The telecom equipment manufacturing industry has evolved significantly over the past few years. The wireless segment has attracted interest from several foreign manufacturers, which have set up production facilities in India to cater to the domestic market. However, policy uncertainty, lack of a local ecosystem and high finance costs continue to pose major challenges for industry players. tele.net talks to sector experts on the current status, issues and future outlook for the telecom equipment manufacturing industry…

How has the telecom equipment manufacturing industry in India evolved over the past few years?

Himanshu Gupta

The telecom equipment manufacturing industry has evolved significantly in the past couple of years and we have been an active contributor to the segment as a whole.

Sanjay Nayak

The growth in telecom services has created a huge demand for telecom equipment in India but unfortunately, we missed this opportunity to create a thriving domestic telecom product manufacturing industry and had to, therefore, rely largely on imports. Telecom equipment technology is fast evolving and the traditional approach of transfer of technology from foreign sources is not yielding any positive results, since manufacturing that is undertaken in the country with foreign intellectual property rights (IPR) only results in low value addition. As a result, the import content remains high.

Today’s telecom products have a high component of research and development (R&D) as well as software. It is well-established that India has a large pool of experienced R&D manpower, which is involved in designing the latest telecom products for major global players. The same talent could be harnessed to create domestic products with local IPR.

Hence, there is a need for a fundamental change in the approach towards telecom manufacturing. We must promote investment in R&D and encourage the creation of domestic products, which can be manufactured in the country by using electronic manufacturing service (EMS) companies.

Satendra Singh

India has come a long way since the time it was dependent on telecom equipment imports. Over the past few years, Indian manufacturing units have been set up by companies such as Nokia Networks (erstwhile Nokia Solutions and Networks) that have global expertise in telecom. While imports still constitute a large share of the total telecom equipment deployed in the country, we are optimistic that corrective measures by the government will make India a manufacturing-friendly destination, thereby reducing imports.

ITI Limited

The liberalisation of the telecom sector in the early 1990s resulted in several global telecom manufacturers like Ericsson and Alcatel-Lucent entering the Indian market and setting up manufacturing plants. The need for setting up manufacturing facilities in the country was driven by the Department of Telecommunications’ (DoT) mandate for indigenous value addition with regard to supplies and support functions. The past decade witnessed exponential growth in wireless connectivity including in the broadband space. However, this did not drive similar growth in the domestic equipment manufacturing industry. Lack of incentives in the customs tariff structure for the import of components and manufacturing equipment at the “completely knocked down” (CKD) level also slowed down growth in the segment. However, the need to facilitate electronic/telecommunication equipment manufacturing has now been realised. In this regard, several initiatives for the localisation of semiconductor design and manufacturing have been taken. These include the National Policy on Electronics (NPE), 2012, preferential market access (PMA) norms and the Modified Special Incentive Package Scheme (MSIPS), among others.

What is your view on the government’s mandate with regard to local screening and testing of telecom equipment deployed in India? What effect will it have on investments in the telecom manufacturing segment?

Himanshu Gupta

ZTE encourages local screening and testing of the telecom equipment deployed in India, which would ensure vendor compliance with the stringent technical and security requirements for deploying telecom equipment. While we welcome the PMA policy introduced by the government, we believe that foreign companies should not be barred from participating in any equipment procurement deals.

Sanjay Nayak

Today’s telecom products are highly complex hardware systems with millions of logic elements and millions of lines of software code. No amount of post facto security screening and lab testing can ensure foolproof detection of spyware/malware or hidden trapdoors in equipment hardware and/or software from a mala-fide supplier. In the telecom industry, it is common practice to remotely download new versions of software and firmware while introducing feature updates in the network. This process renders security screening in labs quite useless since faulty/harmful codes can be implanted any time in the future. The only reliable solution for security is to source IPR from trusted (preferably Indian) companies.

Many countries have typically used local certification and security screening as non-tariff barriers to promote their domestic industry, which can create trusted products, especially for security-sensitive applications like defence and government networks.

Satendra Singh

As per our experience, India needs focused efforts as well as time to build up infrastructure for local screening and testing of telecom equipment. Nokia Networks will continue to invest in the Indian manufacturing segment and is working with the government to build an ecosystem for the same. Our focus has been on further improving the manufacturing quality in India. However, the government needs to review PMA and value addition norms.

ITI Limited

Mandating local screening and testing of telecom equipment deployed in India will ensure that the equipment is not exposed to security threats. However, the government’s mandate should ensure that the tests cover parameters apart from those defined in the Common Criteria Recognition Arrangement. The government’s decision on local screening and testing of equipment has several advantages as well as disadvantages. The move will protect equipment against security threats and facilitate the setting up of accreditation labs, specifically in the PSU sector. It will also promote indigenous IPR development. However, this will result in an increase in equipment costs and delays in accreditation, which will, in turn, impact network augmentation.

What are some of the challenges faced by vendors in manufacturing telecom equipment in India?

