As the Indian telecom sector continues on its growth trajectory, telecom manufacturing is also witnessing rapid growth.With existing players expanding into rural areas and new licensees building a greenfield network, many handset and equipment vendors are drawing up plans to set up manufacturing hubs in India to meet the expected demand. Telecom analysts and equipment vendors share their views on current trends, future potential and key issues…
How has the Indian telecom manufacturing sector (both equipment and handsets) emerged over time?
Bharat Bhatia: India has not been a large player in the telecom manufacturing space. In fact, in 1986, manufacturing was not even allowed in the private sector. However, the manufacturing sector has gradually opened up. In the past two years, it has seen major growth because of the entry of big manufacturing units and the creation of special economic zones (SEZs). With the growth in demand, new manufacturers are setting up plants within local industrial areas as well as SEZs. Today, almost all the major manufacturers including Motorola, Nokia, Samsung and LG are manufacturing equipment here. A large number of Indian companies including Telcordia and Accord have come up and are manufacturing for domestic consumption as well as for exports.
D.K. Ghosh: Since 2004, the government has been persuading global manufacturers to set up shop in India. This has resulted in $10-$15 billion worth of foreign direct investment (FDI) in telecom manufacturing during this period. Due to special initiatives taken by the telecom ministry, a number of multinationals in the core, secondary and tertiary telecom sectors set foot into India. Also, due to incentives offered by states like Tamil Nadu, there was a surge in interest by leading vendors such as Intel, Cisco, Nokia, AMD, IBM and ZTE to set up a manufacturing base in India.
However, in mid-2007, with a change in guard in the telecom ministry, things took a U-turn. Since then, no fresh FDI inflow has taken place in the manufacturing sector.The earlier clause mandating local manufacturing for large turnkey tenders in GSM, broadband, etc. has also been withdrawn.
The government’s taxation policies in the past one year have tended to be more skewed towards lowering import duties on finished goods, and increasing duties and taxes on indigenous items, thereby making it unviable for local manufacturers to compete against imports.
As a result of these imbalanced policies, whatever investments had been made in local centres of competence have now been converted into logistics and delivery centres. Yet, there is an immense potential for local manufacturing. We are not talking of protectionism here. Policies should be structured to enable MNCs and domestic companies to manufacture viably in India.
Girish Trivedi: With the Indian mobile market growing at approximately 100 million new subscribers a year and with the need for a replacement market, India has the potential to consume 120-130 million handsets a year over the next one to two years.
Over the past three years, many companies have started manufacturing while established players have increased their capacity in order to meet not only local demand but also to serve as a manufacturing hub for other developing markets.
Manufacturing of handsets and equipment in India has been an attractive proposition due to the low labour costs and abundance of skill.
International players have transformed the telecom manufacturing scenario in India and a range of telecom equipment specially designed to match the diverse terrain and climatic conditions is now on offer. According to government statistics, telecom manufacturing has brought in foreign investment of nearly $1.5 billion.
Peeyush Vaish: Till about three years ago, telecom manufacturing in India was restricted to the facilities set up by the state-owned ITI Limited.Apart from that, Ericsson had set up a plant to make telecom switches near Jaipur. Subsequently, Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited undertook a drive to buy telecom equipment from vendors that had a local manufacturing facility. This was when global vendors started looking at India as a base for manufacturing telecom equipment.
Now, some of the large telecom vendors manufacture equipment in India.Some of the largest electronic manufacturing services (EMS) companies have set up plants here. Thus, whether it is mobile handsets, base stations or telecom switches, everything is manufactured in the country now. Large vendors have also got many of their component suppliers into the country.
What are the hurdles to its take-off?
Bharat Bhatia: The government has done a lot for manufacturing in terms of increasing demand through positive reforms in the telecom sector. However, what is missing today is that this growth is limited to high-volume items such as cellphones. It has not really gone into items required by operators, such as base stations, switches and routers.This calls for a major policy shift.
At the India Telecom Summit 2007, Prime Minister Manmohan Singh stated that the government would develop a forward-looking policy regime to encourage investments in telecom manufacturing.That has still not happened.
In terms of economics, it is cheaper to import equipment rather than manufacture here. There are no import duties on telecom equipment; this, in turn, implies that if one is to manufacture the same equipment here in smaller quantities, the economics of production costs cannot be justified in comparison with import costs.
Since we are able to set up SEZs for handsets, the cost of phones manufactured here is justifiable when compared to import costs from China, Singapore or Malaysia. But for larger items, local manufacturing still does not make sense. We have asked the government to reduce the excise duty on these equipment from 16 per cent to 8 per cent.
D.K. Ghosh: Government policies should encourage local manufacturing and the government should offer special incentives like free power and water, and other infrastructural support to local manufacturers in special manufacturing zones such as Chennai.
To create economies of scale for local manufacturers, the government should persuade the regulator to make it mandatory for local manufacturers to be offered large contracts. Due quality checks in line with international standards must also be put into place. The infrastructure for manufacturing is inadequate ?? power cuts cripple manufacture, labour laws are inflexible and discipline is lax.
The government should create a favourable climate for local manufacturing by allowing free flow of technical and commercial manpower from countries with centres of competence like China and Germany; improve domestic air/road/rail infrastructure; remove visa restrictions; encourage exports from SEZs, etc.
Public sector procurement practices need immediate amendments. Technocrats should be empowered to take key decisions without ministerial interventions. Government purchases are driven by lowest price offerings and quality takes secondary consideration. The buyer has no control over the process even in the interest of the tender. Tender terms are altered midway and project costs allowed to escalate to save pennies on the price front.
