CASE STUDY: “Singapore Telecom: Strategic Challenges in a Turbulent Environnent™ (COVER PAGE) Session April 2003 Programne : British Business Studies Degree Prog:amme — B.A. (Hons) in Business Administration Course : MGT 466 : Business Strategy Date of Examination: 09 August 2003 Time : 8.00 am — 11.00 am Reading Time Nil Duration 3 Hours Special Instructions This paper consists of EIGHT (8) questions. Answer any FOUR (4) questions in the answer booklet provided. All questions camry equal marks. Materials permitted 1. Separate 22-page case study (students may write notes or the pages) 2._10 sheets of approved A4 sized handwritten notes. Materials provided 22-page case study Examiner's) : Mr Chook Ka Joo, Mr Rouney Holmes, Mr Benny Ng Kok Weng Overseas Moderator: University of Hertfordshire This puper consists of 23 printed pages, including the cover page.(CASE STUDY) MGT466 / Page 1 of 22 Singapore Telecom: Strategic Challenges in a Turbulent Environment INTRODUCTION Princ ‘year 98/1999 has been a difficult azd challenging year Jor the Singapore Tele-om Group. We operaied in a dificult business encironnent “as a result of the regional economic crisis. We also faced increasing compettion boti locally and abrad” (Koh Boon Hwee, Singaporz Telecom Chairman.’ Sngapore Telecom (SingTel) is prepering for battle. Having successfully met the cuallenge of changing Tom a government department :0 becomirg the largest listed fem in Singipore its 1ow facing its next major challenge, compeition in itsprimary Tnarket Its stated goal is to maintain its exceptional record.of zroftability and as dnuch market share aspossible, ater Starhub, a full-service telecoms provider starts operating ir Singapore on April 1, 2000. StarHub will be the first competitor that Sngapore Telecom wil have in the fxedine telecoms sector. aving faced inal Smpetition in the moaile sector with the catry of M: in April 1997, The effects of StarHub’s entry on the competitive landscape will be dramatic. Starhub, bicked by Some of the largest global telecoms providers such as British Telecom anc Nippon “Telecom and Telegrarh, and the deeppocketed Singapore Techaologies Telemedia and Singapore Power, vill try to capture a significant partof the lucrative Intenational Direct Diaing (DD) market as well as the large corsorate business segment. In addition to the intensifying competitive arena. the Asian crisis is taking its toll cn Singapcre Telecom's performance, ani technological advencements such as ferret teephony mean that itis increasingly possible to by-pess the networks of peal telecems providers to make oversezs calls, depriving telecoms firms of an important source of income. The barriers tat protected Singapore Telecoms market appeared to be in darger of collapsing. It is no surprise that Singapore Telecom's chairman warned that earnings growth jor the year ending March ‘2000 would be “negative and if I'm Jueky, fii", unless there is a significant recovery in the regien's real economy.” For some onservers, this warnitg foretold of more difficult times to come for Singapore Telecom. Ta GE WES OTORD wth Aca Professor Lnzos Meroceous of the SUS Busines: School Sueport for: e Notional Uniarsiny of Singapore ie grerfully acknoviedzed.(CASE STUDY, MGT466/ Page 2 cf 22 ‘THE NATIONAL CONTEXT: SINGAPORE’S NATIONAL DEVELOPMENT AND INFRASTRUCTURE POLICY To promote a vibrant environment for the develepment of @ world-class infocommunication industry to enhance Singapore's ecoxomic competitiveness ed quality of fe... Singebore is a fully networked knowledge-based societs. connected to the world, connecting to the future,” Siagapore’s strategic zoals had largely fccused on achieving rapid eccnomic development through closely integrating its economy with global trace and development. accepting heavy foreign investments and attractng multinational coporations. These goils evolved irom a mindset of survival in the 1960s to the drive for efficiency in te 1970s, 10 the focus on peopk development, prodactivity ani value-adced investments in the 1980s. to anticipating and embracing continuous: ‘change in the 1990s* ani lastly to the need tc develop a”learning tation” in the late 1930s and beyond. Singapore's broad srategic actions focused on leve-aging its natural advantage of saving a stategic locition by establishing vorldy the government. o. ‘Singapore's economy had performed exceptionally well. Between 1960 and 1997, Sitgapore actieved real annual growth in GDF exceeding S%, which in 1988 amounted to $8133 billion. Fer capita GDP of $$27.48) was among the highest in Asa and ‘matches or exceeds mest developed countries. However. econome growth slowed dresticaly to 1.5% in 1998 from 8% in 1997, as the effects of the Asian economic crisis tock its toll°By the end of 1998, Singapore wes in recesson for only the second time since the eary 1960s. National infrastrucure had played a key part in Singapore's development. Recognizing that infrastructure quality had a major positive impact on nitione! ‘economic development, major resources were committed to deveop the country's physical infrestruccure. Singepore had placed particular importance on devdoping itsinformation infrastructure, which it viewed es a nationa asset, andhad implemented a number of forward-looking national plans. The “IT2000 Report: A Vision of an Intelligent Island”, for ecample, was published in 1992. advocating the creation of a Najonal Information Irfrastructure aimed at making Singapore a more efficient swtching certre for gocds, capital, informaticn and people, and at achieving further improvements in productiviyz® In some respects, Singapore had about the most advanced information technology infrastructure in the world. The Singapore ‘gorernment had invested in its rapid development by sroviding financial support, protection fram market forces, and managerial talent, while urging the adopion of competitive rates and standards. In recent years. it hac taken a more free market(CASE STUDY) MGT466 / Page 3 of 22 approach to the tekcommunications industrs. intoducing a program 1 graduall: pevatize Singapore Telecom ind to introduce competition into the industry. [MUNICATIONS. ‘THE INDUSTRY CONTEST: TRENDS IN THE TELECON INDUSTRY For mostof the 100or so years the industry has been in existence. the big operators have provided mosly basic services on a takeito-leaveit basis, protected behing the barrers of ther monopoy status. Now, stripped of this protection and facing Competiion at homie and atroad. the telecommunications industry was rapidl: becoming among the most competitive and turbulent industries. Operators were seeking ways to secure new customers and to held on to «= many customers = possible. It was clear that only a few years after the opening of telecoms market © full competition, the gloves ave off and no holds are barred.’ The Glotal Competitive Environment Trends of deregulation, tecknological advancement and privatization and more sophisticated and cemanding consumers were causing turmdi in a onc: stable arid highly profitable industry. Tae advent of competition wat exerting continuous downward pressur> on price: with margins falling as a resul- and necessitated the intreduaion of valse-added services by telecoms providers in an effort to sustain Volume and profitability, Asia had aot been spared these trerds, which were global and sweeping in scope. ‘The rulings of global organizations such as tte World Trade Orgatization and the Furepean Union, and a general movement tovards more open and competitive markets were havng an unprecedented effect on the global telecoms environment. In Asia, Japan and Hong Keng were among the first counsies to liberalize ther telecom markets. In 1990, oaly 35% of outgoing international telecoms traffic wes pen to competition, by 1993 this amcunt had risen to 74%." In 1990 only three countries Clapan, U.K. and USA) permitted competition in tasic telecons services: by 1998 over 30 ccuntries dié so, a number that continued to grow (see Exhibit 1. Exeisrt | Countries Allowing Competition in Basic Telecoms Services in 1998 eee eee ‘Australia Germany Netherlands Austra Ghana Norway Belgium Hong Kone Canaca Israel Chile Italy China Ireland Denmark Japan El Salvador Korea Finlad Mexico Fron New Zealand Fre Nv ‘Source: International Tiecommunications Union(CASE STUDY) MGT466/ Page 4 cf 22 Rapid Technological Chasge ‘The convergence of the technologies underlying telecemmunications. computers, telerision, movies aad publishing was increasingly leaditg to overlapping products, marcets and competition and to firms operating in these industries The 1990s had also seen a pronounced movement towards wireless communications, with mobile phones representing the fastest growth segment in almost all natioxal markets, and one of the fastest growing markets in the world. Such technological advancements were a huge threat for telecoms companies, but also an opporunity tor firms entrepreneurial and innovative enough to invest in and develop new technologies, products and services. Th: telecommunicationsindustry was shifting som propretary to cpen standards, muci as happened to the computer industry in the 1980s. ‘Telecommunications tecnology was progressing so fast hat forecasts of more than a fev years were seldom attempted. In this industry. the ng term vas offen viewed as the period beyond three years. Arguably. only the computer industry was experiencing the same rate of technological change a3 the teleommunications charge for most telecommunications compenies, which have historically been operating in a slowmoving, monopolistic and protectiorist world. "The idea is to creae a compcny run by people who think in terms of ¢ world where the raio of perfirmance to price doubles every 18 months, and where ceals have t be snappid up at once."* Mew services such as internet telepnony, or Virtua Private Networks which were forecasted to be widely adopted in Singapore." were threstening to gain - subsantia] market share i domestic and interrational voice traffic at the experse of established telecommunications companies. A major featire of these new services was ‘hat they cften bypassed the existing infrastructure, allowing providers to deal directly with customers. hh time, these services would challenge the importance of naticnal boundaries, regulatory constraints, licensing approval, and domestic telecommunicaions proviiers. ‘The pressure of internet telephony would be felt mcst in intemational traffic, whica produced an estimated 12-15% of the revenues of large internaional operators but {040% of profits.” In Singapore Telecom's case, international calls accourt for around 38% of -otal revenues. Internet telephony was forecasted to account fer as muck as 15-30% of the global market for voice and fax calls within five years. Internet telepiony was inexpensive for users, and allowed customization of economis crisis was that it geve some “breathing space" to tre establisied players since never and smaller challengers were finding it much harder to realize the? expansion plans. Large telecoms companies such as British Telecom (BT) were investing heavily ia the Asian region. In the six months 1 April 199. BT hed investec @ total of around S$18 bilion to acquire various stakes in the region.(CASE STUDY) MGT466 / Page 6 of 22 These ventures hed immediately made it one of the major players in the continent, one of very few firms vith multi-country op:rations. BT's longer term goal was to invest as much in Asia zs it had in Europe; current investments in Europe were five limes as larg? as those in Asia, According to the CEO of BT Worldwide, “There's no question that over the long term. Asia has b be the engine for grovth in telecoms worldwids. At the moment, Asia probably accounts for 22% of the tctal market... Vithin 10 years, most of the projections say Asia will be 60% of the ‘market."