Manufacturing: Spreading Its Wings

India is slowly realizing the benefits of manufacturing and its role in
creation of national wealth. Manufacturing as an engine for economic growth was
totally neglected as we had shown only a marginal improvement from 15.8% of GDP
in 1991 to 17% of GDP in 2003, whereas some of the East Asian economies have
witnessed the manufacturing sector contribute around 25-30% of their GDP. If the
Indian economy has to grow at 8-9% per annum on an average, the manufacturing
growth rate must be in the range of 12-14%, as against the growth rate of 7%
achieved during 1995-2004. With 12% growth rate, the share of manufacturing in
GDP is expected to reach only 23% by 2015, which is well below that of Malaysia,
Thailand, and China.

Things are moving as per plan on the manufacturing front. According to BRIC
report by Goldman Sachs, India has the potential to grow faster than Brazil,
Russia and China over the next 30 to 50 years. Though growth in G6 nations,
Brazil, and China is expected to remain significantly slow over the next 50
years, India's growth rate is expected to remain above 5% throughout the
period.

The Opportunity

According to VOICE&DATA, the Indian communications (equipment) market
for FY 2004-05 was Rs 39,819 crore and is growing at a rate of 43%, whereas
Indian communications (services) market is estimated at Rs 68,069 crore and is
growing at around 16%. Things look rosy even in FY 2005-06 and beyond.  

On the wireless front, there is a lot of action taking place and the growth
is even larger. The wireless infrastructure market in FY 2004-05 is estimated at
around Rs 11,277 crore and is growing at a rate of 68%: the GSM handset market
is growing at 76%  and is pegged at
Rs 7,384 crore whereas the mobile services market is growing at 60%. On the
subscriber addition front, the country is adding around 5 mn lines every month.
It is expected that in 2010, India will become the second biggest mobile device
market in volume terms. All this is giving a lot of confidence to vendors as
well as EMS providers who have planned or are planning manufacturing in the
country. 

Talking about the future, P Balaji, president, TEMA India said “In 2007,
India plans to have 250 mn telephones, 9 mn broadband connections, and 18 mn
Internet connections. In 2010, the target is to achieve 500 mn telephones, 40 mn
Internet users and 20 mn broadband users; and in 2015 it is 800 mn
telephones.”

FY 2006-07 has started with a big bang. The mega tender
from BSNL for 45.5 mn lines is already out and is to be completed in three
phases-17.5 mn, 14 mn, and 14 mn. It is mandatory for companies participating
in this tender to get core equipment manufactured through established or
proposed contract manufacturer in the country and the vendor has to achieve a
minimum of at least 30% value addition on indigenously manufactured core
equipment. Therefore, in total, BSNL is planning for around 63.5 mn lines. Even
MTNL has floated a tender for 2 mn lines, where the terms and conditions are the
same. In total, MTNL is planning for 4 mn lines. Even Bharti has recently gone
for a RFP of 61 mn lines. Expansions are also on the card for Reliance, Tata,
Hutch, and others. These opportunities will help boost manufacturing operations
in the country.  

This is not the end. If one looks at the export market in terms of growth in
neighboring countries, India's manufacturing looks very attractive. All this,
coupled with IT and entertainment, is making the market equally attractive for
EMS players who are also planning to extend their wings for IT as well as for
the entertainment market. 

It seems India is attractive for those who see it as a global destination for
manufacturing, than who want to manufacture only for India, says Ravi Sharma, MD
and president-South Asia, Alcatel.

The Players

We are seeing OEMs, EMS and semiconductor players setting up manufacturing
shops in the country. With the complete value chain in place, India will move
closer to becoming a manufacturing hub. Apart from this, India's strength in
software will give a big boost to telecom manufacturing in the country. 

On the OEM front, Nokia, LG, Ericsson, and Samsung have already started
operations whereas some are planning to get FIPB approvals and still others are
banking on EMS players. EMS players such as Elcoteq are already operational.
Flextronics would soon be operational whereas others are planning to move fast
to encash on the India opportunity.  

Elcoteq and LG were the first to start manufacturing operations in the
country. Elcoteq started in Bangalore whereas LG started in Pune. At present, LG
is manufacturing around 60,000 phones per month. Recently, Nokia inaugurated its
manufacturing facility in Sriperumbudur and will have collocation facilities for
suppliers. The Nokia Industrial park is spread over an area of 210.87 acres and
the company is planning to invest around $150 mn over three years. The company
is focusing on high running, low and middle range handset and will also
manufacture BTS in due course of time. Plans are afoot to collocate 8-10
suppliers within industrial park. 

