XL Axiata: Overturning Indonesia’s Telco Industry

In February 2011, Hasnul Suhaimi, President Director of PT XL Axiata Indonesia (From here on
referred as “XL” or “XL Axiata”) walked into Axiata Group Berhad headquarter’s meeting room in
Kuala Lumpur, was excited to present XL Axiata’s achievements to the shareholders: four years of
work starting from 2006 when he first joined the company, to 2010. Four years previously, XL Axiata
had pioneered strategic changes in the telecommunications industry by changing its “high-price,
low-volume” strategy to a “low price high volume” one. Under Suhaimi’s direction, XL Axiata became
Indonesia’s second largest cellular provider in terms of revenue growth and profits. Prior to that, it
was always number three, with a market share of less than 15 percent. In addition, while major
competitors were experiencing decreasing market share in 2010 compared to 2006, XL enjoyed a
remarkable growth in market share. But, the shareholders in Kuala Lumpur challenge Suhaimi to
develop a strategy to sustain performance and continue the company’s gains in the nearly saturated
telecommunications market in Indonesia.

The Telecommunications Industry in Indonesia

Brief History

Since 1961

 A succession of state-owned companies had provided telecommunications service in

Indonesia. As in other developing companies, the expansion and modernization of the
telecommunications infrastructure were vital to Indonesia’s general economic development.
 Two telecommunications service providers reigned: PT Telekomunikasi Indonesia Tbk
(TELKOM), the only company that provided fixed-line telephones, and PT Indosat, which
provided International call service.

In 1995

 Indonesia liberalized the cellular telecommunications business.

 Private companies were allowed to operate cellular telecommunication businesses in open
competition.
 Wireless communication was expensive and mobile phones were limited in stock and
variety.
 Communication rapidly grew in importance as well as in demand.

In 2005

 Mobile phones were popular.

 Younger users were attracted by the multitasking capabilities of cell phones such as text
messaging and voice call.
 The growth of internet as information and entertainment provider took an important part in
the growth of the telecommunications Industry in Indonesia.

The Players

Telkomsel
 Jakarta-based PT Telekomunikasi Selular was incorporated in 1995. It was a subsidiary of PT
Telekomunikasi Indonesia Tbk. Telkomsel’s operations in Indonesia had grown significantly
since the company launched its post-paid services on May 26, 1995.
  In November 1997, Telkomsel became the first cellular telecommunications operator in Asia
to introduce rechargeable GSM pre-paid services.
 In September 2006, Telkomsel became the first operator in Indonesia to launch 3G services.
Telkomsel two prepaid cards: simPATI and kartu As and also the postpaid kartuHALO service.
 By the End of June 2010, Telkomsel customer base reached 88.32 million, about 47% of the
full-mobility cellular market.
 In Last 5 years, Telkomsel’s operating revenues grew from IDR 29.15 trillion in 2005 to IDR
45.57 trillion in 2010. Over the same period, Telkomsel’s customer base increased from
about 35.6 million by the end of 2006 to 94 million by the end of 2010.

Indosat
 PT Indosat Tbk was established in 1967 as a foreign capital company. It started operations in
1969, providing cellular services, International telecommunications services and satellite
services for broadcastservice providers.
 PT Satelit Palapa Indonesia (Satelindo) was establishes in 1993 under PT Indosat, Satelindo
was established as a subsidiary of Indosat to operate GSM for the first time, as well as to
issue prepaid cards (Mentari) and postpaid (Matrix).
 In 2001, Indosat had full control of Satelindo. Indosat established PT Indosat Multi Media
(IM3) to pioneer GPRS and multimedia services in Indonesia.
 In 2003, Indosat became a major cellular operator after acquiring three subsidiaries: PT IM3,
PT Satelindo, and Bimagraha.
 Compared to 2006, Indosat’s profits fell by more than 50% in 2010. However, revenues were
up 62% compared to 2006 revenues.

Intra-Industry Rivalry
 Indonesia’s telecommunications industry was ruled by three forerunners of GSM service
providers: Telkomsel, Indosat, and Excelcomindo (XL).
 Telkomsel was dominating about half of the market, Indosat offered the good prices, had a
loyal customer base, and held about 25% of the market share. Third ranked, XL was known
for great sound quality and high price.
 As telecommunication industry grew so with the competition. CDMA technology and new
GSM providers entered the market with low prices and more services that attracted lower-
income market segments.
 In 2005, a phone call cost USD 0.15 per min. By 2008, it cost only USD 0.015 per min due to
tougher competition.
 The declining in monthly average spending on voice calls were driven by two factors:
decreasing tariffs and lower income earners entering the market. These two factors
contribute in increase in mobile subscriptions.

