When the British mobile phone giant Vodafone bought an Indian wireless company for $11 billion in 2007, the chief executive at the time, Arun Sarin, praised the new "tremendously exciting, fast-moving market."
But despite adding tens of millions of customers to become India's third-largest mobile phone company, Vodafone has found this vaunted high-growth market full of unexpected hazards.
First came a surprise tax bill, estimated at $2.5 billion, that Vodafone is still appealing to the Indian Supreme Court. And a brace of new competitors has squeezed margins so tight that Vodafone last May wrote down the value of its India operations by $3.5 billion.
Most recently, a government corruption scandal over the awarding of additional wireless radio spectrum has delayed the much-needed industry consolidation, making it impossible to predict when Vodafone's profits will improve.
Within India, Vodafone trails Bharti Airtel, the pioneering company that created India's private mobile market in the 1990s and snapped up many of its most-lucrative customers. The country's No. 2 carrier is Reliance Communications, which is part of the billionaire Anil Ambani's conglomerate.
In emerging markets "there are new hurdles every day, and they can change the rules of the market as you are playing it," Marten Pieters, the chief executive of Vodafone's India business, said in a recent telephone interview.
The lesson from India? "If you don't have the stomach for that," Mr. Pieters said, "please don't come."
The India push is part of Vodafone's broader strategy of embracing emerging markets through acquisitions, followed by heavy investments in advertising and network improvements. That strategy stands in stark contrast to that of Vodafone's American rival, AT&T, which is concentrating on expanding in its own backyard -- as is evident in its $39 billion deal for T-Mobile USA.
Vodafone's expansion has yielded phenomenal customer growth. More than 70 percent of Vodafone's 359 million mobile customers lived in Africa, Central and Eastern Europe, the Middle East and Asia-Pacific at the end of 2010, up from less than 40 percent at the end of 2006. But this growth has not been matched by profitability, so far. Of Vodafone's £5.2 billion ($8.5 billion) in operating profits in the six months that ended September 2010, less than a third came from its emerging market businesses.
The Indian business has grown faster than the most ambitious Vodafone forecasts -- to 125 million customers, a sixfold increase.
But in India, fierce competition has kept rates low and profits tiny. In the last quarter, Vodafone's monthly average revenue per user in India fell by a rupee, to 176 rupees a month ($3.87).
India's market is overwhelmingly "prepaid" customers, who buy phone time upfront. Every month, millions of new cellphone customers sign up for service in India -- nearly 23 million in December alone.
But the newest mobile customers tend to be middle- to lower-income customers who are just able to afford a mobile phone, or in rural areas only now getting service. In either category, these customers tend to use their phones sparingly.
Vodafone has also been trying to get higher-paying customers on board, by offering monthly unlimited service for BlackBerry users, for example, for 899 rupees ($19.98). But all mobile companies compete fiercely for BlackBerry users, and at around a million people, they make up just a sliver of India's population of 1.2 billion.
So far, analysts have mixed opinions of Vodafone's India foray.
"The combination of the capital gains tax, uncertain regulation and the very tough competitive environment has caused investors to say it wasn't great timing" to do the deal, said Robert Grindle, an analyst with Deutsche Bank in London.
Still, he said, "India is one of the fastest growing assets in Vodafone's footprint, and without the contribution from India the company would have much lower top line growth than it does."
Vodafone's total revenue, excluding asset sales, will grow about 2.4 percent this quarter, Mr. Grindle estimates. Without the India business, growth would be just 1.3 percent, he said.
Vittorio Colao, Vodafone's chief executive, alternates between enthusiasm and frustration when discussing India. The country's "communicative, talkative society is the ideal ground for a communications company," he said in a telephone interview.
At the same time, he said, "in the Indian regulatory system sometimes there is a tendency to see the telecom sector as a lemon to be squeezed."
Vodafone entered India in 2007 through its acquisition of Hutch Essar, the Indian arm of the Hong Kong company Hutchison Telecommunications International.
But a tax dispute began soon after the company completed the Hutchison deal. That September, India's top tax authority demanded to know why Vodafone had not paid taxes on the deal. Vodafone responded that because it had bought -- not sold -- Hutch Essar, it had made no profit on which to be taxed.
Vodafone took control of the HutchEssar business through a complicated series of longstanding holding companies. A Dutch subsidiary of Vodafone bought a 67 percent stake in a Cayman Islands company that holds the India assets. Because the two parties were foreign, Vodafone and a team of lawyers advising the companies argued, there was no tax liability in India.
India's tax authorities see the matter differently.
"I have the law on my side," India's top tax authority, Sudhir Chandra, said in an interview.
Vodafone has been battling the issue in court, and in July India's Supreme Court will hear the case. Meantime, the Supreme Court has demanded that Vodafone put up $550 million in a deposit toward the bill.
Despite their travails, Vodafone executives say they are committed to India. But they hint that they may rethink things if they are still left with a multi billion-dollar tax bill after the Supreme Court decision this summer.
"We like India, it is an important part of Vodafone; but we need to be reassured that it is a business-friendly environment," Mr. Colao said. "For the time being we continue to invest."