ROMANIA, the long road to integration LATEST REPORT July 24th, 2000	Romania the awakening giant of Europe Read our exclusive interview. CONNEX GSM Manager: Mr. Tolstoy, President of CONNEX. Contact: MobilFon S.A. City Business Center 3, Neva Traian St., Complex M101, Sector 3 74228 Bucharest Romania We're CONNEX GSM: Romania's leading mobile telephone company. We achieved the fastest launch in the history of GSM services, connecting northern Romania over the Carpatian Mountains of Transylvania down to the Black Sea Coast. Every day CONNEX GSM is growing with the cities and villages we reach, the people we service, the countries we extend to, and the features we offer. In an emerging country, CONNEX GSM is paving the way to the future. Company Profile Activities Mobile telephone services. Connex is the first company in Romania offering state-of-the-art digital mobile telephony. The company offers three packages that aim to satisfy all customers : Classic, Club and Business. At present, CONNEX GSM - a trademark of MobilFon S.A. - covers 80 localities, towns and resorts. Their target for december, 1998, is to cover 90% of the romanian population. As of december, 1997, CONNEX GSM had over 100,000 subscribers, and over 800 employees. The company is also involved in a number of sponsorship programs, and actively supports the most popular and exciting cultural, sports and entertainment events happening in Romania, such as ATP Open Tennis '97, Romania Investment Summit, Ad Maniacs Night, and a charity Gala based on a Fashion Show by french couturier Jean-Louis Scherrer. Facts Figures Coverage map of the country : Strategy Interview with Mr. Tolstoy, President of CONNEX. Question: Mr. Tolstoy, your company is a leader in your sector, but could you give to our readers a brief historical background of CONNEX, as well as your professional experience? Answer: My professional experience is a bit long, but over the last 10 - 12 years I specialized in the mobile wireless industry. I’m native of Canada and I was involved in the mobile development there for the first eight - ten years and after that I joined an international company. I had have some international experience, I worked in Southern Arabia for three years on telephony, including selling up wireless there, but with this new company I spent time in China and India. Our consortium is made up of an American company called Air Touch, a Canadian company called Telesystem and five Romanian partners. When we had formed the consortium to bid on a license here, in late `95, our business development team started to work on this project. I came here late in October of `96, when we were down to the last few days of decision by the Government to who will be selected, and we finally won the license on November 29, 1996. So, CONNEX was born as a company and when CONNEX started here we had a license that mandated us to build a network and have something operational within a very short time frame. By March the 1st we were technically operational in Bucharest and by mid April we had works launched in the 9 major cities. We were the first GSM operator to win a license and we were also the first on the air, our competitor than went on the air in June. It’s been nothing but a big success from that point on. Our challenge was that we have forecast a certain size, a certain number of subscribers by the end of the year and we met the year in target within weeks of launching the service. So, that point it was a challenge to take up how much bigger we could be and that was not only in terms of the construction of the network, the capacity, but the size of the operation, the size of the company. We had temporary locations, we kept moving and ended up here now, but we’re running out of space in buildings and we’ve grown to 1000 employees now. I remember when we first came here we said to the journalists that we will one day have 500 - 550 employees and they didn’t believed us. They wouldn’t believe us, they said that everybody says when they come to Romania they they’re going to create employment. Less than an year later I’m siting here with 1000 employees saying there is the proof. Q: They were not expecting it but you weren’t either. A: We weren’t expecting to be that big, that successful. So, from that point of view it’s been a challenge, because everybody had to work very, very hard, long ours, initially and I kept saying to everybody to trust me, it will slow down and we’ll have a more reasonable climate. I guess I lied, because it hasn’t slow down. Q: Do you think this will be a lasting trend? A: Well, I certainly hope so now, because the investment is large and the way that GSM or Mobile works in developing country is that you really count on critical mass, you go in with the idea that you’re here for a long term investment and you have to built up the customer base. I have to watch how I spend the money to get to that base and if the first year is the trend, we certainly want that to continue and our plans for 1998 are very aggressive. The strategy now is to more than double the customer base. If we finished the year with more than 120 000 customers, after 8 month of operation only, our goal this year is more than double that. I see the trend