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Telecommunications
Jun 23, 2006
Telecom Equipment Manufacturing in India: Opportunities Galore!!!
Geetanjali Babbar
NEW DELHI -- "The government of India recognises that provision of world-class telecom infrastructure and information is the key to rapid economic and social development of the country. It is also anticipated that going forward, a major part of the GDP of the country would be contributed by this sector."
This statement is from the preamble of the government of India's NTP 1999. One of the key objectives of the NTP1999 was to "strengthen R&D efforts in the country, and provide an impetus to build world-class manufacturing capabilities." The policy further stated: "With a view to promoting indigenous telecom equipment manufacture for both domestic use and export, the government would provide the necessary support and encouragement to the sector, including suitable incentives to the service providers utilising indigenous equipment."
It is these objectives and the supporting the government policies and decisions that have brought about a boom in the Indian telecom sector today, making it one of the top 10 telecom networks in the world and the second largest in Asia with over 100 million subscribers and a tele-density nearly 13. According to the Telecom Regulatory Authority of India (TRAI), as of February 2006, the gross subscriber base of fixed and mobile services together reached 134 million (Fixed Service stood at 49.45 million and Mobile Services at 84.88 million).
Credit Suisse First Boston (CSFB), in its analysis "India telecom tour: The final frontier for wireless growth", believes that a robust macroeconomic backdrop, conducive regulatory environment, strong government support, rising telecom investment and competitive operator dynamics will drive the Indian subscriber base to swell to over 350 million by 2010, driving handset units from 29 million in 2004 to 96 million by 2010. The analysis further expects that the Indian wireless infrastructure market will rise 26 percent to US $4.8 billion in 2006.
Morgan Stanley, in its industry view titled "India Telecoms" (7 December 2005) raised its expectations of the wireless subscriber estimates for India from 152.7 million as of March 2008 to 159 million (increase of four percent). Morgan Stanley expects the net additions to grow at a faster rate of 3.1 million per month in FY07 and 3.3 million in FY08 as against an average growth of 2.2 million per month since April 2005.
The breathtaking speed at which the sector has grown has made the world sit up and take notice of the opportunities and the market potential. This has been further strengthened by the government's decision to allow investment in manufacturing activities in India. The government recognises that its vision of reaching 250 million telephone connections and a tele-density of 22 by 2007 cannot be achieved if the country continues to import technology and equipment.
There is a pressing need to become self-sufficient in the field of telecom equipment manufacture that will meet domestic needs as well as provide export potential. A study by the GSM Association (GSMA) estimated that as many as 930 million handsets might be sold in 50 developing nations between 2006 and 2010.
Background of Telecom Manufacturing in India
In 1994, when the process of deregulation of the Indian telecom sector began, the government invited bids to operate cellular and basic services from private operators. These licences did not carry any mandatory requirement to buy equipment from indigenous sources. However, there was a clause giving weightage in the evaluation of the tenders for basic telephone services to those organisations using indigenous equipment. Private operators procured telecom equipment from foreign sources due to various reasons, including the quantitative restrictions on telecom equipment and the progressive reduction of customs duty on imports as per India's commitment to the World Trade Organisation (WTO).
During the period 1995 to 2000, Mahanagar Telephone Nigam Ltd. (MTNL) and Bharat Sanchar Nigam Ltd. (BSNL) acknowledged the growth of the private sector and the deployment of new technologies by amending the clause "Indian manufacturers" in their tenders to read "Indian manufacturers/suppliers". This led to a situation where the procurement was made from Indian suppliers who were merely importing and supplying the equipment to these government owned companies.
On the other hand, the private telecom operators had been importing directly from foreign suppliers. According to the Department of Telecommunications' "Status Paper on the Manufacture of Telecom Equipment in India" (31 March 2004), some of the policy provisions were:
1. No industrial licence will be required for the manufacture of telecom equipment;
2. 100 percent Foreign Direct Investment (FDI) will be permitted in the telecom equipment manufacturing sector through the automatic route;
