How Vodafone made the right connections in Africa
Vodacom is a major global venture for the mobile giant, but it operates in a difficult and shifting political landscape, reports Christopher Williams
At Nelson Mandela’s former residence in Vilakazi Street, Soweto, South Africa’s future meets its dark past. Hordes of schoolchildren, too young to have suffered the injustice they have come to study, pack noisily into the modest single-storey home. Most seem more excited to be out of the classroom than by the artefacts of the struggle against apartheid on display.
Signs of change are all around outside too. The exterior walls display the Molotov cocktail scorch marks and bullet scars of raids on Mandela prior to his imprisonment. Yards away street performers and hawkers pay no mind to such grim history as they cheerfully work the groups of wealthy tourists.
The nearby Orlando Towers were once grey sentinels to a belching coal power station that lit up downtown Johannesburg but left Soweto in lamplight. They were decommissioned in 1998 and are now emblazoned with colour and commerce.
One serves as an advertisement for Vodacom, the keystone of Vodafone’s £9bn-a-year business outside Europe since a deal this year to merge its Indian operation with a rival. The tower is a 330ft reminder to the citizens of Soweto that in 21st century South Africa, connecting is crucial.
Vodacom, valued at £15.4bn on the Johannesburg stock exchange and 65pc owned by its British parent, is a pervasive presence in the township. As well as looming over the landscape, the company is shirt sponsor to both the major football clubs, the Orlando Pirates and the Kaiser Chiefs. It sells pay-as-you-go airtime via dozens of retail kiosks and fights a street-level battle for customers with rival MTN.
“We’re the number one brand in telco but also generally come just after Coca-cola in people’s minds,” says Shameel Joosub, chief executive. “That’s the benchmark.”
Its headquarters is on the far side of the city, in the burgeoning business district of Midrand. Here increasingly upscale local customers are more likely to wield the latest smartphones and subscribe to monthly packages, in exchange for the fastest 4G network technology. There are still two sides to South Africa and Vodacom must serve both.
“What resonates with high value customers is very different to what resonates with customers that are living more hand to mouth,” says Joosub, a 46-year-old member of South Africa’s Indian minority.
“In South Africa the staple food is maize. People buy a big bag for the month. But if you can’t afford it you buy smaller packets through the month. We’ve introduced that concept to cellular, so you can buy your airtime just for the hour or the day.”
Vodacom has proved able to pat its head while rubbing its tummy. Last year core revenues increased 5.6pc to around £4.7bn. Such growth is a distant memory for Vodafone in Europe, which is only now beginning to reverse a decline caused mainly by price cuts imposed by regulators.
Vodacom’s underlying earnings meanwhile leapt more than 7pc as it controlled costs and benefited from rising demand, comfortably outpacing the overall group. Profit margins were already the highest of any of Vodafone’s major units. Having proven itself up to the challenge of South Africa, Vodacom is being lined up to tackle swathes more of the continent.
Vodacom occupies a cluster of modern buildings that – except for an unexplained rooster patrolling the grounds – would appear perfectly at home on any UK business park, including Vodafone UK’S Newbury site. Efforts have been spent to make the campus more sympathetic to its natural and political environment. Thirsty European roses chosen by Alan Knott-craig, the former chief executive, have been replaced with indigenous species more at home with the arid winters of the Highveld. Land once occupied by a nine-hole pitch and putt course has been put to more inclusive use as car parking.
The British connection nevertheless runs deep. Vodacom was founded as a joint venture between Vodafone and South Africa’s former state monopoly Telekom as part of postapartheid economic reforms in 1994. Venfin, a fund controlled by Johann Rupert, the luxury goods billionaire, owned a 15pc stake until selling up to Vodafone in 2006. He is high on the agenda of the South African press again as the target of the racially divisive lobbying campaign that brought down PR firm Bell Pottinger.
Vodacom made its stock market debut three years after Rupert’s exit, allowing Telekom to cash in and set up a rival network of its own.
Vodafone’s entry into South Africa was part of a lightningfast international expansion as the operator raced to plant flags in as many territories as possible. The launch of 2G network technology had triggered a spurt of growth and consolidation for the mobile industry. Under former chief Sir Chris Gent the company was determined to emerge as a global winner.
It was a strategy that would eventually lead to Vodafone’s disastrous £112bn hostile takeover of Mannesmann in 2000. Vodacom was a better gamble and South Africa became a launch pad into less developed African nations. Beginning with Lesotho, the company expanded into Tanzania and Mozambique.
