Global Telephony / December 1997
By Larry Luxner
At a recent gathering in Punta del Este, Uruguay, telecom officials from half a dozen Latin American nations met to extol the virtues of Time Division Multiple Access (TDMA) IS-36 cellular technology.
"The Latin cellular market is growing over 100% a year in many markets, and there is a TDMA partner in almost every country," boasted Leo Nikkari, executive director of the Universal Wireless Communications Consortium, a pro-TDMA industry association.
Only a month later, proponents of Code Division Multiple Access -- a competing technology -- gathered in Orlando to push for their vision of the world's cellular future.
"The technical superiority of CDMA has been proven through its successful worldwide deployment," said Perry M. LaForge, executive director of the California-based CDMA Development Group. "There are commercial networks in North America, South America, Asia, Europe and Africa. Operators and manufacturers have demonstrated the strength of the technology for over two years."
Not to be outdone, the Irish-based GSM Memorandum of Understanding Association praised the recent introduction of GSM into Chile even before that system was up and running (see sidebar). "The implementation of the first feature-rich GSM digital platform in South America is a very important milestone for the international GSM community," said association chairwoman Adriana Nugter, "and a significant step forward for the world's leading digital standard."
With its strong appeal for foreign investors and ever-increasing wealth and mobility, it's no wonder Latin America is becoming the new battleground for the world's competing cellular technologies. This year, the 30-odd countries throughout the region received some $37 billion in direct foreign investment -- up from $30 billion in 1996 and $8 billion in 1990. That growth -- much of it spurred by privatization -- places the region second in the world after Asia, which received $65 billion in 1995, and well ahead of Europe ($11.75 billion), the Middle East ($5 billion) and Africa (43.3 billion).
According to recent study by the Washington-based Strategis Group, the Latin American cellular and PCS market will jump five-fold over the next five years, reaching 45 million subscribers and generating $30 billion in annual revenues by 2002. Yet over 65% of Latin America's cellular and PCS subscriber base is still centered in three large nations: Brazil, Mexico and Argentina. In fact, the region's top three cellular markets by 2002 are projected to be São Paulo (4.5 million subscribers); Mexico City (3.8 million) and Buenos Aires (3.0 million).
In Mexico and Argentina, says Strategis, the licensing of PCS telecom services "will inject new levels of competition in these markets and contribute to expanding the subscriber base." The study anticipates annual cellphone unit sales will jump from 5.7 million in 1997 to 13.4 million units over the next five years.
In Mexico, the intensifying competition is forcing the two leading cellular operators -- Iusacell and Telcel -- to adopt new service strategies and introduce creative tariff plans.
"The November 1997 spectrum auctions for PCS and wireless local loop in Mexico will bring a bevy of new entrants to the local access market," says Andrew Elrick, a research associate at Pyramid Research Latin America, a division of the Economist Intelligence Unit. "This intense competition will drive growth in WLL as the new entrants begin to leverage WLL's speed of deployment and promise of declining costs per subscriber in order to rapidly and efficiently built out their networks."
Strategis says that by 2002, some 60% of Latin America's digital cellular subscribers will be using TDMA technology, while most of the rest will be using CDMA. The third option, GSM, will only be used by a small fraction of Latin mobile subscribers.
The battle lines have already been drawn in Argentina, where since 1991, nearly two million people from Buenos Aires to Bariloche have signed up for wireless telephone service, marking a revolutionary telecom transformation in a country where only five years ago, people were lucky just to complete a call across town. Metropolitan Buenos Aires now boasts one of the higest penetration rates in Latin America.
"Wireless growth in Argentina has been explosive, close to 200% a year," said Rolando Zubirán, president of Ericsson Argentina S.A., during an interview in Buenos Aires. "In December 1996, there were 650,000 mobile subscribers. We are estimating the market will end up at 1.8 million customers. The overall cellular penetration rate has risen from just above 2% to nearly 6%."