3. The dividend income and the capital invested in telecom manufacturing will be fully repatriable;
4. Technical know-how of up to US $2 million, net of taxes to be paid on an automatic basis;
5. Royalties of up to five percent on the domestic sales and eight percent on export sales will also be permitted.
According to the paper, some factors impacting growth of telecom equipment manufacturing in India were:
1. Private sector service providers had no compulsion to use equipment manufactured by indigenous companies. Their procurement was dependent on the choice of technology, funding mechanism with long-term low interest credits by foreign suppliers;
2. Indian R&D institutions were unable to keep pace with the changing technologies and therefore, many of them had to close their manufacturing units;
3. The government had allowed trading of telecom equipment to foreign companies under 'cash and carry wholesale trading';
4. With the rapid growth of GSM and CDMA, the entire demand was being met through imports;
5. Indian companies like ITI had become traders, importing equipment and supplying to BSNL and MTNL;
6. Manufacturing was based on orders from BSNL/MTNL with no commitment to continued supply;
7. Foreign companies had no obligation to either transfer technology or set up manufacturing base and MNCs operating in India like Lucent, Alcatel, Ericsson and Siemens became traders.
According to analyst estimates, the Indian electronics/IT and communications hardware sector was worth approximately US $9 billion during 2003-04 - a mere 0.7 percent of the global electronics/IT hardware production of US $1,300 billion. The telecom equipment industry is currently estimated at around US $6 billion.
Source: Status Paper on the Manufacture of Telecom Equipment in India, Department of Telecommunicationsc (31 March 2004)
Dayanidhi Maran, Union Minister for Communications and Information Technology, Government of India, speaking at the inauguration of Elcoteq India in April 2005, said: "The Indian telecom sector has grown exponentially. However, the electronic manufacturing sector has been lagging behind its software brother. No country our size can afford to neglect manufacturing. In India, manufacturing accounts for only 16 per cent of the GDP. We need to take this percentage to 25. In a high tech sector like telecom, it is more important that our dependence on imports is greatly reduced."
According to a recent survey by Elcoteq, the electronic hardware market is one of the fastest growing areas of the economy. The demand is expected to be around US $70 billion by 2009-10 and will be a key catalyst to propel the growth of the hardware sector. Not only must India encourage manufacturing, India must also position itself as a major location for sourcing of electronic components and products.
According to the Department of Information Technology (DIT), if India is able to take advantage of these opportunities the industry can reach a level of nearly US $50 billion and generate an additional three to four million jobs.
Currently, around 80 percent of the total telecom equipment demand is met through imports. Given the government's vision and the current growth trends of achieving approximately 250 million lines in the next three years with a tele-density of 22 - this would translate to equipment requirement of around US $28 billion to US $34 billion. Local manufacturing is expected to help India cut the US $165 million it spends each month to import telephones.
EMS industry in India
The worldwide Electronics Manufacturing Services (EMS) revenue is expected to increase from US $167 billion in 2004 to US $324 billion in 2009. iSuppli Corporation recently predicted that the Indian EMS and original design manufacturing (ODM) industry will grow 21 percent per year from US $774 million in 2004 to US $2 billion in 2009. The combined sector will enjoy a CAGR of about 21 percent each year. EMS companies setting up base in India are building telecom and consumer electronic equipment for original equipment manufacturers (OEMs) for the Indian market.
Given the growth of the telecom sector, EMS companies can expect a boom in electronics manufacturing for the telecom sector when by 2009, 37 percent of the EMS market will be for telecom manufacturing. According to iSuppli, India's electronics consumption in 2003 was US $12.3 billion, of which communications contributed 14.5 percent, the rest being consumer, computers, industrial components, etc. The size of the Indian telecom opportunity and the speed at which the sector is growing has ensured that almost all global telecom equipment manufacturers have announced ambitious plans for India with several others waiting in the wings.
Where are we now?
Industry sources estimate that the Indian electronics sector will grow to about US $ 35.6 billion by 2010. According to a recent survey, the market for telecom infrastructure equipment grew by 71 per cent in 2004-05 while enterprise networking crossed the US $1.3 billion mark. The Indian communications equipment market, including infrastructure, enterprise, end user equipment and telecom software grew by 43 percent to US $9 billion from US $6.3 billion in 2003-04. Only the equipment market size was US $6.8 billion in 2004-05, up from US $4.8 billion the previous year.
The year 2005 was eventful in India's telecom scene as not only did the country witness an exponential growth in services and number of subscribers for mobile telecom, but also major global equipment vendors and EMS companies committed to setting up and investing in India. Elcoteq, a leading global provider of EMS in the communications technology field, was the first global company to manufacture telecom equipment in India with a facility that went into production in April 2005.
