Usually, if a business wants to diversify or turn into a conglomerate, it has a simple way to do this. It can either set up the new business it wants to involve in itself, or acquire an existing business to become a conglomerate. However, this process has behind it certain hurdles that some corporations may feel they do not have the time for.
Bureaucracy and red tape does not just exist in the government sector, it is very much a problem in the corporate world and causes great inefficiencies. To avoid the sluggishness of this process, a new trend is emerging in corporate Pakistan. This involves investing into a startup through its venture capital arm and then later taking it on as part of the main business instead of acquiring it or setting it up as is traditionally the way.
At the 021 Disrupt conference in Karachi – Pakistan’s premier tech and VC conference, held virtually this year due to the coronavirus pandemic – it was not just venture capital firms announcing their investments in startups. It was big companies announcing investments in their own venture capital arms as well as tech startups that might be seen as disruptive to their own core businesses.
There have been a few examples of this, and they involve big names. Engro, one of the country’s leading industrial conglomerates, is the first to take this on in the form of EnfraShare. However, it now looks like Habib Bank Ltd (HBL), the country’s largest bank, is ready to use this tactic too. Profit takes a look.
Why would a business do this?
The main idea here is to streamline the diversification of a business and avoid roadblocks caused by corporate bureaucracy. In fact, speaking at 021 Disrupt, Ghias Khan, CEO of Engro Corporation recently endorsed the idea, commenting on how Enfrashare had been able to grow whilst not facing any of these hurdles or challenges.
You see, startups are different. They are fresh and usually geared towards the future through unconventional approaches to problems. Banks and corporations like Engro and HBL are not too keen on being unorthodox. These organizations are filled with individuals beyond their prime that are averse to using technology. They create unnecessary problems in the way of growth and shy away from modern, forward thinking solutions. By establishing something like Enfrashare, a company can let their tech startup incubate on its own, grow, and form an identity and way of doing things that is unique.
Once it has achieved all of this, it can finally become a part of the larger corporation later. This brings a strong, well constructed component to the company instead of one that has to be nurtured, and also saves those working on the startup having to deal with bureaucratic headaches. This method allows them to deal with less compliance related roadblocks and grow through experience. The investment also does not remain an active cost center for the business.
This is what the Engro Corporation hopes to do, given that they are planning to invest upto Rs 150billion in tower-sharing business. The beginnings of Engro Enfrashare go back to 2018, when the Engro Corporation undertook an unorthodox path to diversify its business interests. The corporation set up a startup under its venture capital arm, named Engro Enfrashare which is a tower-sharing company. The startup was given $5 million or Rs800 million.
Engro has now decided to move EnfraShare from its corporate venture capital arm to under Engro Corporation as a proper vertical with plans to invest Rs 50-150 billion in tower sharing business. “For all our business verticals, we are very keen to work with technology companies. We are very keen to create synergies with technology companies that can add value to the four verticals we operate in,” explain their CEO, Ghias Khan.
While Enfrashare was treated as a startup in 2018, things are very different today. Since that initial decision, the startup has evolved into a serious business focus for Engro Corporation, with Rs18 billion invested in the company in two years. So the only question is, what is tower sharing, and what does it mean for Pakistan?
Pakistan currently has approximately 169 million mobile phone connections. This should essentially mean that approximately 81.25% of the population has a mobile phone connection. However, what the statistic does not mention is how many of these are unique mobile connections.
As a result of this growing move in mobile connections, it makes sense for the country to have common transmission towers as opposed to separate or exclusive towers set up and managed by all four phone telecom operators, which is what was the norm in the past.
However, this competition for towers resulted in higher prices and service charges considering that it is not only a capital expense, but also results in revenue expenses yearly. Mobile Network Operators are now more open to expanding their services through common towers. This is especially true in the case of mobile network operators entering into newer territory
Spreading out is important in Pakistan’s case considering that 60% towers in Pakistan are within 100-150 feet of each other. Due to this close proximity and overlapping, the need for tower sharing becomes apparent as an efficient use of resources which can also result in wider expansion over land. That is where Enfrashare steps in.
Enfrashare’s plans for the telcos
Enfrashare’s aim is to become a company that makes connectivity more accessible and affordable for everyone by investing in tower infrastructure under the concept of ‘tower-sharing’. Through them, Engro will invest in tower infrastructure and provide it to mobile-network operators (MNOs).
This provides them with an alternative that ends up saving money for these MNOs. They can then use this saved money towards investing more in active equipment, improve customer experience, and solve capacity issues – all of the big problems facing telecommunications companies in Pakistan. This will also bring optimization in the infrastructure of mobile network operators.
By aiding lower transaction costs and increased efficiency for network users, Enfrashare plans to help facilitate financial inclusion for all by accumulating the largest integrated portfolio of telecom infrastructure in the shortest possible time, while ensuring attractive returns for customers and shareholders. So what are the telcos doing in all this?