Newcomers to the Telco Industry

 In 2005, new companies offered lower-cost cellular services to various market segments.
CDMA service provider such as Esia of Bakrie Telecom and Telkom Flexi of PT Telkom
attracted consumers, particularly from lower income brackets.
 CDMA’s low price was possible because the cost of providing the network was lower than
that of GSM, GPRS, or 3G.
  On the other hand, CDMA-based services had limited network coverage. Most CDMA
networks has limited mobility, subscribers must re-register whenever they are in areas
where CDMA doesn’t provide roaming service.
 Newcomers among GSM providers such as Three of Hutchinson and Axis of PT. Natrindo
attracted the teenage market in Indonesia by offering fun brand personalities and affordable
price.
 Defeating the three forerunners was a great challenge to the newcomers. For over a decade,
Telkomsel, Indosat, and XL had earned trust and the loyalty of most of their customers.
 Newcomers such as Axis, Hutchinson, Esia, and Flexi had to penetrate expand their markets,
and to woo subscribers from the established brands.

XL In The Low-Cost Market

Hasnu Suhaimi Takes the Helm

XL Axiata shareholders discussed the telecom market’s stagnancy and the flat competition between
the three firms: Telkomsel always ranked first, Indosat second and XL third with less than 15% of the
market. These 3 cellular providers held almost 90% of the market- newcomers could only hold about
10%.

At that time, XL Axiata had 9.5 milliom subscribers, less than 15% of the market. Thus, the
shareholders wanted to make XL the number two cellular provider in Indonesia.

In the second semester of 2006, XL Axiata shareholders asked to meet Hasnul Suhaimi, the CEO of
Indosat. They believed that hiring him was the right initial step to make XL number two. After many
considerations, including a pledge from the shareholders to give him full authority to run the
company, Suhaimi took the offer.

Suhaimi believed that there will be more challenges, pressures and tight competition which lead to
growth. Thus, his goal was to unseat second-ranked Indosat by 2010. He started it by identifying
elements in XL organization and structure which slowed procedures. He also saw that the lack of
focus, the non-standardized solutions, and how these factors slowed down performance.

A grand new strategy had to be developed and the organization had to be prepared. Suhaimi’s
positive attitude and motivation was one strong factor that enabled XL Axiata to embrace the new
strategy and to challenge the market.

New Strategy Initiative with “Minutes Factory” Philosophy

In 2005, mobile phone calls were simply too expensive for most Indonesians. As a result, monthly
mobile phone voice call traffic per user in Indonesia was about 40 minutes compared to India’s 400
minutes. Suhaimi then saw the opportunity here. At that time, prepaid subscribers far outnumbered
postpaid subscribers. He, again, saw this as an opportunity.

After analyzing the Indonesia’s cellular providers and India’s experience, he decided to change XL’s
strategy from being a high-cost, low-volume to a low-cost, high-volume, quality service provider. To
fund the new strategy, Suhaimi had to convince shareholders about the strategy’s viability.
However, it was not an easy job. In fact, compared to its competitors, XL had the lowest investment
amounting US$1.5 billion for five years, while the others are above that. Thus, Suhaimi proposed the
shareholders to invest that amount of investment for 2 years, just like what Indosat did. Thankfully,
the shareholders agreed.

In 2007, Suhaimi created a five-part plan to increase company scale and capacity by:
  Expanding network coverage
 Managing costs
 Offering affordable pricing to increase voice usage
 Developing distribution excellence to create a foundation for long-term sustainable growth
and
 Positioning the brand as ‘affordable’

These goals were presented as Formula 123, meaning that XL Axiata must be number one in quality
of service (1) to be number two (2) in three years (3).

To achieve the goals, Suhaimi and BOD formulated and implemented the Minutes Factory
philosophy, a strategy to reshape the company’s value chain with a faster, leaner focus on cost
management. The new employee mindsets were expected to be reflected in the way the employees
worked.

Also, Suhaimi considered 5 critical elements:

1. How long should the price go

2. How soon will this reach the tolerable price limit
3. How much investment is needed
4. How should cultural change in the organization be managed and
5. How should the brand new XL be communicated to the market

How Low, How Soon, and How Much

In April 2007, XL launched its low price strategy: the voice call tariff was reduced from IDR 25/
second to IDR 10/ second. The result: subscribers increased by 10%. However, a lesson is to be
learned: even in a price-sensitive market, a 70% discount wasn’t enough to convince a significant
part of the population to switch to XL.

After this first failure, Suhaimi met all marketing department directors, managers and staffs. After a
long debate and careful calculations from the Finance Department, the group decided to hit the
market with a 90% tariff discount, thus the cost goes down to IDR 1/ second.

With only 7,800 XL BTS towers and less than a year before the strategy hit the market in 2008,
Suhaimi had to ensure that the company infrastructure had the ability to handle increased traffic. To
build more towers, XL spent around IDR 1 billion/ tower. In 2008, XL Axiata went to record as the
company that built more than 5,000 towers in a year.

Considering the sums involved, XL Axiata CFO, Willem Lucas Timmermans suggested to implement a
tight operating cost policy, or in other word to implement a cut cost policy in order to achieve an
efficiency in operational company. He also took roles in ensuring the capital expenditure allocation
for coverage and capacity enhancement was executed carefully in order to support the whole
minutes factory strategy.

In the same time, XL Axiata CTO, Dian Siswarini proposed an idea to build the spirit of network team,
as they have to build many BTS in a short period of time, in order to guarantee the implementation
of the new strategy. She also raised an idea for XL to apply the three-leg towers instead of four-leg
towers since it can help reduce cost but still have the same quality.