Asked why cellular is taking off like a rocket here, Zubirán says "the economy is quite stable and growing very fast, at around 8%, and the telecom industry has a multiplying factor." Despite having the highest unemployment rate in South America, Argentina boasts its highest per-capita income -- around $8,000 a year. In addition, its peso is officially linked to the U.S. dollar on a one-for-one basis, which attracts foreign investment into the country.
Another reason for this explosive growth, he points out, is the fact that the caller -- not the recipient -- now pays for cellular calls.
"Many potential subscribers were skeptical because of the high costs of placing and receiving calls. Now that they don't have to pay [to receive calls], they're signing up," he said, adding that yet a third factor is the opening of the market to two new PCS operators. "This has motivated the incumbent carriers to launch a promotional campaign to catch as many subscribers as possible, to get hold of the market."
In the past few months, Ericsson has snared three orders totaling $193 million to double the capacity of existing analog AMPS and digital D-AMPS wireless networks in Argentina. The orders are from Miniphone, which covers the Buenos Aires metro area; Compañía de Comunicaciones Personales del Interior S.A. (CCPI) for northern Argentina, and Telefónica Comunicaciones Personales (TCP) for southern Argentina.
Together, the three form the Personal Communication National Network, which provides 800-MHz services to nearly a million subscribers, including all towns with at least 500 inhabitants. Roaming deals among the three will soon let subscribers continue to use their phones as they travel throughout Argentina.
"In the wireless market, Argentina is now No. 3 in the Americas, after the United States and Brazil," says Zubirán. "Yet cellular phones are not substitutes for a fixed line. The offer of fixed lines in Argentina has improved substantially."
Asked about Argentine cellular technologies of the future, Zubirán says that "in terms of standards and regulations, the market is quite open to any of the three technologies: TDMA, CDMA or GSM. He adds that "there are two reasons to go digital. One is capacity; there are more subscribers on the same frequency band. Also, with digital, you have access to more sophisticated services which depend on the maturity of the user."
In neighboring Chile -- where the cellular market has been deregulated for quite some time -- TDMA is clearly winning out. Startel, a $700 million joint venture between Compañía de Telecomunicaciones de Chile (CTC) and VTR S.A. (40% owned by Texas-based SBC Corp.) is the country's first nationwide digital cellular network.
Andrew M. Geisse, executive president of Startel, says his company already has over 200,000 cellular, 50,000 paging and 8,000 trunking customers. Its growth has been phenomenal since Startel's establishment on June 14, 1996, but it hasn't been easy.
"Chile is extremely difficult for RF technology because of the multiple mountain ranges and the length of the country," explains Geisse. "If this were the States, we'd have two switches for the same amount of customers. But we have 14 switches spread throughout Chile to reduce our long-distance and transport costs."
He said the network is gradually moving from NEC, Plexsys and Motorola to an Ericsson D-AMPS network. Asked why, he says "I think Ericsson had the best value in terms of price, customer service and technology. What customers want is quality service and voice. They don't really care about the kinds of technologies as much as the vendors want you to believe."
However, Geisse adds, "when we evaluated the different technologies out there for our particular license and frequency, we had two choices: TDMA or CDMA. We chose TDMA because at that time not only was TDMA ready and more developed, but as the carrier, we look at acquisition costs as being one of the most important factors in our success, and CDMA terminals back then and today are substantially more expensive."
For comparison, he says, TDMA or GSM phones are $250-300, while CDMA handsets cost $450-550.
When it comes to technology, the continent's biggest market -- Brazil -- is more of a mixed bag. In October, Japan's NEC won a contract to build a digital system for 150,000 customers in metropolitan Rio de Janeiro. NEC will use CDMA technology "to provide better-quality communications and more facilities to users," says William Nolasco Barreto, director of NEC do Brasil's wireless business unit. Demand for cellular services in the state of Rio de Janeiro is around 1.8 million people. In late September, NEC won a similar order from Telecomunicações da Bahia S.A. (Telebahia) for a 25,000-subscriber CDMA digital network in Salvador, capital of Bahia state.
