Telecom Manufacturing: Can India make it?

By Nandita Singh & Krishna Mukherjee

After spending last three years in navigating the policy landscape for telecom manufacturing, India is now ready for take-off. It is not just euphoria resulting from the catchy “Make in India” campaign of the barely six-month-old new government in India. Telecom manufacturing is on the take-off course. In fact, the recent shutdown of Nokia manufacturing plant located at Sriperumbudur, 40 kilometers southwest of Chennai in Tamil Nadu, is fast becoming a fading memory. What with China’s barely four-year-old startup, Xiaomi that has upstaged global major Samsung in China market, scouting avenues for local manufacturing in India.

Xiaomi is said to have passed over the idea of taking over defunct Nokia plant only because of the missing component ecosystem that it prefers at the location. Now, the company is said to be actively working on roping in its manufacturing partners, FoxConn and Inventag, to make-in-India. “And they are showing interest. In fact, most global companies are sitting up and taking note of India as a manufacturing destination,” says M N Vidyashankar, President of the India Electronics & Semiconductor Association (IESA). He has been working on the cause and has been actively bridging businesses from India to those in Japan and Taiwan.

Japanese companies are keen to work on technology transfer for electronic components with Indian manufacturers in the defense and aerospace segments, informs Vidyashankar. “The talks are at fairly advanced levels,” he says. Just last month IESA signed MoU with the India Business Support Center of Japan (IBSC), an industry body focused on India-Japan business. Led by Vidyashankar, IESA has also signed a similar MoU with Taipei Computer Association (TCA) of Taiwan, to promote local manufacturing in semiconductors and electronics space. Taiwan is a global manufacturing leader in the electronics space.

TCA has set up an office in Bangalore and has been scouting locations for setting-up a technology hub. “They are in the process of evaluating locations in Gurgaon, Noida, Ahmedabad, Pune for this. A 300- acre tract of land is required,” says Vidyshankar emphasizing that this is one concrete development that is on course.

While the India government is keen to arrest a balance of payment crisis by cutting down the electronics import bill that is expected to cross $400 bn, surpassing the oil import bill by 2020, executing it is a daunting task. “In terms of policy, India has put together a great framework and is getting into details and closing gaps,” informs Dr Ajay Kumar, Joint Secretary at Department of Electronics and IT (Deity). Kumar is a man in the thick of all action. His views are echoed in the industry. The devil really is in the interpretation and implementation.

What really ails?

India has witnessed tremendous growth in terms of telecom subscriber-addition in the past decade, but has recorded a bare minimal progress when it comes to manufacturing of telecom equipment. The primary reason, say the industry observers, is even though policy and framework was there but the decision-making was missing in the previous government, more so in telecom industry that was marked by the 2G scam, where the whole governance machinery turned out to be tainted.

From the time telecom manufacturing started in India in the ‘80s, till date, the scenario has hardly changed. Even today 95 percent of telecom equipment is imported. According to research firm Frost & Sullivan, a handful of Indian companies manufacturing telecom gear add up to less than five percent of the total India market requirement.

Indigenous firms fulfill less than five percent of the overall telecom equipment market demand in India. And even after taking into account the global companies that have set up facilities in India, the value addition that happens in India is very low as most of the work is assembly. While companies such as Tejas Networks, Coral Telecom, Aishwarya Technologies & Telecom, Kavveri Telecom, and Himachal Futuristic Communication manufacture telecom products like optical networking products, test and measurement equipment, FTTH, Broadband CPE, in India  few telecom equipment vendors have their own design and IPR (Intellectual property rights). Result, overall manufacturing ecosystem is not maturing at the required pace.

Is Policy Intervention Enough?

Policy is just one part of the solution, according to Anwar Shirpurwala, Executive Director, MAIT. “The policy framework is good-to-go and in place since 2012,” says Shirpurwala adding that there are several other things that need to fall in place via proper execution, right ecosystem, clear roadmap, labor laws, on ground security, taxation structure. “Most importantly, the domestic demand needs to be boosted,” he states.

Lack of domestic market access is a major hurdle, according to a number of market analysts. Due to high barriers on the entry of new players, there are limited number of companies in this industry, which in turn limits skill development. This keeps domestic companies from competing with larger players, both in India and globally.

The Government of India had launched the National Policy on Electronics in 2012 (NPE 12) with the vision to make India a globally competitive destination for Electronics System Design and Manufacturing (ESDM). The National Telecom Policy 2012 (NTP, 2012) works in conjunction with NPE, and provides for creating a design and manufacturing ecosystem for telecom equipment.

