MANUFACTURING: More Shops, Very Few Shop Floors

What do you think could be the biggest export to India from the US? Those
pretending to be in the know are mostly likely to say computer products or
defense equipment (the later perhaps influenced by the newfound Indo-US
strategic bonhomie) or still others are likely to consider education as the
biggest import by India from the US. None of these, if we were to believe the
latest India Country Commercial Guide (2004) prepared by the US Foreign
Commercial Service and US Department of State. The guide ranks the
telecommunications equipment sector as the number one prospect for US exports
and investment in India. While job exports (thought to be the biggest exports
from US to India currently) is not the opportunity that Americans would like to
rank as such, education services come second, computers and related products
third, and defense equipment only a distant 11 in the guide’s ranking for
opportunities.

Now consider the case of Finnish mobile handset and infrastructure vendor
Nokia. According to its annual report, Nokia registered a 97 percent growth in
revenues from its Indian operations at 1 billion in 2003, making it the biggest
growth market for the company after the UAE. India is now among top ten markets
for Nokia in the world. Nokia’s sales turnover from India in 2002 stood at 539
million. Its sales in India have more than tripled since 2001, when Nokia got
just over 216 million. India’s share in Nokia’s total sales has also gone up
from 0.8 percent in 2001 to 3.6 percent in 2003.

Only the cynics and chronically ignorant would disbelieve what the US
commercial guide says or Nokia’s annual report says. After all, for the past
few years India has been one of the two brightest spots (the other one being
China) in the telecom business. The tremendous growth witnessed in telecom
services in the recent years has been the most crucial factor that has defined
India’s current primacy on the global telecom stage. While the cellular
services have been the fastest to grow (more than 100 percent annually),
services like fixed voice and broadband too have shown positive trends. No
doubt, as India’s telecom infrastructure got a new push after 1994, telecom
equipment vendors were one of the biggest beneficiaries and the country emerged
as one of the fastest growing markets for global telecom equipment vendors like
Alcatel, Ericsson, Lucent, Motorola, Nokia, and Siemens. And not just the
equipment vendors, the growth in the telecom industry also heralded new
opportunities for scores of large and small application developers, OSS/BSS
vendors, turnkey service providers, and network integrators.

Too Few Shop Floors

There are three distinct parts of the value chain in the telecom equipment
business. Top most in the value chain is product design where in the
intellectual property (IP) is developed by the company. The next is marketing,
sales and systems integration and support and the last is the actual
manufacturing, where the global trend is towards outsourcing to specialized
contract manufacturers who bring in economies of scale. Except for a few
start-ups, Indian companies are yet to master any of these elements of the value
chain.

Event though the domestic telecom equipment-manufacturing sector has seen a
growth during the past many years, the growth appears insignificant when one
looks at the tremendous growth telecom services have seen during that period.
According to the latest available estimates, domestic manufacturing would not be
worth more than Rs 11,000—12,000, with exports accounting for around five to
eight percent of it. In other words, despite a growing domestic demand,
manufacturing remains the weakest link in India’s telecom industry value
chain. This is ironical when compared to China where domestic industry demand
has driven the growth in manufacturing. It is true that a significant portion of
the telecom infrastructure being built in India is being fed with indigenous
production. However, the equipment manufacturing industry does not have an
impressive profile, neither in terms of quality nor quantity, particularly when
it comes to competing in the global market. There are around 20 companies
manufacturing small- and medium-sized switches and seven joint ventures are
producing large-capacity switches. Most of the Indian equipment vendors make a
living by mostly selling to incumbent operators like BSNL and MTNL, as the
business from private telecom operators–as well as exports–is insignificant.
There are a few manufacturing success stories like D-link or MRO-Tek but then,
they are more into networking products. A significant amount of telecom
equipment is imported as finished goods (or in SKD condition) and the ‘manufacturing’
that happens in India is based on transfer of technology from overseas
companies. Since there are very few Indian companies who own all the three
pieces of the value-chain described above, international companies, who are the
original technology providers, are reaping the real benefits of the growth in
Indian telecom market and the local telecom equipment manufacturers haven’t
gained much. Also, foreign companies have not shown much interest in investing
in manufacturing in India. None of the large global vendors like Lucent,
Ericsson, Nokia, Alcatel, Motorola, and Siemens have any significant
manufacturing presence in India. This sector (along with consultancy) has
received foreign direct investments worth only Rs 1578 crore between 1991 and
2004. On the other hand, almost all the global vendors have poured in billions
of dollars in setting up their manufacturing presence in China and even in
Southeast Asia.

Why India Doesn’t Manufacture...

Many would like to blame government policies for the less than impressive
track record of the telecom equipment manufacturing industry in India. It is
true that despite encouraging notes in the National Telecom Policy (NTP) 1994
and NTP 1999, which made clear the government’s objective to encourage local
manufacturing and R&D, the government policies have

not been of much help mostly because of a lack of proper implementational
framework.