Other global companies like LG, Alcatel, Nokia, Philips, Samsung, Motorola and even Chinese handset manufacturers like Bird, BenQ and others have announced investment plans to leverage the growth of the industry in India. According to Gartner, the interest in setting up a manufacturing hub in India arises from two aspects - a burgeoning domestic market and a global sourcing facility. Moreover, local manufacturing would also help companies become cost-competitive, especially in a price-conscious market like India. With telecom manufacturing getting an investment boost in India, the semiconductor industry and other supply chain industries will experience growth. Therefore, as more global companies commit themselves to manufacturing in India, experts feel this will automatically lead to the creation of a feasible electronic manufacturing ecosystem.
According to Elcoteq, manufacturing in India for India, will lead to a reduced cycle time of around 50 percent. Besides, manufacturing in India could save costs by two to three percent - an attractive proposition for handset manufacturers whose margins are being eroded by fierce competition.
Manufacture in India
India is one of the fastest growing markets for mobile telecom, and there are great opportunities for manufacturing services. With a population of over one billion people, India represents one of the most exciting and fastest growing areas for handset and network equipment OEMs and EMS providers.
India has become an extremely attractive location for manufacturing because of its talent pool of engineers, software developers, designers and a highly skilled workforce with global quality standards. The trend for global EMS companies has been to establish manufacturing capacities in countries with growing markets or proximity to vast markets, favourable costs and a large pool of technical talent.
According to recent reports, telecom manufacturing is cheaper in India than in other neighboring countries. If the supply chain is based out of India, it is possible to make a mobile phone that is five to seven percent cheaper in India than in other neighboring countries. India also has R&D capabilities, which bring down development costs.
Over the last five to seven years, India has emerged as one of the leading R&D and design bases for multinational IT companies like Texas Instruments, IBM and Microsoft and telecom companies like Motorola, Alcatel and Ericcson. With R&D and design capabilities already existing in India, costs in India become significantly lower than in developed countries, and setting up a manufacturing base in India is a form of backward integration for global telecom companies.
Another possibility for equipment manufacturers is exports, particularly of mobile handsets. During 2004, Indians purchased 25 million mobile handsets worth US $2.8 billion. That figure is expected to go up to 65 million in 2006 and 100 million by 2010. Now, if the announced plans of companies like Elcoteq, Nokia, Samsung and LG are on target, starting 2010, upward of 125 million handsets will be rolled out of Indian factories every year. That opens up the possibility of exporting cheap India-made phones to other emerging markets. LG, for instance, expects to export 50 percent of its production in India by 2010. India's R&D capabilities are one of the most advanced in the world and 60 percent of the world's leading product companies and OEMs source a part of their technology from India.
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Mobile Handsets: Fashion takes the center stage |
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The recent mobile handset launches in India by various manufacturers heralds the start of a new era of mobile competition, one in which operators' differentiation in the marketplace is focused on handsets rather than networks. The variety of choice of mobile voice handsets has been good over the last few years and the these are continuously evolving making the handsets more feature-rich. As the past experience tells us that neither better technology, nor past market success guarantees future success, so vendors will have to offer the best that supports next-generation services.
Mobile phones have metamorphosed from basic communicator equipment to the fashion statement reflecting the personality of the user. It is a popular icon of our visual culture whose design speaks a lot about the consumers' social and cultural experience, and aesthetical understanding of technology, which also gets influenced from the latest fashion trends. Today, an individual spends most of his time with the mobile using and flaunting it. So its design, look and features speak a lot about what he is and what he aspires for. With the design and features, technology advancement in the phone also plays a major role as people wants to be seen as tech savvy.
According to H. C. Ryu, managing director, Samsung Telecommunications India, the social experience of consumers shows that mobile phones have moved through its lifecycle from being a communication device to the style object. Due to increasing electronification of consumers' lifestyle, there is ever growing demand of digital convergence matching the latest fashion trends. Even the latest mobile technology can no longer represent pure functional rigidity, but should be customised to fulfill the pleasures of life, the notion of comfort, and emotive necessity towards personalisation.
According to recent reports on consumer attitude for latest mobile handsets, the consumer's purchase decision of a hand held device is based primarily on the aesthetics of the device, this is very well understood by the handset vendors. Also, it is increasingly difficult for a vendor to differentiate their products by simply adding enhanced technology features. For the consumer who is facing a range of seemingly identical devices as far technology is concerned, the aesthetics of a device can generate an emotional response to which customer relates a value and for which he is ready to pay a premium. This is one of the key factors that is driving the handset vendors to offer trendy and fashionable devices.
