The telecommunications industry stands as a major contributor to societal connectivity and economic progress. Without it, almost every work would be incomplete. Within these dynamic landscapes, Axiata, a Malaysian multinational telecommunications company established in 1992 A.D. with the purpose of advancing Asia, has emerged as a significant player, operating across multiple markets in Asia. The company has a vision of being TNGDC, i.e., The Next Generation Digital Champion.
The company drives value across the digital and telecommunications landscapes through its Triple Core Business verticals of Digital Telcos (XL Axiata, Robi, Dialog, Smart, and Celcomdigi), Digital Businesses (Boost, Ada, and Axiata Digital Lab), and Infrastructure (Edotco, Linknet). In 2008, it rebranded as Axiata Group Berhad.
Over the years, the company has extended its presence beyond Malaysia. Axiata serves over 350 million customers. It provides services in 10 countries with key markets including Cambodia, Bangladesh, Sri Lanka, Indonesia, and Malaysia. In today’s tech world, telecom companies must adapt to evolving customer demands and technological advancements. The company has expanded its foothold outside Malaysia's borders over the past year. Axiata has more than 350 million members and offers a wide range of services in 10 countries, the most important of which are Cambodia, Bangladesh, Sri Lanka, Indonesia, and Malaysia. In this age of technological advancement, telecom providers have to cope with changing customer preferences and technical improvements. Axiata has responded to this challenge by prioritizing digital transformation projects. Axiata's entry into Ncell, Nepal's largest telecommunications provider, launched in 2004 A.D., represented an important milestone in its strategic growth aspirations in South Asia. The acquisition occurred in 2016, providing Axiata with a strategic advantage to leverage the increasing need for telecommunications services in Nepal and the surrounding area. Prior to Axiata's arrival, Ncell was already a strong participant in Nepal's telecom business. The company provided a diverse scope of services, which included mobile voice, data, and value-added services, among others. With a large user base and strong brand exposure, Ncell held a top place in the market, making it an ideal business option for Axiata.
Main Issues and Performance
Axiata’s entry into Nepal was motivated by its goals to extend its reach in South Asia, discover opportunities for growth, and solidify its position in the region. The purchase of Ncell in 2016 was viewed as a decision to tap into Nepal's increasing need for telecom services. Despite its start, Axiata faced challenges during its time in Nepal.
Regulatory and Taxation Challenges
A significant regulatory challenge for Axiata in Nepal was the imposition of hefty renewal fees for telecom licenses. The Government of Nepal required Ncell to pay NPR 20 billion (approximately $151 million) three times over a 25-year period. Axiata considered this cumulative fee of NPR 60 billion ($452 million) to be financially unsustainable. Additionally, Nepalese law mandates that telecom companies with more than 50% foreign ownership must transfer all assets to the government upon the expiry of the license period. This provision created significant uncertainty and deterred long-term foreign investment.
Capital Gains Tax Dispute: Axiata's failure to finalize the purchase of Ncell from TeliaSonera in 2016 was primarily attributed to a capital gains tax issue. The Government of Nepal claimed that the tax implications stemming from this transaction remained unsettled, leading to financial disputes. Axiata was eventually compelled to pay NPR 47.39 billion ($380 million) in capital gains tax. Despite this payment, the issue remained unresolved, with additional tax demands continuing to arise, exacerbating the financial strain on Axiata.
Deteriorating Financial Performance: Ncell’s financial performance deteriorated, impacting Axiata’s profitability. A 6% decrease in revenue year-on-year due to reduced mobile voice usage, interconnect rates, and increased competition resulted in a 48% decrease in net profit over three quarters. As a result, Axiata reduced the value of Ncell’s assets by $258 million. It wrote off $68 million in outstanding amounts, resulting in a loss of $279 million in the initial quarter of 2023. Axiata's deteriorating financial status of Ncell played a role in Axiata’s choice to withdraw from Nepal.
Policies and Regulations
Make a thorough probe into Axiata Group's Controversial Ncell e...
The regulatory environment in Nepal posed numerous challenges for Axiata. High renewal fees and stringent regulations regarding foreign ownership created an unsustainable financial burden. Additionally, the capital gains tax dispute further strained Axiata’s financial resources, highlighting the complex and often unfavorable regulatory landscape in Nepal.
Economic and Operational Environment: Nepal’s economic environment also posed additional challenges for Axiata. High inflation, slow economic growth, and pervasive corruption created a difficult operating environment. Rising inflation led to increased expenses and reduced purchasing power, whereas slow economic growth impacted potential earnings. Issues like corruption scandals and bureaucratic hurdles disrupted business activities, creating obstacles for Axiata in achieving its goals in Nepal.
Competition and Market Conditions: The telecommunications industry in Nepal is experiencing heightened competition as numerous companies compete for a slice of the market. While Ncell holds a market share, it is facing competition from other telecom operators who are expanding their reach and providing attractive pricing and new services. To stay ahead Ncell must keep investing in its network infrastructure and marketing efforts to hold onto its customers putting a strain on its resources.
Competition and Market Conditions: The telecommunications industry in Nepal is experiencing heightened competition as numerous companies compete for a slice of the market. While Ncell holds a market share, it is facing competition from other telecom operators who are expanding their reach and providing attractive pricing and new services. To stay ahead, Ncell must keep investing in its network infrastructure and marketing efforts to hold onto its customers, putting a strain on its resources.
