Government to the Rescue

Indian telecom services sector has grown exponentially over the last decade and has established itself as one of the fastest growing markets in the world. This growth in telecom services has created a huge demand for telecom equipment in India, but unfortunately it did not drive a similar growth in the domestic telecom equipment industry and today, we hardly have any world-class telecom product companies from India.

The rapid growth of telecom services and need for fast network rollouts have resulted in a situation where we have to import more than 80% of our telecom equipment needs. The motivation for investment in domestic telecom products and manufacturing was further reduced since India's signing of ITA-1, which brought down the import duties of telecom equipment to zero.

With no explicit government policy support there was no motivation for component, EMS as well as product ecosystem to develop within the country. This is not only a cause of concern from forex outflow and trade deficit angle, but it also has security implications. In addition, as a country we are losing out a great opportunity to build a potentially large-scale domestic telecom product industry.

The New Telecom Policy (NTP-2012) has recognized the importance of having a strong domestic telecom industry and the government has taken few bold policy level decisions to promote domestic telecom products and manufacturing.

This policy leverages the domestic market demand to create a market-pull for domestic companies to develop, manufacture, and sell their products in India. The government has ensured that PMA policy is compliant to our global trade obligations since it is restricted for government procurement and for procurement of any equipment that has security implications.

Telecom products, like any other electronic products, require a minimum threshold volume to get economies-of-scale which dramatically reduce their costs and help them become competitive. This vicious circle presents a tricky situation for domestic/start-up companies who have to compete against global players, who already have such volumes from their worldwide sales and hence are cost competitive.

The PMA policy attempts to provide a fair opportunity to such domestic companies by giving them an opportunity to meet some portion of the domestic demand (30% to begin with). It also stipulates that restrictive conditions, which prohibit domestic companies who have the requisite technical capabilities and products are not made ineligible in tenders due to lack of prior experience.

The PMA policy has been designed in a way so as to ensure that the end-customer does not get impacted in any adverse way, while still promoting domestic products. It requires that the product that is procured under PMA, should meet the same technical specifications and quality standards that is expected from any global supplier. By requiring that the domestic manufacturer matches the L-1 price, as determined by competitive bidding, there is no additional cost either to the purchaser or the government. As such, PMA does not really provide any 'reservation' but it provides a fair opportunity for domestic telecom product companies.
India already has tremendous technical talent and a large domestic market-key ingredients that are enablers for stimulating the domestic telecom product industry. The other elements of the ecosystem can easily develop, once the telecom product industry gets a kick-start.

India has All the Key Ingredients

Unlike earlier generation of telecom products, today's systems are not merely based on hardware, but are differentiated by the software that controls them and provides the intelligence. This change in paradigm also reflects in the value-chain of telecom products where the majority of value of the product comes from innovative design, architecture, and system development (including hardware as well as software), while the actual assembly/testing activity (either from SDK or CKD level) contributes to less than 15% of the total value.

Telecom Manufacturing Value Chain

PMA is open to any Indian company, regardless of their ownership structure, so long as they do a certain minimum amount of domestic value-addition (25% to begin with increasing to 60% by year 2020) for that product in the country. This is a very positive step, since it encourages companies who want to invest in India and do R&D, product development, local sourcing, and assembly/testing. It clearly discourages traders or low-value-add manufacturers who want to benefit from the Indian market growth, but not make the commitment to do value-addition in the country.

In addition to R&D and product design skills, many elements of the ICT manufacturing ecosystem already exist in India. We already have many global as well as local EMS companies operating in the country. India also has a strong component supplier base in the areas of mechanicals, cables/assemblies, connectors, electro-mechanicals, bare PCBs, and specialized passive components. With assurance of volumes (which the PMA will provide), these components suppliers can easily invest to scale-up their capacities and diversify their product portfolio. Even though we don't have a semiconductor fab in India (setting up of which is envisaged in the NEP-2012), we can still capture a lot of value-addition from fab-less design companies in India, who have demonstrated skills in high-end chip design for telecom products.

It is estimated that over 250,000 engineers are already working on various telecom technologies as a part of IT services companies, Indian R&D centers of various global companies and in academia. With the right government policies, such as the PMA, and the next wave of growth in Indian telecom services led by broadband, the entrepreneurial energy of this vast pool of telecom technologists can easily be unleashed to build innovative telecom product companies from India-both for domestic as well as world markets.

As per the estimates of Trai report on manufacturing, India has the potential to create a $150 bn domestic industry over the next 10 years, which will not only cater to our domestic needs, but will also enable India to become a global hub for telecom equipment. Such a large-sized industry will also have a pull-through effect on the other ecosystem elements such as electronics component and EMS industry and will have a long-term positive impact on India's economy. In this context, all the key policy decisions of the government to promote domestic telecom products, implemented quickly and in right earnest, will go a long way in achieving this important goal.

Sanjay Nayak
The author is MD and CEO,
Tejas Networks
vadmail@cybermedia.co.in