Business Analysis Project: A Study of Telkomsel, Indosat and XL in Indonesia Telecom Industry”

1.0 Introduction

Telecommunication companies in Indonesia have provided products in the form of telecommunications services, both domestic and international. Some example of the telecommunication companies are Telkomsel, Indosat, XL Axiata and Smartfren Telecom. The companies offered wider ranging services such as fixed and mobile connections, data communications and leased connections, and value-added services.

The purpose of this analysis is to investigate and compare their financial and strategic position especially the Indosat and XL as the main entities. The analysis will be divided into two segments, Financial Analysis and Strategic. In the financial analysis, this paper will investigate the industry-specific indicators such as KPIs, Return on Assets, Market Share and Sales performance. Furthermore, to conduct a strategic analysis, 5 force porters were used to outline the companies’ strategic positions.

1.1 Company Background

Competition among cellular telecommunications operators in Indonesia is dominated by cellular market with the number of customers at the end of 2013 has positioned three big companies, e.g., PT. Telkomsel Tbk, PT. XL Axiata Tbk, and PT. Indosat Tbk with 131,513 million users, 60,172 million user and: 59.6 million user, respetively. The operators determine prices and other competitive strategies with thre rest of the market are taken by PT. Smartfren Telecom Tbk with 11,332 million users (source: summarized from 4 companies of their 2013 annual reports). According to the Ministry of Communication and Information Technology, Telkomsel controls the 42% of total market share followed by Indosat (16.7%), (XL Axiata 15.9%), Hutchison 3 Indonesia (Tti) (5.4%), and Axis Telekom Indonesia (2.1 %).

1.2 Reasons for analyzing the companies

Studying Market leaders from the industry is important to understand the trend of the telecommunication and their strategies in the competition. To do so, three leading telecommunications companies in the Indonesian market have been selected for this analysis. Telkomsel as the main entity are compared to Indosat and XL Axiata. Therefore, the selection of the companies will help to reflect the current situation of the Indonesian telecommunication industry and accommodate audience in identifying trends.

Key Issues

The Information and Communication Sector is a GDP supporting sector with a higher growth rate than other sectors. Based on data from BPS, the contribution of the Information and Communication sector always increased every year. In 2013 and 2017, the sector’s share of Indonesia’s total GDP based on current prices had dropped, but, afterwards, had an upward trend.

Fig.1 comparison of GDP of Telecommunications Services and GDP of Information and Communication sectors

2.0 Financial Analysis (Comparison with competitors)

2.1 Special KPI for Finance

2.1.1 Revenue Growth

The financial analysis of this script has been broken down into the involvement of specific KPIs involved in general and industry. Therefore in the context of KPI Income which is involved in general terms, Return on Assets and Market Share will be used because of their ability to efficiently reflect financial health. The statistics and interpretations for the KPI mentioned above are stated below:

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

Based on table 2.1.1, it showed that all operators in Indonesia has competed in the same conditions of technology, social and economic situation with same regulations. However, based on the graph, it showed that Telkomsel has increased trend (2015, 2016, 2017), compared to the decreased trend of Indosat and XL in 2015, 2016 and 2017. Telkomsel has the widest network area compared to all other cellular operators, eg, 95% of the entire population in Indonesia, therefore it is not surprising that Telkomsel’s service area is known in almost all “districts” in Indonesia. The increased trend are supported by Telkomsel’s effort in adopting and developing dual bands (900 & 1800), GPRS, Wi-Fi, EDGE and 3G technology (Budiyanto, 2010). In 2015, there were 566 companies that had obtained licenses to carry out telecommunications services in Indonesia. That number increased compared to 2014 which only amounted to 509 companies. The increase is inseparable from the policy of free competition and openness adopted by the government in the investment method in the telecommunications industry in Indonesia, particularly cellular telecommunications.

