Roland Berger Strategy Consultants. content. Fresh thinking for decision makers

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1 Roland Berger Strategy Consultants content Fresh thinking for decision akers Opportunities for obile telephone operators in rural areas Custoers in the countryside are different They need unique offerings Wireless network operators have to rethink their approach Suitable strategies are already available Deceber 2011

2 SuCCESS IN RuRal MaRKETS: NEW CuSTOMERS FOR TElECOMMuNICaTION BuSINESSES Large population in rural areas * : India 800 China Net subscriber additions in rural areas * : India 107 China 128 x Desire for obile phones: 90% = Potential custoers: 1.29 bn * exaples

3 content Rural Markets Soetie in the id-1980s, the first obile phones appeared in Hollywood fils, as a status sybol for the rich and powerful. Gone are those days. Today obile counication is so coonplace that the arkets of the industrialized world are thought to have reached saturation point. Mobility players find it hard to achieve even eager growth rates in these arkets. Things look totally different in eerging and developing countries, where obile phones are less widespread. But this is changing fast. The deand for obile counication in these countries is high, as the growth rates in several key eerging arkets show (Egypt, Brazil, China, India, Indonesia, Nigeria, Pakistan and Thailand). Here, 570 illion new obile phone subscribers were added between 2007 and However, these new custoers are not all city dwellers, as you ight think. There is considerable deand for obile counication aong the rural population too. Most of the 570 illion new custoers, 303 illion to be exact, live in rural areas. And the growth continues: Well over 90% of those currently without a obile phone want one. "Metropolitan" business odels do not work in the countryside Unfortunately, this deand does not autoatically translate into big profits. Product design, sales and arketing odels established in the cities cannot siply be transferred to the countryside. Equipping sparsely populated areas with the technical infrastructure needed for coprehensive obile coverage does not coe cheap: in fact, the costs increase as one penetrates ore reote arkets. At the sae tie, since the rural population has a low average incoe, the Average Revenue Per User (ARPU) tends to reduce with reoteness. On a hayride PROFIT Rural PROFIT City Mobile telephone operators should also take the path to the countryside if they look out for new custoers. In the long run, ignoring the rural population's need for obile counication for the above reasons is not a good idea. It would leave the field wide open to copetitors. And since custoer growth in rural areas is at least as fast as that in urban areas, significant arket share would be lost. Relatively low ARPU aong new custoers can be copensated for by high volues. Not to ention the additional iage boost. Aong copanies who have entered the rural arket, the successful ones are those who see their rural custoers as a separate custoer group that has to be addressed with specially tailored concepts. Copanies who siply transfer the concepts they have established in big cities to the countryside, are destined to fail. Taking the network to the countryside Expanding a network in rural regions using urban quality yardsticks for network coverage and speech quality is expensive and coplicated. A strategy of expanding cheaply and quickly with oderate quality of network coverage is ore proising. This ay reduce quality, but quality can be iproved once there are enough custoers spending enough oney. The opposite strategy of a high-quality but slow and expensive network expansion not only reduces financial

