With the Indian wireless communications market continuing to witness unprecedented growth, adding 18-20 million subscribers every month, the demand for active infrastructure including base station transceivers (BTSs), radio frequency (RF) cables and transmission has been strong over the past few years. In fact, wireless infrastructure is considered to be the fastest growing segment of the telecommunications market.
With penetration rates still at less than 60 per cent, the demand for connectivity in the country is not likely to diminish any time soon. Despite the peak 2G investments by existing operators already over, operators are likely to continue with network ugradation as continued subscriber additions will lead to a rise in demand for network capacity. They will also continue to make strategic investments for capacity creation in rural areas. Moreover, many regional wireless service providers, like Aircel and Idea Cellular, have started expanding their operations throughout the country.
In addition to network expansion, as the focus of the industry shifts from voice to data, there will be an increased demand for capacity, which will necessitate the deployment of active infrastructure.
The launch of 3G (on a wider scale) and broadband wireless access (BWA) services will further fuel growth in the country’s wireless domain. It will open up new competitive markets for telecom operators and technology heavyweights as these technologies will require new equipment on the radio side, including new base stations and antennas. In order to migrate from the current GSM to a wideband CDMA (WCDMA) network, while the core network (the intelligent network, billing and the mobile switching centre) will essentially remain the same, the radio access part will require an upgrade. Estimates have pegged the total industry orders for 3G equipment alone at Rs 373-Rs 442.7 billion ($8-$9.5 billion). Operators have already placed large orders for 3G equipment with vendors and are likely to invest $1-$2 billion each to get 3G deployments under way.
On the supply side, telecom equipment vendors are gearing up for the opportunity in this segment and there is intense rivalry between incumbents Nokia Siemens Networks (NSN) and Ericsson, and the fast growing Chinese vendors Huawei Telecommunications and ZTE, for whom the market is of strategic importance.
Clearly, as the Indian wireless market continues on its growth trajectory and readies itself for the next level of growth, there are attractive opportunities for players in the wireless infrastructure segment.
Size and growth
The major vendors in the wireless infrastructure segment include Ericsson, NSN, Huawei Telecommunications, ZTE, Alcatel-Lucent and Motorola.
According to industry estimates, the Indian wireless infrastructure market (including GSM and CDMA) grew at a compound annual growth rate (CAGR) of 30.82 per cent from Rs 112.75 billion in 2004-05 to Rs 432 billion in 2009-10. On a year-on-year basis, the sector, which had witnessed growth rates of over 40 per cent in the preceding three financial years (2006-07 to 2008-09), saw a decline in the growth rate in 2009-10 to nearly 30 per cent despite new operators launching services. The decline may be attributed to the slowdown in the operators’ 2G expansion plans (due to lack of clarity on the 3G auctions).
Globally as well, despite a contraction in capital expenditure on wireless infrastructure in 2009, according to analysis by ABI Research, the overall capex declined by only about 5 per cent compared to 2008. While spending reduced in Western Europe, operators in North America – despite seeing some negative impact – continued with their 4G upgrade plans.
Meanwhile, spending in China and India received a boost as 3G deployments got under way. The biggest positive impact was from China. With 3G spectrum becoming available at the beginning of the year, the country witnessed deployments through the year, adding 243,000 new wireless base stations in 2009. This kept the momentum going. In addition, Africa saw continued momentum in base station spending, with Huawei providing vendor financing to operators in the region.
In 2010, there has been a renewed focus on spending on account of competitive pressures around improving capacity and coverage.
Key trends
Over the past few years, several key developments have taken place in the sector, some of them on a large scale, thus becoming industry trends. These include a focus on managed services, rising capital expenditure and a competitive vendor landscape.
Managed services
Telecom operators, who have traditionally viewed operating the network as their core competence, have over the past five years, been under intense pressure to reduce costs while concurrently improving service levels and launching new services. As a result they have been looking to vendors to operate and maintain all or part of their network, move the network to next-generation technologies, and help drive down network operating expenses. In fact, globally, 2009 was a year that saw managed services gaining increasing importance for wireless equipment manufacturers and becoming a $7 billion market.
In 2004, Bharti Airtel set a precedent in the Indian industry by outsourcing its mobile network management to Ericsson and NSN. Under a managed services contract, the company only pays for the utilised portion of the network.
Since, at any given point of time, a third of the capacity could remain unutilised, it is a huge advantage for the company. This model has now become an industry trend and has been adopted by other telecom operators such as Vodafone Essar, Aircel and Uninor. Managed services agreements can provide savings of 20 per cent to operators on the opex side.
While the market has been dominated by two major players, Ericsson and NSN, and Alcatel-Lucent being another key vendor in this segment, other vendors have also started capitalising on this opportunity in the past two years. For instance, Chinese vendor Huawei Telecommunications derived almost 20 per cent of its revenues from managed services in 2009. Managed services will continue to gain momentum in the industry and the future trend is likely to move towards vendor-agnostic multi-vendor managed services. There is likely to be a movement towards backhaul as a managed service. This will enable mobile operators to focus on their core business, while guaranteeing a backhaul capacity that matches their changing traffic demands.