2.1.2 Return on Assets (ROA)

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

One of the objectives of financial statements according to Eccles, & Saltzman, (2011) is to provide financial information that helps the users of the report in assessing the potential of the company in generating profits. One measure used in profitability ratios is to use Return on Assets (ROA). According to Kabajeh, et al.,(2012), ROA is the ratio of returns to total assets. ROA measures the level of net income derived from total company assets. This ratio is used to measure how much the contribution of capital invested in the overall assets to generate net income. ROA can also be used as a comparison tool in the industry, where the companies that are members are similar companies. In 2015 the value of RoA increased because PT Telekomunikasi Indonesia experienced an increase in RoA value, while PT Telkom, PT Indosat, PT XL Axiata experienced a decline in RoA value.

2.1.3 Market Share

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

Telkomsel has 45% market share in Indonesia, followed by Indosat Ooredoo 21.60% and XL 14%. It is proven from this picture that competition between GSM and CDMA is dominant to GSM. In 2014, it can be seen in the Table that Telkomsel has reached 140,586 million subscribers, followed by Indosat Ooredoo which reached 63.2 million customers, XL Axiata with 59.5 million customers.

2.1.4 Customer Number Operator Seluler

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

In 2016, there is an increased number of subscribers of each operator, especially, Telkomsel has the biggest increase which reaching 153.614 million subscribers followed by Indosat Ooredoo with 69.8 million subscribers and XL Axiata with 42.5 million subscribers. Puspitasari & Ishii (2016) argued that internet users in Indonesia are geographically uneven. Internet users in Indonesia are mostly located in Western Indonesia area of the island of Java (especially in big cities like Jakarta and Surabaya), Bali and Sumatra (Wahid, 2006). Therefore the writer uses the object of research of cellular operator users in Western Indonesia.

2.1.5 Average revenue per user

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

Telkomsel until the first semester of 2017 has 169.54 million subscribers with a mixed Average Revenue per User (ARPU) of IDR 46 thousands compared to the same period last year of IDR 44 thousands (www.indotelko.com, 2017). In the first quarter of 2017, Indosat Ooredo touched an ARPU of Rp. 27.5 thousands (www.indotelko.com, 2017). In early 2017 XL Axiata had an ARPU of Rp.41,000 (www.indotelko.com, 2017).

3.0 Strategic Analysis

3.1. 5 Porter’s Forces

Strategic analysis is an effort to understand how the companies can handle competition to build strength and to reduce the effect of the threat. In this section, we will analyze the parameters mentioned and conduct an assessment of each strength and threat from the analysis of the 5 Porter’s Forces.

3.1.1. The threat of new entrants into the market

As global financial crisis has widespreaded effect, the crisis also have impacted on telecommunication industry in Indonesia. The country has felt the effects of the global financial crisis indicated by inflation increases, importing countries reduce their orders and the value of exports decreases. Some companies implement programs to reduce the number of employees and leave without pay. All of these factors resulted in a decrease in the level of consumer spending, which had a negative impact on the annual revenue of the telecommunication operators.

However, despite the global crisis effect, there is a potential growth driver from the Indonesia’s economic growth. The large population and rapid economic growth have driven high demand for telecommunications services. The telecommunications industry still continue to grow in line with Indonesia’s economic growth which is expected to increase demand for telecommunications services. After being analyzed in the previous sub-chapter, the results of the analysis show that barriers to entry for new entrants to threaten the industry are very HIGH.

3.1.2. The threat of substitute products or services

The more goods or services that can replace a company’s products, the weaker the company’s position. Today’s mobile communication services have far exceeded telephone and SMS services. Users can connect with friends, family and colleagues through e-mail, video calls, audio and video messages, status updates and VoIP. None of these features are standard services on mobile devices, because they are developed and managed by many different companies and run on infrastructure owned by Telkomsel. The company also has experienced low telecommunication tariffs till now which can be categorized as the cheapest tariff. such low tariff especially for mobile services has impact to the increased mobile phone subscribers which help the company to be competitive that the substitute product. From the results of an analysis of the threat of substitute products for the industrial environment, the company has obtained HIGH ratings.

