Dare to Manufacture!

To manufacture or not to manufacture is the old telecom debate
that refuses to die. In fact, it gets perked up whenever a bad economic patch
hovers over the Indian business scenario. One party insists that manufacturing
is already a lost opportunity, and rather than attempting at resuscitating it
the country should concentrate on telecom software and services. But the other
side refuses to buy the viewpoint and says it’s imperative upon India to have
a bustling equipment manufacturing business if it really wants to be a
telecom/IT superpower.

Policies only on Paper

The government has taken very encouraging stands in its
policy guidelines. Both National Telecom Policy (NTP) 1994 and NTP 1999 made
clear the government’s objective to encourage local manufacturing/R&D.
According to the NTP 1994, "Taking into account India’s size and
development, it is necessary to ensure that India emerges as a major
manufacturing base and a major exporter of telecom equipment". It also laid
emphasis on the need of R&D saying, "An equally important aspect is the
strategic aspect of telecom, which affects the national and public interests. It
is, therefore, necessary to encourage indigenous technology, set up a suitable
funding mechanism for indigenous R&D so that Indian Technology can meet the
national demand and also compete globally."

NTP 1999 went a step further and identified incentives for
service providers who used indigenous equipment so as to encourage local
manufacturing of equipment. It also sought to encourage the export of telecom
equipment: "Export of telecom equipment and services will be actively
incentivised. Synergies among various telecom players (manufacturers and service
providers) will be exploited and used to provide integrated solutions for
exports."

But when it came to implementing the policies, the government
seemed to be on a different track, frequently resorting to import of equipment.
And whatever preferential treatment local equipment manufacturers have enjoyed
so far vis-à-vis DoT, is now threatened by the impending WTO regime.

Sure, India can look at the export market and develop itself
as a destination for ousourced manufacturing. But, that will need a definite and
well-defined initiative of the government and not just mere mentions of
manufacturing in policies here and there. What will also be needed is
development of world-class infrastructure in terms of real estate, transport,
power and communication, apart from disinfesting the manufacturing scenario of
evils such as unfavorable licensing and bureaucracy delays at local, state and
national levels.

Investment Disincentives

As if in reaction to the dismal state of affairs in telecom
manufacturing, investments in the sector have almost come to a grinding halt.
And talking of investments, it’s hard not to compare India with China, which
got investment worth $1.9 b in a single shot from just one company, Motorola. By
comparison, the sum total of funds invested so far in India’s telecom
equipment manufacturing industry, by both domestic as well as foreign investors,
stands at $1.8 b (Rs 8,000 crore).

It’s not that big equipment manufacturers didn’t consider
setting up plants in India. In fact, many of them took up large spaces in
industrial townships in and around cities like Delhi and Bangalore. In
anticipation of a favorable climate after the deregulation in telecom, several
of them set up joint ventures with Indian companies. Alcatel tied up with Modis,
Lucent with Tatas and Finolex, and Ericsson with Birlas. But demand generation
in the country fell too short of their business expectations–it was not large
enough to support a regular flow of inventory. Another dampening factor was the
long-drawn nature of tenders of government monopoly service providers. To make
matters worse, tenders were often postponed or even scrapped on account of one
dispute or the other. The result: the country today has legacy factories that
perform rudimentary manufacturing of niche products and components.

Local Brigade

As early as 1953, Indian Telephone Industries (ITI) and
Hindustan Cables Ltd (HCL) were formed with foreign collaborations to
manufacture switches/telephones and cables respectively. In 1960, Hindustan
Teleprinters Ltd (HTL) was formed to manufacture teleprinters and accessories in
technical collaboration with Olivetti.

It was in eighties that the sector flourished the most. C-DOT
was born in 1984 with the bold objective of building an Indian digital switch.
The zealous research and development activity carried out by the organization
yielded the design of a Rural Automatic Exchange (RAX) in 1985. It was an
indigenous product that suited our telecom needs of expanding in rural areas
without incurring much expense. This development gave India a newfound
confidence in the manufacture of world-class telecommunications equipment. Quite
a number of C-DOT switch manufacturers came up and large-scale production of
rural exchanges took place. At its peak, C-DOT licensed technologies to about 45
manufacturers and even today it is a force to reckon with–contributing to an
addition of 6.1 million telephone lines by Indian telcos during 2000-01. Among
C-DOT equipment manufacturers are ITI, HTL, Puncom, BEL, BHEL, VTL, Crompton
Greaves, Meltron, Keltron, GNFC and GVFCL.

Also, 1980s was the time when several private manufacturing
companies also came into being. Bharti Telecom, ARM, Surana Telecom, Aksh
Optifibre Ltd, Enkay Telecom, and Bhagyanagar Metals are to name just a few.

And then, in 1994, the government invited private players to
operate services such as basic, cellular, paging, and radio trunking. Also, with
the economic liberalization, there began an influx of global vendors in the
country, who were competing for the same market that Indian companies had been
addressing. With pressures from WTO to implement a tariff-barrierless regime,
customs duties came down steadily, thereby making imports cheaper as well as
accessible. The equipment market became crowded and highly competitive, pushing
many local manufacturing companies to shift their focus to services instead.

Present Scenario

Given the number of new licenses being awarded, the length of
fiber ducts being laid out and the rapidly accelerating mobiles market, things
should have looked quite rosy for the overall telecom sector.

Unfortunately, while development on the services front has
been phenomenal, little appears to be in store for the manufacturing sector,
which is faced with two major challenges today. One, India is being steadily
opened up to the global market, as trade restrictions are done away with. Import
duties on telecom products have crashed across the board, thus allowing
companies to easily move goods from overseas. Two, in their attempt to cut down
on operational costs, US, European and East Asian multinationals are outsourcing
manufacturing to cheaper destinations in Taiwan or China.

