project on capex and opex

SUMMER TRAINING REPORT ON

CAPEX AND OPEX SAVING SOLUTIONS FOR TELECOM INDUSTRY

For

S.M.Creative Electronics Ltd

BSMC Power Systems .

BY

SRIKANT YADAV

B-55

In Partial Fulfillment for the award of the degree

Post Graduate Diploma In Business Management

2009—2011

New Delhi Institution of Management

NEW DELHI INSTITUTION OF MANAGEMENT

SUMMER TRAINING REPORT ON

CAPEX AND OPEX SAVING SOLUTIONS FOR TELECOM INDUSTRY

For

S M CREATIVE ELECTRONICS LIMITED BSMC POWER SYSTEM

Under the supervision

Of

HIMANSHU RAGHAVA

Submitted By- Submitted to-

Srikant Yadav Monika Nijhawan

Roll : B-55


ACKNOWLEDGEMENT

It is a great sense of satisfaction and a matter of privilege to me to work at S M

Creative Electronics Limited .I wish to express my heartiest thanks to S M Creative

Electronics Limited for providing me the opportunity to undergo training in their

esteemed organization.

I would like to take this opportunity to thank Director CRC Manoj NDIM and my

special indeptness to Monika Nijhawan our project in charge whose guidance was a

great support and all the members of the Institute that were always ready to assist me.

It gives me immense pleasure to express my gratitude towards all the individuals

who have helped me in completing this project. I am extremely

grateful to Mr. Vikas Gupta (MARKETING HEAD OF S M CREATIVE

ELECTRONICS LIMITED) granting permission to carry out the project work

in his department. Special thanks to my project guide Mr. Himanshu Raghava

(Marketing Manager, S M Creative Electronics Limited ) for his invaluable

guidance during the project period which helped me in completing the project

successfully he helped me out in understanding the subject .

SRIKANT YADAV


DECLARATION

I Srikant Yadav student of New Delhi Institution of Management (2009-2011)

declare that every part of the Project report on Capex and Opex for Telecom

Industry that I have submitted is original.

I was in regular contact with the nominated guide and contacted number of times

for discussing the project.

Date of project submission:-______________

<<Signature of the Student>>

Faculty’s Comments:

__________________________________________________________________

__________________________________________________________________

_________________________________________________________


EXECUTIVE SUMMARY

Through this project I have tried to get the knowledge about Opex and Capex for Telecom Industry. Its been a learning experience working in this project .The main objectives of the project are:

1.To understand capex and opex structure in the industry.

2.To have the awareness about capex and opex workings.

3.Overall opinion about capex and opex.

4.Cost saving initiatives.

5.Industry environment.

6.Market position.

This project was carried out through published reports and through company respondents.Through this project I learnt the various concepts of Capex and Opex.


CONTENT TABLE

S.N. TOPICS Pg. No.

1. INTRODUCTION 8-15

2. MANAGEMENT 16-18

3. OVERVIEW OF BSMC 19-24

4. BEGINNING OF TELECOM SECTOR 25-28

6. HOW BSMC PRODUCTS SAVES ON CAPEX & OPEX 29

5. MEANING OF CAPEX AND OPEX 30-38

6. OPEX OPERATIONS 39-41

7. PROBLEMS ON CAPEX AND OPEX 42-45

8. INDIAN TELECOM TRENDSETTER IN TERMS OF

CAPEX AND OPEX

46-47

9. OVERCOMING THE OPEX OPTICAL TO TELECOM

PROFITIBILITY IN ASIA-PACIFIC

48-53

10. CONVERTING CAPEX INTO OPEX 54

11. CAPEX AND OPEX WORKINGS 55-56

12. FIXED MOBILE CONVERGENCE IN EMERGING

MARKETS

57-62

13. OPEX MARGINS 63

14. CONCLUSION 64-66

15. BIBLIOGRAPHY 67


MANAGEMENT

Sanjay Trehan

Managing Director

Sanjay Trehan did his B Com (Honours) from Delhi University followed by MBA

from XLRI Jamshedpur.

He worked in different divisions of an Indian Company-Mekaster-before founding

S M Creative Electronics Ltd with Col S D Maini.

He has 26years experience in Telecom Industry with a through knowledge on the

rapidly growing India Telecom segment from fixed line to wireless and Submarine

cable network. He nurtured the company from a single product to multi-product,

multi-industry servicing company in the last 17 years.

Brig.R.Mohan (Rtd)

Director

A telecom graduate with vast experience in Telecom Industry and Operations.

After a long rewarding tenure in the Indian Army (Corps of Signals), took charge

of Alcatel Operations in India and retired as President-Alcatel India.


Col S.D Maini (Rtd)

Chairman Emeritus

Col.S.D.Maini is the co-founder of S M Creative Electronics Ltd in 1992, along

with Sanjay Trehan.

He was commissioned in the Corps of Electrical and Mechanical Engineers

(EME), Indian Army in 1950. Later, he joined Bharat Electronics Limited (BEL),

the premier defense electronics company in India and he was instrumental in

setting up Ghaziabad, Panchkula, and Kotdwar Plants of BEL and retired from

BEL in 1985 as Executive Director (Northern Units). He actively takes part in

product design, development & engineering activities and quality assurance

Vikas Gupta

Head-Telecom Power Division

Vikas Gupta is an Electronics Engineer & has over 12 years of experience in the

Telecom Power. He joined SMCEL in 1996 as a Research Engineer and later

Technical Head. Lately, he has been looking after the Manufacturing & Sales

activities as well.

His areas of expertise include - Sales & Marketing, New Product Development,

Domestic & International customer relationships, Strategic Planning & running

profit centre.

He handles business operations of SMCEL-Subsidiaries Trehan Electronics

International Ltd-Bangladesh and BSMC Power Nigeria Ltd-Lagos.


