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.