Sanjay Nayak

The challenges faced by domestic telecom vendors in India are:

• Lack of domestic market access: Many government tenders have restrictive eligibility conditions and proof requirements, which prohibit Indian start-ups from bidding for their products. This is one of the biggest hindrances since without achieving economies of scale in India, domestic companies cannot compete either in India or globally against larger players.
• As per a recent IESA/E&Y study, the domestic telecom industry faces fiscal disability of up to 26 per cent, as compared to foreign companies, on account of the high costs of finance, infrastructure bottlenecks, taxation issues, zero duties on imports,  etc. Unlike foreign players, Indian firms do not get any R&D incentives or soft loans for product development and their cost of working capital is very high.
• Lack of support for exports and lack of “Brand India” for products (unlike for services): We ought to use effective bilateral trade mechanisms, such as grant-in-aid programmes and offset programmes, to promote domestic telecom product sales.

Satendra Singh

There are a few challenges faced by vendors in the market, including:

• PMA norms for government procurement: The component, raw material and silicon ecosystem is non-existent in India and manufacturers have to rely on imports of critical components and chipsets. The government should focus on creating a component/raw material/ silicon manufacturing base in India. Until then, all these raw materials, which are not available locally, should be considered a part of local value addition. Forced localisation policies on certain telecom equipment will limit the flexibility of government agencies with regard to procurements, as it will result in increased costs and limited options. Further, it will impair the government’s ability to meet its legitimate security, performance and cost objectives.
• Lack of local ecosystem in India: Currently, the local supply chain in the Indian telecom equipment manufacturing market is limited to mechanical components, packaging and plastics. However, the high-end electronic components across the value chain are not currently manufactured in India and hence, are sourced from global vendors. The lack of an adequate ecosystem is a key limiting factor for increased local sourcing.

ITI Limited

It is a well-accepted fact that vendors in India face several challenges in telecom equipment manufacturing, including high costs due to infrastructure gaps (limited power supply, transportation issues and high finance costs). The inadequate ecosystem is also a key challenge. Further, the lengthy procedures that are required to be followed for obtaining approvals, etc. deter manufacturers from setting up greenfield ventures in the country.

What steps should the government take to incentivise local equipment manufacturing?

Sanjay Nayak

In the last few years, the government has formulated several new policies and schemes such as PMA for government procurement and the MSIPS. However, the problem is in ensuring effective implementation of these policies. For example, it is ironical that in a recent tender for building a countrywide national defence network, which is covered under the PMA policy, even world-class products from domestic companies were not eligible due to restrictive conditions. The government must ensure that the implementation of existing policies is tightened and undertaken in a time-bound manner.

Satendra Singh

The government should mainly focus on taxation and duties, which are the main concerns for the telecom sector, besides issues related to the improvement of transport and energy infrastructure. There is an immediate need for a harmonised, investor friendly and predictable tax regime. Retroactive taxes should be avoided and transparency should be ensured. The government should also invest in R&D, IPR and product development.

ITI Limited

As part of the ecosystem for electronics manufacturing in India, a definitive plan for ensuring the sustainability of different stakeholders like component manufacturers, system manufacturers and system integrators needs to be formulated. This can be achieved through support in the form of funds/incentives.

Further, it is necessary to implement a mission to oversee all manufacturing-related activities, which should include stakeholders, academic institutions, and members from the Indian Semiconductor Association, Telecom Equipment Manufacturing Association, Cellular Operators Association of India and DoT. Further, the government should establish a suitable ecosystem in the country for manufacturing electronic/telecom products, including the setting up of semiconductor fabrication industries. Incentives must be provided in the tax tariff structure to import components at the completely knocked down level as compared to importing on a semi-knocked down or completely built unit basis.

What is the future outlook for the telecom equipment manufacturing segment?

Himanshu Gupta

The future outlook for the telecom equipment manufacturing industry seems positive. ZTE offers end-to-end solutions, covering every segment including wireless, access, VAS, terminals and professional services.

Sanjay Nayak

India must adopt a design-led manufacturing approach and become a strong global player by leveraging its manpower strengths and large domestic market. As per the estimates of the Telecom Regulatory Authority of India’s report on manufacturing, the country has the potential to create a $150 billion domestic industry over the next 10 years, which will not only cater to our domestic needs, but will turn India into a global hub for telecom equipment. Such a large-sized industry will also have a pull-through effect on other ecosystem elements such as the electronic component and EMS industries, and will have a positive long-term impact on the country’s economy. Hence, there is huge potential for the telecom equipment manufacturing industry. However, it is important to remove the obstacles in the way of realising our true potential.

Satendra Singh

A positive and inclusive environment in the past has paved the way for growth in the Indian telecom equipment manufacturing industry. However, to ensure further growth, efforts need to be made in terms of bringing in global expertise and addressing existing challenges on the regulatory front. We are optimistic about the future of the telecom equipment industry in India.

ITI Limited

The Indian telecom equipment manufacturing industry is expected to witness rapid growth with the National Telecom Policy (NTP), 2012 and NPE, 2012 opening up several opportunities in the field of electronics in general and telecom in particular. The incentives already announced (MSIPS, Incentives for Greenfield and Brownfield EMCs, and PMA norms for domestically manufactured electronic products), could drive future growth in the Indian manufacturing segment.