Samsung Telecommunications India, a 100% subsidiary of Samsung Electronics
Korea, has already started commercial production of its mid-range GSM handsets,
SGH X-200 at its Manesar plant in Gurgaon. This plant boasts of highly advanced
production facilities and technologies, along with an excellent workforce. The
initial investment for the plant in the current financial year is $15 mn says HC
Ryu, MD, Samsung Telecommunications India.

On similar lines, Flextronics is planning to start operations in
Sriperumbudur in the third quarter of 2006. The park is spread over an area of
250 acres.

“The facility at Chennai is modeled on the industrial parks we have
elsewhere in the world and it will cater to mobile handsets, consumer digital
products, and telecom infrastructure equipment like base stations” says
Gururaj A, general manager and director, India operations, Flextronics
Technologies (India).

Seeing the opportunity, Samsung Telecommunication has
started production of GSM handsets at its Manesar plant in Gurgaon. Presently,
the production capacity is around one million handsets per month. The Chinese
vendors are not to be left behind and both Huawei and ZTE are aggressively
pushing for FIPB clearance related to manufacturing. Huawei manufacturing plans
are pending with the government.

Speaking about manufacturing investment, Yu Yongbin, director, Sales and
deputy chairman (designate), Huawei India said “Our planned direct investment
for the manufacturing facility would be in excess ofÂ
$100 mn, and the facility will manufacture wireless equipment and
wireless terminals.”

ZTE is planning an investment of $50 mn in a phased manner, starting with
CBUs and then gradually shifting to SKD and then CKD, says Zhang Renjun,
president, ZTE South Asia. The plant will not only cater to the India market but
also to SAARC, adds Renjun. 

Last year, Ericsson became the first international vendor
to manufacture radio base stations in the country. The equipment manufactured at
the Jaipur plant are customized for the Indian market and has an initial
capacity of 10,000 units and it is being upgraded to include manufacturing of
mobile switching center and base station controllers, says Mats Granryd,
managing director, Ericsson India.   

ITI, the incumbent vendor has also started GSM manufacturing both at Mankapur
and Rae Bareli. And things are in full swing at both the centers where there has
been technology transfer agreement with Alcatel on GSM infrastructure equipment.
Nortel has completely outsourced its manufacturing operations.

	    Â		     Â
"It seems India is attractive for those who see it as a global destination for manufacturing, than who want to manufacture only for India" -Ravi Sharma, MD and president-South Asia, Alcatel		"The equipment manufactured at the Jaipur plant are customized for the Indian market and has an initial capacity of 10,000 units and it is being upgraded to include manufacturing of mobile switching center and base station controllers" -Mats Granryd, managing director, Ericsson India		"In 2007, India plans to have 250 mn telephones, 9 mn broadband connections, and 18 mn Internet connections. In 2010, the target is to achieve 500 mn telephones, 40 mn Internet users and 20 mn broadband users" -P Balaji,president,TEMA India

About Nortel's manufacturing plan, the firms MD, India, Ashoka Valia, says
“Nortel's strategy is contract manufacturing and it is outsourced to
Flextronics and Solectron.”

Motorola is progressing on the manufacturing front and the strategy is to
start with SKD and then move to CKD. As per the official communication, the
company plans to unveil its manufacturing plans in the next 1-2 months.

With the coming of the fab facility in Hyderabad, front ended by Sem India,
things are moving as per plan on the manufacturing front. The fab will not only
cater to telecom but also IT, consumer electronics, industrial electronics, and
automotive electronics. So, the day is not far when components such as DSP,
microprocessor, microcontroller, memory, ASIC, discrete, analog, logic, and
sensor will be manufactured in India.

So, for India the entire value chain is in place except hardware R&D for
handsets. With manufacturing, the industry has to focus on platform design and
phone ID design which is not happening in India, says Henry Gilchrist, director,
Business Development and Marketing, Elcoteq Asia.

On software design front, India  has capabilities to provide design services to Indian/Asian
manufacturing companies mainly in the mobile handset segment says Ramakrishna
Dutt, MD, Quasar Innovations.