S.K.Gupta

Head-Finance & Accounts

S.K.Gupta is a Chartered Accountant with more than 20 years experience. He has

been working in the organisation since last 7 year as Head (Finance).

He worked with various organizations under various capacities and has rich

experience in the field of Financial Planning, Accounts, MIS, Fund Management,

Budgeting, Costing, Taxation and building internal financial controls.

His greatest strength is Proficient knowledge in related field, Positive thinking, and

Analytical approach, Hardworking, Sincerity and Integrity.


.

OVERVIEW

BSMC Power Systems an ISO 9001:2000 organization, was formed in 1995 as a

50:50 joint venture between S.M Creative Electronics Ltd. & Benning, Germany.

Later in 2004, BSMC was merged with and become a division of S.M. Creative

Electronics Ltd.

The Core competencies of BSMC are founded in its strong technology base for

manufacturing of state of the art DC Power Systems & Providing Telecom

Infrastructure Products & Solutions. This strength enables us to develop

internationally competitive products, provide world-class partnerships, and add

value through customization , integration and technical support. We provide O&M

of landing stations and passive infrastructure for cable landing station &

Submarine cable landing station solutions.


BSMC has grown significantly and diversified its activities from merely

manufacturing to providing turnkey power solutions including various

infrastructure products & Solutions for Telecom, Gas and oil, Power Line

communication and Power Utilities Networks. As a result of our expansions, we

have crossed the border limits and today we have our 100% owned, full fledged

subsidiaries / branch offices in Singapore , France, Nigeria, Sri Lanka, Bangladesh,

Afghanistan, and our exclusive partners in South Africa, Czech Republic, Vietnam

etc.

Our products are approved and working with leading Telecom operators such as

Roshan, AWCC, Grameen phone, Airtel, Tata Communications, MTN, TIGO,

TELENOR, Vodafone, Multi-Links ( A Telecom SA Company), Power Grid

Corporation of India, Gas Authority of India to name a few.

Experience and execution of IMEWE Submarine Cable – landing Station Project of

Telecom Egypt added another feather to the BSMC cap of activities

Research & development

In-house State-of-the Art R&D facility specializes in developing customized power

systems and turnkey power solutions for applications in Telecom, Railways,

Defense and Nuclear installations etc. BSMC R&D Center is approved by The

Ministry of Science and Technology, India.


Quality policy

BSMC believes in and strives to maintain the highest quality standard of its

turnkey power solutions, products and service. BSMC’s endeavor to upgrade and

improve the quality never stops.

Customer support

We believe in high ethical standards and establishing long term relations with our

customers, through total satisfactions for them in our products and after-sales

support.

Product R

InfrasItructure

BSMC Corporate Headquaters are located at prime location in National Capital

region with a beautifully constructed building at Electronic City of Gurgaon.


Surrounded by corporate like MUL, Aricent, Alcatel, TCS and others, the office

incorporates professional atmosphere at its location following all the industrial and

environmental regulations. Not only the Headquarters, BSMC has taken care of all

its units specifically to its location and construction to employ

Ease of operation

Easy approachability

Motivated Staff

Approachable Customer

Professional culture

Quality productivity

BSMC Infra is equipped with

Beautifully constructed factory in foothills of Himalaya.More than 30,000 sqft

Factory Covered Area.More than 195 EmployeesMulti Located Customer Service

CentresHighly qualified & experienced team of professionalsFull Fledged Design

Engineering CentreLatest Testing and Machinery set-up.

Quality Procedure

Customer Confidence

Quality certification is a fundamental requirement for all manufacturing units now-

a-days, but at BSMC , we strongly believe in Quality and our management always

conveys on “Zero Compromise” on quality issues. Our Quality Management

System ensures :


Quality Assurance

Quality Control

Quality Improvement

Besides manufacturing, our emphasize is to apply Quality management not only in

the manufacturing process but also in Finance, Administration, Sales and

Marketing, Design Engineering etc. Courtesy to our efficient quality team

supported strongly by the Management and all colleagues, BSMC enjoys sky level

customer confidence in it and is always appreciated by the customer by repeated

business transactions. Today BSMC power systems are installed at more than

40,000 sites in various parts of the world.

In its endeavor to achieve total customer satisfaction, SMCEL has obtained ISO

9001:2008 Certification for design, implementing, testing and maintenance of

Power Supplies.

SMCEL runs a continuous quality management system (QMS) assessment

program with STQC, Standardization Testing and Quality Certification (STQC) ,

an attached office of the Department of Information Technology(DIT),

Government of India. With a number of successful external audits, SMCEL’s


quality management processes and procedures have been repeatedly reported to

demonstrate a very high level of compliance with the ISO 9001:2008 Standard.

SMCEL’s management team and personnel are strictly committed to maintaining

and constantly improving the SMCEL QMS in conformity with customer quality

objectives and requirements via regular management reviews, internal audits,

customer feedback and quality awareness training.

The SMCEL quality assurance team has designed and documented a set of internal

processes to ensure that the company’s R&D operations comply with the

guidelines set down by the standard.

SMCEL's Quality Process

On-going collection of various quality and performance matrix.

Summing up and reporting all quality metrics on a quarterly basis

Motivation of Quality Circle

Recording and storing all tests and associated documents with references to

be provided to the customer along with related deliverables

RCA (root cause analysis) process for operations improvement and

prevention of potential quality issues

SMCEL's performance management policies include the following quality

assurance initiatives:

Crystal Clear communication with customer at all levels ( technical,

operation etc. to identify customer requirements and grasp the client's vision

of how SMCEL can meet them)

Comprehensive documentation reviews (internal, external)

Well-prepared conferences with customers

Stringent code inspection


Innovative product verification strategies

Quality and excellence form an integral part of our business process to ensure the

delivery of reliable solutions on our customers' terms, including their most

stringent time requirements. We do our utmost to make the notion of 'quality' more

tangible and comprehensible, defining it as a crucial element of service delivery.