Revamping the Culture

Suhaimi knew the effectiveness of the strategy change depended on effective and efficient
management and internal structure. To ensure the execution of the new strategy, he identified
elements in the corporate culture that required modifications. In Sep 2006, the employees were not
adapting to the changing market, were not very consumer oriented and didn’t know the strengths/
weaknesses of their competitors. Moreover, he also saw the need of speed. Thus, for organization to
become fast, agile and sensitive to market changes, XL Axiata BOD decided to create a company
culture called “ÏTS XL”.

ITS XL program focused on the values of integrity, teamwork and service excellence to help
employees become faster, more eager and learners. It needed transparent, consistent, and
prevalent communication. To encourage employees to communicate, Suhaimi spent up to 3 hours a
day replying to employee emails, encouraging his teams to be active and proactive in delivering their
ideas for the company’s growth and development. All employees were invited to contribute and
actively participate in internal activities via a “bottom-up initiative” program.

An “efficiency” culture was infused through the Minutes Factory philosophy. To grow, to increase
revenues and profits, the company must work faster and more effectively. Employees were
encouraged to be disciplined, to work effectively, to arrive and leave work on time to cut electrical
bills. Overtime work went down to zero.

Despite initial problems, XL was consistent in implementing and maintaining the culture.

People Management

Under Suhaimi’s direction, the number of employees increased by only 14.5% in 4 years. In fact,
there were only 2,360 workers in 2010, less than any other telecommunications firm in Indonesia.
Management agreed that a lean organization was one success factor. The span of control had to be
communicated effectively and efficiently. Joris de Fretes, Director of Human Capital, found some
managers had only 1 or 2 staffs. This caused inefficient performance. He decided that any manager
must have at least 4 personnels.

To increase the company’s production efficiency and effectiveness, Joris also decided to outsource
the in-house call center and distribution sections. These departments were later closed so that the
organization could focus more on strategy.

In 2009, the company activated a Talent Management division to improve human resources and to
standardize competency-based, key performance indices to evaluate each employee.

Communicating the New XL to Consumers

Before 2007, XL had 4 products for different segments: a postpaid service called Xplor, and 3 prepaid
services: Bebas, Jempol, and Jimat. To increase efficiency and effectiveness of the marketing budget,
XL decided that the 3 prepaid services should be merged into one. To increase market awareness of
the new product, Nicanor V.Santiago III who officiated as Chief Marketing Officer (CMO) and his
team implemented a radical creativity in advertising strategies by featuring animals since it is
deemed as the funniest and most disturbing. XL succeeded in attracting consumer attention and in
increasing brand awareness.

Dealing with Market Sensitivity

In response to XL’s strategy, soon other competitors battled to capture a larger share of the GSM
and CDMA market, bombarding the same market with the same approach: low price, high quality,
and high volume. As the result, average revenue per user fell sharply and growth halted at single
digit levels.

Competitor Backlash

 XL’s IDR 1 strategy preparations were secret. After its launch, in august 2007 there was no
competitor response for three whole months.
 In December 2007 telkomsel was the first to counter XL’s low price strategy with Simpati
offering prepaid calls at IDR 0.5 per second to telkomsel users. Indosat was the last to
respond but offered much lower price that the first two.
 This tariff war extended to billboard and television. According to Nielsen Company
Indonesia, telecommunications firms were the highest advertising spenders for promotional
activities in all media segments, with total spending topping IDR 5.55 trillion.
 This XL stratey definitely disturb the other player, especially indosat whose position as the
second largest telecommunication service provider was threatened.
 XL knew that Low prices weren’t enough to compete , it hat to build more BTS towers to
maintain its quality and to accommodate increasingly high traffic, by 2010 XL had almost
tripled its 2006 coverage with more than 22.000 BTS towers.

Consumer Response

 In sales strategy, COO Joy Wahyudi found the urge to distribute starter packs and prepaid
vouchers directly to retailers, outlets, and to every little shop and street side vendor to
anticipate the increasing demand in the market.
 Because of the high visibility, affordability, and availability of XL’s product and services, in
2008 subscriber increased more than 170%, and by 2010 XL held 22.6% of the total market
shares.
 Another effect of XL’s low rates was the rapid increase of voice call traffic in four years. In
addition, low tariffs also affected the Indonesian telecommunications industry churn rate
level. In 2010 churn rate level was between 15 and 20% per provider. This means that out of
40 million XL subscriber, some 20% were subscriber that changed numbers or switched
operators.
 By the end of 2010, Indonesia had ten listed cellular providers, the industry had penetration
level of 97% or about 235 million subscribers.

XL AXIATA : Sustaining Growth

CEO Hasnul Suhaimi had turned the industry upside down by making quality telecommunication
services available and affordable to everyone. The company quadrupled its subscriber population to
40.4million nearly tripled revenues to IDR 17.6 trillion.

Amid tight competition where all players adopting the same strategy, how can XL Axiata sustain
performance and increase market share? Suhaimi considered the alternatives:

- Continue the tariff war

- Company innovation and differentiation
- Focus on improving current product features and service quality