continuing, it’s hard, because the economic indicators sometimes are not steady in Romania, the evaluation of the currency or the inflation rate, both, sometimes have impact on the buying power of the consumers, but right now there is every indication and our whole business plan for `98, and we even projected a three years business plan, suggest a very strong upper curve. Q: Could you elaborate more precisely on your strategy? A: Our strategy is first of all liked partially to the bid commitments and we have a commitment to do a very aggressive extension of the service across the country. Right now we cover about 55 - 56 % of the population and that is changing literally every month because the construction pace we have this year is about twice as fast in terms of subside construction, highway coverage as it was the case last year. Coverage is important in cellular business, but the quality of service is very important also. Our second point is that we are focusing on quality, we will not sacrifice in the interest of just saying we have service on the road or service in a certain city, we want to make sure that the quality of the network is there and that in brand name. Our name CONNEX, we spent of money promoting it and our strategy continues to be to put CONNEX in the front of people’s minds. We were very lucky when, in the fall, in November - December, we hooked up with a very famous personality here, from a comedy troupe and he became our spokes person for a new service launched which is called CONNEX GO. That is a prepaid package and prepaid in cellular works very well across Europe. It’s really designed for what we call people who are occasionally users or credit challenged. What I mean by that is that they may have a hard time paying their bill at the end of the month, but, if they pre-buy air time on a card whenever they have some money, they become an occasionally user, a very important segment to us. So, that’s the retail business and again, our strategy is to make sure that we’re there, very present in the retail business. Q: The Government decided to issue two more mobile telephony lines. One of them will be a basic service for the provider RomTelecom. How will this decision affect your business? A: We were very involved why the Government was going through that process and made our feelings known to the Government at various levels: the Minister, the Prime-Minister, the House of Deputy and the Senate. On the surface, we feel that Romania does not need a third and a fourth license. I don’t think the population can support that. However, we respect the Government’s power of decision to do that and these licenses, as you know, are on different frequencies, that technology, DCS, PCS is fine for urban locations, but it’s a costly way to cover rural locations. The first license was directed to RomTelecom and we wish them luck. Our understanding is that they will not become operational until the end of 1999, at the earliest, and that is something that we wanted to have assurances, because, throughout Europe, the protection has to be there for at least two to three years for a GSM operator when we start up. So, that was one of the things we wanted to secure from the Government, that a third and a fourth license they would commit after we had the chance to establish a base, because our investment is large. We paid 50 million for the license by comparison to the 25 million they’ve paid. The fourth license will go to public tender, I don’t know when, maybe the end of this year, maybe the early `99. I seriously don’t know who will bid because the other thing that’s going to happen in the mean time is the privatization of RomTelecom this year and why hat links into this is as the strategic partner is selected for the privatization, we have been presented to the Government a scenario that really requires that the regulatory body, which is part of the ministry today, be separated. What we will not appreciate is a scenario where RomTelecom has a strategic foreign partner who will potentially could be our competitor or somebody else that is very knowledgeable strong in the world. We don’t want our third license competitor to be the same competitor we have today. If France Telecom was to be the strategic partner, they already are a GSM operator, so we want structural separation. We want to make sure that within the RomTelecom the wireless division is separated from the basic telephony and within the Government, the regulatory body is separate from the ministry. We made those feelings known to all that was at the Government, the response has been positive, they’ve said that they will push for structural separation, they will have an autonomous independent regulatory body. If that happens, I welcome competition. We do well on competition. Q: Your main competitor is Dialog. What are your advantages? A: Dialog is a good competitor, they came in just after us by few weeks and it’s been an aggressive competition on both parts. I can candidly say that I feel that dialog takes a lot of our ideas and tries to improve on them and so I think they’ve developed an image of being a bit of a second player in the market and, if you ask them, sure they would say the opposite. We have