Looking at numbers too, the picture doesn’t appear
promising. For the last five fiscals, the sector has been tottering around the
Rs 10,000-crore production levels. This, at a time when telecom services have
marched ahead rapidly. On the exports front, things have been even worse–annual
figures of Rs 250—500 crore are peanuts given the size of the industry.

To Be or not to Be?

That really is the question. And going back to the
hardware-versus-software debate, can we really afford to focus on one and ignore
the other? The pro-manufacturing camp argues that it will be tough for the
software industry to sustain its growth if there isn’t a healthy hardware
manufacturing base. Plus, it points out the fact that India cannot depend on
imports for long. One, what India needs is equipment that are made for the
Indian market–equipment that won’t burden service providers trying to roll
out services in villages and handsets that are affordable for rural subscribers.
Two, one cannot depend on imports for designing and making communication
equipment that go into our defence/secured networks and other strategic
projects.

For Camp		Against Camp
KR Naik managing director D-Link	S Narayanan CMD MRO-Tek	Rajeev Chopra V-P (marketing) Cisco India	Ramgopal Vallath* country manager 3Com Asia
On having a manufacturing plant in India: Having a manufacturing plant in India facilitates logistics support, and quality control. Easy availability of products locally, tax benefits, technology know-how and cost-effective and skilled labour are other factors. Also, the manufacturing process can be scheduled as per requirements. Better service support and quicker time-to-market are also facilitated. On outsourcing: Outsourcing does not help in the long run. The availability of products is affected and one has to depend on external sources for products. Outsourcing can be undertaken in the short run. On what Indian networking companies should aspire for: Indian networking companies should aspire for exports and world-class standards. India does have the right talent and skilled manpower which has to be harnessed to it’s maximum potential. If the right infrastructure meets the right manpower, the production levels can be increased and the quality can also improve with the knowledge of the competitor’s products.	On advantages of manu-facturing: Manufacturing helps understand the technology in-depth. We believe that with manufacturing you understand what goes into the box. Today, we manufacture NT1, HDSL modem, FCAT series, media converter, etc.  Over 40% of our revenues are from manufacturing. On competitiveness of Indian products: Indian products are in no way inferior on quality when compared to the West. If the Indian government recognizes the strength of manufacturing in India and offer sops to the hardware industry as it did to the software industry, it is definitely possible for Indian manufacturers to offer high-quality products that are cost effective as well. In the long run we can build products with in-house R&D and offer them to the global markets. On MNCs: MNCs may leave the country once the margins thin down, leaving the networks built by them high and dry. Indian networking companies will still be around to support, maintain and upgrade those networks. Â	On companies having local manufacturing plants having an upper hand over Cisco on cost and support fronts: Out of over 40 manufacturing facilities, only two are owned by Cisco–the rest are owned by our contract manufacturing partners. Externally, the customization of the Internet’s open-standards technologies requires a different business model designed around professional services. We have an ecosystem of partners who have expertise in customizing our technology, taking the new Internet architectures, and finishing them into a customer Internet solution. On MNCs’ products not taking Indian climatic conditions into consideration: Our products conform to all local standard in countries that we do business in.	On why 3Com doesn’t manufacture its networking products in India: 3Com has centralized manufacturing across the world and we manufacture our products in three locations. This way, we bring additional efficiency into manufacturing. None of  the top networking companies have manufacturing facility in India. On robustness of 3Com’s networking products as compared to those manu-factured by Indian companies. Also on meeting TEC recommendations: 3Com products are robust enough to handle high variety of climatic conditions. As for TEC, this is required only for products enterfacing with the PSTN. For any such product, TEC approval is obtained before sales.

There are pockets of hope nevertheless. Companies like Tyco
and D-Link have shown the way by building plants that are cost-effective even by
Chinese standards. Tyco is a major exporter of connectors while D-Link is known
to be contract manufacturing both computer and networking equipment for
companies in the West as well as in Asia. Then there are companies like HFCL,
ARM, Fibcom, and MRO-Tek that have taken the JV or technical collaboration route
to manufacturing the latest communications equipment and yet compete quite
successfully against imports from the US and Europe.

Outlook

So what lies ahead for companies still interested in the
manufacturing business? One way is to come out with innovative products and
designs. Except for one or two RAXs and corDECTs, the R&D community here has
not been able to produce enough product ideas and designs. And that is quite
sad, especially when IITians and engineers from other reputed enginnering
institutes are doing pathbreaking work in labs of large US and European
companies like Lucent, Nortel, IBM, Ericsson and Nokia.

As shown by a group of IITians at Chennai, headed by Prof
Ashok Jhunjhunwala, India can design world-class products locally as well–the
only requirements being hard work and dedication. To develop corDECT, an
affordable wireless communications technology designed for countries like India
that is currently being tested by BSNL and other service providers in India, the
team worked withot much funds and state-of-the-art labs. The group is already
busy chasing another big dream. Professor Jhunjhunwala was heard saying in a
recent academic function that his real aim was to make a product company that
was the best in the world. Research and development work is already in full
swing.

Bangalore, Hyderabad and Gurgaon are bustling with several
startups, funded by tech evangelists and VCs in the US, who are working on
developing prototypes of the next-generation communication equipment. But the
sad thing is that most of these startups do not have plans set up plants in
India.

Another approach that companies can undertake is contract
manufacturing. For this, they need to build efficient manufacturing plants
housing the best machines and employing the best practices. They can not only
manufacture products designed by Indian startups but also obtain bigger
contracts from large outsourcers like Cisco, Nortel, Juniper and Ericsson. With
improved infrastructure and a pro-active government, the country can still give
other outsourcing destinations of the world a run for their money.

Nareshchandra Laishram

Consensus Action Recommendations of Hardware-Special Interest Group