"Nortel's strategy is contract manufacturing and it is outsourced to Flextronics and Solectron" -Ashoka Valia, MD, Nortel India

The Supply Chain

Having successfully sold India as a destination for telecom manufacturing to
OEMs and EMS players, the policy makers should not rest on their laurels. Now,
they have to make an extra effort to see how component suppliers can set up base
in the country (either in the industrial park or in other facilities) at the
earliest. This will help in lowering the cost of procurement, thereby making
India manufactured phones cost effective not only for Indians but also for
exports. But for this to happen, India has to look at 75-80% component sourcing
within India, either using the existing companies or bringing a whole bunch of
companies who have been partnering with vendors and EMS players.

On the manufacturing front, we are planning to catch up with China. So we
have to provide similar atmosphere that is available in China. Comparing
India-China, Renjun, says “India's manufacturing base is not as developed as
that of China although the cost of manufacturing is competitive. But at the same
time, India is incomparable in its software development skills.”

Presently, very little component sourcing is happening in the country and
what is being sourced is electrical and mechanical parts; whereas electronics
are all imported, says Ravi Sharma.

But ideally, one should look at 20-30% local sourcing in next two years and
40% in next three years, says Rajiv Kochhar, head, Avista Advisory. And for
75-80% sourcing, one has to really work hard and see that proper atmosphere is
created for it.

“This becomes extremely pertinent in a high growth market such as India,
where operators have to deploy networks rapidly and stay mindful of costs due to
falling ARPUs. It is our partnership commitment with our customers,” says
Granryd.

ZTE is planning an investment of $50 mn in a phased manner, starting with CBUs and then gradually shifting to SKD and then CKD. The plant will not only cater to the India market but also to SAARC" -Zhang Renjun, president, ZTE South Asia		"The facility at Chennai is modeled on the industrial parks we have elsewhere in the world and it will cater to mobile handsets, consumer digital products, and telecom infrastructure equipment like base stations" -Gururaj A, GM and director, India operations, Flextronics Technologies (India)		"The plant has already started commercial production of its mid-range GSM handsets, SGH X-200. It boasts of highly advanced production facilities, along with an excellent workforce. The initial investment in the current financial year is $15 mn" -HC Ryu,MD, Samsung Telecommunications India

Initially, the focus of OEM and EMS was on printing and packaging companies
and things have started to move in this direction. Second comes plastic,
keypads, moulding, electro-mechanics, and mechanics and third comes LCD, camera
modules, antennas, processor and others. In the second and third category, there
is lot of homework to be done to see how US, Japanese, and European companies
can set up their shops in the country.

One has to understand the basic thought, that majority of component players
are companies with small turnovers and they are very careful with any new
investments in any new location. So, the policy makers should make it a point to
see how to make their investments safe on the one hand and profitable on the
other, as it will help everybody in the long run.

The Indian electronics industry is estimated to be around $365 bn by 2016
whereas worldwide it is presently around $1,400 bn. The Indian semiconductor
industry is expected to grow to $40 bn by 2016. Presently, there is no
manufacturing of semiconductor in India and we are now starting this sector as
it is the core of the industry and everything around also becomes available
because of the ecosystem says Dr Vinod K Agarwal, chairman of the board,
president and CEO, SemIndia.

Creating clusters would not be easy in different geographies of India, but
the way things are moving, we will see clusters in and around large OEMs and EMS
players. But for that to happen, the state governments should work in tune with
policies designed by the cental government to see what is promised gets
delivered at the end of the day.

Investment should be made in infrastructure projects such as roads, railways,
ports, and airports for movement of goods. And one has to also work on logistics
front. Not an easy task but we are slowly moving towards it.

India will achieve the dream of becoming the manufacturing hub soon, thanks
to the initiative taken by Prime Minister Manmohan Singh in constituting a high
level committee on manufacturing to look into implementation issues, and also to
undertake regular review of initiatives that could be adopted for achieving a
sustained growth of 12% in manufacturing. The committee will create a policy
framework for necessary reforms covering all aspects of manufacturing
competitiveness. It would also ensure coordination among various ministries that
deal with manufacturing sub sectors and review the implementation of time bound
action plan to achieve the objective of 12% growth and would initiate steps to
make India a manufacturing hub in telecom, along with other verticals.

Pravin Prashant

pravinp@cybermedia.co.in