® The Asian competitive climate in telecommunications differed irom the global climate in some respecs. For example, major investments were needed in many ! Asian countries such as China and India,as their telecommunicatiors infrastructures were relatively undeveloved, in contrast with Western Europe, which had a mature | infrastructure. For example, China had in recent years. been adding as man new teleshone lines each ycer as were available in the whok of Switzerland, Hovever, * service availatility and quality in many perts of Asia lage¢ behind those of developed Countries signgicantly. Key characteristics and trends in Asian telecommunications are shown in Exhibit 2. While the characterisics and trends descrbed in Exkibit 2 apply to many Asian | coustries, companies stich as Singapore Telecom and Heng Kong Telecom oferate under very different conditions, illustrating the contrast between national competitive | environments within Asi. With regard to industry characteristics for exanple, Extremely low teledensity: Lower quaity and avaiability of fixed-line services; Higher corcentration o residential users: Less demand for specialized features: Higher vulerability to credit risks; Highly regulated tariffs Relatively Imited competition among service providers KSA N N88 i is on telecommunications irfrastructiirs development by most ‘Suonz grovth of fixed ine and mobile telecommunications 1etworks: Acceleration of deregulstion and privatization; Increased competition fom entry of western telscomrounicaions firms; Concession/licensing periods of 15-25 years utileing the Buid-Transfer-Cperate mode or a variation thereof ‘Strong demund for debtand equity capital to finince expanson; Industry ratonalization hhrough mergers and acquisition Upgrading cf telecommunications technology, wih significam pricing imract, KAS KKK(CASE STUDY) MGT466 / Page 7of 22 Singapore had high teledeasity, high quality fixed-line services, higher demand tor specidized features, lower rulnerability to creditrisks and filling tarifis. Hong Kong, while similar to Singapore in many of these characteristics. was a highly competitive market with many firms competing in every segment of the indusry. Exhibit 3 shows the penetiation rate per 100 people of fixed phone nes, mobie phones ind pagers in Singapore, as well as the average figures for developed counsries.°A more detailed look at the size and growth of telecommunications in various countries i provided in Annex A. ‘The penetration rates offixed and cellular fines in Asia as a whole. however, were considerably lower than for other continents (other than Airica) and fo- the world as a whole (see Eshibit 4; figures denote lines 2er 100 irhabitants).”: The lover penetration rates suggested high potential for growth, particularly when economic growth resumed after the economic crisis of the late 1990s. Some industry observes 2elieved that mobile prone penetration rates in developed markets and in some high-growth developing countries coud reach as high as 70% in the rear term. This growth would be fuelled, its thought, by new thi-d generation phones and technologies waich would be capabe of linkirg to the Internet, thus providiag a whole range of additional information and video services.* Even mere conservative observers estimated that cellular penetration ir Singapore could reach 30% by 2001 Singapore's domestic telecoms eavironmemt was moce similar to those of develored countres than to most of Asia. in areas such as service quality and penetration levels. Singapore had therefore experienced a higher intensity of glotal trends such as deregulation and privatization. technological advancement. asd increased sophistitation of consumers who increasingly demanded higher standaris of qualiy and service, as well as more choice of telecoms rroviders. Exar 3 Peneration Rates in Singapore and Developed Countries (%) ‘Singapore (September 1999) Developed Countries Average —___-___Smpore (September 1999) _ Developed Countries Average _ Fixed lines 576 309 ‘Mobile phones a4 97 Paging lines 391 153, —— Exvusit 4 Penetration Races in Verious Regions in 1998 (%) a ‘Afica Americas Asia-Europe Oceania World. Se a Europe Oceanian World 4029 14.26 Fixed tnes 2.24 3233 71383725, Mobile phones 0.45 12.09 305 13.15 24.87 539(CASE STUDY) MGT466¢ / Page 8 of 22 SINGAPORE TELECOM’S STRATEGY, PERFORMANCE AXD LeCaL, COMPETITIVE CONTEXT Early Days ana Privatization Singwpore Telezom's roots can be traced to the introduction of telephone services in Sngapore in 1879, just three years after Alexander Graham Eell's inversion The amalgamaion of may private and government service providers over the folloving decades ultimately resulted in ¢ single organization providing telephone and postal services in Siigapore. far been unable to achieve its target of drawing 15-20% of tctal sales fom its foreign ventures." As a consequence, Singapore Telecom dispcsed almos: all ofits significant invesiments in Europe. most of these less than’ five years after the initial irvestments, unusual inan industry with fairly long gesution Periods. Many observers viewed these ventures as expensive lessons for Singaore Telecom, whick taught it that success in the protected domestic market did not necessarily prepare it for success in distant and competitve markets against rge and technologically sophisticated firms. Results had been improving, however, and in financial yea: 1999, overseas investments contributed 11% of pr=tax profits at USS232 million. Nore recenily, Singapore Telecom had refscused its overseas investments on Asia. Significant investments include SS35.6 nillion in AAPT of Australia which provided switched and le:sedline communications services, $847.1 million in PT Bukata Singapore Telecon International in Inconesia whch operated fixed public switch telephone services, 5$155.7 million in Glove Telecom: in the Phiippines, which provided mobile phone, international and fixed-line services, $835.9 million in Shinawatra Datzcom and Shinawatra Paging which proviled data communicaion and raging services, and $8551 million in Advanced In’o Services of Thailand, a cellular phone operator.*"in November 1999, Singapore Telecom and KDD, Japan's larges internaticnal telecorimunications operato; established an equity joint venure to integrate their services. However. it also pulled back fro some regional ventures, as it 2ecame clear that these were too minor to significantly impact Singapore Telecom's profitability.