Geographical and Infrastructural Barriers
Nepal faced challenges due to its terrain, making it difficult to improve infrastructure in remote areas. Providing network coverage in these regions needed investments in towers and transmission lines, which were both difficult to implement and expensive. The geographical hurdles hindered Ncell’s efforts to expand its services efficiently and affordably, affecting its market reach and service standards .
Political Instability: Political instability in Nepal was also a factor that influenced Axiata’s choice to withdraw. The nation has a track record of upheaval, leading to disruptions in business activities due to shifts in government regulations, administrative holdups, and interference from politicians. This kind of instability poses challenges for foreign investors trying to plan for the future.
Critical Recommendations and Their Impact on Issues
Focus on Core Markets: Axiata’s withdrawal from Nepal is part of a strategic realignment focused on bolstering the company’s financial standing and prioritizing markets with better conditions. By selling its stake, Ncell Axiata aims to allocate its resources and enhance shareholder value. This decision aligns with the company’s strategy to simplify its range of offerings by selling assets that no longer fit its long-term goals. By concentrating on markets, Axiata anticipates improved efficiency and profitability.
Portfolio Optimization: Regularly reviewing investments and divesting assets in fluctuating markets allows Axiata to streamline operations, minimize risks, and reinvest in opportunities with growth potential. Exiting Nepal enables Axiata to redirect capital to regions offering prospects for sustainable growth and profitability. Portfolio optimization is a critical strategy for Axiata, allowing the company to maintain a balanced and profitable investment portfolio.
Strengthening Regulatory Compliance: Axiata’s journey in Nepal highlights the significance of compliance for long-term success. By strengthening its compliance practices, Axiata can mitigate risks linked to hurdles and maintain a reliable operational setting. Improving regulatory compliance helps Axiata navigate through landscapes and realize its long-term goals in new markets.
Enhancing Financial Performance: To ensure long-term success, Axiata must prioritize improving its performance. By employing cost management tactics and streamlining its operations, Axiata can boost profitability and operational effectiveness. Enhancing performance is crucial for Axiata’s ability to reach its goals and uphold a solid market presence.
Addressing Economic and Operational Challenges
The case of Axiata in Nepal highlights the importance of overcoming operational obstacles to achieve success. Through the adoption of strategies to overcome these hurdles, Axiata can establish a favorable operational setting. Dealing with operational challenges is imperative for Axiata, enabling the company to reach its standing goals and uphold a robust market position.
Fostering a Conducive Business Environment
The case of Axiata in Nepal highlights the importance of establishing a business environment to encourage investment inflow and retention. Nepal can improve its appeal to investors by implementing measures that support transparency, stability, and predictable regulations. Cultivating a business atmosphere is pivotal for Nepal, as it enables the nation to draw in investments and drive sustainable economic development.
Building Strong Partnerships: For long-term success in new markets, building strong partnerships with local stakeholders is critical. By fostering strong relationships with local partners, Axiata can create a stable and supportive operating environment. Building strong partnerships allows the company to navigate complex market dynamics and achieve its long-term objectives.
Leveraging Technological Advancements: Achieving success in the telecommunications sector requires leveraging technological advancements. Through investments in technologies and advancements, Axiata can improve its range of services. Enhance operational efficiency. Leveraging technology is critical for Axiata, as it enables the company to stay ahead of the competition and reach its goals.
Leveraging Local Expertise: In order to maneuver through market conditions, it is crucial to leverage local expertise. By collaborating with businesses and hiring local professionals, organizations such as Axiata can acquire perspectives on regulatory, cultural, and operational intricacies. This method can assist in minimizing risks and improving market entry tactics. Local expertise offers an insight into market trends, facilitating decision-making and operational productivity, ultimately leading to sustained prosperity.
Future Outlook
Axiata pulling out of Nepal highlights the challenges faced when doing business in developing markets with varying conditions. Issues like hurdles, financial disputes, economic instability, and intense competition led to Axiata’s inability to continue operations in Nepal. This move underscores the importance of creating a business environment to attract and retain investments. Axiata’s experience in Nepal serves as a lesson for investors, stressing the need for risk assessments and a deep understanding of regulatory and economic landscapes before venturing into new markets. Furthermore, stable political environments and favorable government policies encourage investment and expansion.
Lessons for Future Investment
Axiata’s encounter in Nepal acts as a warning for investors. It underscores the significance of conducting risk evaluations and grasping the regulatory and economic landscapes prior to venturing into a new market. Investors should be ready to navigate structures and handle financial ambiguities, particularly in developing markets. Additionally, a stable political climate and favorable government regulations play a role in nurturing lasting investments and expansion.
The Potential for Policy Reform
Nepal can take advantage of Axiata’s departure to review and improve its regulations and investment strategies. Nepal has the opportunity to establish an investment climate by addressing the root causes of Axiata's exit. Streamlining tax laws, promoting transparency in procedures, and maintaining stability are crucial measures to attract and keep foreign investors. These changes could allow Nepal to capitalize on its market opportunities to boost development and technological progress in the telecommunications industry.
Conclusion
Axiata’s choice to withdraw from Nepal was influenced by a mix of hurdles, financial difficulties, economic uncertainty, and competitive demands. This move was influenced by high renewal costs, ongoing capital gains tax disputes, declining financial results, and tough operating conditions. By pulling out of the market, Axiata is looking to enhance its portfolio and concentrate on areas that offer prospects for long-term growth. This decision emphasizes the necessity of a transparent business environment to encourage investment and underscores the value of adaptability in dealing with intricate market dynamics. The experience serves as a critical lesson for future investments, highlighting the importance of understanding local environments and fostering robust business strategies.