It also has a joint venture in war-torn Democratic Republic of Congo, where its offices have been attacked with rocket propelled grenades, and it has clashed with its partner. Till Streichert, Vodacom chief financial officer, says despite the challenges, the company wants to increase its stake in a long-term bet on the development of the country.
Until last month South Africa accounted for three quarters of core revenue. Its international ambitions have received a major lift, however, from Vodafone’s decision to transfer a 35pc stake in the Kenyan operator Safaricom to Vodacom. The £2bn deal, paid for in shares that Vodafone then sold to comply with free float rules, reduces South Africa to two thirds of core revenues. Safaricom is also a pioneer in M-pesa, a lo-fi mobile payments technology that has replaced cash for many transactions in Kenya – four fifths of its 28m customers are users. Vodacom tried to popularise M-pesa in South Africa to a cool reception, but is making more progress in Tanzania and Mozambique where banking services are less widely available. “We think there’s an opportunity for us and Safaricom to learn from each other,” says Joosub. “It gives us exposure to more markets. And from a profit perspective Safaricom on its own is more than the rest of our international markets. And it’s a high-growth market.”
For Vodafone the deal was partly a vote of confidence in Vodacom to act as a vehicle for African expansion and partly the latest means of tidying up its sprawling portfolio of assets. Vittorio Colao, the chief executive, has indicated more operations could be folded into its South African listing, such as Vodafone Ghana if government approval can be secured.
Such manoeuvres have prompted City speculation that Vodacom could one day be spun off entirely. Both companies insist their relationship is
‘Tell them to let us have us more money. We know how to make a good return on it’
mutually beneficial, delivering cost savings in procurement and securing technical advantages over rivals. It cuts both ways. Vodacom is acting as a test bed for artificial intelligence. The buying patterns of its “hand to mouth” pay-as-you-go customers are crunched by an algorithm that returns personalised airtime offers, for instance. For wealthier customers, it is working on adapting the technology to suggest videos to watch and so consume more data.
In its pursuit of growth it is also looking at acquisitions of unrelated players as the African telecoms scene shakes out those lacking either the stomach or the capital to invest.
“It’s no secret that there are a lot of assets up for sale today,” says Joosub.
“There are a few players exiting where as before guys like Etisalat were just pumping money in.”
Streichert adds that Vodacom has plenty of financial firepower to deploy if required. Any such moves would need Vodafone approval.
Jan Delport, a live wire Afrikaner who serves as Vodacom’s chief technology officer, seems frustrated that the company’s purse-strings are held by Vodafone in London.
“Tell them to let us have us more money,” he jokes. “We know how to make a return on it.”
Delport is in a daily battle with MTN to maintain Vodacom’s leadership as South Africa’s fastest and most reliable mobile network. He used the company’s share of Vodafone’s £19bn Project Spring investment to take a big lead, with 4G now available to 76pc of the population. Now the investment is complete. There is less of a step back down in South Africa than in other markets, but pressure has increased.
“We’re very competitive,” says Delport. “We have to keep our noses ahead. We are fanatical about it. It is a struggle when your competitor out-invests you. So we are super focused in ensuring we get the best bang for our buck.” The concern is intensified by the South African government’s inclusion agenda, which covers everything from rural coverage to radio spectrum licences and black ownership. Operators suffered a fright last year when ministers proposed to effectively nationalise the airwaves and forced them all to rent capacity from a central agency. The threat has receded, but it is an example of the challenge of building on shifting political sands.
The potential exit of Jacob Zuma as ANC leader long before his term as president ends has fuelled concern. His sudden sacking of South Africa’s finance minister earlier this year, causing shock waves in the markets, undermined confidence. Unpredictable government action is viewed by analysts as the greatest threat to Vodacom’s growth.
External challenges are plentiful. In just the last week Vodacom and its fat profit margins have been among the targets of a protests calling for cuts to the cost of mobile data.
As a result Vodacom sets great store by its social contribution. The costs of failing to fund education programmes and supporting healthcare can be high. It has invested in low-cost mobile masts that can be fitted to the shipping containers that serve as retail units in townships. “I don’t think in emerging markets the government ever has enough money to do what it should,” says Joosub. “You have huge inequality and residual issues because of apartheid or socialism and these things. So I think as a big corporate it is always incumbent on us to play a role and give back.”
Giving back can happen in unexpected ways in South Africa. Above Joosub’s desk is a picture of him with Mandela, who visited the Vodacom headquarters as president.
“The way he did it was he would introduce you to someone and say ‘this man is going to build you a school’. Then you had to do it.”
South African people hold placards as they protest about curbs on data usage, left. Soweto’s Orlando Towers are now emblazoned with colour and commerce, right. A Vodacom base station in Alexandre Township, below right