In order to encourage large-scale manufacturing and to attract domestic and global investments into the Electronic System Design and Manufacturing (ESDM) sector in India, the Modified Special Incentive Package Scheme ( M-SIPS) was notified on July 27, 2012.

As per the scheme, subsidy is allowed for investments in capital expenditure – 20% for investments in SEZs and 25% in non-SEZs. It also provides for reimbursement of CVD/Excise for capital equipment for the non-SEZ units. For high technology and high capital investment units, like fabs, reimbursement of central taxes and duties is also provided.

Industry experts also say that even after implementation of the policies, there are other majors that need to be looked at, such as high cost of working capital. “Unlike foreign players, the Indian firms did not get any R&D incentives or soft loans for product development and their cost of working capital is very high,” says Sanchit Vir Gogia, CEO, Greyhound Research.

In the absence of right ecosystem, manufacturing became costlier than imports (as there were no regulations on imports) and in the same time frame China emerged as a manufacturing hub. So, investments started pouring in China instead of India.

“There is a significant cost disadvantage attached when we compare manufacturing of certain telecom equipment in the country with the cost of importing the same. This is due to the fact that the overall ecosystem of telecom equipment manufacturing in the country is not mature enough,” says Tarun Pathak, Senior Telecom Analyst, Counterpoint Research.

We missed on taking the telecom R&D bus at the right time. “Eighties were still better in terms of manufacturing when we had C-DoT and other organizations coming up but somehow we missed on R&D. The world was moving on a different trajectory, and we were entirely on a different road,” elaborates Faisal Kawoosa, Senior Manager, Telecoms & SemiTronics at CyberMedia Research (CMR).

Spirited Play

Market forces and entrepreneurs soldier on, nevertheless. “While the policy landscape in India has been navigated mainly in the last three years, we have been designing and making in India for the last 14 years,” says Sanjay Naik, CEO & MD of Tejas Networks, that provides end-to-end optical transport solutions to telecom service providers.

Tejas Networks R&D and manufacturing in India serves domestic as well as international markets. The company has been investing `100 crore in R&D every year. “We have been the champions of ‘make-in-India’ much before the policy came in existence,” says Naik, stating that the policy and the recent buzz just confirms that the direction they have taken is right and now they can accelerate the pace as Tejas Networks anyway is running in the right direction.

Another key player, Coral Telecom is equally gung ho. However, Rajesh Tuli, MD of Coral Telecom, cautions that implementation is everything, citing the case of National Frequency Allocation Plan (NFAP-2011) that was approved in 2011 and was developed to cater to the needs of newly emerging technologies such as Ultra Wide Bands (UWB), Intelligent Transport System (ITS) and Short Range Devices and how his company Coral Telecom struggled with making headway with its products, in spite of the plan directives.

Companies like Nokia Networks, Ericsson, ZTE and Huawei make up the major share of the telecom equipment market, globally and in India as well, even though Chinese companies such as Huawei and ZTE are running into telecom security issues in Australia, US and now India as well. Now, if domestic telecom manufacturing is to take-off in India, the playing field should get a bit more leveled for domestic companies, thinks Tuli of Coral Telecom. He has been at the forefront in representing industry interest via Telecom Equipment Manufacturers Association (TEMA). “There is an unfavorable brand/ quality perception about ‘made-in-India high tech goods’ that needs to change,” says Tuli.

“There is a challenge of making private operators and large enterprises open to procurement from local manufacturers, who manufacture and supply state-of-the-art products at competitive rates,” says Prof NK Goyal, President, CMAI Association of India and Chairman Emeritus of TEMA.

In India, the second largest telecom equipment market after China, these market challenges add to the policy implementation and effective coordination between state and central government issues.

Ensuring Preferential Market Access (PMA) for domestic manufacturers is high on government agenda. The buyers in India, large public enterprises, often find a way to circumvent and procure from their preferred partner, which is generally one of the global top five companies. “If there is a quality certification authority in place, the government can boost demand for domestic manufacturers,” says Tuli of Coral Telecom. “There is a significant amount of work underway on setting standards and quality,” informs Dr Kumar. There is Telecommunication Engineering Center (TEC) and Center for Development of Telematics (C-DOT) government bodies that have been involved in telecom technology standards. Industry leaders think, its time both organizations need to be reinvented with new goals, aligned with current industry requirement. “Playing catch up is a tough game, “admits Dr Kumar of Deity.

“Boosting demand and matching supply is key,” says Shirpurwala. On agenda is the proposed Electronic Development Fund (EDF) which, it is said will cross a corpus of $1 bn and will support startups in commercializing their technology and products. It will be focused on futuristic type of technologies.

