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Adding value to the telco sector

The telco ecosystem is amongst the most dynamic and evolutionary of any industry. Each year at the industry’s blue-ribbon event, the Mobile World Congress, the key commentators herald the arrival of new entrants to the market, the latest trends and revolutionary services. Earlier this year in Barcelona was no different. For handset manufacturers, infrastructure providers and network operators, 2011 brings with it a myriad of new commercial opportunities and challenges. This Business Briefing provides an overview of the current landscape, reviews the challenges faced by vendors serving this sector and how one global provider is responding by playing a fundamental role in inter-mediating the telecoms value chain.

Data explosion

With Cisco predicting a trebling of wireless data traffic over the next decade (see Table 1 and Chart 1) and governments clearing spectrum to pave the way for new auctions; operators are investing extensively in next generation networks. To fund HSPA+, LTE, Fiber and VDSL, MNOs and MSOs (see definitions below) are increasingly looking to manage their own working capital positions more effectively with centralised payments, streamlined collections and efficient liquidity management structures and solutions.

This is a truly global industry and service providers targeting the sector require an extensive global coverage model supported by direct cash clearing memberships in multiple jurisdictions. Shared Service Centres (SSCs) and Payment Factories, once the preserve of other sectors, particularly technology and pharmaceutical companies, are fast becoming features in the telco sector. Additionally, SWIFT corporate access, regulatory change, such as the Payment Services Directive (PSD) and SEPA in Europe, and XML connectivity are all helping to drive cash management optimisation objectives.

Moreover, as the banks reassess how they allocate their balance sheets following the financial crisis, operators are looking to diversify funding sources. Export Agency Finance, in some cases offering attractive sub-LIBOR borrowing rates, is an increasingly popular choice for equipment purchases. On the flip side, bill discounting and receivable finance have been essential elements in helping infrastructure companies reduce their Days Sales Outstanding (DSO) and improve their liquidity position, on the back of their sales to operators.

Furthermore, many leading telecom companies and Internet Service Providers (ISPs) in the emerging markets are looking to tap into investor’s ‘growth market’ and segment appetite, to raise capital beyond their national borders to fund their expansion plans. Russia’s group’s November 2010 IPO and Global Depositary Receipt launch serve as a prime example. The company raised US\m and as Reuters reported at the time that ‘makes it Europe’s largest listed internet business.’

Table 1: Examples of Mobile Data Traffic Growth in 2010

Region Mobile Operator and Content Provider Examples
  • From mid-2009 to mid-2010, KT recorded a 344% increase in 3G mobile data traffic, SK Telecom’s traffic grew 232%, and LG’s traffic grew 114%.

  • KT expects a 49-fold increase in mobile device traffic from 2009 to 2012, but plans to offload 40% of this traffic.

  • Softbank’s mobile traffic grew 260% from 1Q 2009 to 1Q 2010, according to estimates by HSBC.

  • KDDI expects mobile data traffic to grow 15-fold by 2015.

  • NTT DoCoMo’s mobile data traffic grew 60% from year to year.

  • China Unicom’s 3G traffic increased 62% in a single quarter from Q1 to Q2 of 2010.

  • SFR’s mobile data traffic has tripled each year since 2008.

  • Telecom Italia delivered 15 times more mobile data traffic in 2010 than in 2007.

  • Vodafone’s European mobile data traffic increased 115% from 1Q 2009 to 2Q 2009, and 88% from 2Q 2009 to 2Q 2010.

  • TeliaSonera expects mobile data traffic to double each year for the next five years.

United States
  • AT&T reports that traffic grew 30-fold from 3Q 2009 to 3Q 2010.

  • Google reports that the number of YouTube videos delivered to mobile devices tripled in 2010, reaching 200m views/day.

Source: Cisco VNI Mobile 2011

Chart 1: Global Mobile Data Traffic Forecast by Region
Chart 1: Global Mobile Data Traffic Forecast by Region

Source: Cisco VNI Mobile, 2011

Collaboration and M&A

On the back of a wave of mega mergers and minority-investment divestitures, companies are looking at the best ways to realise synergies and extract greater operating efficiencies. The merits of sharing or selling passive infrastructure, outsourced network management and WiFi off-loading, as utilisation increases, are proving attractive options for telcos. In turn, this is necessitating fresh consideration around escrow accounts and supply chain financing.

