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Latin America: The New Land Of Opportunity?

By Robert Walzer

Latin America has been in the news constantly since its wireless markets opened up. From Mexico to Argentina, both mobile and fixed access services look set for growth. What are the prospects for cdmaOne in this highly promising but economically uncertain market? Robert Walzer

Mobile phone companies that promote the use of CDMA are meeting with more success in uniting the region than did the 19th century South American patriot Simon Bolivar. Bolivar died before achieving his dream of union, but companies like Lucent Technologies, Motorola Inc., Nortel Networks, Qualcomm and NEC do Brasil are coming closer to doing something similar with installation of cdmaOne equipment in many of Latin America's biggest markets, paving the way for seamless hemispheric wireless communications.

CDMA infrastructure providers are expected to perform strongly in Latin America this year, with operators rolling out new service based on the digital mobile standard in Mexico, Brazil, Bolivia, Paraguay and possibly other nations including Argentina and Venezuela. Government privatization of telecom markets and their allocation of spectrum is making it all possible. But three trends in particular are driving CDMA's growth in the region: government auctions of PCS rights; the upgrading in many markets to digital from analog; and the deployment of wireless local loop (WLL) systems.

Significant
For international suppliers of CDMA equipment, 1999 looks promising. "Every market of significance in Latin America has CDMA started and growing," says Woody Ritchey, vice president of Motorola Inc.'s Americas Cellular Infrastructure Group. "We've seen a 30 percent increase in expansions and new business in Latin America on the CDMA side in 1998. I expect at least that much growth this year."

David Dial, Lucent Technologies' vice president of business development for the Caribbean and Latin America, adds: "For us, growth of CDMA is significantly greater than anything else. We expect that to continue this year in Latin America. CDMA is emerging in a significant way and, in percentage terms, will grow stronger than TDMA."

Introduced to Latin America just two and a half years ago in Lima, Peru by way of a 10,000-line network employing Motorola infrastructure and Samsung handsets, CDMA has quickly become a formidable rival to the more entrenched TDMA standard and to GSM, which is still in the early stages of development in the region. At the end of 1998, CDMA had seven percent of the mobile market, while its chief rival TDMA controlled 30 percent. (AMPS, the analog standard in the process of being phased out, still enjoys a 62 percent majority of Latin America's market; GSM has one percent.)

The biggest challenge for companies selling CDMA equipment in the region isn't proving the quality of their product-laboratory tests tend to favor CDMA over TDMA in terms of voice quality and line capacity. Rather, it's taking on the region's biggest equipment supplier, Ericsson, which favors the use of TDMA equipment.

"TDMA, because of Ericsson and because it had a head start, is still the dominant standard in Latin America," says Leslie Arathoon, a Latin America telecoms analyst at Boston-based Pyramid Research, a unit of the Economist Intelligence Unit. "But CDMA is now playing catch-up, and it's gaining ground." Pyramid sees CDMA's share of PCS and mobile business reaching 15 percent by the end of this year, and 35 percent within four years compared to TDMA's projected 58 percent share at that time.

Activity
There is still a lot at stake. Pyramid, for one, predicts 43.8 million mobile phone subscribers in Latin America by 2003, up from 19.2 million at the end of last year. Other analysts suggest that annual wireless revenues will reach $20 billion by 2000 and $30 billion by 2002. About two-thirds of that activity will be in three countries: Brazil, Mexico and Argentina.

Mexico is expected to be a hotbed of CDMA activity this year. There, Qualcomm will supply equipment to operator Pegaso Comunicaciones y Sistemas, which won a bid to install PCS mobile networks in Tijuana, Mexico City, Monterrey and Guadalajara. Qualcomm had a 49 percent stake in Pegaso, which it transferred to its spin-off Leap Wireless International.

Mexican operator Unefon, which has won nine PCS and nine wireless local loop frequencies, signed a letter of intent with Nortel Networks in May, 1998 to be its supplier. Unefon did not meet the December 31 deadline for raising the cash to pay for the frequencies, and in the meantime, Nortel now says its agreement with Unefon has expired. Unefon stands to lose its licenses and 20 percent deposit unless it makes the payment by March 31.

Deals in the pipeline
The outlook isn't as bleak as it may seem. Nortel Networks is installing a CDMA PCS network with a capacity of 150,000 subscribers in Guatemala for operator Telgua; it is to be completed mid-1999. Nortel spokesman Ernesto Ortiz says: "We have a couple more PCS deals in the pipeline using CDMA this year," although he was unable to go into detail about them.

Meanwhile, Mexican operator Grupo Iusacell has chosen Lucent Technologies to provide for the installation of a PCS network in and around Mexico City and in Baja California and the country's northeast, where the operator is digitizing the network.

Motorola has an equally high profile in Mexico with three networks up and running since late last year and another soon to follow, all at 800 MHz. Elsewhere in the region, Motorola will be busy expanding existing networks in Sao Paulo, Lima and Buenos Aires into outlying "non-dense urban parts," Ritchey says. Adds Crispin Vicars, an analyst and director at Boston-based Yankee Group: "Motorola and Qualcomm have taken the strategy of participating in the license process and being part of the consortium. It's a guarantee that you'll be installing the equipment."

In Paraguay, Motorola is to supply the Millicom International Cellular-owned operator Telefonica Celular de Paraguay with equipment for the deployment of a CDMA network. In Bolivia, Motorola is also the likely candidate to supply Telefonica Celular de Bolivia with CDMA equipment, analysts say, although Motorola wouldn't comment on those projects.

Looking ahead, Venezuela, whose planned PCS cellular license has been subjected to great political and regulatory delays, is seen as possibly fulfilling the promise of new spectrum allocation this year. Argentina, too, could soon be auctioning off PCS bands-also possibly this year. "You'll see another wave of opportunity for CDMA where PCS licenses are awarded," Lucent's Dial says. Adds Ritchey: "We're seeing a good portion of PCS operators, perhaps half of them, entertaining CDMA."