We realize that high quality services combined with organizational effectiveness

serve the launching pad to business success of our customers. Therefore, we

continuously improve our design, development and testing procedures, evaluating

achievements and taking the necessary measures to update our quality model and

quality control practices.


BEGINNING OF TELECOM SECTOR


Product Range


How BSMC Products Saves on Capex and Opex

Site Infrastructure & Power Management System or SIMS, is a combination of various Functional Blocks, that facilitates management of Unmanned Telecom Sites. This is a complete standalone site manager which makes maximum Utilization of Grid Power. BSMC Power Systems India are one of the most trusted Site Infrastructure Management System (SIMS) suppliers worldwide. This can be ordered with various combinations to suit every site or need. Built in Class-B & C Lightning and Surge protection, RFI/EMI/EMC/EFT filters. SIMS meets international standards i.e. CE, UL etc.S

CAPEX Optimization Eliminates all discrete blocks such as AVR+IT,

Generator ATS Panel, Surge Arrestors, Air-conditioner controller, AC Distribution etc.

Saving on OPEX Minimizes Generator Run Time by utilizing Grid

Power even if two phases are available Does battery cycling by precisely observing

battery voltage and shelter temperature. No Human Intervention after Installation. Fully Integrated Unit allows faster network

rollout. Minimizes bulky & lengthy cable routing & terminations. Remote Site Status Communication on 5 hand phones and two remote

servers/computers/laptop


Capex vs Opex

The optical networking industry has recognized that the industry’s health depends

on lowering service provider operational expenses as well their capital

expenditures. Equipment vendors have made significant efforts to address this

need, and optical component vendors have also taken this issue seriously.

But perhaps the component vendors are barking up the wrong tree? I’d like to put

forward the case for paying more attention to lowering capex than opex.

The drive to lower opex in optical networking originated from analyses that Ciena

Corp. (Nasdaq:CIEN) conducted in the late 1990s on the predicaments of U.S.

interexchange carriers. Ciena showed that data traffic was rising rapidly, revenues

from data traffic were growing at one-seventh this rate, and costs associated with

data traffic were growing faster than revenues.

McKinsey & Co. and Goldman Sachs & Co. continued this work in 2001, when

they maintained that service providers could not solve their financial problems

simply by reducing capex. Service provider costs needed to fall at 30 percent a

year, but since capex made up less than 30 percent of total spending, service

providers needed to reduce opex as well. McKinsey and Goldman Sachs concluded

that service providers needed to reduce operating expense at a rate of 24 percent a

year.

Equipment manufacturers have embraced these recommendations and have been

promoting their systems as lowering capex and opex. One optical networking

equipment manufacturer – Photuris Inc. – stated at NFOEC 2002 that its new


product could save 50 percent on opex versus systems in use today. In addition, the

manufacturer maintained that for every dollar invested in its equipment, the

product saved as much as seven dollars in opex.

These assertions are encouraging for the optical networking industry. They also

raise expectations that optical components can be developed that have parameters

that create quantifiable opex savings. Defining such parameters, however, seems

elusive. In addition, statements one hears at different levels of the optical

networking supply chain suggest that searching for opex parameters may not be as

rewarding as concentrating instead on those that relate directly to capex.

For example, service providers are intensifying their payback requirements on new

equipment. New equipment can often incur increased initial costs, for features that

enable greater savings during the life of the equipment. If a service provider had

required a payback period of three years on a new kind of optical networking

equipment, then the provider may now be requiring payback to be demonstrated in

just one year. The shorter recovery period places more of a premium on delivering

the biggest financial advantage upfront – in other words, cutting capex.

Moreover, it is not clear how well service providers can quantify optical

networking opex in legacy networks or how much these costs can really be

lowered. Technology planning engineers at service providers point out that opex

incorporates many factors beyond the direct cost of provisioning, maintaining, or

protecting a wavelength. These engineers agree that equipment that allows for

point-and-click lighting of wavelengths does have the potential to provision

services faster and minimize the cost of sending technicians into the field. Service

provisioning costs, however, are complex and incorporate many other factors.

Lighting a wavelength is just one of many costs in the process, with others from


operations, administration, provisioning, and maintenance creating bottlenecks that

are more significant to the total cost. Technician costs are also not variable, as

service providers cannot readily eliminate this function. Union contracts with

service providers, as well as prudence against unforeseen scenarios, encourage

service providers to retain their technicians.

Technology planning engineers also point out that that the remote, automated

capability of next-generation optical networking equipment can increase service

provider costs. Using this feature requires that DWDM equipment and routers be

populated with transceiver boards in advance of live traffic. Yet, having a DWDM

transmitter and receiver, for example, sitting idle until traffic is turned up is asking

a service provider to leave tens of thousands of dollars of inventory unused. In a

tight economic climate, a service provider is motivated to preserve cash rather than

purchase capital that is not immediately generating revenue.

Such complexities concerning opex suggest that the optical component vendor

should concentrate on what can be quantified in selling to the intermediary, the

equipment vendor. There are clearly some parameters that do affect opex that can

be quantified. Size and power consumption are among two of the obvious ones.

Real estate and cooling costs are significant expenses for service providers, so any

savings that component manufacturers can provide will help everyone.

Optical components that are inherently geared for lowering opex by being

dynamically and remotely tunable, however, are struggling to take off. One can

read about design-ins of widely tunable lasers and dynamic spectrum equalizers,

for example, but their vendors complain that revenues are disappointing. Worse,

they are not taking market share from earlier, less sophisticated versions of these

products.


An executive from a tunable laser manufacturer told me privately at NFOEC that

his full C-band products were simply overkill for any business of significant

revenue. He said that six nanometers was sufficient for applications that could

actually ship, as these applications were for sparing and inventory management.