(CASESTUDY) MGT466 / Page 10 of 22 Faced with compettion irom foreign callback servces. Singapore Telecom had continually reviewed aid reduced its International Direct Dialling (ID) “ates i onder to retcin globally competitive standaris. and coxtinuously introducee newer! and cheaper pricing packages. The average internationil call charge declined by 4% baween 1993 and 1996. Several new value-aided services for private and business users were ako introduced, to improve the quality of services. to provide new streams, ofreverue are to meet customer demands. Yet the challenges ahead probably cwarfed those that Singapore Telecom had faced to date: “With the rapid aavancement in communications technology, Singapore Telecommunications may have no option but to offer a fixed mosthly charg: to those who use ils service for international calls in two years’ time. In five yeurs, it might even have tooffer long-distance cails for free .. bandwidte is growing by leaps and sounds, tring ennually by someestimates. fice years the amourt of information that canbe carried through a network could be some 250 times that of the current level. In 2004, a “phone” cal could inckude realstine video ofthe ‘two (or more) parties conversing, It could aso feature ictures anagraphics, cnd—: at the sam time link he many users tothe internet. Faced with a inge bandwicth, it makes no sense for 2 telco to charge for a specific seriice,"* Perhaps in anticipation of the prospective entry of more competition, Singapore, ‘Tekecom launched a nev effort in 1999 to establish lorg-term service agreements! ‘with its major commercial customers. This effort locked major customers intomult” year service agreements in Singapore end ir the regio, in return for preferential ~ rates. By these means, Singapore Telecom intended to prevent defection of its existing ‘customers to new service providers, The turnover composition of Singapore Telecommurications’ various servces is Exist 5 Composition of Group Turnover : FY 98/99 FY 97/98, 86 Million % ‘S$ Million [ternational telephone 19687378 2087.9 Nobile communications 3600 180 1059 Public data & private netvork e061 Rational teleshone 566 12 s92 Postal services 307.9 63 ALB Tr & engineering services 2623, 34 B75 Sue of equipnent 2168 7750 Directory advertising 1258 12 Piblic meseages 33 S44 Ghers 225 487 Deal 4388.5, 4922 100 ‘Source: Singapor: Telecom Aanual Reports(CASE STUDY) MGT466/ Page 11 of 22 Annex B contans Singapore Telecom Chairman's 1999 statement to shareholde-s. giving nore information on the various aspects of Singapore Telecoms strategy. Singapore Telecom's Structure Singapore Telecon's subsidiaries inchded National Compuer Systems. Singapore Aeradio, Singapore Post, Singapore Telecom International. Singapcre Telecom Investments, SingTel Mobile, Singapore Telecom Paging, Singapore Telzcom Yellow Pages Fte Ltd., and Telecom Equipment. Singapore Telecom provided fixed: mobile, Internet and satellite services, as well a: systems ntegration through is wholly-owned subsidiary Naional Computer Sysems, and aspired to be “a tom! service provider vith 2 range that covered the entire spectrum of the telecoms business." Singapore Telecom's organizational structure up to early 1999, involved the grouping of businesses into international. domestic mobile end domestic fixed-line businesses. In March 1999, Singapore Telecom announced a major restructuring. ‘whose primary aim was to focus on growth areas such as overseas ventu-es and nev business areas such as e-commerce, systems integration, multimedia and interne based services. ‘The restructuring involved the creation of three new units — the consumer business unit, covering residential customers and small- and medium sizedenterprises, the corporate business unit dealing with corporate accounts. and the global business unit concerned wih Singapore Telecom's overseas invesments. A new Chief Operating Officer (COO) position and three custcmer units under the COO wer also created, This new post was intended to relieve the Chief Executive Officer trom running day to day operations and allowed him tc focus on growth areas such as overseas ventures and new business areas, The Advent of Competition Despite Singapore Telecom's success in building Singepore’s telecomnunications infrastructure. the governmeat embarked on a program of gradually introcucing competition. This decision reflected global trends of deregulation and the government's belie! that competitive pressures would prepare Singapore Telecom. for increased international competition and expansion, thus ensuring the competitiveness of Singapores telecommunications infrastructure and services." Competiton was introduced in phases, to allow Sirgapore Telecom to prepare. The frst direct competitor to Singapore Telecom, MobileOne (M1), commenced mobile phone services in April 1997. MI was a consortium of two foreign firms (Cable & Wireless of UK, and its partially-owned subsidiary HongKong Telecoms) and two local firms (Singapore's sole newspaper publisher SP and the diversified, governmentlinked Keppel Comoration). M1's entry had the tsual dramatic results associated with the introducticn of competition in a previously protected market — M1 capured significant market share, prices decined by between 50% and 70% within a yar, the rarge and quality of services impreved significantly and ‘he market ‘expanded rapidly. In the process, the mobile phone penetration rate rose from 14% at the start of 1997 to 41% by September 1998,(CASE STUDY) MGT466/ Page 12 of 22 Axcording to analysts, “Y's success— it grabbed 32% of the mareet share within tro vears, a phenomena’ Gdhievement xy world staxdards — was largely ave to its marketing sacty, attention focustomer service and vetwork quality "# As an example of the rrice wars that erupted with the entry of M1. in Jamary 1999, Singapore Telecom vas forced to cut its rates twice in one day, by a totd of 18%, vhen ML responded t its first rate cut. In the next few days Singapore Telecom also reduced sone monthly subscriptions by 355 to 40%." according 10 the Busitess Times it is a “monumenta task" to compare which packige would offer the test value, given that Singapore “elecom and M1 have different peak hours and denomiaate free tlk time differently, ia $ or in minutes. After a comparison of the competitive packages, it concluded tha: “Sngapore Telecom is the biager culprit in tryiag to vonfiwe’ consumers. Besides diferent charges for the different times of the day, it also has separa’e rates for incoming and outgoing calls". ‘The owo competitors ix the mobile market constantly monitorec eaci others perfornance and made cotntermoves. In January 1999. for example, about 90% of the 15000 new mobile phowe subscrivers signed on