Made in India – Global telecom equipment manufacturers set up shop

Buoyed by the exponential growth in demand for wireless services, the Indian telecom equipment manufacturing sector has come a long way in the past decade. In 2000, government-owned ITI Limited was the only player in the segment, though private participation in the sector had been permitted since 1984. However, 10 years down the line, though indigenous manufacturing is yet to take off, India has been able to attract global equipment manufacturers to set up shop in the country and is well on its way to becoming a telecom equipment manufacturing hub.

India started emerging as a telecom equipment manufacturing hub in 2005, when Alcatel tied up with ITI for manufacturing GSM base stations and 3G equipment. In April 2005, Elcoteq, the world’s third largest supplier of handsets to original equipment manufacturers, became the first company to set up a telecom handset manufacturing unit in Bangalore. An estimated Rs 132 billion worth of foreign investment was committed to equipment manufacturing in India in the latter half of 2005.

Prior to this, the common perception was that there wouldn’t be enough domestic volumes to sustain a profitable manufacturing unit. Lack of adequate infrastructure and the absence of a components base were the other roadblocks. The Indian market was, instead, considered more appropriate for trading due to the low duty barriers. Many handset manufacturers preferred trading under the cash and carry wholesale trading licence granted by the government.

However, by 2007, encouraged partially by favourable government policies, which allowed 100 per cent foreign direct investment (FDI) in telecom equipment manufacturing through the automatic route and promoted the setting up of telecom product-specific special economic zones (SEZs), India had become the second most attractive destination after China for FDI by manufacturers, according to A.T. Kearney’s FDI Confidence Index rankings. By then, companies such as Intel, Cisco, Motorola, Ericsson, Nokia and LG had already set up manufacturing facilities or chalked out significant investment plans to do so. Between 2007 and mid-2008, global majors had announced investments worth over Rs 720 billion in India.

This upward growth trajectory was sustained even through the global economic slowdown. In late 2008 and early 2009, India proved to be the saviour for global vendors hit by the recession. Companies like Nokia Siemens and Alcatel-Lucent focused on emerging markets such as India to stay afloat. In February 2009, Alcatel-Lucent decreased its headcount by over 1,000 people globally, while hiring an equivalent number of people in India.

However, in spite of this, India has still not managed to grow its indigenous manufacturing segment. ITI continues to be the main domestic telecom equipment manufacturer. Unable to withstand stiff competition from global vendors, the company, which has been operational since 1948, has been in the red since 2003. This is in stark contrast to countries like China where local manufacturers like ZTE and Huawei have flourished not only in the domestic sphere but globally as well.

Between fiscal years 2003-04 and 2004-05, the telecom equipment market was driven by large operators investing in expanding their network footprint and upgrading their networks to EDGE in 2004. Bharat Sanchar Nigam Limited (BSNL) floated a tender for 14 million GSM lines and Bharti Airtel deployed greenfield networks in various states. The growth in offshoring also resulted in an increased demand for networking equipment. The expansion rate of the segment hovered around 15-25 per cent till the end of fiscal year 2007-08.

The Indian telecom equipment market is expected to be driven by further expansion of the wireless subscriber base, which is projected to cross 1 billion by 2013. This will require major network expansion by operators, resulting in substantial revenue potential for vendors.

While companies like Idea Cellular and Aircel are in the process of becoming pan-Indian players, Tata Teleservices Limited (TTSL) and Reliance Communications (RCOM) are launching pan-Indian GSM services. Regional players like BPL Mobile (now Loop Telecom) and Shyam Telelink (Sistema Shyam TeleServices) are also expanding their networks. Further, the market is witnessing increased activity with new entrants such as Datacom and Etisalat DB gearing up to launch services.

Operators are also increasing network coverage into the rural areas. This will lead to a greater demand for network equipment such as low capacity, low-cost, low power consumption, large coverage and sturdy outdoor base stations, according to a leading vendor.

Deployment of 3G and Wi-Max services in the near future and a strong demand for innovative telecom services from enterprises are expected to contribute to the growth of the telecom equipment industry. Domestic manufacturing centres are likely to be a key source for 3G network equipment. Similarly, WiMax services will require Wi-Max-compatible high-end technology equipment for its networks. The broadband and video communications segment is another highgrowth segment.