The incremental cost for eight 100GHz tuning range was sufficiently small to

justify these static applications, but the price premium for an even wider tuning

range was just too high. The slow acceptance of optical components specifically

for highly automated optical networks suggests that less dynamic optical

components provide a more valuable mix of capex and opex savings.

I recommend to my optical component clients that they rely on the mix that has

worked most successfully over the history of optical communications. A reduction

in the cost per bit per second per kilometer is the argument that justified single-

channel TDM transmission in the 1980s and WDM in the 1990s. Architectures

have varied and are still evolving today, but the metric of $/bit/s/km continues to

be the most persuasive, largely because it is the most simple to quantify and use for

comparisons.

The optical component vendor can differentiate himself in $/bit/s/km by improving

either the numerator or the denominator. The vendor can lower the price, while

keeping the same distance-bandwidth product; or the vendor can preserve the

price, while adding dbs to the link budget. Of course, with pressure on saving

money so strong these days, customers value improvements to the numerator more

highly.

How much of an improvement do equipment manufacturers require to be

motivated to adopt a more powerful technology or more economical product?

During the boom, one heard from the service provider community expectations of


10x improvements in first-installed cost. These targets were, however, for

complete overhauls of existing networks rather than for incremental improvements.

No service provider today has the available capital to invest in a brand new

network.

Current targets seem to be more consistent with historical expectations, based on

incremental build outs, upgrades, and rehabilitations. Optical component vendors,

prior to the boom, were used to equipment vendors expecting reductions of at least

15 to 20 percent to justify engineering redesigns. Today, with competition intense

for every available socket, equipment manufacturers are expecting much steeper

declines. Some equipment manufacturers are saying that the overall material cost

of the board has to fall at least 15 percent to justify a redesign. If the optics on the

board makes up just 25 percent of the material cost of the board, as may be the

case in a metro system, then the optics have to fall 60 percent so that the net cost

declines 15 percent.

The challenge to the optical component vendor is to meet these stiff expectations in

a differentiated, sustainable manner. Significant improvements in cost per Gbit/s

per km are difficult to achieve, especially in the numerator. Still, offering

improvement on the price-performance ratio is more valuable than making

promises that are not as easily quantifiable. Any optical component sales engineer

will tell you that in a competitive bid, link budget and price virtually always trump

footprint and power consumption. Specifications even more remotely removed

from first cost, such as those relating to maintenance; find themselves even lower

on the priority list. After achieving leadership on price-performance, the vendor

also needs to offer other benefits that demonstrate its product as distinctive in a

crowded field. In addition, the vendor has to prove long-term viability, either with


cash reserves or a partnering relationship with a major supplier. These three areas

are essential for success.

In conclusion, optical component manufacturers should definitely address opex

issues in their development and manufacturing of new products. Increasing

functionality, reducing size and power consumption, decreasing the number of

fiber connections, enhancing reliability, etc., are all valuable to the health of the

industry. Given the questions raised above, however, the component manufacturer

seems more likely to increase his ability to increase sales by concentrating first on

lowering capex and making decisions concerning opex subordinate. Such

recommendations on decision-making criteria may seem to place the optical

component vendor’s health ahead of those of the industry, but the ambiguities in

transforming service provider needs into quantifiable parameters at the optical

component level strongly suggest such behavior

DEFINITION

Capital Expenditures Refers to the cost of developing a product or system. OPEX

(operating expenditures) are the ongoing costs for running it. For example, the

purchase of a printer is the CAPEX, and the annual paper and ink cost is the

OPEX. For larger systems, OPEX may also include the cost of human operators

and facility expenses such as rent, electricity, heating and air conditioning.

An operating expense, operating expenditure, operational expense, operational

expenditure or OPEX is an ongoing cost for running a product, business, or

system. Its counterpart, a capital expenditure (CAPEX), is the cost of developing

or providing non-consumable parts for the product or system. For example, the


purchase of a photocopier is the CAPEX, and the annual paper, toner, power

and maintenance cost is the OPEX. For larger systems like businesses, OPEX

may also include the cost of workers and facility expenses such as rent and

utilities.In business, an operating expense is a day-to

day expense suchas sales and administration, or research & development, as

opposed to Production, costs, and pricing. In short, this is the money the business

spends in order to turn inventory into throughput. Operating expenses also

include depreciation of plants and machinery which are used in the production

process.

On an income statement, "operating expenses" is the sum of a business's operating

expenses for a period of time, such as a month or year.

In throughput accounting, the cost accounting aspect of Theory of

Constraints (TOC), operating expense is the money spent

turning inventory into throughput. In TOC, operating expense is limited to costs

that vary strictly with the quantity produced, like raw materials and purchased

components. Everything else is a fixed cost, including labour unless there is a

regular and significant chance that workers will not work a full-time week when

they report on its first day.


What Does Capital Expenditure - CAPEX Mean?

Funds used by a company to acquire or upgrade physical assets such as property,

industrial buildings or equipment. This type of outlay is made by companies

to maintain or increase the scope of their operations. These expenditures can

include everything from repairing a roof to building a brand new factory.

Capital Expenditure - CAPEX

The amount of capital expenditures a company is likely to have depends on the

industry it occupies. Some of the most capital intensive industries include oil,

telecom and utilities.

In terms of accounting, an expense is considered to be a capital expenditure when

the asset is a newly purchased capital asset or an investment that improves the

useful life of an existing capital asset. If an expense is a capital expenditure,

it needs to be capitalized; this requires the company to spread the cost of the

expenditure over the useful life of the asset. If, however, the expense is one that

maintains the asset at its current condition, the cost is deducted fully in the year of

the expense.

WhatDoes OperatingExpense Mean?