However, it is also a fact that government policies can only partly be blamed
for the current state of affairs of telecom equipment-manufacturing industry.
"It would be more reasonable if we look for reasons elsewhere,’’ says
an industry veteran who does not want to be identified. And he is not wrong.
Only the naive could believe that a correction of the duty anomalies with regard
to import of components etc. or rationalization of the tax structure (two
factors often blamed for stifling local manufacturing) would be enough for
telecom equipment manufacturing to take off on a large scale. Positive moves on
these fronts can surely help in creating an environment conducive for
manufacturers.

However, there are many more and much stronger reasons for the lack of the
growth on the manufacturing front. And in many ways Indian manufacturers
themselves are responsible for the sorry state of affairs of the sector. For
one, Indian manufacturing companies have largely been dependent on business from
BSNL and MTNL and have never really looked for opportunities in the global
marketplace. In stark contrast, their Chinese counterparts have always had an
export mindset despite access to a many times larger and growing domestic market
in China. Forget exports, Indian companies are yet to gain a respectable share
in the equipment business generated by private telecom operators in India.
Indian companies failed to gear themselves up for the domestic market
opportunities that emerged once deregulation happened. While foreign vendors
lapped up the business created by the likes of Bharti, Tata, Reliance, and
Hutch, Indian vendors simply did not have a strategy for tapping the new
opportunities. Instead, they kept focusing on the BSNL-MTNL market. Moreover,
even as foreign vendors lured Indian operators with high-end products, their
Indian counterparts did not do much to go up the value chain. There were hardly
any efforts at innovation and C-DoT remained (and to date still remains), the
country’s only R&D institution of any significance in the telecom
technology space.

"Indian companies lack the focus needed to become successful global
product companies. We don’t have many companies who aspire to become
successful global product companies. Product development requires a different
investment mindset, different kind of teams as well as a good ecosystem that
fosters such success," points out Sanjay Nayak, CEO and co-founder Tejas
Network, one of the rare Indian telecom product companies.

D-Link: One of the few manufacturing successes in India ITI: The state-owned company must emulate Chinese firms like Huawei and ZTE, and go global

Indian manufacturers lost out on another opportunity–that of contract
manufacturing, which gained a major ground in telecom equipment business
beginning with mid 90s in the past century. Global vendors like Motorola,
Alcatel, Ericsson, or Cisco who have been outsourcing a lot of manufacturing and
have spread their manufacturing bases to several parts of the world, did not
find India attractive enough because of several reasons. These reasons included
lack of an ecosystem of partners (like component suppliers), poor infrastructure
and logistics for facilitating fast movement of goods, and also a lack of
substantial domestic market opportunity for their products. Instead, these
vendors looked at India as a great source of the talent needed for software
development and R&D. That explains why almost all the big foreign vendors
have a strong and growing software development and R&D base here.

Has India Lost the Race?

Not really. Building on the human resource that India has, Indian companies
can still take on the world, provided they get their act together. Also the
government must also come up with some concrete incentives for telecom equipment
vendors. However, local manufacturers must not expect China-style state
encouragement that sometime smacks of protectionism.

Government or no government, India has enough merits to build a strong
manufacturing base locally. Already, India is being recognized as an electronics
design hotspot with scores of global and Indian companies successful operating
from within the country. C-DoT is a success story. India is also recognized as a
key supplier of products and technologies for rural telecom by the international
organizations such as International Telecommunications Union. Indian companies
are also supplying key software for almost all the global telecom vendors.
Foreign companies like Tyco Electronics have a big export business out of India.
D-Link is known to be contract manufacturing both computer and networking
equipment for companies in the West as well as in Asia. Moreover, leading
contract manufacturers like Flextronics (world’s largest) and Solectron
Corporation (via their subsidiary Force Computers) are already here and
successfully carrying on their operations. Venture capitalists too have begun
investing in product manufacturing companies.

What’s Awaiting India?

According to TIA, international telecommunications spending (not including
US figures) is predicted to total an estimated $1.5 trillion in 2004, up 10.3
percent over 2003. Spending in the US telecom industry is expected to rise 6.8
percent to $769.5 billion in 2004. Total spending on telecommunication equipment
in the Asia-Pacific region is expected to increase from $112.5 billion in 2004
to $146 billion in 2007, growing at a compound annual growth rate of 8.6 percent
according to TIA’s 2004 Telecommunications Market Review and Forecast. This is
the kind of opportunity that awaits Indian companies. "India is losing out
on significant foreign investment, higher employment opportunities, and export
revenues," says Jayaram Pillai, managing director, National Instruments,
India.

The birth of an Indian Nokia or Alcatel may be a dream too far. Indians,
however, can surely work towards gradually conquering the world. And to do that
not only the locals must go global, they must innovate.

Ravi Shekhar Pandey