessed trade deficit for the last few decades. The
government has taken a series of reforms to promote exports and encourage foreign investments.
However, the government needs to continue to reduce corruption, reform the cumbersome
bureaucracy, and eliminate non-science based health and safety standards. The government can
encourage exports and restrict imports by supporting local industries, improving the infrastructure,
improving the quality of life and the overall standard of living.

The financial, telecommunication and other private sectors can be opened to foreign investments.
This will encourage competition and hence initiate innovation which is beneficial for the country.
Spending on education will result in an increase in the percentage of skilled workforce and will also
reduce unemployment. The government must ensure that it maintains good relations with its trading
partners for the future growth of the country.

4.2 Recommendation to Airtel

Having analyzed the cultural attitude, political framework and the economic structure of Egypt, we
can conclude that Egypt is an Emerging Market. Adequate support from the government makes the
country suitable for investment. The booming Telecommunication market indicates the potential for
the entry of a 4th operator into the country. A significant portion of the low income segment remains
untapped. With the continuously increasing number of mobile subscribers, Airtel can conquer a
substantial portion of the market.

Airtel has time and again focused primarily on expanding its base across the world. The acquisition
of Zain Telecom in Africa has given Airtel an exposure to the African market and a huge subscriber
base. Having a presence in 15 countries across Africa, we can affirm the fact that Airtel can establish
itself in Egypt.

As an International Business Consultant, I strongly recommend that Airtel should tap the booming
Egyptian mobile market.

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APPENDIX A

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APPENDIX B

Market Share Of Existing Operators

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APPENDIX C

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Airtel Africa - Accessed on 12th February 2011.

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http://www.itnewsafrica.com/?p=9214

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