A category of expenditure that a business incurs as a result of performing its

normal business operations. One of the typical responsibilities that management

must contend with is determining how low operating expenses can be

reduced without significantly affecting the firm's ability to compete with its

competitors.

Also known as "OPEX".


Operating Expense

For example, the payment of employees' wages and funds allocated toward

research and development are operating expenses. In the absence of raising prices

or finding new markets or product channels in order to raise profits, some

businesses attempt to increase the bottom line purely by cutting expenses.

While laying off employees and reducing product quality can initially boost

earnings and may even be necessary in cases where a company has lost its

competitiveness, there are only so many operating expenses that management can

cut before the quality of business operations is damaged.


CAPEX OPERATIONS

Capital expenditures (CAPEX) refers to the money spent to acquire and maintain

the physical assets of a company. These assets are most commonly referred to as

plant, property and equipment (PPE) on the balance sheet. Manufacturing

companies tend to have large CAPEX and usually spend more money on

maintenance than service firms. For technology-rich companies, CAPEX might

also refer to the cost of developing a product or system. Either way, it is a number

the investment community uses to measure a firm's investment in future revenue-

generating activities. A company with low CAPEX may have fewer expenses.

The Indian telecom market has become a trendsetter for the telecom operators in

the developed markets such as Europe and the US for efficient ways to reduce their

capex and opex at a time of tough economic challenges. A recent report by E&Y

on the short-term prospect of telecom sector in the developed markets, has

suggested that telecom operators in developed markets need to ‘unlock and reclaim

the full value of their networks”.

“The Indian telecom market is at least five years ahead of its American and

European counterparts in terms of hiving off passive infrastructure. Hiving off the

tower business into independent business units is going to catch-up in the

developed markets”, Vincent de la Bachelerie, the global telecommunications

leader with E&Y told FE. Most of the incumbent operators in India, including the

country’s largest telecom operator, Bharti Airtel, Reliance Communications and

Tata Teleservices have hived off their tower business into separate business

entities.The report shows that telecom sector has been resilient across Europe and

America despite the recent global slowdown. Cost reduction has become high on


the operators’ agenda making it difficult for the operators to justify huge

investments into the business networks.

The report titled ‘The Power of the Pipe’, further adds that Mobile Virtual Network

Operators (MVNO) have largely failed in the developed markets where they are

struggling to justify their business model. MVNOs typically buy bulk airtime from

the Mobile Network Operators (MNO) and sell it to consumers under another

brand. “They don’t add any value to MNOs services, their model hinges on a

strong marketing and distribution which can be easily done through a normal

distributor or a mass market retailer such as Carrefour”, Vincent added.

The report was compiled from interviews from 18 telecom companies and industry

stakeholders across Europe and America. AT&T, France Telecom, Vodafone

Europe and Deutsche Telekom were among the participants.

Regulatory uncertainties especially in the area of spectrum surfaced as a big

challenge for the operators in current times. Investment incentivisation was rated

as the biggest issue facing the operators since the telecom operators were finding it

increasingly difficult to match the investments that investors, governments and

consumers were demanding.

Among the strategic objectives the participants unanimously voted for customer

value/centricity as the most important objective followed by service innovation and

cost efficiency.


India & China to lead global telecom sector capex spend to over $ 224 bn by

2015

The demand for mobile services particularly in the

developing markets such as Indian and China will fuel

the capex of mobile service providers across the globe

to scale over $ 224.5 billion by the year 2015, says a

new research from market research firm, The Insight

Research Corp.

"Capital expenditures (capex) by telecommunications service providers globally is

expected to increase at a compound rate of 2.4 per cent, from USD 199.6 billion in

2010 to USD 224.5 billion in 2015," says the market research report.

While the developed markets would observe a slowdown in spend, the demand for

mobile services in developing markets will offset for this and result in overall

growth in capex. "This growth is expected to continue during the forecast period.

India's capex outlook is prima facia evidence of this trend," the report stated.

China however might see a comparatively slowdown in telecom gear spend due to

slowdown in mobile subscriber growth rates, rock-bottom equipment prices and

operator margin pressure.

The fixed line sector is expected to continue witnessing decline in capex spend.

PROBLEMS ON CAPEX AND OPEX


Capital expenditures (capex) plummeted after the crash of the telecom bubble of

1999-2001. This correction for previous excesses, most prevalent in the U.S. and

Europe, has caused many carriers to spend below even “maintenance” levels,

creating service quality problems, network outages, delays in turning up service,

etc. Despite his capex drop, profitability remains elusive for many carriers: the ten

largest carriers worldwide booked an average net profit loss of 8% (most recent

fiscal year results). Revenue growth in most areas is modest (and negative in a few

places). As a result, the focus has shifted to operating expenses (opex). Many

service providers have announced plans for opex reduction through consolidation,

staffing cuts, OSS/software implementations, and other methods. Their suppliers,

in turn, have addressed opex constraints as a focus of product marketing pitches.

Cutting opex is tough to accomplish in practice, though. M&A activity can

increase opex in the short term, and technical methods of reducing opex are

limited, unproven, and require organizational changes in companies. Success to

date, on all accounts, has been mixed, despite the rhetoric. Significant reductions in

opex are central to sustained telco profitability, yet few carriers have achieved

success in anything more than gradual, incremental cost cutting.

SituationinAsia-Pacific

In the Asia-Pacific region, service providers appear to be on the right track.


Helped by solid revenue growth, lower overall staffing expenses, a smaller

capex “bubble”, more limited competition, industrial policy favoring a stable

telecom sector, good economic growth, and – one would hope – some smart

strategic decisions on the part of carriers, net profit margins have grown from

10% in 2001 to 14% in 2003, for a group composed of 20 of the region’s large

carriers (referred to as “AP20” in this report) (Figure 1).

