With the government granting approval for around 550 special economic zones (SEZs), the SEZ momentum is picking up in India. Offering tax incentives, subsidies and vast areas of open space to companies, SEZs are attracting significant investment and interest from telecom equipment makers.
With long-term plans for India, prominent global telecom equipment manufacturers such as Nokia and Motorola have set up SEZs in the country. This is also in line with the government’s initiative of making India into a full-fledged telecom equipment manufacturing hub.
Background
In a climate of increasing competition and deteriorating scope for product differentiation, companies have to remain cost effective. SEZs, which enable companies to carry out their operations at locations where it is logistically easy to source components, offer the opportunity to do just this. So far, Nokia, Foxconn (in conjunction with Motorola) and Flextronics have taken advantage of this strategy.
Set up with an initial investment of $150 million, the Nokia SEZ has been operational in Chennai since 2005. The Finnish equipment vendor has also signed an agreement with seven global component manufacturers including Salcomp, Aspocomp and Foxconn to set up production facilities as co-developers of the SEZ.
Singapore-based telecom equipment manufacturer Flextronics currently has a plant near Chennai. Covering 10 acres, the unit employs over 2,000 persons. The company is planning to extend this facility into a 250 acre SEZ at an investment of $100 million over the next five years.
Foxconn has started production in a semi-SEZ in Tamil Nadu which has been operational since 2006. In March 2006, the company signed a memorandum of understanding with Motorola and the State Industries Promotion Corporation of Tamil Nadu (SIPCOT) to jointly set up an SEZ in Sriperumbudur. While SIPCOT was responsible for providing land, Motorola and Foxconn had co-developer status.
Status check
The Nokia SEZ, with 4,100 workers, currently employs a little less than 50 per cent of Nokia India’s workforce. The unit also caters to the company’s export requirements. In 2006, 25 million handsets, which comprised 25 per cent of the total handset production at the SEZ, were exported.
Flextronics’ SEZ operations support the manufacturing requirements of local and global original equipment manufacturing customers. By co-locating manufacturing and logistics operations with strategic suppliers on site, the SEZ aims at minimising logistics costs and improving manufacturing cycle times. It offers a plethora of vertically integrated services including design, plastic injection moulding, mechanical and enclosure integration, distribution, logistics and repair.
Foxconn intends to invest about $110 million in developing its SEZ over a fiveyear period. By 2008, Foxconn will set up a manufacturing unit inside the Nokia SEZ to build components on a purchaseto-build basis.
Key concerns
Even though a lot of interest and activity has been generated by these SEZs, there are several lingering concerns. The infrastructure surrounding them is substandard.According to Sachin Saxena, director, operations, Nokia India: “The roads leading to the SEZ are barely motorable and the Chennai airport cannot cope efficiently with its passengers, let alone cargo.” This, in turn, has led to an increase in the attrition rates of the company.
Future growth
Despite concerns, hefty investments continue to pour into telecom SEZs. Nokia’s processing unit, which has the potential to employ 30,000 people, is expected to be fully functional by mid-2008. Flextronics is also planning to step up its operations.By October 2007, the company intends to manufacture a million mobile phones a month in the Sriperumbudur complex.
The elaborate expansion plans of Nokia, Flextronics and Foxconn have generated a lot of confidence in the system.Samsung and Sony Ericsson are planning SEZ forays. While Samsung aims to develop a multi-product SEZ at Sriperumbudur at an investment of $100 million, Sony Ericsson has recently announced plans to manufacture handsets in India.
Analysts predict a bright future.According to Saurabh Kaushal, industry manager, ICT Practice, Frost & Sullivan India: “The country’s traditional strength in R&D, high credit quality, good location for high-end manufacturing, and low labour costs compared to the rest of the world make India an attractive location.”
Although incentives like customs and import duty exemption, access to domestic tariff area, free access to ports and 100 per cent foreign ownership have the potential to catapult Indian SEZs to a significant global presence, factors like stringent labour laws, lack of skilled manpower, exchange control norms and repatriation of capital still need to be addressed.