Yet in predicting CDMA's growth this year, the health of Latin America's largest economy, Brazil, can't be ignored. It is potentially the biggest prize in the region but not without challenges. The recession-plagued country, which was granted $41 billion by the International Monetary Fund late last year to prevent a collapse of its currency, found it impossible in January to defend the value of its currency, the real, and let it float freely. Brazilian President Henrique Cardoso hoped to promote a reduction in interest rates and a return to growth and employment. But the country's immediate future is uncertain.

Linchpin
"Brazil is the linchpin," Motorola's Ritchey says, adding that an economic downturn would result in placing more customers on existing networks rather than expanding them and create more demand for vendor financing. "The wild card right now is the economic climate and whether there'll be an economic downturn. If Brazil falters it could have an impact on everybody's growth plan."

There has been no shortage of wireless activity in Brazil, however. This year, Lucent Technologies is supplying CDMA infrastructure to Telesp Celular, which is owned by Portugal Telecom. Building out $340 million worth of wireless networks based on CDMA in Sao Paulo state, one phase of the project has been completed in the Osasco region, where some 150,000 customers have signed up for the digital services.
In all, the contracts call for the installation of wireless CDMA networks to support more than 1.5 million subscribers in Greater Sao Paulo and select areas in the interior of the state, the largest wireless market in Brazil. The metropolitan Sao Paulo area alone is being equipped with more than 400 cell sites, a build-out expected to be completed by June of 1999.

Up and running
Nor should one forget the Brazilian sister company of Japanese giant NEC. NEC do Brasil has contracts to supply over two million CDMA lines in Sao Paulo, Rio de Janeiro and Bahia. In Rio de Janeiro a total of 660,000 users will eventually be served by Telerj in a rollout planned for completion by March this year. Around a quarter of a million customers are already using the network. The Salvador, Bahia network is up and running too: 20,000 of the 40,000 line capacity has already been taken up and local operator Telebahia has ambitious plans for expansion of its digital services to 500,000 customers this year.

The project in Sao Paulo is the biggest, however. NEC do Brasil has signed contracts to deploy a network with about 318 base stations accommodating some one million users. The project is planned to be completed by the end of the first quarter this year.

It won't be easy. As NEC itself points out, Sao Paulo has 17 million, densely packed inhabitants, a lot of traffic and complex geography. However, even NEC's two million lines across three states combined with a million for Lucent, is only a small part of a total population of some 150 million. There's a lot to play for still.

And it's not just in cellular. Another promising area for CDMA vendors is wireless local loop systems. Following the deployment of six CDMA-based wireless local loop networks in Brazil, Mexico, Guatemala and Puerto Rico, at least one more is being built in Brazil this year. A fixed-line mirror consortium dubbed Canbra won the contract to compete with Tele Norte Leste in a region comprising nearly 90 million people in 16 states including Rio de Janeiro and Belo Horizonte.

Canbra's partners are Bell Canada Inter-national, WLL International, SLI Wireless, Taquari Participacoes and Qualcomm. "It is very probable that the mirror company will choose CDMA as the primary standard for its wireless local loop build-out," says Andy Castonguay, Pyramid's Brazil-based analyst. Indeed, many analysts already see CDMA as the best solution for fixed wireless because of its spectral efficiency.

Meanwhile, the CDMA Development Group (CDG), and groups supporting competing technologies are busy lobbying Latin American governments to auction spectrums in a manner that allows for equal opportunities for all standards.

"We want to make sure that spectrums are made available that would provide the opportunity for companies to bid using CDMA as their technology," says Jim Takach of the CDG. "We'd like to see the operator or investor able to choose the technology they wish."

But, as Pyramid's Arathoon points out, it's not only the merits of the technology that decide whether CDMA or TDMA win Latin American infrastructure supply contracts. It's also a matter of which provider can provide a better financial package. "Many times, selections are not made with the standard in mind, but rather on the basis of the vendor or financing involved," Arathoon says. "As markets liberalize and new players enter the fold, they often ask for financing. The question then becomes: 'Who can give me the best deal?' Vendors are becoming more like strategic partners rather than just equipment providers." Owing to their size and ability to finance their equipment, the Nortels and Lucents of the world hold a natural advantage in the region.

Appetite
Also working to CDMA's favor, the desire to roam beyond national borders is whetting the appetite of Latin Americans for the standard. CDMA is now offered across North America, serving about 6.8 million subscribers. Ritchey says that facilitates easy roaming with the U.S., Latin America's biggest trading partner. This is particularly the case in Mexico, where the North American Free Trade Agreement that links it with the U.S. and Canada, plus a 2,000-mile boundary with the U.S., makes it the world's largest roaming border.

It's perhaps no coincidence that CDMA is used by the country's leading mobile phone operators, including Iusacell, Telefonia Celular del Norte (Norcel), Celular de Telefonia (Cedetel), Pegaso and SPC.

CDMA equipment makers have also begun manufacturing in Latin America, with the promise that equipment prices will further decline and further boost sales. Lucent, the CDMA market leader in Latin America, recently opened a 212,000 square meter industrial complex in Campinas, Brazil, to make digital switches and other cellular infrastructure for CDMA, as well as for the other standards.

Other CDMA factories are opening in Brazil as well. Motorola has opened a facility in Jaguariuna, in Sao Paulo state, to make CDMA base stations, receivers and controllers.

Meanwhile, worldwide, the promise of cheaper handsets is being realized. CDMA handset manufacturers make about 15 million units a year; if demand continues to grow in Latin America at present rates, that figure could soon need some revision.