According to Dr Kumar, EDF will operate like a mother fund with a number of focused daughter funds supporting new ventures with capital ranging from

$5 mn to $50 mn. The initiative is boosted with setting up of incubators across the country. Two of these are already finalized – one at STPI in Gurgaon and the other one in Patna, which will focus on medical electronics. “Then there is nationwide facility for supporting electronics entrepreneurs that is coming up on a cloud. This is in association with Mentor Graphics, a Nasdaq-listed company that enables companies to develop better electronic products cost effectively and faster. It can help engineers grapple with chip design challenges,” shares Dr Kumar.

As far as, tax rationalization and simplification goes the government has been supportive and will continue to be,” assures Dr Kumar. According to him, India market brand perception shift is the biggest task right now and the new government has been somewhat successful in that communication. “The perception has improved in the last six months. It can only get better,” he says.

“’Make in India is a broad vision statement which encompasses all the telecom policies. It means we have to own the design, R&D, manufacturing and all the elements. It brings to the fore the fact that India does not have a choice but to manufacture in the country, but for that, faster implementation of policies is a key requirement,” sums up Nayak of Tejas Networks.

Can India make it?

To ‘Make in India’, R&D is key with special focus on startups, entrepreneurs and domestic products. It will go a long way in promoting indigenous manufacturing of telecom equipments and creation of jobs.

However, the government needs to move fast to address the regulatory, financial and infrastructure issues. That would mean changing the inverted duty structure, charging lower license fees if telecom companies buy Indian equipment, providing funds for research, and raising import duty on products made in India.

The government has launched electronic manufacturing clusters that will provide infrastructure to attract investments in Electronics Systems Design and Manufacturing (ESDM) sector. The first cluster is being launched in Madhya Pradesh and more such clusters will be set up in other states such as Tamil Nadu, Andhra Pradesh, Odisha and Maharashtra among others. And handset maker Samsung Electronics would be among the first ones to benefit from the Government’s Modified Special Incentive Package Scheme (M-SIPS) policy.

Samsung is committed to India market. So are some other major MNCs. Talking about its commitment to the India market, Cai Liqun, Huawei Telecommunications India CEO, says that the company will invest in India to realize the full potential of ‘Make in India’ campaign. Currently, Samsung has two manufacturing units in Chennai, where it is manufacturing telecom networking equipment for 2G, 3G and 4G network rollout.

On the other hand, handset makers believe that the campaign has been started with the right spirit but setting up shop in India will take its own time as India is not yet ready with a full ecosystem for local handset manufacturing. Along with capital support there also needs to be ready availability of other resources that are required for manufacturing.

“In China while we are designing a phone we have several options to choose from for each of the components but in India there is no easy access for handset components which makes the notion of manufacturing in the country a little difficult,” says Arvind Vohra, India Head, Gionee Smartphones.

Spice Technologies, which is into contract manufacturing for tablets PCs and smartphones among others, believes that promoting smaller entrepreneurs for related components manufacturing, skills developments and technology tie ups with China, Korea and Taiwan are a few steps that can give an immediate boost to the Indian manufacturing ecosystem.

“We are currently evaluating the opportunity and soon will be making the related tie-ups. Lack of clarity on policies and laws on the joint ventures and ease to access on the legalities are the challenges which need to be addressed,” says Shripal Gandhi, Founder and CEO of Swipe Technologies.

Although in the consumer-demand led handset business, Indian OEMs have made a good start with R&D facilities available. Though not locally focused, several global telecom giants have setup their captive design centers for telecom equipment. But expecting the high tech industry to take lead for ‘Make in India’ can happen only in medium to long term time frame.

“Other industry segments will have to prove the existence of skill sets, infrastructure, ecosystem, along with government and institutional support before telecom equipment manufacuring takes off, as telecom is not a vertically integrated industry. It needs an ecosystem where several partners and suppliers own specific subsystems and supply these to a central organization,” says S Ramachandran, Research Manager, IDC.

For this ecosystem to flourish locally and be reliable, good infrastructure right from uninterrupted high quality power supply to transportation networks are required.

Experts say that key components imported from other countries will dent the profit margins and need to be indigenously manufactured in India. So, clean room type of facilities will be required for manufacturing basic parts such as an integrated circuit. Intellectual Property rights need to be protected for global and even local telecom players to confidently take up design of local systems. Investment and scale of operations are the last two requirements where the government can help.

However, referring to the ‘Make in India’ campaign, RS Sharma, Secretary, Deity, says that the government is moving in the right direction to boost manufacturing in India and things will start falling in place gradually. India telecom manufacturing is about to land in a sweet spot.