Margins have not improved in all regions or at all carriers, but the level of Asian

margins is much higher than other regions. This 14% average, in fact, is

comparable to the 2 best performing non-Asian carriers – SBC and BT – in

Standard & Poor’s list of the 10 largest global service providers. The growth in net

profits stems from stronger revenue growth (16%, versus 9% in 2002), capex/sales

(capex intensity) decline to (18% from 22% in 2002), and company investments in

affiliate companies. Opex also grew, by 14%, but, as in 2002, slightly slower than

revenue growth. The gap between revenue and opex growth is not wide, but

enough to differentiate Asia – on the whole – markedly from North America and

Europe.

Reducing Opex

Going forward, though, Asia cannot rest on its laurels. Asian carriers are beginning

to see more competition, increasingly saturated markets, and uncertain prospects

for new services. They will have to get serious about opex reduction soon, in order

to sustain the impressive results of recent past. Opex cuts typically require upfront

investments in process or technology change, and take years to achieve real results.

Hence, Asian carriers should consider the following options:

- Staff cuts: direct staff costs are between 25-50% of total opex among Asian

carriers, so must be addressed. However, staff should be shrunk as a side effect of


other efforts that change how the network is operated and services or provided;

otherwise, quality of service and brand value will decline.

- Mergers and acquisitions: M&A activity aimed at growing market share and

integrating network resources within a specific market should be approached with

caution. More scale brings better bargaining power with suppliers and (possibly) a

stronger brand, but the integration process is very expensive and distracts carriers’

from everyday business needs. M&A aimed at entering new markets, and – in the

process – achieving greater scale (and reducing supplier and capital costs) is of

potentially greater benefit (e.g., SingTel’s Optus acquisition).

- Software/OSS: some of the best opportunities for opex reduction are in building

new software/operational support system (OSS) platforms that automate and/or

simplify processes that are currently manual. By some measures, OSS spending in

Asia-Pacific is well over $5B per year. OSS investments also face obstacles to

success; for example, automating provisioning – a potential huge time and cost-

saver – is complicated by heterogeneous networks and the use of homemade OSS

systems. Regardless, this is an area that carriers must attack to begin cutting opex

dramatically.

- Automatic control planes: control planes in accord with the ITU’s ASON and

ASTN models, in particular GMPLS, can enable unified control management of

the network layers (packet, TDM, wavelength, fiber) in a way that should cut the

cost of network operations substantially. Most interest in GMPLS, though, comes

from carrier labs; given the potential impact of it, and the need for at least 5 years

to implement properly, control planes should soon be a front-burner issue within

the network planning groups.

- Metro Ethernet: using Metro Ethernet (ME) technology (whether on switches or

multi-service provisioning platforms) promises to deliver data services much

cheaper than their legacy alternatives. Opex is lower in all stages of the service:


initial provisioning, bandwidth upgrades, service additions, and site additions.

Since many carriers are experiencing some “growing pains” with ME deployment,

though (especially in the area of performance monitoring), carriers will need to

implement carefully and learn from other carriers’ mistakes.

- Network outsourcing: both PCCW and Telecom New Zealand – using two very

different approaches – are experimenting with outsourcing network operations

requirements. While too early to gauge success, both efforts should be studied

carefully by carriers interested in cutting the cost of running and maintaining the

network.

While the burden of implementation is on service providers, equipment and

software vendors must develop solutions to the opex obstacle, and work closely

with their customers to ensure product visions turn into reality.


INDIAN TELECOM A TRENDSETTER IN TERMS OF CAPEX AN OPEX

The Indian telecom market has become a trendsetter for the telecom operators in

the developed markets such as Europe and the US for efficient ways to reduce their

capex and opex at a time of tough economic challenges. A recent report by E&Y

on the short-term prospect of telecom sector in the developed markets, has

suggested that telecom operators in developed markets need to ‘unlock and reclaim

the full value of their networks”.

“The Indian telecom market is at least five years ahead of its American and

European counterparts in terms of hiving off passive infrastructure. Hiving off the

tower business into independent business units is going to catch-up in the

developed markets”, Vincent de la Bachelerie, the global telecommunications

leader with E&Y told FE. Most of the incumbent operators in India, including the

country’s largest telecom operator, Bharti Airtel, Reliance Communications and

Tata Teleservices have hived off their tower business into separate business

entities. The report shows that telecom sector has been resilient across Europe and

America despite the recent global slowdown. Cost reduction has become high on

the operators’ agenda making it difficult for the operators to justify huge

investments into the business networks.

The report titled ‘The Power of the Pipe’, further adds that Mobile Virtual Network

Operators (MVNO) have largely failed in the developed markets where they are

struggling to justify their business model. MVNOs typically buy bulk airtime from

the Mobile Network Operators (MNO) and sell it to consumers under another

brand. “They don’t add any value to MNOs services, their model hinges on a


strong marketing and distribution which can be easily done through a normal

distributor or a mass market retailer such as Carrefour”, Vincent added.

The report was compiled from interviews from 18 telecom companies and industry

stakeholders across Europe and America. AT&T, France Telecom, Vodafone

Europe and Deutsche Telekom were among the participants.

Regulatory uncertainties especially in the area of spectrum surfaced as a big

challenge for the operators in current times. Investment incentivisation was rated

as the biggest issue facing the operators since the telecom operators were finding it

increasingly difficult to match the investments that investors, governments and

consumers were demanding.

Among the strategic objectives the participants unanimously voted for customer

value/centricity as the most important objective followed by service innovation and

cost efficiency.


CONVERTING CAPEX INTO OPEX

Leading telecom players have taken a beating on their capital expenditure (capex)

plans affter having touched their peak in the last fiscal. For the current fiscal,

Bharti Airtel, Reliance Communications and Vodafone Essar have chalked out

their capex plans, altogether pegged at $6.5 billion, down 30% as against thes

outlay for the last fiscal.