been innovative and I’ll give you some examples. Everybody does billboards so we did them, they did, but we did unique things like we hired a cartoonist to do unique, attention grabbing advertising in the media, in the print and than we put it on buses. Well, guess who hired a cartoonist and painted up buses? Our competitor. So, there is an example of we led, they follow. We do certain special events and very quickly they jumped on and do similar events. So, in one way, I could be upset, because I feel like they’re copying us, but, on the other hand, I would say that this stimulates the whole market, because my experience in North America has shown me that if any operator is promoting cellular, in this case GSM, it kind of bring to the attention our business to our customers and the whole business grows. So, I think in a way we’re bouncing off of each other and helping to stimulate the business and I think, as our business grows, it stimulates the economy. We’re providing a service that today RomTelecom can not provide. The wireless solutions are proving to be an alternative to basic telephones or waiting for basic telephones, which is the case in many areas in Romania, you have to wait for a service. So, competition is good, a third company I don’t really know how well they will do and a forth one, I would not rush up to invest my money. Q: It is being there at the right time. A: You know, the population of Romania is 23 million, originally we talked about penetration level of 10 or 11 percent, now, even if you talk about 20 % within 10 years, which I think is really possible, that doesn’t suggest that there is still a third or a fourth operator that can make money here in the end. After two and a half years we will have investments close to 400 million $ and when you invest you expect a return of your investment. Q: You talked earlier about the response of the Government to your suggestions. Do you think they will really keep their promises? A: I would certainly hope that they’ve listened, I can only give you my personal impression here. The minister Pantis has been consistent and kept his word for the last year and a half that we’ve known him. So, when he understands what the size of the investment is, the concerns that we have, we want consistency in decisions, continuity, we want this professional structure that regulates us, yes, I would say that I think that, in all the sincerity, he will attempt to deliver that. There are parties in politics that work here between the various parties and the coalition Government and he has to manage through that as we do. I’m optimistic that that kind of a structure will be there, that we will be treated in a fair approach and, if we sense we’re not, we will be very quickly back to explain our concerns, but today I have no reason to suspect that they say one thing and do another. That’s not been the case at all, its been pretty consistent. I hear that other parts of the Government, sometimes when I listen to business man, that it has been a little harder for them, it had been a little bit more of this inconsistency or lack of decisions. I would say in that sense we’ve been luckier. Q: CONNEX is a Canadian-US joint venture, but do you have also other big partners? A: Yes. I can share the percentage because I think it is known. Telesystem International Wireless is the major shareholder and right now they own 62 % of the consortium. Air Touch of the United States owns 10 % and they have an option to increase their shares if they want to up to 20 %. Logic Telecom is a Romanian company that owns 16 % of the business and when we first formed the consortium Logic was owned by a combination of Romanian business people and some foreign investors. They sold their company Logic to a firm from Thailand who’s specialized in telecommunication business. It’s still a Romanian company but they’re now hold by a Thai investor and they’ve brought in a Romanian president to replace the previous owner. Posta Romana, who is the post office monopoly in Romania owns 5.5 % of our company right now and 4.5 % is owned by a company called ISAF, which is a company that specializes in constructions related to railways and signaling and so on. 2 % is owned by a company called Ana Industries, a firm owned by George Copos. That’s the makeup of the company. The management of the company, by the shareholders structure, is that, as the C.I.O., I come out of the Telesystem operation, the chief technology person comes out of Air Touch operation and the chief financial officer comes out of the Telesystem group. Those were parts of the partnership agreement and, other than that, the management is made up of people that we have brought from foreign properties that either we or Air Touch had and over the year we’ve been trying to "Romanianazing" the company. We’ve been working at a process and we think will take 2 to 5 years to develop the Romanian management team that we want and ultimately 95 % of the management will be Romanian. Q: In Romania you have a big image. You are a leader in this sector of the Romanian economy and I would like to ask you a more global question. How confident are you for the future of Romania? A: I have to express it at two levels: one is as