Trends in handset design
There had been rapid changes in the form and features of the mobile phone. The trend is very clear in form as there had been shift in focus from static Bar phones to dynamic clamshell and slider phones. Samsung is a trendsetter with its "slim and wide" design phone concept that offers better portability with its lightweight and thinness, as well as enriches multimedia features in a mobile environment with larger screens.
The latest trends in cell phones’ features reflect a convergence of voice, video and data communications. By blending information with entertainment, cell phones are center-stage in the evolving trend of mobile infotainment. The companies are bundling their phones not only with MP3, polyphonic ringtones, video recorder, photo shoot, GPRS and radio-TV programs at push button, but also adding up aura features making phones more emotive.
Commenting on the latest trends in handset design, R.K. Dutt, managing director, Quasar Innovations, said: “To satisfy the appetites of the demanding mobile marketplace, vendors are offering latest technological advances in intelligent design which are more sleek these days, colorful displays, customisable music and interactive gaming - all brought together in vibrant colour body. We also see a great opportunity for fashion brands/companies to independently produce their own-designed phones, in collaboration with the operator and handset vendors.”
As far as the technology issues in handset designing are concerned, H.C. Ryu is of the view that the mobile handset continues to drive the global high-tech industry. Companies are layering on features ranging from GPS (global positioning system) to video to additional wireless-communication schemes. The biggest challenge is to pack the ever-growing list of features and services into lighter and slimmer handset devices. Samsung endeavors to provide its customers with the latest technology in slimmer and smaller phones. Its latest external memory FBT flash card is one such example of technology advancement, which is much smaller and tech savvy card compared to the multimedia card.
Designing new handsets
Mobile handsets have entered a new phase of development as they undergo a transformation into multimedia devices with extremely sophisticated capabilities. Today's customer needs a mobile phone to conduct his or her daily life, both business and personal. He also wants to use its high-tech services to increase productivity and personal pleasure. Stimulating the wants-turning implicit needs into valuable services-is key to operators' future success. In designing the future handsets, the dynamics of market has to be closely monitored.
In the last decade, wireless handsets have evolved from voice-only telephony devices to voice and data-capable devices implemented on an open mobile computing platform possessing high-speed wireless connectivity. Over the period of time, the development process used to realise and launch wireless devices has also grown more complex and distributed. The development of a mobile device undergoes many stages. Each stage has unique requirements for design verification and performance analysis tools. On a broad level, these stages can be grouped into four phases: core platform development, product realisation, product deployment and optimisation, and application development.
Features driving mobile usage
According to H.S. Bhatia, PGH, GSM phones, LG Electronics, feature usage is specific to a segment. For a basic segment, color screen would be a driving force. For a mid segment, Bluetooth, MP3, video would be the driving force. For high-end customers, Mega Pixel camera loaded with features and a matching design does the trick.
Increasingly, customers are looking for a single handset that can meet a multiplicity of criteria, such as offering the longest talk time, the applications most suited to their needs and the best price. Although most of the conventional features are going to stay there will be ever growing demand for GRPS, Bluetooth, enterprise need of computing, media presentation, etc. Nowadays, mobility is not an add-on but becoming fundamental aspect of many services, creating huge demand for high-speed access to the Internet, entertainment, information and electronic commerce (e-commerce) services anywhere. Features like TV streaming, high-speed Web navigation and videoconferencing, etc. are fueling the need for 3G services.
As 3G services are set to deploy, the demands on the handsets and applications will increase exponentially. Without advanced functionality in the mobile handset to deliver the best quality experience possible, 3G-service deployment and user adoption rate will be slowed.
The business challenge is to keep constantly launching widely popular feature phones matching the upcoming trends and simultaneously increasing the profitability. With clamshell and sliding forms, features such as TV, GPRS messaging, MP4, video streaming, etc. will shape the future business model. All these requires careful management of video-clip services and content costs in the short-term, followed by evolution to advanced cellular technology, such as HSDPA, and integration with DVB broadcast technology. The market will only grow if latest technology is made available at an affordable price.