Competitive vendor landscape
There is intense competition between the incumbents (NSN, Ericsson, Alcatel-Lucent and Motorola) and the price-competitive and increasingly innovative Chinese vendors Huawei and ZTE.
Until recently, North American and European vendors dominated the telecom equipment market in the country and currently account for over 50 per cent of the market. However, over the past few years, Chinese vendors have been moving up the ranks in the wireless infrastructure space and are now a major force to reckon with. For instance, in 2006 while Huawei’s India revenues were just Rs 8.1 million; by 2009, the company had chalked up Rs 110 billion in telecom sales. Globally as well, in a significant achievement, Huawei, which accounted for just 5 per cent of the market in 2005, had moved into the third place in 2009 with nearly 20 per cent share of the wireless infrastructure market.
According to industry experts, innovative financing options and contract structuring for new telecom operators are likely to be the deal clinchers for these companies. For instance, according to ZTE, its main advantage over the incumbents is the financing options it provides following its five-year agreement with the China Development Bank, which provides the company a $15 billion credit line. Both these vendors are currently dealing with all the leading operators including Reliance Communications and Tata Teleservices Limited, and giving stiff competition to the incumbents. While there has been a degree of scaremongering among politicians about awarding contracts to Chinese vendors, the government has taken steps to address these issues, as operators are concerned about a significant increase in mobile infrastructure prices by excluding these vendors.
Equipment manufacturing
India started emerging as a telecom equipment manufacturing hub back in 2005. At that time, Alcatel had tied up with ITI for manufacturing GSM base stations and 3G equipment. It is estimated that Rs 132 billion ($3.3 billion) of foreign investment was committed to equipment manufacturing in the country in the latter half of 2005.
Given the large size of the Indian wireless infrastructure and handset market, government incentives that include 100 per cent foreign direct investment (FDI) in manufacturing, and the low cost of manufacturing, are the reasons behind India emerging as a manufacturing hub. Key equipment and handset vendors including NSN, Motorola and Ericsson have set up their manufacturing bases in the country. This trend is expected to gain momentum over the next few years with more vendors setting up bases here.
Moreover, with the government tightening security norms for importing telecom equipment, a number of foreign vendors are looking to start manufacturing in India. Broadband and IPTV services equipment provider UTStarcom, and Wi-Max network equipment supplier Alvarion are among the vendors that are taking initiatives to manufacture their products in India.
Technology trends
On the transmission side, there has been a shift from copper to optic fibre. On the switching core side, a shift from the legacy time division multiplexing (TDM) switching networks to an all-internet protocol (IP) multi-purpose softswitch base common core network is likely. With the mobile capacity crunch starting to affect operators, backhaul and core network upgrades have become high-priority areas.
In fact, there has been a big shift in backhaul strategies as operators try to reduce the costs associated with skyrocketing mobile data traffic. They are now planning to shift from a dual/hybrid backhaul approach – TDM plus IP/Ethernet – to a single IP/Ethernet backhaull. Ericsson continues to lead the mobile backhaul microwave radio equipment segment, with a 20 per cent worldwide revenue market share in 2009. Several vendors are close behind.
On the base station front, the adoption of outdoor BTSs and the separation of the RF portion from the base band unit are rapidly gaining traction. This eliminates the requirement for feeder cables that form an integral part of the network infrastructure and are used to connect antennas and mobile stations. Currently, each telecom cell site requires six runs of feeder cable with each run varying from 40 to 50 metres. Therefore, about 250 to 300 metres of cable is required per cell site.
While there are various antenna technologies in the market, variable-tilt, high-gain, multi-band and remote electrical-tilt antennas have become increasingly popular as compared to earlier fixed tilt single-band antennas.
As India has large rural areas, operators are using high gain antennas, which cover bigger areas and can operate on GSM, CDMA and 3G frequencies. Therefore, they can be shared to reduce the number of sites and lead to a reduction in costs.
In addition, given the strong emphasis on aesthetics, the market is also witnessing a growing use of concealment solutions. This involves hiding the antenna and associated filter infrastructure to make it more appealing.
Further, with the emergence of 3G markets, tri-band antennas are likely to become essential in providing value-added services such as mobile broadband. The need for multi-band antennas is gaining traction in the market.
The way forward
Clearly, the Indian telecom market continues to offer huge growth potential for infrastructure solutions as it gradually moves towards maturity. With the subscriber base expected to reach 1 billion by 2013, the demand for active infrastructure will continue to be strong over the next four to five years. In addition, the launch of 3G and BWA services by end-2010 has also resulted in significant investments in wireless infrastructure, IP backhaul and terminal equipment.
According to Crisil Research, the sector will witness a total investment of around $55 billion (Rs 2,475 billion) over the next five years for the launch of 3G and BWA services, network deployment by new operators and the rollout of long distance networks. However, according to industry experts, growth in the active infrastructure segment is likely to flatten in the medium term (after 2014) as rural telecom penetration levels reach 50 per cent and subscriber additions plateau.
Nonetheless, the shift in focus from voice to data and the expansion of 3G networks across the country will continue to drive the demand for active infrastructure in the long term, albeit at a slower pace