3.1.3. The threat of increased competition from market rival

The next threat is increased competition from competitors. One example of the cause of the rising level of competition is the price war and the innovation of new products from competitors (Porter, 2008). The biggest threat faced by Telkomsel is the competitive price from new competitors or existing competitors that can attractt the Telkomsel’s customers. To handle the competition from market rival, Telkomsel has to reduce rates with the impact of slowing down Telkomsel’s revenue growth in 2008 of 1.4%. Due to intense competition and a tariff war, Telkomsel establish strategy to win new customers in 2008. At the battle of competition, Telkomsel has lost its market of CDMA technology with negative growth and small revenues (West, 2006).

At present, most customers has used GSM since its low cost than CDM. This situation help Telkomsel to maintain the GSM subscribers to increase even higher. The Telkomsel’s competitive gain are still supported by the people always need communication and population growth. However, as exit barriers are also still high, the company has been invested in inexpensive telecommunications infrastructure. despite the operators are waging a price war in gaining consumers, they alsso faced by low switching costs (Miravete & Röller, 2004). Therefore, from the analysis results, it obtained that the competition between the competitors in the same industry are in the MEDIUM position.

3.1.4. The supplier bargaining power

The supplier mentioned in this analysis is Telkomsel itself. The suppliers in this industry is dominated by Telkomsel with transit interconnection services. It is well known that the providers of transit services are the holders of long-distance fixed network operators. As regulated market, telecommunication in Indonesia has been regulated by PERMEN 08/06 that transit interconnection services must pass through or are channeled through the remote network. At present, Telkomsel is utilizing its large capacity and network infrastructure for interconnection transit services compared to other operator. One of the operator, Indosat, is also a licensee of fixed network operators, does not take advantage of the excess capacity and network infrastructure to supply this industry (Lumanto & Kosuge, 2005).

Companies that depend on a few suppliers will have weak bargaining power (Crook & Combs, 2007). Scarcity of suppliers will make them easily raise the product prices so that the profit margins of a company are running low (Kärkkäinen, 2003). Conversely, companies that have many alternative suppliers will benefit greatly. Telecommunications companies are now using fiber optic cables both on land and in the sea so that the old cable network (copper) is no longer sufficient to accommodate both data and information. However, the need for fiber optic cables is still largely imported from abroad so that if the domestic currency exchange rate weakens, this currency rate will bring a backfire. Considering the situation, the bargaining power of Indonesian telecommunications companies is not too weak because the suppliers consist of many companies (Kumar,et al., 2009). Therefore, from the analysis results above, the bargaining power of suppliers to the telecommunication industry is in the HIGH position.

3.1.5. The bargaining power of buyers

The more the number of competitors in a company, the customer (buyer) will have a stronger bargaining power and reduce the profitability of the company, and vice versa (Casterella, et al., 2004). The cost of switching or switching cost is one of the variables of the buyer’s power to make an offer, with a relatively small transition cost that will make the bargaining power higher(Michael, 2000). To switch from products offered by old players to other new replacement products. In this case the relative buyer to determine whether the buyer will do network construction to provide direct connections or the buyer makes network leases. The cost of the transfer depends on the needs of each operator, the provision of direct connections will require large investment costs, especially because of the impact of the global economic crisis that occurred until now(Cambini & Jiang, 2009).

The buyer’s profit is one of the factors for the buyer to bargain. Buyers in this case telecommunications operators will look for ways to increase profits for companies, with the tariff scheme of interconnection transit tariffs mentioned in the previous chapter and section concluded that the tariff scheme for transit services is more expensive than direct services(Bomsel, et al., 2003). So it can be concluded that the buyer’s profit pressure with a small indicator of the buyer’s profit affects the bargaining power of the buyer. From the analysis of the bargaining power of buyers to the industry based on the parameters mentioned, it was found that the bargaining power of buyers to the industry is HIGH.

