Budget 2008: Industry opinion Sunil Mittal, chairman and managing director, Bharti Airtel “Union Budget 2008-09 has been on expected lines, although we are disappointed that the corporate tax has not been changed.” Manoj Kohli, CEO and president, Bharti Airtel “The focus on rural and small-town connectivity is a very positive move. The increased outlay of Rs 4.75 billion for SWAN projects will help achieve greater penetration and will provide connectivity to smaller towns and villages. This is also aligned with our rural focus.” T.V. Ramachandran, director-general, COAI “We are disappointed with the budget as there was nothing in it for the telecom sector. The finance minister had announced last year that there would be rationalisation of the tax structure. There is no action on that even after a year. Our other demand, relating to cenvat, has also not been addressed.” S.C. Khanna, secretary-general, AUSPI “The finance minister has not rewarded the sector for achieving phenomenal growth and the government continues to heavily tax the industry.” Manoj Chugh, president, India and SAARC, EMC Corporation “Investments in excess of Rs 8 billion in the area of building a knowledge infrastructure, including broadband, SWAN and data centres, will definitely enhance our capabilities. This supports our belief that information sharing across the country will lead to more inclusive economic growth. We are also encouraged by the reduction in customs duties for IT hardware components, as it will lead to lower prices and higher consumption in the domestic sector.” R. Sivakumar, managing director, sales and marketing, South Asia, Intel “The budget is focused on building social infrastructure by increasing broadband connectivity and strengthening the education system across India. These measures are a step forward for transforming India into a knowledge society.” Shubham Majumder, analyst, India and Indonesia telecom, Macquarie Capital Securities “The budget had nothing for the sector except that it brought in a negative surprise in the form of 1 per cent national calamity contingent duty on cellular phones. Handset companies may take this marginal hit themselves rather than passing it on to customers. In any case, price deflation in the handset industry is a regular feature.” Sourabh Kaushal, industry manager, ICT practice, Frost & Sullivan “Looking at the potential of the sector, the funds allocated for the information and communications technology industry, including 100,000 rural broadband kiosks, SWANs and state data centres, are minuscule. But they definitely constitute a move in the right direction. This is likely to lead to huge opportunity in the mid to long term.
We expected the finance minister to extend the Software Technology Parks of India scheme and to rationalise the fees, taxes and duties on the telecom sector, but this was not even touched upon by the minister in the budget. From the telecom industry’s perspective, apart from a few indirect positives, it was a lacklustre budget.” Vishal Malhotra, partner, global tax advisory services, Ernst & Young “A positive point for the sector was the rationalisation of cenvat credit on inputs/input services used in providing both taxable and exempt services. Most telecom operators have accumulated large pools of unutilised cenvat credits due to the 20 per cent restriction on utilisation of credit provided under the existing rules. With virtually all of the telecom service becoming taxable, they would now be able to fully utilise the cenvat credits.
Further, the amendment to the tax withholding provisions (with retrospective effect) appears to be geared towards enabling the tax department to recover taxes from entities acquiring indirect interest in Indian companies through acquisition of overseas entities. This would especially impact some of the recent acquisitions in the Indian telecom space. Apart from that, there is no major announcement for the telecom sector in the budget.” As the wireless segment continues to surge ahead with over 8 million subscriber additions a month, the wireless infrastructure market is also witnessing rapid growth. Investments in wireless infrastructure are being driven by the massive expansion initiatives announced by service providers as well as by rising consumer demand for mobile connections –? a result of low tariffs and handset prices.
With a target of 250 million subscriber additions by 2010, key players such as Bharti Airtel, Reliance Communications and Idea Cellular are expediting network rollout in the rural areas and the new entrants will be setting up networks. This translates into an investment of about $24 billion in telecom infrastructure by 2010.
Given the possibility of a global slowdown, the Indian telecom industry, with its planned investments of over $24 billion in wireless infrastructure as well as the expected rollout of new technologies like 3G and Wi-Max, has become a strategic market. The country represents a significant revenue-generating opportunity for telecom equipment vendors such as Nokia Siemens Networks (NSN), Ericsson, Motorola and Alcatel-Lucent. While NSN, Ericsson and Alcatel-Lucent have won contracts worth $15 billion over the past two years from telecom operators for setting up and managing networks, vendors like Nortel and Motorola have increased their focus on emerging technologies targeted at small and medium businesses (SMBs).
The SMB segment is witnessing rapid deployment of wireless technologies. SMB users, who relied primarily on wired networks in the past, are migrating to wireless solutions with the availability of faster and more secure wireless solutions, at least for last mile access.
Capitalising on this opportunity, Nortel has designed an unlicensed band Wi-Max product for the last mile broadband needs of SMB users. The company will also launch voice over IP, wireless local area network, security, and converged voice and data services for the SMB market. Cisco too has introduced a complete range of wireless solutions, including routers, switches and wireless phones for the segment. “SMB is the fastest growing segment for us; we are seeing more than 100 per cent growth in this segment,” says Amit Malik, head, SMB, Cisco India and SAARC.