As of now, Ufone, Zong, Jazz and Telenor have 48,000 towers cumulatively. These are across 201 locations. Enfrashare, on the other hand, wants to act as a third party tower sharing service. Over the next five years, Enfrashare plans to add more than 5000 towers in Pakistan and hopefully across the country in addition to the 2000 towers it already has. They will then provide the services of these towers to all four of the telcos.
The efficiency of tower sharing can be vetted by the fact that mobile network operators are also looking into renting or leasing out their towers to EnfraShare so that they can be turned into shared towers. For the telcos this would save them operating and maintenance cost. As per Edotco, telecom operators can reduce their tower operating costs by 35 to 55 percent especially how tower tenancy rate remains 1.3 in Pakistan compared to the global average of 2.2.
HBL follows suit
A few years ago if a bank had said they wanted to be a tech company with a banking license, heads would have turned. However, as technology paves its way into nearly every business, especially financial institutions, that statement is not a cause of alarm, shock, surprise or treated as a joke. It is taken very seriously.
The President & CEO of HBL, Muhammad Aurangzeb, while addressing future CEOs, talked about the future of banking in the digital world during his speech at 021 Disrupt. While the whole speech revolved around tech and how future CEOs need to be data driven, not much was said about what HBL is doing to become a tech company with a banking license.
But according to Aurangzeb, the way to go about this is not to simply set up innovation labs or introduce venture capital stakes. There is a larger need to develop a wider ecosystem and a disciplined fintech engagement model. In HBL’s case, the bank has long been trying to make concrete changes with the way tech is involved in their business. However, it has not been able to achieve all it had set out to do. After failing with in-house solutions, HBL has now taken the more unorthodox move of using its VC arm to invest in fintech.
In November 2020, HBL brought in former CEO of Ignite National Technology Fund, Yusuf Hussain, as head of its Venture Capital division. Hussain is a respected name in the venture capital circles, specialising in startup acceleration and Funding, incubation, offshore Services, IT-enabled Organization Transformation, Program Management, Legal Negotiations, Technology Sales, and Executive Management.
Profit has learned from informed sources that HBL, through its venture capital arm, is looking to invest in fintech, primarily non-traditional competition to HBL. Aurangzeb realizes that these fintech are serious competition, and that banks need to let their guard down in order to move forward.
“This preference for competition will not only be pushed by the consumers but also regulators,” he said. “The world will see a more interventionist approach from regulators around the world including the State Bank of Pakistan as they aim to reduce barriers of entry.”
Non-traditional competition: fintech
“The real challenge is from incumbents which include new banks and nontraditional participants,” says Aurangzeb. “Just look at China. More than 90% of Chinese mobile payments are run through Alipay and WeChat Pay. This is the new world order in terms of the competitive landscape.”
When it comes to looking at non-traditional competition, China is in fact a very good example, and one worth looking into in more detail. The backstory here is that the Alibaba-backed Alipay, and Tencent-backed WeChat Pay are both rival platforms in China. Alibaba is essentially the Amazon of China, whereas Tencent Holdings owns China’s most popular social media application, WeChat, which has seen tremendous growth over the years owing to restrictions on international social media applications in the world’s most populous country.
China Union pay is third in line. However, its share is miniscule compared to these two giants.Through these apps that have easy to use interfaces and are cheap as well, China has gotten tremendous success in China and has managed to form digital ecosystems.
Consumers can pay for anything with their mobile app, and vendors actually prefer to receive payment in this form too. Physical cash is virtually useless as a result, and plastic money seems like a hassle when you can simply pay for anything using a mobile phone – something people hardly ever forget at home anymore. What this means is that banks have been able to go virtual, cut down on brick and mortar branches.
However, bankers in China remain weary, considering their primary utility has become to top up digital wallets. They feel they are being driven out of business by these services. Not only are they losing money they would otherwise be earning through either competition by these platforms, or by joining hands with them, but they are also losing out on customers that had over the years trusted their system. In China, their role has been reduced to dumb-pipes.
One might be tempted to think that as long as they are needed to top up digital wallets, things are alright. However, it is a little more complicated than that. Because it is the banks that are to undertake compliance and stricter regulatory requirements, which are a cost burden. However, while this burden increases, they are no longer getting the fees that they have grown used to, nor do they get additional benefits or the ability to provide bank- run solutions.
Later on in his talk, Ghias actually mentioned how technology has redefined and will continue to redefine bank-customer relationships. “Banking will continue to be more personalized. CEOs will have to make tough calls while talking about open banking platforms,” he says. “They will eventually have to move towards things that are better for customers than the bank.”
“This is what we call pushing the boundaries of the business model. The trade off, however, is the self-penalization of short term product revenues for long term customers. It requires a fine balance and to get out of the not-from-here-approach.”
Why invest in future rivals?
For a country like Pakistan formal banking is not yet as widespread as one would hope. Financial inclusion remains one of the lowest in not only the region but in the world. What this means is that unorthodox solutions and nontraditional participants in the financial sector may disrupt the process of inclusion.
HBL does not want to take its chances. If HBL remains at the forefront of the development of such products through its VC division, it has a stake in it. As a result, HBL makes sure it is not redundant and stays relevant.