with M1." Singazore Telecom immeciately carred out a promotion and announced that ithad attracied more than 50% offnew mobile subscribers for February, as a result of this promotioa. Advertisng in the telecoms nndusry is intense and growing in value. In financal year 1996, it was $827.4 milion, whict rose sharply in 199° to $870 nillion with the entry of ‘ML. I 1998 advertising spending rose to S8764 million, and it was expected to surpass $$100 million in fnancial year 1999, with the extry of Surhub, whch announced: “StarHub’s advertising and promotion budget will be significant — in the dovble-digit, multi-millior-doltar region —to enable us to crate a strong presence in he market place, Although Singapore's mobile market might appear saturated given global levels of motile phone penetratior, industry analysts fcrecasted that the peretration may rise to about 50% :o 60% in the short run. It was dso forecasted that the Asia-Paciic regions number of mobie subscribers woud nearly treble by 2003, from 109 milion to 296 million, while the average monthly revente per subscriber would decline from USE41 to USE29. This would lead to an increase in aunual moble subscrber revenue from USS69.4 billion to USS:04 billion: In the medium tern. mobile phone penetration rites were forecasted to exceed fixed-line rates. In te longer term, moble communications would becone a part of many types of hone and office devices, and the industry would lose its identity as a distinct indust-y primariy offering voice telecommunications servces. Cortinuing with its plan for introducing competition, the government in 1998 issued :wo more licences fer mobile phone services and cne for fixed telephore services to start cperations in April 2000. Al licence winner: were consortie which(CASE STUDY} MGT466/ Page 13 of 22 comprised at least one governnentlinked corporaticn. The primary tactor driving this liberalization was the recogrition that competition would bring the sams positive penefits tothe xed Ene marketas it did in the mobiee phone nuarket. Fafure to do this would.on the other hand, handicap the cout with highertelecommunications costs and older tecknology than in competitor economies vich more effective ielecommunications Industries. Singapore Telecom's Performance Singapore “elecom's performance in the 1990s had been spectacvlar. with profitability cing unmatched in Sngapore, aid arguably, in muuch of the global telecoms industrs: Sperating returas were high e1ough to replace net fixed assets in less than wo sears, whie shareholders’ funcs could be repaid with about three years’ profits, Gane C shows Singapore Telecom's nancial summary for the period 1991-1998. Despite inensifying competition and falling interaatioral call races, Singapore Telecom had continied to delver ia terms of service quality and finandal returns, ‘The quality of Singapore's ‘elecommunications infrastructure ranked Brst in a survey of ten South East Asian countries in 1997." Its telecoms infrastucture in particular 1ad also ranked first in the Asia-Pacific Telecommiurications Index 1999. Compiled by the National University of Singapore's Centre for Telemedis Studies, However, Singapores telecom infrastructure scored poorly n the “choice” and sregulatior” subindex of this survey, where it was perceivec as offering limited choice of service providers and having a regulator which wzs not responsive or transparemt. Singapore Telecon was also ranked 7tf out of 26 nternatioml carriers jp 2 1999 Data Communications survey, which ratei telecoms providers on value, quality relabiliy, speed of repars, billing and genera. responsiveness for fame relay and leasecline servizes.* In terns of ebsolvte profit figures, Singapore Telecom remained the mos. profitable Singapore irm. with + profit of $81.88 billion for she financial year 1998/99.* Although, the company managed to go through the worst of the Astan crisis relatively unscathed, the outlock for the next financial year appeared goomy. According to Singepore Telecom's chairman growth earnings could te flat, unless the local and regional economic envirorunent recovers For 1998/1999 group revenuefell by 1.2% operating profs fell by 10.5% and operaing expenses increased by 6%, Singapore Telecom's IDD revetue. its largest revenue contributor, fell by 10.4%, largely due to lower call rates, which fel by 13%, Singapore Telecom's growth rate in recent years has been relatively unstable (see Annex C). ‘WHAT LOES THE FUTURE HOLD? “The comgetitive environment vould become more intense with the entry of StarHub in April 2000. StarHub aimed 0 be the fist info-communicatioss company in Asie Pacific to offer total convergence offixel and mobi'e commun cations on a single, integrated pletform. Tht: means Sour lome, office and mobile phowes could ail be Linked, so yae could be reached ‘anywlere with just one number."(CASESTUDY) MGT466 / Page 14 of 22 The relative contribution of IDD revenues had been declining over the years, fron 50% at the time of Singapore Telecom's isting in 1993, to 38'vin financid year 1999. StarHub's entry was expected to spell even steeper decline. as market share wasinevitably ‘ost to the new competitor. Singapore Telecam expected to lose beween, 20-40% of the fixedline and IDD markets to tarHub wehin the next two to three years According to Singapore Telecom's vicepresidentior corporate products, the decrease in ‘DD's revenue contribution would depend on StarHub’s price aggressiveness, the growth of new revente streams, and new technological advancements and indusry trends.* Corporate customers accounted for about 80% of Sngapore Telecom's S& billion revenue: Star'tub's CEO believed that once SterHub entered the market in Abril 2000 it could attract a signficant amcunt of business from these customers: Corporate customers “vere quite keen to talk to us... and we haven’ come across 1 locked door yet... Yee hear things like why cant I ge: this particular kind of ervice in Singapore. lean get that in the US, why doesit cost me much. why does it take two months to get this installed.”®“.. our strength is that Singapore Telecom cas't imaginewhere we're coming fram.” Singapore Telecom stressed that it would match or surpass all offers Sta Hub makes when it began operatio: ‘We will never let our competitor get the bette: of us."