A Promising Market – But greater encouragement needed for growth in telecom manufacturing

In addition, the government is envisaging the following for improving the quality of manufacturing, processing upgradation and encouraging contract manufacture:

Vishal Malhotra: Broadly speaking, the fiscal framework for facilitation of expansion in domestic equipment manufacturing is already in place. Provision of SEZ benefits to manufacturers is a major step forward. Many global and domestic players have already leveraged this opportunity and have taken up the SEZ option to manufacture in India. A critical aspect in the future could well be the systems that support industry ?? provision of basic infrastructure, free movement of goods, and more flexible labour laws. It has been a positive initiative to make it mandatory for players selected for the recent $5 billion bid for equipment supply to manufacture in part in India. This has clearly worked in China and could be a major driving factor in the growth of Indian manufacturing.

Ramdev Sharma: Today, India’s telecom and software services sector has become the cynosure of all eyes. But the country still needs to create a similar conducive environment for telecom manufacturing. There must be a vision and an action plan (in the form of policy initiatives) to capitalise on the vast market potential. We need to learn from global experience in creating a suitable FDI-friendly environment. China has demonstrated how technology and capital-intensive telecom and IT equipment can be produced cost effectively, benefiting telecom operators and consumers. A manufacturing industry with large-scale FDI exposure will surely strengthen competition, producing high quality systems at cost-effective prices.

From another perspective, an investor looks for faster processing of applications, flexible labour laws, stable economic policies, better roads and ports, reliable power, and rationalisation of duty and taxes. Of these, India offers few options that match global standards. To attract large-scale investment, the government needs to bring in sweeping tax reforms and remodel the tax structure, including cutting individual and corporate tax rates, scrapping dividend distribution tax and minimum alternate tax, and rationalising duties and indirect taxes. Self-sustained technological prowess is critical to the growth of manufacturing. Establishing a sound platform for building extensive R&D competence will be a catalyst for developing innovative technologies that would help the manufacturing cause.

P.P. Singhal: In one sentence, the biggest push required is to stop the grey market for terminal equipment. This can be done by allowing Chinese vendors to set up their manufacturing base in India as China has been the sole source of the grey market. Unless they are considered at par with European vendors in setting up their manufacturing base in India, customers will not enjoy any significant advantages. And unless that happens, the grey market will continue to thrive. Today, Chinese vendors are not investing here as they are apprehensive about government policies. In the past, approvals from government agencies have been delayed endlessly in the name of security threat. If there is proven evidence of a security threat from Chinese equipment manufacturers, the policy should say so and bring clarity to all telecom vendors.

The entry of Chinese vendors makes business sense for operators as they can add more equipment in the telecom networks. Due to low ARPUs and low teledensity, it is not viable for operators to sink more money into capex. However, if they see volume growth even with low ARPUs, they will not hesitate to add more capex. Today, telecom is no more a luxury item. Rather, it is a necessity, a tool to increase the GDP. Every Re 1 invested in telecom brings in Rs 3 to the GDP.

What benefits do vendors perceive in setting up manufacturing hubs in India?

S.K. Khanna: Multinationals interested in setting up large world-class production facilities in India would seek the following:

Least number of hindrances to the continuity of production ?? continuous water and power availability and flexible labour laws that enable them to optimise labour utilisation and thus reduce labour cost.
Availability of a market for their products, both for India as well as for exports.

Vishal Malhotra: The biggest incentive is probably the burgeoning Indian market. Mobile services are growing at more than 60 per cent annually and with the impending rural network expansion, the equipment market is set to see an enormous rise in demand. Due to India’s low labour and infrastructure costs, manufacturing here makes business sense. India also has a rich technical talent pool. This has worked in India’s favour in the booming R&D and outsourcing spheres becoming a key differentiator between India and other emerging markets. There could be other advantages, such as intellectual property rights, when one compares India and China as a manufacturing destination. Investment in India could be a way of de-risking investment in China. Also, with the FTAs forged by India, it may be attractive for companies to manufacture here to supplement their global market exports, using their facilities to supply to other markets.

Ramdev Sharma: According to optimistic estimates by a leading research agency, the Indian market would require telecom and IT equipment worth $60 billion by 2010, in pursuit of its challenging milestones. This presents an enormous market potential to drive the manufacturing cause in the medium to long term. Therefore, manufacturers with an Indian base will be able to respond rapidly to meet the delivery obligations of customers cost effectively. For manufacturers searching for low-cost destinations across the globe, India would be a natural choice with its skilled and talented workforce.

P.P. Singhal: No vendor perceives any benefit in manufacturing in India since the volumes and government policies are not conducive. There are too many technologies with ever-changing specifications. Besides, getting approvals from government agencies, especially in the case of Chinese vendors, can be time-consuming. However, if the above are streamlined, the benefits could outweigh all other bottlenecks. The benefits likely to accrue are lower inventory and transportation costs, cheap labour, better turnaround time, better after-sales support and, most importantly, improvement in customer confidence.