Qualcomm, an early proponent of CDMA, is involved with NEC and Telebahia to deploy a CDMA 800-MHz overlay in Bahia utilizing the IS-634 solution. This makes Telebahia "the first operator in the world to implement Qualcomm and NEC's IS-634 system architecture," according to Carlos Duprat, director of engineering at Qualcomm do Brasil. He says the CDMA technology provides operators a "multi-vendor solution that provides flexibility in designing and deploying CDMA networks."
CDMA received perhaps its biggest boost in July, when BCP -- a consortium led by Atlanta-based BellSouth International -- paid a whopping $2.6 billion for the right to operate a cellular network in the São Paulo metropolitan area, home to 18 million people.
BCP says it plans to spend $500 million to build and operate the São Paulo network, to be based on all-digital CDMA technology supplied exclusively by Northern Telecom. Charles C. Miller, president of BellSouth International, said in announcing the winning bid that "São Paulo is one of the most densely populated cities in the world, with only 12 telephone lines per 100 people. The growth potential for this market is simply staggering."
CDMA technology is now in place in Argentina (Compañía de Radiocomunicacio-nes Moviles); Brazil (Ceterp, Telebahia, Telebrasília, Telesp and Telerj); Chile (Chilesat Telefónica Personal); Dominican Republic (Tricom); Peru (Telefónica) and Venezuela (Telcel).
Even Peru -- a poor country where fewer than six out of 100 households have basic telephone service -- offers lucrative opportunities. Over the next five years, Telefónica del Perú plasn to serve over a million subscribers in major Peruvian cities via a $350 million network purchased from Motorola's Cellular Infrastructure Group. Says Jack Finlayson, vice-president and general manager of Motorola CIG's Americas unit: "This contract is extremely significant for Latin America since it marks the first countrywide CDMA deployment by a wireless operator in Latin America."
Interestingly, the region's wireless revolution has given rise to a new trend: the manufacture of cellular handsets and infrastructure equipment in Latin America itself, particularly Brazil. As the heavyweight of the Mercosur trade bloc, Brazil offers telecom firms lucrative tariff incentives to make the equipment domestically, rather than import it from elsewhere.
"The reason we chose Brazil was that Ericsson has a long and strong industrial tra-dition there, and Brazil is competent in the area of manufacturing highly advanced telecom equipment," said Hakan BCM Wretsell, vice-president of Latin American sales and market-ing for Ericsson Mobile Phones in Miami. "The quicker the market ramps up, the more we'll add."
Wretsell joined Ericsson in 1987, a year when the company sold 35,000 cellphones worldwide. Now, Ericsson sells that many in a week -- just in Latin America.
"Our projection is that during 1997, about 4.9 million new cellphones of all brands will be sold [in Latin America], up from 2.6 million in 1996 and the same in 1995," said Wretsell. "Ericsson is a very weak brand in the minds of the end user. When we started, Motorola and Nokia had a significantly higher name recognition in Latin America than did Ericsson."
Earlier this year, Motorola's Pan American Wireless Infrastructure Division (PWID) began assembling its DPC-650 and other mobile phones at a $20 million plant in Jaguariuna, 30 kilometers from São Paulo, Brazil. Motorola -- like rivals Ericsson, Lucent and Nokia -- now plans to go a step further -- it'll manufacture cellular infrastructure equipment at a new 50,000-square-foot facility. Grace Jenkins, director of marketing and operations at PWID, says her company will invest $30-40 million in the factory.
The plant will employ 200 people in the manufacture of SC9600 and SC2400 base transceiver stations for both analog and CDMA digital cellular systems; the rest of the 200-acre Motorola campus will be completed by August 1998, housing other business units besides the Cellular Infrastructure Group (CIG) facility.
Jenkins said in a phone interview that generous tax incentives played a role in locating the plant in Brazil, as did the advantage of manufacturing within Mercosur and thereby avoiding high import tariffs.
"Labor costs are the same as in the U.S., though on the [cellular] infrastructure side, total savings would be a minimum of 15% and as much as 30% [by manufacturing locally]," she explained. "It's in the best interests of our customers."