4 Roland Berger Strategy Consultants capacity for other investents but leaves a copany vulnerable to faster copetitors. Collaborative approaches at an industry-level or with governental support are also being explored, especially in African countries. Tailoring the product to rural custoer segents It is also iportant to face the fact that not all rural consuers are the sae. Farers, students, rural workers or rural business owners have, for exaple, different incoe levels, internet usage, and different counications habits and needs. One product does not fit all. Copanies have to understand that rural custoers need to be segented and their value proposition drivers understood. This consuer insight should be used to design tailored products and services for rural consuers. Sall is beautiful MAKE IT SMALL To offer rural custoers saller packages proved to be a successful business odel, as other copanies found out. Affordability is key... In general, the average incoe of rural custoer target groups is uch lower than in big cities. Differences of a few cents can ean a lot to the affordability is essential. Other industries can provide ideas for new approaches. Food corporation Nestlé, for exaple, reduced the size of coffee and ilk powder packages and sold the at a lower price successfully, as the sales figures show. Nestlé's Bono cookies are an excellent exaple: The packet size was reduced fro 200 to 140 gras, and sales rose 40% as a result. Consuer products giant Procter & Gable had a siilar experience when it reduced the size of toothpaste tubes and detergent sachets. CavinKare, a producer of beauty and personal care products, took a slightly different route. The copany identified how uch local custoers in India would be willing to pay for shapoo and created the appropriate package size. It paid off: The copany gained a 40% arket share. Taking a page fro this playbook, an Asian obile phone provider applied this odel: It odified its pay-as-you-go contract to allow users a iniu balance of just USD 5 cents with great success. All these exaples follow the sae idea: Successful copanies often reduce entry barriers for their ain target group by tailoring the product to the pocket of the custoer. This helps the product to penetrate the arket and built a custoer habit, which could lead to lasting loyalty over tie.... but value-adds are still possible Besides the very price-sensitive target group, the rural population also consists of segents who aren't convinced by cheapest offers alone. Here, another strategy could be proising: To link the core product in our case, country dwellers' desire for obile counication with other services relevant to the target group. China Mobile, for exaple, developed an offering for the target group of farers that provides a subscription to faring-related inforation on prices and price trends in addition to their obile phone contract. Using this and siilar other value-added approaches, China Mobile gained nearly 13% new custoers in 2010, totaling to 523 illion users. Revenue fro value-added business reached RMB billion (USD 63.6 billion), representing an annual growth rate of ore than 15% and accounting for roughly 31% of China Mobile Group's operating venue. China Mobile uses a cen-

5 content Rural Markets tral platfor, but localized the operation in delivering content on a province or region basis. The key of success also lies in cooperation, e.g. the copany fored a relationship with individual specialists like a card anufacturer, who created a enu ebedded card. Other add-on services are possible, in the real of healthcare, for exaple: In eerging and developing countries there is a lack of all-around healthcare provision for ost of the rural population. The next edical service station is often far away. At the sae tie, any widespread diseases such as tuberculosis or HIV require regular care and intensive onitoring by edical professionals. A good use of obile phone technology would be to query certain key paraeters with the patient and transit the digitally to the doctor in charge. With this, specialist advice is possible even at reote rural clinics and non-frequent visits to the doctor can be copensated partially at least. Access granted Another proising value-added area for obile operators is obile banking. In sub-saharan Africa, for exaple, over 470 illion people earn less than the equivalent of USD 10 a day but together, they would be able to deposit alost EUR 60 billion annually, yet only one in five has a bank account at all. By contrast, even the lowest earners in Africa usually have a obile phone. In other eerging and developing countries there is a siilar situation: In India, a Roland Berger case study found that 230 illion cellphone users currently ake little or no use of banking services. This nuber is likely to increase in the years ahead since the population is growing faster than the banks' new custoer business. So why not leverage the appeal of obile telephony to link banking services and obile counication? Of course, the banks would benefit fro such a schee, but so would obile phone copanies. They could stand out fro their copetitors by offering these value-added services and expand their custoer base. Several banks already started to tie up with the teleco-copanies to roll out their businesses in rural areas. Reaching out to reote custoers econoically Alongside network expansion and product design, the right sales setup is crucial for successfully winning new custoers in the countryside. Revenues at rural points of sale tend to be a lot lower than in cities, with coparatively high cost to serve the channels. The traditional topdown sales hierarchy of one national distributor, several regional distributors and local retailers does not always work in the rural areas. 4 Q Q Q 2010 China Mobile's subscription uptake has increased steadily quarter after quarter, after providing affordable value-added services to rural users. Further inforation 3 Q Q 2010 One successful strategy is to set up rural distributors alongside the regional urban distributors, with shared costs and infrastructure. These rural distributors know the local arket well and can handle it via icro-distributors, which are either sall town retailers or sei-urban/ rural retailers. Many copanies shy away fro this approach because they fear reduced visibility and control in the supply chain, and also diinished ability to "push" aterial into chain. However, these challenges can be addressed with an active sales anageent approach. Following this idea consequently results in down-to-earth solutions convincing by their siplicity: Stockists in rural areas can use cycles and even boats for their distribution and therefore overcoe infrastructural contraints and by doing so, reach custoers in reote areas or tiny settleents, for which even a distribution via sub-trucks or vans would be too elaborate. Altogether, a cheap and quick-to-establish way to service new custoers in rural areas. On the Roland Berger Strategy Consultants has developed strategies for the banking sector in sub-saharan Africa.