Girish Trivedi: Handset manufacturing costs in India are influenced mainly by factors such as labour, local component base and economies of scale. However, there are various factors that can derail these advantages. These include: low availability of skilled labour and rigid labour laws; inadequate infrastructure (power etc.); regulatory and governmental bottlenecks; and frequent changes in laws and duty structures.
Peeyush Vaish: Initially vendors had two major fears.One was that the Indian market was too small to absorb the output. That is not a problem now. Second, due to poor infrastructure, it would not be possible for supplies to reach the plants on time.Today, many vendors have got their component suppliers to also start manufacturing units within the same complex. They have managed to streamline the export process. What we still need to do is improve infrastructure, be it power, roads or water supply.
What specific steps should be taken to promote telecom equipment and product manufacturing in India?
Bharat Bhatia: Promotion of exports, local procurement and the right policy initiatives are the key steps needed. Within the Telecom Equipment Manufacturing Association, there is a body called the Telecom Export Promotion Council, which is now being activated to increase exports. Once exports are promoted, they will boost manufacturing.
D.K. Ghosh: Aside from the above, infrastructure needs to be improved, labour laws should be made more flexible, and paperwork for clearances should be reduced to a singlewindow situation.
Girish Trivedi: The steps that may be taken are:
Peeyush Vaish: Now that telecom manufacturing has taken off, we need to attract chip manufacturers to set up facilities in India. Once a chipplant is set up, it will draw in more telecom and IT companies to manufacture in the country. But here too, the government will have to chip in with viability gap funding.
What new trends are likely to emerge in this space in the coming two-three years?
Bharat Bhatia: One major trend that is now gaining popularity is the “cluster approach”. The world over, manufacturing has taken place in those places where the entire ecosystem was in place. For example, in India, Sriperumbudur near Chennai is fast emerging as one such place where manufacturing companies like Motorola and component manufacturers can coexist.This approach will ensure that the whole ecosystem, starting from raw material conversion to small parts and components, followed by the assembly and testing of these parts, and then shipping them to different locations, gets clustered in one area.This is what has happened in countries like China where places like Shenzhen are now operating as clusters.
This model is likely to become more popular with two more places in India, one near Pune and the other in Noida, emerging as major clusters for manufacturing.
Another major trend will be the further growth of the wireless market, especially broadband, which is still to take off. The government has recently come out with the auction procedure for Wi-Max spectrum.This will provide a push for bringing in equipment other than just cellphones.
D.K. Ghosh: Contract manufacturing, software-based equipment design, sharing of both passive and active infrastructure, etc., are some of the new trends that will emerge in this space in the coming years.
Girish Trivedi: Over the next three years, a large domestic demand will be met by locally manufactured handsets and India will emerge as a production base for a specific product line for the global market as well. India is likely to become the hub for low-cost handsets serving not only the domestic demand but also the other emerging markets.
Cost control and cost leadership will drive the market position and will dictate market dynamics.
India will take steps towards improving R&D offerings and becoming a potential service centre for major manufacturers.
Peeyush Vaish: Expect more vendors to set up plants in India. Existing vendors could also expand their current facilities. With the growth of telecom in Africa, a manufacturing plant in India would be a huge benefit. It would cut down on shipping costs from China.
The other trend is to blend the software and manufacturing skills in India.Since over 70 per cent of telecom manufacturing today happens in software, India is a great location for global vendors to get the best of low-cost software development and manufacturing facilities. In fact, some vendors are already using this route. With the launch of 3G and Wi-Max services, there will be the need for an entirely different set of equipment. Obviously, vendors will have to set up separate manufacturing lines for these.
What have been the international trends in the telecom manufacturing space?
Bharat Bhatia: Most countries which developed their electronic and telecom manufacturing industry in the early days have seen them emerge as large contributors to the countries’ GDP.For instance, 22 per cent of Israel’s GDP comes from electronics and telecom manufacturing; Korea has 14 per cent of its GDP coming from this segment; Finland has 12 per cent; Thailand has 12 per cent and Germany has about 7 per cent. These countries are really focused on opening up telecom manufacturing. This has provided a huge growth opportunity for their economies. In contrast, in India, telecom manufacturing accounts for less than 1 per cent of GDP. Taking this up to only 10 per cent will enormously benefit the economy.
Another major global feature in telecom manufacturing is that no country is self-sustaining ?? every country imports and exports. China, for instance, has a huge telecom manufacturing base. Two years back, it exported equipment worth $80 billion, but at the same time it also imported about $50 billion worth of telecom products. Similarly, the US had $150 billion worth of exports against imports worth $225 billion. The situation is similar for Taiwan, Japan, etc. This may be the case with India too, only if the two transactions are balanced.
D.K. Ghosh: The key trends in telecom manufacturing are:
Girish Trivedi: One of the biggest global trends across manufacturing as a vertical is to manufacture and source products in low cost countries. This is likely to gather strength as margins come under pressure. Managing costs will take the front seat and cost optimisation will become essential.
As more than 50 per cent of the demand for mobile phones comes from emerging markets, customisation and choices at the bottom of the pyramid will grow. This will mean that the “one product for all” approach will not work.
Brand consciousness among the emerging markets will reduce the shelf-life of a product, forcing manufacturers to continuously innovate their product offerings. They will also have to look for the next level of killer applications.
Any location/country with all the required skills in process, product and capital engineering will succeed, owing to its manufacturing history and the presence of a quality education system.
Peeyush Vaish: As in most other sectors, telecom manufacturing is moving out from Europe and America to Asia and Latin America. This is only going to increase. Already, large vendors have set up huge manufacturing facilities in China. These vendors are looking to broad-base their investments. This is an opportunity for India to get more telecom manufacturing facilities set up here.