Consumers are becoming more sophisticated in their selection of handset, and this is driving the market for stylish and fashionable mobile phones. Independent study shows that there will be sufficient consumer demand to support the sale of 23 million fashion handsets by 2010. Also, as technology gets more and more standardised, it will be hard to differentiate handsets based only on enhanced technology features. Mobile manufacturers will have to rely on the aesthetic GUI, which can generate an emotional response for which consumers will be willing to pay the premium. |
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The Opportunities |
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According to Arête Research, every operator in India is undertaking massive expansions trying to boost subscribers and market share. Network capacity is expected to nearly double in 2006. All five national operators are spending up to US$ 1 billion on network expansion over the next 12-15 months. With equipment prices already at the world's lowest it's a competitive market for handset makers. BSNL has decided to issue a single tender for installing an additional 60 million GSM lines. This will possibly be the largest-ever telecom expansion deal in the world and is estimated to be worth over US$ 5 billion - that covers towers, electronics, integration and installation; leading to immense opportunity for OEMs operating in India. The Company Board had earlier decided to allow all equipment vendors to bid for its tenders. It had also set aside the recommendations of a high-level committee, which had proposed that only the existing vendors - N ment vendors like Siemens, Lucent as well as Huawei Technologies and ZTE of China. The government has stipulated that the tender will insist that all vendors set up some manufacturing facilities in the country as a precondition.
Ericsson and have recently started indigenous manufacture of base stations, while Nokia has set up a unit in Chennai to manufacture both handsets and okia, Motorola, Nortel, Ericsson and ITI-Alcatel - be allowed to bid. This decision benefits global telecom equip ITI-Alcatel network equipment. Siemens, Motorola and Huawei Technologies have also announced that they plan to make substantial investments in the manufacturing sector in India. Indian R&D companies now have substantial number of employees working on custom software, legacy product roadmaps, embedded systems and running back office functions for operators. Nearly 10 per cent of telecom equipment R&D is now done in India, but growing 40 per cent per annum. At this pace, Indian IT vendors could have 50 per cent of industry R&D headcount by 2010. In the next 22 to 31 months, Indian telecom companies will invest around US$ 15.8 billion on network equipment alone. A substantial amount of this will be done by Stateowned BSNL and MTNL.
Given the demand in the country, the emphasis has now shifted to low cost products - handsets and equipment - and that is the reason for large-scale investment in manufacturing in India. With the entire telecom industry valued at over US$ 27.2 billion and with leading OEMs and EMS companies setting up operations in India, the telecom boom will also lead to a boom in the ancillary industry. Nokia establishing a manufacturing facility in Chennai and announcing that it will rollout India-made Nokia handsets, with an investment of between US$100-150 million is another milestone that establishes India on the world's telecom manufacturing map. In the GSM category, Nokia holds over 55 per cent market share in India and India is the Company's fifth largest market.
Nokia has also received a contract worth around US$141 million from BSNL for GSM/EDGE and GPRS network expansion in North India. Besides global companies investing in manufacturing in India, the Government has announced a US$ 23 billion-revival plan for the State-owned Indian Telephone Industries (ITI) Bangalore. ITI will start manufacturing mobile phones with help from global equipment major Alcatel at its facility in Uttar Pradesh, which has a capacity of manufacturing three million units.
Motorola has also announced that it will begin manufacturing in India by assembling its hottest selling and popular low cost C115 mobile handset (less than US$ 45) "Made in India" through a third party equipment vendor. This will also help Motorola comply with the stipulation of BSNL that prospective bidders for its equipment tenders should have a manufacturing facility in India. Another key trend has been the investments being made by global companies to leverage India's R&D and design capabilities. Companies like Intel have announced investments for high-end design and development work on chips.
Texas Instruments' R&D centre in Bangalore is working on analogue and digital signal processor digital chip design. Other companies like Motorola, Hyundai, ZTE Corporation, Qualcomm, Huawei, Nokia and Ericsson have all committed investment to leverage India's capabilities in design. The last 12 months have been witness to announcements by global companies like Elcoteq and Nokia that will redefine telecom manufacturing in India, and signal the emergence of a new industry that is likely to benefit the Indian economy. Elcoteq, with its ODM capabilities globally, acts as a one-stop shop for world class product design and offers flexibility of business models for customers including New Product Introduction, Original Design and Manufacturing, Collaborative Design and Manufacturing and Joint R&D and Contract Manufacturing. All of this will benefit global companies setting up base in India, who can leverage Elcoteq's expertise to manufacture in India or for the Indian market. |
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