Like the huge investments in networks, the managed services segment has emerged as a key growth area over the past two years. Bharti Airtel set the precedent in this regard in 2004 by outsourcing its mobile network management to Ericsson and Nokia. The operator paid only for the utilised portion of the network. This was a huge advantage given that up to a third of the capacity might be idle at any point of time. This model was subsequently adopted by other operators such as Vodafone Essar and Idea Cellular.
The market for managed network services has grown rapidly in the past three years and is expected to sustain the same levels of growth till 2012. According to A.T. Kearney’s latest foreign direct investment (FDI) confidence index rankings, India is the second most attractive destination for FDI among telecom manufacturing investors, the first being China. Manufacturers including Intel, Cisco, Motorola, Ericsson, Nokia and LG have already set up or announced large investment plans for hardware manufacturing, research and development, and software design facilities in India. During the past one and a half years, these major companies have announced investments of over $18 billion. Chinese vendors are also consolidating their position in the Indian telecom environment.
They currently account for over 10 per cent of the total wireless infrastructure market.
Passive infrastructure sharing is another key trend in the industry.
With significant advantages including cost reductions of 30-40 per cent and faster network rollout, the model is gaining popularity amongst wireless service providers as they push into low-margin rural areas, which account for as much as 70 per cent of the country’s 1.1 billion people. The government has also been encouraging carriers to take advantage of infrastructure sharing with a view to increasing the availability of telecom services throughout the country.
With several new players entering the telecom arena, this is a trend that is expected to continue.
Another important development is operators hiving off their tower businesses into wholly owned subsidiaries, and the emergence of independent tower companies. The mobile tower business, which is expected to witness rapid growth, has generated significant private equity interest lately. For instance, Morgan Stanley picked up stake in telecom infrastructure firm TowerVision for about $300 million, and Kohlberg Kravis Roberts bought 2.5 per cent stake in Bharti Airtel’s tower company, Bharti Infratel, for $250 million.
Players and market share The wireless equipment market in India is dominated by Ericsson and NSN. The other key vendors include Alcatel-Lucent, Motorola, ZTE and Huawei. In terms of revenue generation in 2006-07, NSN was first, followed by Ericsson, Alcatel-Lucent and Motorola. Chinese vendors ZTE and Huawei also witnessed rapid growth and gave competitors a run for their money.
ZTE grew by over 1,000 per cent over the year. While all the vendors witnessed impressive growth in revenue during the year, Nortel was the only company that showed negative growth.
Globally, Ericsson is the largest vendor with revenues of $20.9 billion in the January-September 2007 period and a market share of 34 per cent. India accounts for over 4 per cent of the company’s total revenues. Ericsson has over 40 per cent share of the Indian wireless market with over 50 GSM and CDMA networks as of May 2007.
Meanwhile, driven by strong growth in emerging markets, NSN is catching up with Ericsson with regard to market share in the global wireless equipment segment. According to research firm Dell’Oro, NSN currently accounts for 29 per of the global market. In the second quarter of 2007, India replaced the US to become the company’s second biggest market in terms of sales after China.
NSN’s market share in India is estimated to be about 30 per cent as compared to Ericsson’s 27.9 per cent. The company’s revenue from the Indian market was $1 billion in 2006-07.
In contrast to Ericsson and NSN, Nortel has been losing ground across the multiple markets it competes in.
In India, it has been unable to obtain a wireless contract since March 2006 despite operators rolling out networks in rural areas at a rapid pace.
Even globally, Nortel has been plagued by accounting troubles and operating losses, and was once considered a prime target for a takeover.
One of the major reasons for the operating losses was the company’s decision to offer very low prices to Bharat Sanchar Nigam Limited in 2004 in an attempt to penetrate the Indian wireless space. This, according to Lehman Brothers, resulted in a total loss of $200 million. The company is now strengthening its enterprise segment with a strong focus on Wi-Max.
Challenges While the wireless equipment space is clearly witnessing strong demand, driven primarily by the need to add capacity for another 250 million lines, there are certain issues that need to be resolved. A major one is the high level of imports. According to industry experts, of the Rs 96.5 billion worth of wireless equipment installed in the country in 2006-07, local manufacturers accounted for only 5.18 per cent at Rs 5 billion. The rest was imported by the operators. This gap is a result of the disparity in duty structure between imports and locally manufactured equipment. According to the Telecom Equipment Manufacturers Association, the rationalisation carried out recently in the budget will improve the situation.
Another major challenge for vendors in India is the strong competition they have to contend with. Price is always a major factor and the challenge is to ensure that the cost of new products is below the price.
Notwithstanding these challenges, the telecom equipment industry in India is clearly on a roll with strong demand from telecom operators. L Given the possibility of a global slowdown, the Indian telecom industry, with its planned investments of over $24 billion in wireless infrastructure and expected rollout of new technologies like 3G, represents a significant revenue-generating opportunity for vendors.