** «firstly, we want to exsure that we are pricecompetitiv. that we offer value-for- nomex We elso need ta deliver appropriate levels of custymer service. There, we lave been centinuouslytrying to improve the service delivery... The ether area i ve will cont nuously lock for new products anaservices...J think ther is always 2 froblem that you are at incumbent, you are large and people feel that therefort, they favor the underdog "* According to the Minister for Communications, Mah Bow Tan, the Telecommunications Auttority of Singapore would continae to ensure high service standards and z competitive environment; but when the phying field was more even, it would adopt a more relaxed regulatory arttude. They would aso ensure that, customers were free to switch between providers and thatthere would be no pevalty invobed in the switch. In the past, charges fr switching betweer providers had beenfinely balanced io avod penalizing or encouraging switching between providers. ‘The newly appointed read of Singapore Telecom Mobile, however, feared that publi: sympathy was not vith Singapore Telecom, as it had been a fo-mer monqpoly in the mobile market ané had a current monopoly in the fixed-line market antil April2000. Consumer response to new offerings by MI since April 1997 demonstrated that consumers were glad to have a choice of riobile providers and night have felt that 2rices wer? maintained at an artificially high level tefore the opening oi the market to competition:(CASE STUDY) MGT466/ Page 15 of 22 “Whes I took the job, Ireatl; felt the public sympatay was not with us. it was with the newcomer. People will rot be very forgiving i Singapor Telecom makes a smistate .. We need to go back to tall the customers hat first ofall, we are sorry jor all the things that we've done to you in the post..." ‘A recent event in which SingNet (a Singapore Telecom subsidiary) subscribers computers were secretly scenned, suggested that improvements weve needed ‘According to the Asian Wall Street Journal: “At the request ofan Interneisercice provider. Singepare's intemalsecurit: agency secrety scanned 200,000 conputers last month to trace a virusthat allowshackers to steal compute password: and credit card numbers. The action came to light last ueek only afer a law student who had installed antihacking softwar filed a ‘polic« report alleging that ler computer had been entered into by the Misistry of ‘Homi Affairs on 10 differeat occasions in mid-April. The revelation has caused ‘such « conirovery in the isiand-state that this week the Interret service provider involied, SingN¢t, issued a public apology headed, We shouldhave informed you first’ SingNet insisted thatthe scanning was only for the purpose of identifing ‘computers susceptible to hackers, and that no computers were actually entered to acces: confidential information .. But SingNet 's reassurance did little to calm computer users in Singapore ... Online discussion groups heve been filed with proteds charging invasion c privacy and expressing suspicions of hidden motives ‘for the intresion."® In March, Singapore Telecom said that it was searching for an Internet user's identity vho claimed in a new:group posting that Singapore Telecom Mobile's users had not benefited ftom the company’s recent price euts, and threatened t sue him.” Singapore Telecom's stern reattion to this Internet user's allegedly libelous comments about its packages was a teling indication of the intense rwvalry in this industry sector. ‘The outlook for the near :erm was seen to be negative ty Singapore Telecom, Downward trends were expected to continue in its “key business drivers”, international telephone traffic, mobile subscribers and business lines. Singayore Teleccm intended to implement strictsr cost cortrol measures to protect its bottom line.* Cost cutting measures included reducing the salaries of senior managers by 10%, and management ying economy instead of business class, According to the Singapore Telecom Group director of human resources: “Thewage cuts vill help SingTel to better manage ts cosis in the current economic slowiown .. Being leadersin the company, we must show our staff that we are swillieg to live through good and bad times with them together .. In the most recent announcement of Singapor2 Telecoms planned competitive strategy, Singapore Telecom’s chairman explained tow the company would focus 01 the competition and on growh:(CASESTUDY)MGT466 ' Page 16 of 22 ‘SingTel ha: consistenty regarded competition as 0 regivnal challeige .. In the sia Pacific we continee to outperform our competitors... Besides getting reaay Lar the competition, our other focus is to develop our grow'h strategy We have a feur-prongea approach. Firstly, we will take atvantage ofthe busines opportunitie: that come with the convergence oftelecommurications, ITand media Gur broadband multimedia service, Singapore Telecom Magix. is @ gpod examplr ofa ‘convergent service’ Secondly, we will seek new business opporturities as they energe and synergize thim with our existing services and sperations, Examples oF ese include ecommerce and Internet hubbisg. Thirdly we will persue gioba’ asd regional expansion through investments cverseas. Finally, we will also take alvantage oj our existing assets, such as our billing systems, telecon netivorks aid real estate, to generate new revenues ‘hrough secvices such as jacilit) management and billing services."6 ANNEX A tions Growth in Selected Ceuntries ‘Number of Fixed Lines (000) Hines Per 100 People 1990 1995 _2000F 1990 1995 2000F ‘Aucralia 2787 9200 10870 Br BOF Belgum 8850 11,044 495 Chita 850 40,706 241.884 06 a Denmark 3123 (3.494 604 Hong Kong 2475-3278 4.34 a) Indit 5o7t 11978 28.272 46 ua Indonesia 1966 3291 10,157 06 ui Japa 54528 61068477 wl 488 Soun Korea 33275 18600 26.059 310 ale Malgssia 1588-3332 “7.003 <0 16e Norvay 2392-238 554 Philbpines 10 ©1410 .257 io 21 Singypore 10531429 1,938, sao 478 ‘Swecen 5967 6357 . 683 ‘Thaltand 13203482. 