MANUFACTURING: The Walk Begins

Even though it was one of the first sectors to be opened up for private

competition (as early as 1984), equipment manufacturing in telecommunications

never really took off. Even when the Indian telecom services market began to

show huge potential and thereafter witness exponential growth, manufacturing was

not seen as India's forte. There was never any significant local initiative

like in China where the likes of ZTE and Huawei flourished not only locally but

globally too. This was despite some favorable government incentives for local

companies (though local companies often term government policies as unfavourable

especially with regard to duties on components). The biggest symbol of local

equipment manufacturing in India, ITI, is today almost a sick enterprise and has

become more of a trader, according to a department of telecom (DoT) status paper

on manufacturing in India.

On

the other hand, foreign companies did not seriously consider India for

manufacturing. Lack of enough domestic volumes to sustain a profitable

manufacturing was often cited as the reason for their lack of interest.

Manufacturers also argued that India's inadequate infrastructure and absence

of a components base made it uninviting for manufacturers. As such, for most of

them India was a market that was good only for trading, something which became

more attractive because of the lowering of duty barriers. For instance, most

handset manufacturers, the fastest growing equipment business, prefer trading

under the 'cash and carry wholesale trading' license granted by the

government.

India appears to be turning a different chapter now. In the recent months,

leading vendors like Elcoteq, Ericsson, Nokia, LG, and Hyundai have announced

their intentions of setting up manufacturing in India. While no concrete

announcements have been made by Motorola and Sony Ericsson with regard to their

plans, Nripendra Mishra, secretary, DoT, recently told an Assocham conference

that his department had "definite information that Motorola and Sony

Ericsson will soon be setting up manufacturing plants in India."

Why Now?



It is a fact that nothing much has changed as far as the Indian environment

for manufacturing is concerned. Government policies more or less remain the

same. India's infrastructure remains utterly inadequate. The component base is

still not sufficient to sustain manufacturing. Why is there a sudden rush among

global manufacturers to set up shop floors here?

Mobile Subscriber Base (As on 30 November, 2004) Source: COAI & AUSPI

One major factor driving the manufacturing initiatives of most of these

vendors is the growing demand for telecom services in the country. That may

explain why most of the manufacturing plans pertain to mobile handsets, demand

for which has grown many times faster than any other equipment in the past

couple of years. The likes of Nokia, LG, and Hyundai appear to realise that as

India begins to emerge as one of the largest markets for mobile phones in the

world, it would be wise to have a manufacturing base here. "Every body has

been always optimistic about India in the long term but the growing market is

now making things happen," says Venkat Rajendran, Head of Flextronics

Design Asia.

Also 'be as close to the market as you can be,' seems to be everybody's

strategy now.

So it's not surprising when a vendor like Nokia says it is investing in a

manufacturing facility in India to "better meet burgeoning demand for

mobile devices in the country". Pekka Ala-Pietilä, president of Nokia,

during a recent visit to India said that India's position at the heart of a

rapidly growing mobile communications region makes it an attractive option for

establishing their new manufacturing facility.

Ssang-Su Kim, vice-chairman and CEO of LG Electronics had told VOICE&DATA

in an earlier interview that his company planned to set up a handset

manufacturing plant in India, as it would give it an edge over other players in

terms of quality, production, and market share.

These companies are also looking at India as a manufacturing hub for South

Asia and even the entire Asia-Pac. This is what Ala-Pietilä meant when he said

that the planned Nokia factory in India "would be an integral part of our

global manufacturing network". Hyundai and LG Electronics have also said

that fifty percent of the output from their Indian plant will be earmarked for

exports. "Fifty percent of the output will be earmarked for the domestic

market while the rest will be for the global market, primarily in the Asian and

SAARC belt," Vijay R Singh, managing director, Hyundai India Telecom

recently told the media.

Key Market Indicators Source: V&D 100

Many observers also feel that vendors with a local manufacturing base would

be more competitive because imports could be relatively expensive even after

April 2005 when all duties have to go. Poor efficiency of Indian ports and other

infrastructure makes import to India expensive compared to most other important

markets. So it would be better to manufacture locally and take advantage of the

cheap labour costs and other available resources to drive costs down and thereby

make the products reach a wider market.

The other key factor driving their eagerness to set up manufacturing base in

India is obviously the large and highly skilled engineering talent pool

available in the country, which can play a crucial part in design of high-end

and sophisticated components. Also, as telecom hardware (including mobile

phones) becomes more and more software dependent, a country like India with its

software skills becomes a natural choice for these vendors. Given all this, it

would not take much time and effort to develop an ecosystem of component

suppliers. Already, leading electronic manufacturing service providers (or

contract manufacturers, as they are more popularly known) like Solectron and

Flextronics are exploiting India's design prowess. Solectron is using India

for design and production of advanced electronic components, subsystems, and

systems. Similarly, Flextronics which has a relatively small manufacturing

operations based out of Bangalore where it makes telecom infrastructure

equipment and also offers design services is continuously evaluating India.

For long, India and Indians have cribbed about the lack of any significant

manufacturing activity in telecom in the country and have seen themselves as

losers when compared even with some Southeast Asian countries as well as with

China, which is emerging as a shop floor of the world. It goes without saying

that the intention of the global vendors to set up plants here augers well for

telecom equipment manufacturing in India. However, India still has a long way to

go if it really has to emerge as a serious player on the global manufacturing

stage. A lot that has not changed must change.

Ravi Shekhar Pandey

"We continue to look at cell phones as an opportunity"

Flextronics is the world's top electronics manufacturing services (EMS)

provider. It ended the last fiscal with revenues of $14.5 billion. Flextronics,

which a network of facilities in 32 countries spanning five continents, has a

growing presence in India too. Venkat Rajendran, Head of Flextronics Design

Asia, spoke to VOICE&DATA on the current opportunities in India and the

possibilities of the company setting up a manufacturing presence here.

Why are international manufacturers suddenly waking

up to India? What is your view?



The world is getting more and more optimistic about India in the

medium to long term. In the recent times, the Indian market has been steadily

increasing and gathering size. Some tax reforms too have happened. The reduced

tax regime and increasing market size seem to be some of the obvious drivers for

this increased interest on India.

What

is Flextronics own position on India?



We have large manufacturing plants in other Asian locations which are

very competitive today. We do see positive developments in India. But we expect

more to happen and we will continuously evaluate India for our manufacturing

strategy. Flextronics is optimistic about India for the future.

Flextronics already has a presence in manufacturing in India. We have taken a

big step for design in India recently. We have more than 3000 Flex employees in

India now. We see our design and manufacturing complementing each other well.

What specific improvements you want to see happen in

India ?



There are expectations for improvement in labor laws, tax

rationalization, infrastructure etc. Lot of talk is already in the air. We hope

these materialize soon.

What does Flextronics manufacture today in India? Do

you manufacture telecom equipment and cellular phones?



Our India operation has so far been focused on high mix - low volume.

Major part of manufacturing is in the Telecom segment today. We already

manufacture equipment for fiber optic communication, wireless base station,

wireless on local loop and other telecom systems. We continue to look at

cellular phones as an opportunity.