6 Roland Berger Strategy Consultants downside, these solutions are not scalable, as there is no network of consolidated service providers. Expanding existing sales partnerships or establishing new cooperations with bigger copanies is faster and less capital-intensive. Finally, there is the possibility to use existing ass distribution systes like PDS and post services. The advantage lies within its great reach and its established, trusted channel. But it coes at the expense of less control over a standardized brand iage and soeties inertia toward the distribution of new products and is thus ore suitable for regions with lower custoer potential. Spread the product Copanies who are successful in rural areas use different distribution channels as long as these are cheap and quick to establish. Consuer goods-copanies leveraged innovative partnerships to drive distribution reach and fundaentally alter distribution econoics. Soe of the outsourced last ile distribution by training key influencers fro each neighborhood in areas where conventional distribution networks can not econoically reach. Explaining the value added A sall-scale but focused sales approach also helps copanies deonstrate to potential custoers the value added of their products. Nokia, for exaple, deploys "salesobiles" in eerging and developing countries sall vans in which sales reps tour the country prooting the latest services and add-on offerings for the "farers of today". The Korean white goods anufacturer LG takes a siilar approach to explain its icrowave product group, including cooking deonstrations in a sall van. And Unilever's Shakti progra in India collaborates with local feale entrepreneurs who advise their clientele on health and hygiene atters as well as selling the the appropriate products. Local sales representatives are able to eliinate suspicion, answer questions and deonstrate the product live benefits that not every store can offer. This sall-scale channel eans that rural sales will never be as cheap as in cities. But involveent specially tailored to the region and target group can certainly be worthwhile, as it also boosts the brand. Consuer Education in general helps to grow business. To explain the benefits of cellular obility to non-users reaches out to new potential. Finally, technology gives obile operators opportunities to create inexpensive sale odels, for exaple by launching e-recharge systes to top up credit on a pay-as-you-go phone but this technology of course also needs to be explained.

7 content Rural Markets Good things coe in threes Success factors for rural business The right way for a obile operator to do business in rural areas depends partly on which target groups have the ost custoer potential, which arkets copetitors already occupy and which sales forats can be used. Roland Berger has identified three key factors based on its experience fro various custoer projects: 1. Product design: The product ust be tailored to the target group's needs, whether in ters of entry-level prices or regular costs. The product could also be ade ore appealing through add-on services (e.g. obile banking). Siply transferring popular etropolitan products to the countryside will not work. 2. Sales and distribution: Rural sales activities need to be organized on a saller scale and with ore focus. Only then can they eet the rural population's needs and expectations. In soe cases, partnerships ay play a key role, possibly involving a loss of control which needs to be anaged. Partnerships can also be used to leverage scale and expand reach. Innovations in distribution odels will fundaentally reduce cost and iprove effectiveness. Brand and arketing Product design Sales and distribution Roland Berger Strategy Consultants identified three key factors for success in rural arkets. 3. Brand and arketing: Only if the benefits of the offering and possible add-on services are clear will rural custoers be won over. Rural custoers value the experience of local contact people such as their local shopkeeper. It is essential to think beyond the traditional and use non-traditional and local edia effectively. For obile operators, it's about ore than only growth beyond the etropolitan areas. The enlargeent of custoer base also strengthens the copany as a whole and therefore also in the cities. The introduction of new distribution odels enhances know-how within the copany. And new collaboration odels could also prove as valuable for the business in etropolitan areas. To aster the above entioned challenges therefore are a task for all arket participants. IF YOU HAVE ANY QUESTIONS, PLEASE FEEL FREE TO CONTACT US: Chandan Joshi, Partner chandan.joshi@rolandberger.co Thoas Klotz, Partner thoas_klotz@sg.rolandberger.co think:act CONTENT Publisher: Prof. Dr. Burkhard Schwenker, Dr. Martin C. Wittig Project anageent: Dr. Katherine Nölling Roland Berger Strategy Consultants GbH A Sandtorkai Haburg news@rolandberger.co

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