24 39 Viewam 9% 715 5.095, 02 LL Ux 28.989 83,770 489 uUsA 135337 164.624 108,781 546028 Asia 108,759 182.454 459,954 350 5A Wort 519,208 682, au 9 Bt Source: Internationa; Telecommsetications Union, Goldman Sacks(CASE STUDY} MGT46 / Page 17 of 22 ANNEX B Singapore Telecom Chairman's Satement to Shareholders, 1998/98 Dear Shareholder, Financial year 1998/.999 has been a difficult and chellengirg year for the Singipore Telesom Group. We operated in a difficult bisiness environment as a resut of the regional ecmomic crisis. We als» faced increasing competition both locally and abroad. Corperate Reorganization As the business landscape and market envircament change, Singapore Telecom mustalso evolve to meet te company’s and cusomers' chinging needs. To this end, Singepore Telecom reorgenized in April 1999 10 increase our focus on the people that natter most to us — 2ur customers. Specific customer units have been set up to manage the diverse telecommunications needs of our diferent customer segments inclucing corporate clients. small and medium-sized enterprises and residential consurners. In acdition, thenew organizational sucture als) emphasizes new growth areas such as our overseas ventures and new businesses Ike ¢-commerce, systems integration, mulimedia and Internet-based services. Growt. Singapore Telecom hes ideitified ecommerce and Internetbased activities as areas ‘where there are significant growth opportunities. The Singapore Telecom Group of . companies is uniquely positioned to offer services throughout the e-commerce vzlue chain, from proving terminals to end users to fulfiling the orders of consumers. For example, Singapore Telecom, Singapore Telecom Motile and SingNet provide the infrastructure for e-commerce, NCS can provide the systems integraton capabiities and SingPost cin support the physizal fulfilment of orders. Singapore Telecom will also take advantage of the growing trend towards the ccnvergence of telecommunications, IT and media to introduce new se-vices. Our broadband multimedia serviee, Singapore Telecom Magix, & a good example. Infrastmcture Derelopment Despite an already extensive domestic and international infrastructure. we continue to invest heavily ia infrastructure to ensure that ve have su‘ficient capacity to meet the growing demands of ourcustomers. At the same time, we actively implement ne latest technologies to offer innovative services. For the finaacial year 1998/1999, our capital expenditure amounted to approxmately SS1 billion. In the current yeer, we expect to spend another ‘$8900 nillion to build and improve our networks, particularly to support mobile aad ecommerce services. For example, Singapore Telecom Mobile is currently conducting a wideband CDMA trial, It wil also be introcucing various high speed data services. (cideas to give our customers the convenience o' e-commerce applications such 1s mobile stock trading, banking and ticketing services.(CASE STUDY)MGT466 / Page 18 of 22 To provide our corporate customers with the global connectivity that is essential in today’s competitive business environment, we will continue to invest in internaional network and cable systens, This also ensures that there will alwa’s be sutfcient capacity to suprort increasing demand for bandwidth. Sing:pore Telecam has invested a toul of more than US$5(0 million in digital submarine casle nenworks. An extensive interrational infrastructure provides our multi-netional customers with the reduncancy and diversity they require. This is a stretegic advantage that new entrants t the market cannot offer. Overseas Investments Our overseas investment: have done well, contributing 11.2% to our pretax profit, this year. In fact, the su:cess of our internationalization efforts has contrituted signiicantly to our earnings growth this yea. Belgacon in Belgium and Clobe Telecom in the Philippinesare the Group's two most successful overseas investments. ‘We target contributions from our overseas investments to increase to 20% of pr=tax profit by 2005. Itis our stretegy to pa'ticipate actively in the companies in which we invest and to adi value through our expertise. Of the $$25 billion that we have invested in 19 countries, SS13 billion ae now in listed coripanies. Today. the value of tiese companies is more than double the invested amount. Besides the Ginancial returns we receive from our overseas projects and ventures, Singapore Telecom also seeks to maximize smnergies ftom its investments. For instasce, Singapore Telecam Mobile is exploring the feasitility of launching reginal - mobie products and services jointly with our partners, Advanced ‘nfo Service of Thailind and Giobe Telecom. Such products and services which indude local SIM cards and preferred roaring, offer signiicant value to equent travellers in the region. The three cellular companies are also looking at bukk purchasing of handsets and retwork ecuipment b achieve greater savings through econamies of scale. Singasore Telecom will continue to look for investment opportunities overseas that will make meaningful contributions to our bottomline. Looking Forward Singapore Telecom's businesses are closely linked to economic activities in Singapore and the region. Although the worst seems to be aver for the regional economies, the outlook nonetheless rerrains uncertain. The impact >f significant rate cuts implenented in ‘he first quarter of this year be fully reclized in the financial rear 1999/2000. However, we exnect contributions from our associated companies over: to cottinue to improve, which will mitigate the expected veaker operating results. Singapore Telecom commemorates 120 years of teleconmunicaticns services in Singapore this year. We are proud to have contibuted to Singapore's success 1s a telecommunications hub for the region. Our mary years of experience and expertise in providing telecommunications services to Singapore homes and tusinesses will put us in good stead notwithstanding the introduction of competition next year(CASESTUDY) MGT466 ! Page 19 of 22 “We will strive, through nnovation and continued customer service improvements. to buid on the relationships we have established ‘with our customers so that we can contirue to serve them in the years ahead. Eahancing shareholder value is one of Singapore Telecom's ‘ey objectves. To acaieve this, we intend fo create a more efficient cepital structure mrough various meastres, including a shere buyback program, if and when appropriate. and the payment of special dividerds. Our aim is to werk towards a debt to equity rato of 50-30%, This will, however. aot inhibit the Group's ability to continue wih its exparsion plans and overseas investments. T would like to thank mny fellow Direccors of the Singapore Telecom Board for their contributions to the success and development of tht Group. | also thank the Manzgement, Union and Staff of the Group. Through their unsiinting efDr«s, Singepore Telecom has been able to perform well given the difficulrcircumstasces. With their continued support and dedication, Sngapore Telecom will be more than able o meet the demands of the coming year. KOH BOON HWEE Chairman(CASE STUDY) MGT466/ Page 20 of 22 ANNEX © Singapore Telecem’s Financial Performance (S$) (997, 1996. 