Owing to the fact that almost all the telecom circles in the country have been

penetrated by leading players, the slip of the capex in the current fiscal is looking

obvious. Now, the main focus of these players will be the need to spend on

network upgradation and marketing or operational expenditure (opex).

Telecom service providers, of late, are in the process of hiving off the passive

infrastructure assets like towers to separate companies and outsourcing non-core

operations, including IT and call centres. And now, the trend is all set for

converting capex into opex.


CAPEX AND OPEX WORKINGS

An operating expense, operating expenditure, operationalexpense, operational

expenditure or OPEX is an ongoing cost for running a product, business, or

system. Its counterpart, a capital expenditure (CAPEX), is the cost of developing

or providing non-consumable parts for the product or system. For example, the

purchase of a photocopier is the CAPEX, and the annual paper, toner, power and

maintenance cost is the OPEX. For larger systems like businesses, OPEX may also

include the cost of workers and facility expenses such as rent and utilities.

In business, an operating expense is a day-to-day expense such

as sales and administration, or research & development, as opposed to Production,

costs, and pricing. In short, this is the money the business spends in order to

turn inventory into throughput. Operating expenses also include depreciation of

plants and machinery which are used in the production process.

On an income statement, "operating expenses" is the sum of a business's operating

expenses for a period of time, such as a month or year.In throughput accounting,

the cost accounting aspect of Theory of Constraints (TOC), operating expense is

the money spent turning inventory into throughput. In TOC, operating expense is

limited to costs that vary strictly with the quantity produced, like raw materials and

purchased components. Everything else is a fixed cost, including labour unless

there is a regular and significant chance that workers will not work a full-time

week when they report on its first day.

In a real estate context, operating expenses are costs associated with the operation

and maintenance of an income producing property. Operating expenses include

accounting expenses

license fees


maintenance and repairs, such as snow removal, trash removal, janitorial

service, pest control, and lawn care

advertising

office expenses

supplies

attorney fees and legal fees

utilities, such as telephone

insurance

property management, including a resident manager

property taxes

travel and vehicle expenses

Travel expenses are defined as those incurred in the event of travel required

for professional purposes.

For this purpose, “travel” is defined as the simultaneous absence from

the residence and from the regular place of employment. It is prompted by

professional or company purposes and likely does not concern the traveller’s

private life, or concerns it only to a small degree. Travel expenses include

travel costs and fares, accommodation expenses, and so-called additional

expenses for meals. For the self-employed (contractors and freelancers), the

expenses constitute business expenses.

leasing commissions

salary and wages

raw materials


Fixed-Mobile Convergence in Emerging Markets - The Impact on Capex and

Opex

The convergence of fixed and mobile telecommunications in emerging economies

is still in its infancy, and even though next-generation networks already dominate

capital expenditures, bona fide fixed-mobile platforms and services are rare. A

handful of greenfield service providers and market challengers have chosen all-IP

infrastructure for their WiMAX networks and started installing IMS platforms to

support business fixed-mobile convergence (FMC) services, such as IP Centrex

and VoIP. We believe that the IMS architecture, with its support for both legacy

and IP networks, holds solid long-term promise for emerging-market operators.

However, migration to an all-IP network in earnest won’t happen for years, since

many emerging-market operators have adopted a wait-and-see strategy to learn

from IP pioneers in North America and Western Europe, such as AT&T, BT, KPN

and Telekom Austria.

As all-IP networking waits on the sidelines, a growing number of providers are

reaping the benefits of scale, running multiservice operations and integrating their

fixed and mobile divisions. Most incumbent operators never sold their mobile

arms; others increased their ownership in previously spun off operations to 100%.

And in China and Russia, fixed-mobile integration has begun, with significant

implications for the telecom industry in those markets. Key findings we publish in

this report include the following:


- Fixed-mobile service bundles are the first step on the road to convergence. Many

operators in emerging markets already offer packages of mobile voice and fixed-

broadband Internet services to business and home users.

- WiMAX is starting to create waves in most emerging markets as a substitute for

fixed networks, despite its slow start. A number of greenfield WiMAX operators

have chosen an all-IP architecture, pioneering convergence and influencing overall

market dynamics by prompting competitors to expedite investment in next-

generation networks.

- Case studies in China and Russia show that integration of fixed and mobile

operators will have a significant impact on the telecom industry structure and long-

term investment plans.

Naturally, integration causes concern among equipment manufacturers: What

impact will it have on Capex?

The new report, Fixed-Mobile Convergence in Emerging Markets: The Impact on

Capex and Opex, examines the early FMC choices telcos have made in emerging

markets and analyzes the impact of these choices on the overall direction of

telecom investments and the level of operating expenses.


Key questions answered

- What are the key drivers of fixed-mobile convergence, and how do they differ

between mature and emerging markets?

- Who will launch FMC in emerging markets?

- What benefits will fixed-mobile convergence offer emerging-market industry

players?

- Will mergers of fixed and mobile operators result in greater operational

efficiency? If so, when and how?

- What drives Capex in emerging markets today? And will the strong Capex

growth continue?

Target audience

Integrated operators in emerging markets

Identify successful strategies for introducing and promoting FMC offerings; draw

on the experience of others in planning for changes in Capex and Opex.

Equipment and application providers

From the case studies of China and Russia, develop an understanding of how the

introduction of FMC in a market will affect Capex and Opex over both the short

and long terms, and acquire insight into the challenges facing emerging-market

operators in network rollouts and operations. Use these insights to successfully

position your equipment and services as well as to enhance your value proposition.


Financial services, investment firms

Receive a thorough grounding in the salient issues facing fixed-mobile M&A and

integration in emerging markets today. Use this analysis to understand who is best

positioned to succeed and to assess upcoming opportunities in emerging

telecommunications markets.