4.0 Limitation of the analysis

4.1 Limits of Financial Analysis

This study has limitations in accordance with the financial analysis conducted in this study. In addition, comparing KPIs of companies that use different accounting policies to record the same transaction will make fatal mistakes. Many corporate performance measurement systems can be used, but future performance measurement systems are no longer limited to measuring financial performance alone, but are more comprehensive and integrated in non-financial aspects with the scope of measurement in the company’s internal and external environment (Dossi & Patelli, 2010).

4.2 Limitation of Strategic analysis

The theorem of 5 Porter’s power has the assumption of a classic perfect market while the most real-world industries are not perfect markets in such economic context, for example, they are regulated and imbalanced by information among industry players (Grundy, 2006). According to George S Day (1997) in the book “Wharton on Dynamic Competitive Strategy,” the 5 Porter’s power has limitations of framework, since it only discusses a few guidelines that set boundaries in defining a competition. Porter’s analysis tool assumes that only clear boundaries between functions can offer benefits to the industry. In the present time, various functions and benefit offers can be separated in various industry and products. This causes difficulties for business competition today.

5.0 Conclusion and Recommendation

After being analyzed one by one of the 5 influences affecting the telecommunication, some conclusion about this assessment and parameters are as follows:

For threats to newcomers, HIGH results are obtained, these results provide the conclusion that the threat of new entrants to enter this industry will meet with major obstacles.

For the threat of substitute products to the industry, it obtained HIGH results, with the understanding that substitute products will threaten the industry as a large threat,. Therefore, the players in the industry need a strategy to deal with the threats, especially threats of substitute products such as mobile services and network leases.

For the bargaining power of buyers (e,g, potential partners of Telkomsel) towards the industry, the results of the assessment are HIGH due to the close relationship between the threat of substitute products and the bargaining power of the buyer. The high position are caused by the possibility that a substitute product can offers a better price which then seize the existing customers. In addition, the customer also have a high bargaining power and higher income to switch to substitute products.

The bargaining power of suppliers gained by Telkomsel towards the industry is considered HIGH, because in this industry Telkomsel has an interest and acts as a player. Therefore, as a supplier, Telkomsel has high bargaining power toward the industry and the buyer.

However, as competition in the same industry between Telkomsel and Indosat has increased, it positioned Telkomsel in the MEDIUM level. This reason is reasonable because, at this time, the competitors also have experience even though the entry of new competitors are still high to play in this industry.

Recommendation

Based on a comparative analysis of Telkomsel, Indosat and XL strategies, the success of the Telkomsel, Indosat and XL strategies is an operator that implements Porter’s Generic Strategies.

5.1. PT. Telkomsel Tbk

Telkomsel has successfully implemented differentiation of infrastructure in Western area of Indonesia especially in Java island, where other operators are still leasing Telkomsel infrastructure including Telkomsel towers, which aside from Telkomsel’s revenue from tower leases, Telkomsel also has a majority of voice user customers who contribute 85%.

5.2. PT. Indosat Tbk

Indosat has succeeded implemented product differentiation of media service providers, communications and ranging from connectivity solutions for packet switched Asynchronous Transfer Mode (ATM) and frame relay to modern networks based on IP-VPN (Internet Protocol-Virtual Private Network) and MPLS (Multi Protocol Label Switching) services., Internet services provided by IM2, rental of satellite transponders for telecommunications and broadcasting companies, and value added services such as Disaster Recovery Centers and Data Services.

5.3. PT. XL Axiata Tbk

XL has successfully implemented cost leadership, reducing the burden of telecommunications services, depreciation, amortization, employees, marketing, general and administration compared to Telkomsel and Indosat, where XL uses expenses every year around 45% -57%. This is what makes XL able to offer lower prices than its competitors. In the differentiation strategy XL offers machine-to-machine business services, known as M2M (Mobile Xurveillance, Xlocate, and Xcloud).

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7.0 Appendix

A. Revenue Growth

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

B. Return on Assets (ROA)

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

C. Market Share

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

D. Customer Number Operator Seluler

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

E. Average revenue per user

Source : Telkomsel Annual Report, 2013-2017, Indosat Annual Report, 2013-2017, XL Annual Report, 2013-2017

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