an observer and one as a leader within an industry. In the year in a half that I’ve been in Romania, I’ve learned a lot about the country, about the people, I had the occasion to meet the President a couple of times, The Prime-Minister, I deal a lot with ministry people. I would say that I’m very optimistic about Romania’s future. I think that it’s very interesting to be here at this point in time. We arrived about one month or two before the President was elected, it was an exciting time. As a company, I think that we have to look at the results and in the first year of results, it far exceeded our expectations. Our investors are extremely happy, but they ask the same question: do you see continuity, do you see this positive trend continuing? I would say that my answer it has been always yes and I’m going back to Montreal to speak at a board meeting in March and that question will come up. Is our investment safe? Do you have continuance plans? I think my answer to this would be we feel very comfortable because it will continue to grow. I’m perhaps lucky, because in this sector of telecommunications, when the economy has a downturn, sometimes we still do well and the reason for that is people still need to communicate. The business sector, right now we have less that 1 % people having mobile phone there, the early adopters, the business people, the entrepreneurs, people who communicate around the world and within Romania, that sector, when things get harder, still, perhaps more vitally, have to communicate. So, in many ways, we will continue to do well even if there is a bit of a downturn or there is a bump in the road to progress. What we have to manage is the consumers segment. If there is a downturn or a devaluation of the currency or the buying power is weak, than perhaps the consumer segment suffers a little bit so we have to have plans in place on how to manage that. But, I’ve been here when the conversion of the Lei was 3500 to the US $, when I arrived, the highest was 9700 and it fluctuated mostly last year around 7000, right now is 8300 and I would say that I’ve not seen a change in the buying trend. People still buy our product or services at a faster rate than anticipated, I’m satisfied, I think the Government has to get the reforms in places they talk about, they have to be more decisive. I think that the President is extremely popular and gives that vision and I think the Government falling in line behind him on that vision they can deliver some key things, get more foreign investment of a longer term perspective. I think that retired in Canada 10 years from now I’ll think I was part of the successive Romania. In fact, my lob had been to go to a country, start up a property than move on and I did that in China and India and when I came to Romania, initially I was going to do the same, get the team in place and move on. The next place where we were going was Brazil and I always wanted to go to South America but, honestly, when I landed here I thought I want to stay here for a while and so I changed jobs and became the C.E.O. with at least a two years commitment that I signed to stay here and it finished one year and I’m thinking what about a third year here. So, that’s got to be a positive indicator. Q: So, at the beginning it was not fine at all? A: In September or October I was told that we were going to be bidding here and had a chance of wining, we were on the running, I was asked to come and evaluate the property and evaluate what kind of resources we will need. That’s why I did that but I liked what I saw and I came back to Montreal and I say I want to stay on that project, is an opportunity. Q: As a final issue, what will be your final message to them? A: My final message to these readers would be come, see Romania, invest in Romania, but do your homework. By do your homework I want to suggest to understand within your industry segment what you will have to know and what you will have to do in Romania. You have to understand the rules, Romania is very liberal in terms of foreign structures and joint ventures so understand in your particular segment what percentage has to be Romanian content and what percent doesn’t, understand the regulatory scene, come and meet the Government officials. There is a good bureaucracy in Romania, no doubt about that, so come and meet your particular people who will influence your area, the ministries, the organizations. The third part would be to really size up and do some analysis. It’s hard to do market research in Romania, but you still have to try to get a feel for your industry and segment, whether you’re in the clothing business or high tech, you have to get a feeling for what are the opportunities that lie within Romania. Romania is a big country so you got to look up the urban and the rural areas and decide where you going to land. So, I would say do your homework but it certainly is I think a land and area of opportunity.   Read on   © World INvestment NEws, 1998. This is the electronic edition of the special country report on Romania published in FORBES Magazine's enriched with complementary information, such as full interviews, detailed company files and more. June 1 st 1998 issue Developed by AgenciaE.Tv