Several government initiatives are also likely to provide a fillip to the segment. These include the proposed setting up of the Telecom Equipment and Services Export Promotion Council and the Telecom Testing and Security Certification Centre, the provision of incentives like income tax exemption for 5-15 years, dutyfree import of components, capital goods and leases, and a fast-channel customs clearance process. In order to foster indigenous manufacturing, the government, in 2008, stipulated that only companies which manufacture 30 per cent of the equipment within the country would be eligible to bid for the incumbents’ expansion contracts.

With the Wi-Max spectrum auction around the corner, Motorola is getting ready to make its India centre a global hub for research in wireless broadband technology. The company is looking to boost investments and increase its headcount for such research initiatives. Its Indian labs are already supporting its global trials for LTE in China and Japan.

Set up with an initial investment of Rs 6 billion ($150 million), the Nokia SEZ in Chennai has been operational since 2005. The company has also signed an agreement with seven global component manufacturers ?? Salcomp, Aspocomp, Foxconn, Perlos, Laird, Jabil and Wintek ?? to set up production facilities as co-developers of the SEZ.

In June 2006, Nokia merged its networks division with that of Siemens. Under the terms of the agreement, Siemens is contractually tied to remain in the 50:50 partnership for a minimum period of six years.

In April 2009, NSN opened its new Global Network Solutions Centre (GNSC) at Noida to remotely manage telecom networks across the world. The Noida facility is NSN’s third such GNSC in the world.

According to the company’s estimates, it is currently one of the largest suppliers of wireless equipment in India, which is its fourth largest market. About 7 per cent of Ericsson’s revenues come from India.

The vendor recently tied up with 12 universities to train a group of engineers specifically for the telecom industry.

ZTE has a manufacturing facility at Manesar, Gurgaon and an R&D centre in Bangalore which manages VAS products in India and other markets. The factory manufactures CDMA, GSM, digital subscriber line and next-generation network (NGN) equipment as well as handsets. The company was reportedly planning to set up a second manufacturing facility in India but has dropped the idea on the grounds that importing equipment from its China-based unit was more profitable.

In July 2005, Alcatel-ITI launched a plant for manufacturing mobile base stations. The plant had an initial capacity for 2,000 base stations, which was doubled by the end of 2005. India and China are the company’s major drivers of revenue growth.

In September 2006, Huawei opened a new facility in Bangalore to develop optical network products and wireless LAN solutions for its global customers. The R&D centre focuses on its next-generation Optix Series of intelligent optical network products based on cutting-edge optical technologies.

Over the past year, the equipment major has been looking to double its India revenues to about $2.6 billion. It is also looking to set up a manufacturing facility here.

According to a leading vendor, there is a need to encourage manufacturers to build a complete ecosystem, whereby they don’t simply manufacture a base station or switch in the country but set up an entire ecosystem to manufacture the cabinet, ancillary materials, plastics, etc.

Second, there needs to be more aggressive lobbying at the government level to bring in manufacturers into the country. The government not only needs to impose more structured duties and levies but also to provide proper infrastructural support like efficient ports, usable roads and power supply for manufacturing processes.

The government should also introduce incentives such as tax concessions for investments in R&D and hosting so that equipment manufacturers relocate more of their R&D activity to India.

Clearances also need to be speeded up. Equipment vendors face a number of issues in terms of cargo. The turnaround time (from the time the material lands at the docks or the airport to the time it reaches the pantry or gets loaded) is very high. There is scope for improvement in the existing cargo and customs facilities. There is also a need to improve infrastructure facilities like roads and power, since most of the manufacturing facilities are located in remote regions.

The government also needs to devise schemes to train manpower. While many definitive steps have been taken in this regard, there needs to be more cohesiveness. For instance, most of the science programmes in schools are still analog. They need to be made digital as many new technologies are coming in.

If these challenges are overcome, there will be no stopping the sector from overtaking China as the premier manufacturing and R&D destination.