19987, 1994", 1988 1990 Turnover 45 49102 42109 9,6990 36169 3.908 27969 1998.5 Operaing Expenses moI0d 27381 29979 BBE 17012 LATTA SNES 1.3008 1.2665 Operaing Prost 193.1 2204. 20630 1.9504 Lae 17 12807 1088S ran Profits & Losses of, asseciated firms m7 1804476 = 78) GB] S) 33H] Restructuring costs = a9 - Fee - = Net prot 19%4 18861 16875 154 19930 1058 10053 Fined sasers 4581 40082 35350 331 3.1003 208 25503, Cash aad bank depasts we AIC 38875 L484 23532 161 1613 eee ae et curent assets 4487 39086 29709 HHA GURS DANO 335L7 36LL 16349 Non erent liaitties 56 418 SST ABBA. BNO SAY BZS Sharchelders' funds TOO F872 F551 4185 4128.1 3a. 24500 ‘Turnover grown (8) 1265 6072s Net proit growth (8) A MB 2460S 9 eee ae Earnings per share (cent) mg? 3 LOTS BB awe Det tangible asset per : share (cents) 525 450 ASAT TOLD ~ Eividents (cents) & 5045 Ce ‘Return ca sharcholdes funds (8) a6 0S SLRS Return en total aseots (&) =] 7S OSS ZZ ” Operating return on ‘turnover (8) 6 46 at a92 kT 8B Operating return on net fed assets (6) uy 885 GLAS SLA 502 ‘Turnover per employee (6,000) st 46 asa 5956S tet NS ORD-778 Sowce: Singapore Telecom Annual Reports 1990-199 7 Singnjore ‘Telecom transferred lrge funds baik to the government prior to its public isting. “* Includes 2 $61.5 bition cash conpensaton fron the government for bringing forward ihe end of Siagapore Telecom's exclusive license by seven yes, “** Figures are not avalable or not comparable die to its then status as a government deyartmentgs ENDNOTES | onal Repo: 19099, Charmane saver: Tem HL (1999: Srgaoore Teecam warng 2 bs po ear Seren Sree ures Rlecrnmuneaton: Actor of Sngacore. 1 pave Ber tim £6. (1987), Saaiong sepige Bentens Nk Soar © SdoouS (990 Seuoce nes.nsre Nexo. Comerte, Ponce Buacets ten Mamre + Unes siernue na ore § ce Inresnstre Praataten. Veco) Quorary 38 “4 Kroos €2" Aomegza L. Nee BS ane ig 1h ''996 Sngeoore ‘Unitotes. Suing me. Nevond ieeeecs infarcts “erie: Saran Scoei C'se 9296912 + fron es. Seaneroee 1S “) internczonci Teecornumeces" ner, wwewssat St Monagng Tolacoms Ole Shamyors New Soreercers Ereromst Octane! 158 11 Veta! vate Newwors eies ‘org race ere, Sunes trees sgn 12.1988 “+ Tecorsunezions The Deets of Dsrance fenteryes 0.1995 ctfence in Government: Tae "Ong ©1999) note Sri ation ofAsa Saress"ree Cr tm “ Bhan ml mung oe more Aten gunn Ties ree 1B Exomorey Pubiesvors, Hang Kony Tuecommunkations Author of SngacOre, was gous 3 Iremavenai Teiecomnunicatons Usin, navn turt 4% Mobie gone oenenrzuon seen hiting 708% Bosvess Tes Feorsary 13-14, 1998, Org (1999), Corporate curcmers leg to gve ousness 0 us Siztu ener. Business ‘mes. dori 2 * Heraciecus, L_ (1996). Pruatizaton: Global renas ane roicatons of the Srgipore excenence, Rezoren ier Sees Fatuty of Business Asminisvauon, National Utmersay of Signore RPS 29843, Low. (1995), Prvatizzion in Singacore: The Bug Puan, Pioer for Symeosium on Prucuzcton Organised by ine Anan ‘ Organizanen, Bangkok. 46 jul Tan, Cr. 1992), SirgeporeTelecom: Fron Pubic to Prvate Secor iternonang! Buincl of ove Sector Meregement (8) 4 418 Ge. MH.8 Low L. (1980), Pavansaton ef Teecomuncaucns Seraces Singanore in?-vevszvan ord Derequcnor ASEAN nc EC tang Mereis More Eectee. Pekmans. 4 Wager Naa), 233, (CASE STUDY! MGT46€ / Page 21 of 22 Rares mora exe. Singapore Tekcom Keneee mar 8-2 1988 Te L982), ingroore“& Busrass “ren Maree 1 nets valerresrucung 189, Sajor snane-ae at 5508 of Reguatery Changes for Asan ings cf speca| Sessan an Eecive Hansen se) Repucusr Wong Teecommunesicnstorum Singatore May 1993.1 13-15, Frochorea, se-competion Susress “nes "TeR.r (1999). Sngsoore Tereiom Mobic cuts rates twace mn 8.50110 F270 off rt) cnalenge Sueraes “me. january 30.21 Tan.T (1999). Singapore Telecon. MI sieg t aut m price war Seis Tes tanury 30 h-FL. (1899), acking a-ounsh: Hs anc iow oF hancprone paclager. uecess Times. Feoruiry 1. és 1M Jans on Smgarore FlecomMobile. Busiess Mareh 10, ‘Tecos acvertsng wb seen epoing $100min lusness Tires Agr 23, Ten “L, (1999), USS45CE to be mace m segont mobie market. Susmess Tines. fans 5 Th Smamore stops be business. Sos Tires Avgust 22.1997 Sibore 6 tops agam in telecoms ranking. Straus Temes sanuary 19,999 “Septore Telecom shines mn edlecom survey Straus Times May 3.1995 Cire. (1599). Singpore Tetecom tates the leid wth $1.86 fet pitt. Sears Timer Maren 2 Sigaoore Teiecom se 37% Blsnets Imes june 5 warning even a5 ts profswonitarHubcomg (Chooeg. Wand Tan (1999). IOD reverue orcas ("the brs tine ‘rots Times, jne 5, 20%6-"0% 1055 in market share expected. usness Temes June 5 1999, ‘Tan. T Singapore Telcom to rear less fom IDD calls Svets Times. june 14 (Ong, C (1999). Conorate custoners wilng te ave business to ur HarHub chiel Buaness Tens Apel 9 Tan T StarHub eyes 25% of ID market Swrots times Apri 8, “Tan (1999) Singapore Telecom t9 maten prices Shots mes April I. (Ong. Cand Teh, HL (1999). Standing above the fay: Business Tines ay 6 TAS wil "step back’ once marke. opens up. Bsmess Times Febrvay |2. 1999: Ong, C. (1998, New TAS mle may spet (CASESTUDY)MGT466 / Page 22 of 22 etd _of handchone subsenption perks Busiess Tmes Novemper Singh (19801 (Ong C. 11999) Singapore Telscom mobie ates battle to the competion, Buuness Tree tinms Sesser 5, (1999. SyigNet anclogze: for vt scanning ASa Wall Steet jvera? May 7 Tax T. (1989), Snganore Telecom Nebie may sue net user Bumess Ter Hach 22, swwveSingapore elecorn.com ‘Tan T (1929), Sagapore Telecom’ top earners take extra pay 4, Stats Temes Jaruary 18, “Trnacript_of comments by Fir Koh Boon Hwee, Singapore Tebcom Charman. at news conference ofjune 4, 1298