The introduction of a new telecoms operator creates new opportunities in the towers market. Xinwei requires significant investment in new infrastructure to begin to compete with the existing players, so lower network deployment cost options are highly appealing.
Newcomer Xinwei will face Latin America’s two largest telecoms operators Claro and Movistar when it launches, both of which have considerable financial backing and regional expertise to hold off any threats to their market shares. Xinwei has experience in the telecoms equipment market, but Nicaragua will be its first major network launch after winning a bid for a licence in 2012.
The new dynamics of the Nicaraguan mobile market have created an environment that BMI believes will encourage operators to consider selling off their remaining tower infrastructure, or in the case of Xinwei, go directly to tower companies. As the largest market geographically in Central America with a low income and sizeable rural population, keeping costs low will become a greater focus for operators at every stage of development.
New player, new dawn?
Xinwei announced it would begin rolling out infrastructure in 2013, but more than two years passed before any further confirmation of network installation was announced. The operator stated in July 2015 that it had begun deploying base stations in Managua and would launch services by the end of the year. Xinwei said it would invest US$300mn in 2014, considerably lower than the total planned investment of US$2bn, announced when it first acquired its licence.
BMI maintains its gloomy view of Xinwei’s prospects given the maturity of the Nicaraguan telecoms market. Competition between Claro and Movistar drove mobile penetration to 121.5% by the end of 2014; BMI forecasts this will reach 142.1% in 2019. The two companies are increasingly concentrating on data-led services and have the advantage of owning a wide range of local language content as well as their regional footprints enabling them to trial new services in different markets and roll them out quickly in smaller markets like Nicaragua.
Xinwei intends to launch 3G services using the Chinese-developed TD-SCDMA technology, which has not been widely implemented outside its home market. The use of the home-grown technology offers the newcomer cost savings but in using a different technology to its rivals, Xinwei cuts off the opportunity to negotiate use of Claro or Movistar’s infrastructure to expand its services more quickly.
Data will drive demand
Nicaragua mobile and 3G/4G forecasts
BMI believes Xinwei will struggle to gain market share from its larger rivals, suggesting the company will look to offset some of the costs of roll out by using local towers companies to speed up roll out. As towers companies have largely come to the fore after the initial roll out of most markets’ mobile infrastructure, the Nicaraguan market is ripe for towers investment. The high penetration rate means a refocus for operators looking to create cost savings. Existing investors in the country such as SBA Communications already have partnerships with Claro and Movistar across their regional footprints. The tower company has the largest number of towers already in Nicaragua and is therefore well placed to further build on its existing regional partnerships.
Movistar’s sister companies in Brazil, Chile, Colombia, Mexico and Peru have sold towers with increasing frequency over 2010-2015 – indeed Movistar has already sold the majority of their Nicaraguan towers to SBA Communications. Claro’s parent América Móvil has not pursued this trend with the same level of enthusiasm but will be forced to separate its infrastructure in Mexico, which we believe will lead to an increasing interest in the sale of more infrastructure.
Investment so far has been limited in Nicaragua with exception of SBA Communications. The IFC agreed a loan for Guatamala’s Continental Towers in 2012 to aid the latter’s expansion in the region but by mid 2015 the company still only held fewer than 100 towers in Nicaragua. Its regional focus and market knowledge, however, make it a key candidate for Nicaragua’s operators to sell their towers infrastructure. MCM’s Torrecom has also built a substantial portfolio in Nicaragua.
Nicaragua presents obstacles for tower growth
Operating in Nicaragua is not without its challenges. Infrastructure is lacking in most rural areas, limiting the ability for network extension, while red tape and political unrest increase the uncertainty of the business environment.
Power remains the most significant challenge for telecoms networks, with Nicaragua showing the weakest installed power capacity in Central America. Although BMI’s Power team forecasts strong growth and maintains an optimistic view of the renewable sector, access to power is a significant hurdle for telecoms infrastructure in Nicaragua, particularly as subscriber growth prospects lie in rural areas or in data networks. Own power sources and generators are, BMI believes, a significant cost to existing and prospective operators in the mobile market.
Nicaragua below its regional rivals
Nicaragua and Central America risk indices, 2015
Opposition to the Nicaragua Canal project, to be deployed by Xinwei’s owner Wang Jing, continues to grow. Combined with unrest over President Daniel Ortega’s decision to seek a third term in office in 2016, the political environment remains uncertain. Deteriorating economic conditions in Nicaragua are further undermining Ortega’s popularity. Declining fiscal transfers from Venezuela reduce Ortega’s ability to fund social spending programmes, causing Nicaragua to turn elsewhere to find funding for its fiscal gap. The Ortega administration has expanded its relationship with the Chinese and Russian governments in order to secure financing. It will also continue to attempt to use the Nicaragua Canal project as a means of boosting growth and dollar revenues from foreign investment. This will not be enough to stymie public revenue stagnation, however, and will limit the government’s ability to increase spending ahead of the election. These factors may slow regulatory development or interaction with local authorities for rolling out infrastructure.
These factors are further exacerbated by the crawling-peg exchange rate set by the Central Bank of Nicaragua, which sees the córdoba depreciate 5.0% annually against the dollar; the rate has been in place since 2004. We forecast NIC27.26/USD in 2015, from USD25.96/USD in 2014 and NIC33.14/USD by 2019.
Opportunities for tower players
While there are a number of challenges facing tower companies wanting to enter the market or expand their existing footprints, these are also the challenges facing existing and prospective operators in the market. We believe these challenges will be what drive operators to offload some of their infrastructure as they have in other markets. Both Claro and Movistar have sold off infrastructure in their larger markets and we believe the Nicaraguan market’s dynamics will encourage this strategy. For Xinwei, leveraging the existing towers market will be a significant boost to the expansion of its brand new network, enabling a quicker roll out and allow the operator to begin generating income from its services