Mobile operators

Understand the drivers behind FMC, why the FMC path is critical in the long run,

and when to pursue it. Get a head start in understanding the impact of 3G and

broadband deployments on traffic, future Capex and Opex.

Fixed operators

Anticipate changes in the telecom industry resulting from fixed-mobile integration

and convergence. Position yourself to take advantage of sharing access to fixed

infrastructure with mobile network operators.


OVERCOMING THE OPEX OBSTACLE TO TELECOM

PROFITABILITY IN ASIA

Improving operating profits can be accomplished by either growing revenues or

cutting costs. Since revenues are flat, at best, among service providers in North

America and Europe, their focus has turned to reducing operating costs, after

reducing capital spending (capex) drastically in 2001-2. Carriers in Asia-Pacific

(AP), however, have kept profit margins high due to solid revenue growth, lower

staffing expenses, a smaller capex “bubble”, more limited competition,

government policies favoring a stable telecom sector, good economic growth, and

some smart strategic decisions on the part of carriers. AP carriers reduced capex in

2002-3, but operating costs (excluding depreciation) have not yet been attacked

aggressively. As revenue growth slows in the years ahead, carriers in AP must

diligently reduce opex burdens in order to keep profit margins high, and continue

to attract investors.

Technology suppliers – hardware vendors, software firms, systems integrators –

have a unique opportunity to help Asian carriers take on this task. While some of

the operating cost “excess” is related to heavy customer acquisition costs,

advertising/marketing, and inefficient corporate structures, much more is related to

operating and maintaining the network. The staff needed for these tasks often cost

less, on average, than their peers in North America and Europe, but cutting opex

may require smart staffing reductions. Carriers must choose or migrate to products

that offer real opex efficiencies. Ideally, this will mean improvements in overall

“life cycle costs”, including the initial capex costs. They also should find ways to

turn up, monitor and repair service more efficiently (possibly through new control

planes). Staff layoffs may be avoided or minimized for carriers that can re-task


employees to growth markets or new service areas.

This report offers the following data and analysis to its readers:

- Section 1: Executive Summary provides a concise review of the analysis and

conclusions of the report.

- Section 2: Service Provider Results – 2001-3 presents aggregate measures of

2001-3 performance, for 20 large Asian carriers , plus regional breakdowns and

analysis.

- Section 3: Opex Segmentation presents two views of how best to segment opex,

from the ITU and the US FCC.

- Section 4: Leading AP Carriers: examines trends at a few of the best performing

service providers in Asia-Pacific.

- Section 5: Opex Reduction Strategies addresses some of the common methods of

reducing opex and their effectiveness.

“Overcoming the Opex Obstacle to Telecom Profitability in Asia-Pacific”

addresses a central issue driving financial results and strategic moves at Asia’s

telecom service providers. This report arms Asian carriers, their partners, and their

suppliers with the insight needed to address opex intelligently as top-line growth

slows in the region.


CONCLUSION

Carrier capital expenditure (Capex) is undergoing a dramatic transformation under

the combined effect of factors ranging from demand for additional capacity to

convergence and network evolution towards next-generation networks (NGNs).

The analysis of operator capital spending and the assessment of the business

opportunity for telecoms OEMs has traditionally been confined to carrier spending

on network infrastructure. As the size and allocation of operator Capex shifts

dramatically in response to industry dynamics, the Opex line item in operator’s

income statements has become a holy grail for vendors.

Today, mobile operators, for instance, spend three times more on Opex than

Capex, or a total of US$400–500bn annually. Not all of that Opex spending is

available to equipment suppliers and vendors, however. Although many operators

have outsourced business functions such as IT, call centers, and other areas,

Network Services is the focus of most of the outsourcing that pertains to the

equipment supplier and vendor market. Today, Network Services is an US$80bn

spending area; we believe that US$30–35bn of this is directly accessible by the

major telecommunications vendors, like Ericsson, Alcatel-Lucent, Nokia-Siemens,

Motorola, and their peers.

This 25-page study helps to quantify operator network capital and operating

investments worldwide. It examines how network-related spending among

different functions is allocated by operator type, mobile, wireline incumbent and

wireline challenger. Conducted online, this survey of roughly 100 operator

network executives offers critical insight into the priorities and needs fueling


operator decision making and helps vendors stay competitive by diversifying

services offerings and appealing to operator sensibilities.

Sample Survey Questions

We asked 25 questions, including the following:

- What % of Opex is allocated to Network Opex? How will Network Opex:Opex

ratio change over the next three years?

- What % of network Opex is allocated to the operations and maintenance of the

core network?

- What % of network Opex is allocated to maintenance services? How will

maintenance Opex: network Opex change over the next three years?

- What % of maintenance expenditures is allocated to field maintenance, remote

support, software updates, repair and replacement, and the management of spare

parts?

- What % of network Opex is allocated to network optimization? How will it

change over the next three years? Who conducts network optimization for your

network?

Study results and analysis include:

- Raw data in Excel format

- 27 slide data presentation

Benefits

The Demystifying Opex & Capex Budgets study provides quantitative intelligence

on spending patterns of wireline and

mobile operators, offering insight into the overall market potential. The study

supports business planning activities of

vendors and equipment manufacturers with direct insight from their operator


customers. It draws upon hard facts

derived from the operator survey to provide the most accurate opportunity

assessment.

This program assists vendors worldwide to:

- Quantify demand and operator spending by network area

- Identify the best opportunities to align capabilities and offers

- Develop more accurate forecasts to deploy resources and go-to-market execution

- Align service positioning and marketing with operators requirements


BIBLIOGRAPHY

1.www.smcel.com

2.www.bsmcindia.com

3.www.investopedia.com

4.Company journals

5.Telecom journals


project on capex and opex

Documents

singtels optus

potentially

global telecommunications

net profits

sustained

inefficient

mass market

good economic