A very recent example is Vodafone’s decision to sell its 44% stake in the French mobile phone operator SFR to Vivendi for €7.95 billion (£7 billion). The deal gives Vivendi, France’s pre-eminent media conglomerate, full control of SFR and ends months of talks with Vodafone.

The activity is by no means limited to Europe with last month’s announcement of Deutsche Telecom agreeing to sell its T-Mobile America business to AT&T for $39 billion (£24 billion).

Analysts predict more restructuring and asset sales in the industry as telecom giants look to raise money to invest in their networks.

One solution from a global bank

With risk an ever present feature of commercial operations, telecom companies (with expensive ducts, cabinets, masts, servers and micro-systems to protect) are taking a fresh look at the benefits of in-house captive vehicles and self-insurance. Some of the most far-sighted telcos are offering subscriber protection on smartphone loss and bill protection, in event of unemployment/income loss, with insurance Letters of Credit and collateral custody a necessary banking element to assure third party underwriters.

The inter-dependency of today’s high-tech manufacturing chain and the need for extended partnerships was further underscored by the recent events in Japan. Secondary to the much greater human tragedy, a commercial consequence of the earthquake has been a severe disruption to the production of the resin used in smart-phone semiconductors (over 50% of which is concentrated in Japan) prompting concerns for the supply-side.

The following Vodafone case study neatly summarises the solution benefits of a well-structured and broadly sponsored supplier finance programme. Indeed, the advantages of expedited vendor payment/alternative funding and extended terms for procurement highlight the win-win nature of these structures. For Vodafone, supply chain finance is the latest chapter in a comprehensive business transformation programme.

Cost management

With increasing competition in operating systems and devices, the cost of smartphones and consumer subsidies are falling to offset non-monetised network use (fixed data tariffs) and falling/flat-lining voice revenue. Beyond the ongoing challenges to net neutrality limits, in the face of a surge in bandwidth-intensive content, and Average Revenue Per User (ARPU) enhancement tools, such as machine-to-machine and m-commerce digital services, all the players in the telco sector are looking to drive down subscriber acquisition costs and Selling, General and Administrative (SG&A) expenses.

such as machine-to-machine and m-commerce digital services, all the players in the telco sector are looking to drive down subscriber acquisition costs and Selling, General and Administrative (SG&A) expenses.

Some providers, including Citi, have greatly helped industry players to differentiate themselves with the consumer and the employee, and improve Earnings Before Interest and Tax (EBIT) through leading-edge card solutions such as:-

  • Prepaid cards

    – designed to help organisations distribute electronic payments simply and efficiently. Such cards incentivise a network switch, customer loyalty and referral or device purchase cash-back. Citi’s prepaid card product which supports millions of telecom payments in the US (for Verizon, Sprint, T-Mobile and others) is now internationally available and is being adopted by thought leading companies in the technology and telecom sectors in Europe and Asia.

  • Travel and entertainment cards

    – a corporate credit card for employees – this forms part of a concerted corporate effort to manage the third highest controllable expense. In this highly competitive landscape, account directors and sales/marketing personnel travel extensively to meet with clients and develop their business. Local-issuance capabilities of the banks help the leading handset and infrastructure companies more effectively manage employee expenditure and gain economic return.

Additionally, outsourcing is an increasing trend in the industry and service providers need to harness their core competencies to serve the companies engaged in the production and exportation of ‘kit’ at the very beginning of the value chain. With so many documents involved in export Letters of Credit (LC), as well as the varying and changing country regulations and trade practices and process discrepancies causing delays to timely payment, there are opportunities to provide ‘one-stop shop’ solutions for document preparation and LC issuance.

“it is clear interconnectedness and innovation are the overriding themes.”

Case study

Vodafone’s supply chain finance programme

A multinational mobile communications company worked to leverage its processing centres with an easily integrated supply chain finance programme.

