Manufacturing:Needs to Grow

For the last 10 years, the Indian telecom industry has been the poster boy of the country's success story, both at the domestic and international arena. Perhaps, this is the only industry segment in the country that has continuously breached various targets set by the government. The target of teledensity of 7 by 2005 and 15 by the year 2010 set in NTP 1999 was achieved in 2004 and 2007 respectively, and the target of 600 mn connections set by the planning commission for the end of 12th 5-year plan (2007-12) was achieved in February 2010.

Look at the data-India had 5.7 mn mobile connections in 1991 and in 2011, it has more than 826 mn subscribers. The teledensity in 1991 was a mere 0.8%, and now it has reached to a respectable mark of 62.69. The country has been adding around 18 mn mobile connections every month. At this rate, India is all set to breach another target of reaching 1 bn mobile subscribers by 2014, well before the deadline.

Besides the growth in the wireless services front, rapid advances are being made in machine-to-machine communication, cloud computing, tracking and positioning, controlling devices and processes, smart meters, smart grids, and smart cities. As a result, the number of connected devices and human beings would together exceed all the estimates that are being made today.

However the other side of the coin is not as bright. The supply system-telecom manufacturing sector, has not shown corresponding growth despite the significant expansions of the telecom network and the subscriber base. A Trai data reveals that in 2009-10, the contribution of all domestic products has been 12-13% of the Indian demand and it stands further low at just 3% for the Indian products. The telecom industry mostly has to depend on the imports from foreign countries. Looking at the industry data, it becomes quite clear that the telecom ecosystem has so far failed to adequately spur the manufacturing segment and as a result, the domestic telecom equipment manufacturing segment has not been able to meet the demand, forcing the telecom operators to import most of the equipment required for their network.

Look at the Demand

As per the data revealed by Trai, the demand for telecom equipment in India was `54,765 crore in 2009-10 which was about 5.5% of the global demand. This is projected to grow to `96,514 crore in 2015 and `170,091 crore in 2020. Only about 12-13% of the demand for the telecom equipment is being met by domestic production. The demand supply gap and the imbalance between the exports and imports of the telecom equipment provides a good opportunity for the manufacturing of telecom equipment in India both by the global companies as well as the Indian product companies.

Besides the growth opportunity in mobile services, there is a huge potential in Broadband Wireless Access (BWA). The growth is expected to increase from the current level of 0.25 mn to 11 mn in 2013 growing at the rate of 144% per annum. Similarly, 3G modem subscribers are expected to grow from the current level of 2 mn to 22 mn by 2013 at 82% per annum, EV-DO and WCDMA subscribers to grow from the current 3 mn to 67 mn by 2013 at 88% and the estimated equipment opportunity is about $3 bn.

Besides this, India is emerging as one of the fastest growing semiconductor market. With India's consumption of ICT products growing from about $10 bn in 2004 to over $300 bn in 2015, demand for semiconductors is projected to shoot up from $1 bn in 2004 to over $40 bn by 2015, says a report by Indian Semiconductor Association. It clearly indicates that if the domestic manufacturing is not initiated, India will be compelled to import $150 bn worth of semiconductors in the next 10 years.

A view from the operator's perspective also tells the same story. It speaks volume of the investment potential from their side. For FY 2009-10, most of the telecom operators have posted EBIDTA of around 18%, as reflects in their annual reports. The investment made by these operators has grown to `225,610 crore for the same period from `148,653 crore in 2008-09, showing a growth of 51.77%. This shows that the telecom operators are in a position to invest further for their network expansion. Increasing investment in network expansion augers well for the manufacturing industry in India and the situation is expected to continue for the next decade.

What's Stopping Them?

There are reasons why the Indian manufacturing industry is not able to meet the demands through domestic equipment manufacturers. Manufacturing needs support of other components of the value chain to flourish. Manufacture of components and sub-assemblies in India would help both the Indian product companies and Indian manufactured product companies. Large global EMS vendors need to be encouraged to set-up competitive large scale operations in India. This would not only reduce the input cost but also enable the same infrastructure to be used across the entire electronics sector. It is very important to have a tax structure that encourages manufacturing. Today, import of components invites custom duty as against the zero duty on the finished products. Smaller domestic players face the problem of not having economies of scale and availability of long term financing at low interest rates. R&D facilities, access to low cost funds and testing and certification are other areas which needs to be looked into to make the manufacturing environment more conducive. There are several measures to be taken all of which could increase domestic production and enhance the value addition to the products being manufactured in the country. A number of smaller Asian countries have made their mark while India continues to struggle with extremely low domestic production of telecom equipment. A robust telecom network needs a strong telecom manufacturing base which will in turn contribute handsomely to the GDP and employment of the country. Therefore there is a need for a comprehensive Telecom Equipment Manufacturing Policy that would give the country a definite direction and facilitate the country in being a strong telecom manufacturing powerhouse.

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Manufacturers in India

The Indian telecom hardware manufacturing is at present dominated by MNCs like Motorola, LG, Nokia, Ericsson, Samsung and Alcatel-Lucent, who have set up manufacturing bases in India and have catered to the local demand, besides exporting to international market. Other foreign majors that have set up manufacturing bases in India include Foxconn, Flextronics, Elcoteq, Celestica, Elextronics Aspocomp, Salcomp, Siemens, Cisco, Perlos and Solectron. Last year, NSN opened a new facility in Chennai for the production and distribution of mobile communications infrastructure. LG Electronics has also announced that it will be further expanding its handset manufacturing facility in India. NSN and Ericsson are manufacturing the entire range of wireless equipment including BTS and transmission equipment in the country. Indian companies like Kavveri Telecom, BEL, Tejas Networks, Coral Telecom, VNL, Midas, Matrix, Valiant and Shyam Telecom have also started their operations in the country.

On a positive note, the sector regulator has recently come out with a suggestion report on local telecom manufacturing. Trai suggests that the mobile phone companies are mandated to source 80% of their network equipment and other related infrastructure from the domestic manufacturers by 2020. It wants the government to ensure that local telecom manufacturing companies get 50% of all telecom network orders by 2020. This implies that the regulator wants the manufacturing arms of the international vendors such as Ericsson, Nokia Siemens, Alcatel-Lcuent and Huawei, among others, to account for only 30% of all equipment orders by 2020. Besides, Trai also wants telecom hardware imports to be restricted to 20% of the country's total requirements.

To give further fillip to the electronic hardware manufacturing industry, the government is contemplating a proposal of mandating 30% of all government procurements to go to Indian manufacturers.

However compared to the pace of growth in the Indian telecom sector, the growth of Indian manufacturing looks like a dwarf. To fulfill the demand of the Indian telecom industry and to make it sustainable, the industry can not depend on imports in the long run. At times, it is said that the rate in which India is importing telecom equipments, one day it would surpass the import bill of oil to the country, if the ecosystem around Indian telecom industry is not developed and that too in time.

Gyana Ranjan Swain
gyanas@cybermedia.co.in