What are the concerns?
S.K. Khanna: There are some manufacturing concerns.

Vishal Malhotra: A major consideration is the competition that China offers India in the telecom equipment manufacturing market. India needs to develop greatly in manufacturing expertise, especially compared to smaller Far Eastern markets that offer high quality, low-cost manufacturing. Another area that needs to be addressed is the duties and taxes levied on import of components for telecom equipment manufacture, procurement, etc. All possible tax benefits should be ensured to prospective manufacturers, as was done in the past for computer manufacturing. Logistical and infrastructural shortcomings could also hamper productivity.

Ramdev Sharma: India does present a huge market opportunity for goods manufacturers. Some imperatives for prosperous manufacturing are technological prowess by way of R&D competence; cost-effective and timely availability of capital; qualified, trained, disciplined and cost-effective workforce; good support infrastructure like power, roads, ports, etc.; rationalised tax and duty structure; long-term vision and commitment by way of pragmatic policy initiatives to increase investor confidence; and appropriate market size that provides economies of scale to manufacturers.

In addition, an investor looks for faster processing of applications, flexible labour laws, stable economic policies, faster roads, better ports, reliable power and rationalisation of the duty and tax structure.

P.P. Singhal: Delay in allocation of spectrum for 3G and lobbying between the CDMA and GSM operators are some of the concerns.

What are the future trends in the sector? Which segments are likely to receive greater thrust in India?

S.K. Khanna: The trends are likely to be as follows:

Vishal Malhotra: The most significant trend has been the arrival of global handset manufacturers and network operators in India. Most of the major manufacturers have already set up, or are in the process of setting up, facilities in the country. They have paved the way for other components and network equipment manufacturers to set up similar facilities here. Many high-end handsets have been developed partly in India. With significant growth anticipated in the rural hinterland, one trend could be the development and ultimate manufacture of low-cost 2-2.5G handsets. The ideal of a $20 handset could boost deployment of rural telecom. Similar action has begun in other spaces like electronic manufacturing services, base transmission stations, mobile switching centres and mobile switches. Component manufacturers in printed circuit boards, plastics and connectors, chipsets, etc. could also ride on the expansion wave. India could well become a manufacturing centre for equipment export, especially in the handset market. The domestic handset market is set to expand to almost 65 million in 2006. Such volumes would open up the option of customised handsets being developed. Players would also look to leverage their facilities to export to other emerging markets such as Africa. As mentioned earlier, the FTA understandings with various countries are a major advantage India has in attracting investment in manufacturing. However, all this should be realistic only by about 2010.

Ramdev Sharma: Recently, some PSU carriers have incorporated criteria in their tenders that necessitate setting up of a manufacturing base in India. Though encouraging, such initiatives are not enough. To meet the challenging target of telecom and broadband penetration, thrust is being given to mobile and next-generation networks, and broadband technologies.

P.P. Singhal: With larger laid-out plans from BSNL, Bharti, Reliance and Tata, not only for GSM but also for CDMA and broadband, there is a very big market for all manufacturers in handsets, FWP, IFWTs, CPEs and set-top boxes. Therefore, the focus shall be on such terminal equipment as these will not only have a virgin market but also a large replacement market.

Is domestic telecom equipment manufacturing taking off in India? Why or why not?

S.K. Khanna: Domestic telecom equipment manufacturing has already taken off, as can be discerned from the following indicators:

Vishal Malhotra: Yes. Investments have been announced as India is becoming increasingly visible in the global market. Numerous ventures have already taken off. The telecom minister has taken many initiatives in positioning India around the world. Over the last six months, $3.3 billion has been committed for investment in telecom equipment manufacturing in India. At least 10 global players have recently announced plans worth $5 billion. All of this though is clearly not much compared with nearby markets. China, a leader in this race, has attracted $50 billion in five years’ time. Even Singapore and Malaysia have attracted large amounts of FDI in the recent past. There is clearly room for manufacturing to accelerate, especially in view of the impending rural expansion. If we manage the incentives for manufacturing firms, there is no reason why domestic manufacturing will not boom.

Ramdev Sharma: It is in the process of taking off but it definitely requires a push. The Indian economy has been growing at 8 per cent since the past three years. The contribution of the manufacturing sector to the GDP stands at just about 15 per cent in India compared to 35 per cent in China. Promotion of the sector needs to take place at the core. Some economists suggest that to increase the contribution of this sector to the GDP to 20 per cent, the manufacturing sector must traverse a steep trajectory.

P.P. Singhal: The potential in telecom manufacturing is yet to be exploited if we consider that most domestic telecom equipment players are running into losses and even those that are able to show profit, do so because of income from other sources. The government should either consider telecom equipment manufacturing as “deemed exports” or waive the excise duty and sales tax on telecom equipment to make it competitive. The sector should grow in one to two years if the policies are modified to encourage the sector.