Vodafone is one of the world’s largest mobile communications companies by revenue, operating across the globe providing a wide range of communications services. Their vision is to be the communications leader in an increasingly connected world.

The challenge

The Vodafone Group provides mobile communications in Europe, Africa, Asia Pacific, the Middle East and the United States. To increase its operational efficiency and extract economic value from its supply chain, Vodafone established two centralised service and procurement centres in Europe; the Shared Service Centre in Hungary and the Vodafone Procurement Company in Luxembourg, respectively. With the establishment of these new processing centres, Vodafone was seeking a supply chain finance programme that would leverage these platforms while providing economic value to Vodafone and its suppliers.

“Citi’s technology platform is instrumental in making the programme work for us. Further, Citi has a very workable proposition that is easy to roll out because they are actually addressing a real need – it’s not a contrived need, it’s a real need and a real opportunity.”

Neil Garrod, Group Treasurer, Vodafone

The solution

Citi has partnered with Vodafone on various Project EVO* (evolution) implementations and is familiar with Vodafone’s specific business needs. Citi deployed the same team that had worked with Vodafone in the past ensuring the highest level of service. The team created an easily integrated supply chain finance programme that not only leveraged Vodafone’s existing processing centres, but also enabled Vodafone and its suppliers to conveniently maximise working capital while mitigating risk.

Additionally, the structured programme provides Vodafone (and other potential investors) with the option, but not the obligation, to invest in short term, liquid notes that are secured on the underlying Vodafone receivables; generating high yield investment income without assuming counterparty risk. Citi’s technology platform was easily integrated into that of Vodafone and its suppliers. In fact, Citi’s programme enabled Vodafone to leverage its existing connectivity such that a single file could be submitted to Citi for both regular and discounted supplier payments. Finally to ensure that the programme was quickly adapted by Vodafone’s suppliers, Citi and Vodafone conducted several workshops, co-presented at supplier forums, and met with individual suppliers to ensure the on-boarding process was both straight-forward and convenient.

“Through Citi’s recommended supply chain finance structure, Citi was able to demonstrate compelling economic value add – both in the form of working capital improvements to Vodafone and its suppliers.”

Mark Tweedie, Managing Director, Global Telecom Head, Citi GTS

The result

The launch of the supply chain finance programme proved an immediate success for Vodafone Treasury, Procurement and Shared Services, as well as Vodafone’s suppliers. As a result, Vodafone’s operating companies that have migrated to the Shared Service Centre in Hungary and who are consequently using the Vodafone Procurement Centre in Luxembourg are now working with Citi to be added to the programme. Given Citi’s global presence and expertise, Citi is already adding Vodafone’s operations in Germany, Italy, Portugal and Spain to the supply chain finance programme, with plans to add more operating companies in future.

(*Project EVO is Vodafone’s business transformation programme to implement a single integrated operating model across Finance, Supply Chain, Procurement and HR supported by a single ERP system.)


Whilst the Telecom industry wrestles with the forces of regulatory intervention, burgeoning traffic use, cost apportionment and fixed and mobile convergence, it is clear interconnectedness and innovation are the overriding themes. In summary, by selecting the right banking partner, telco companies can:

  • Benefit from best-in-breed payment, collection, and liquidity infrastructure to better manage their working capital and tighten the Cash Conversion Cycle (CCC).

  • Finance their suppliers, discount receivables, arrange export agency funding, provide letters of credit and outsourced documentation services thereby finessing and facilitating heightened trade activity. Citi is playing its part in supporting this important sector both for companies who seek to consolidate as well as those looking to expand.

Citi is playing its part in supporting this important sector both for companies who seek to consolidate as well as those looking to expand.

Citi’s experience as a trusted partner

For more than 100 years, Citi has been successfully partnering with clients and enabling them to benefit from extensive product capabilities, geographic reach and local market expertise. With a footprint in more than 101 countries, encompassing full local capabilities which are complemented by local network partnerships, Citi is perfectly positioned to address our clients’ treasury and procurement needs. Our dedicated in-country professionals can assist in advising on the best-in-class transaction banking solutions.

Contact details:
Mark Tweedie,
Managing Director,
+44 20 7500 5546
Citi Global Transaction Services