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If the ongoing rush is anything to go by, India's burgeoning telecom industry is fast becoming the favourite destination of global handset manufacturers. In the past 18 months, almost all the leading telecom handset makers –­ LG, Motorola, Samsung, Sony Ericsson and Nokia –­ accounting for 77 per cent of the world mobile phone market, have either set up manufacturing units in the country or are in the process of doing so.

Nokia of Finland, for instance, formally opened its first handset factory in Chennai in March to support the growing demand for handsets and network infrastructure in the Asia-Pacific region. In fact, the company, which has invested $150 million in the venture, started commercial production in January 2006 and in the subsequent 28 weeks has rolled out 1 million handsets.

Others too are looking to strengthen their presence in the country. Korean multinational Samsung, for example, has announced plans to invest Rs 850 million this year to implement various projects by 2010. The unit is expected to produce about 1 million phones every year. Motorola too, which has made India the hub of its high-growth markets, is in the process of setting up a manufacturing facility in the country. In fact, end-2005, Motorola launched a sub-$40 handset, indigenously manufactured in India for the common man.

Then there are relatively smaller names too –­ Taiwan-based BenQ (which has bought out Siemens' handset unit), the Haier Group and Nungbo Bird of China –­ which are keen to increase their presence in the world's fastest growing wireless services market, also slated to be the world's third largest mobile market by the end of the year, behind only China and the US. Mid-March, officials of Nungbo Bird were in India, talking to the Indian Chamber of Commerce and seriously exploring the possibility of setting up a manufacturing facility in West Bengal.

Apart from handset producers, manufacturers of semiconductors, set-top boxes, telecom base stations, switches and network equipment are also trying to grab a slice of the Indian telecom pie. With a target of achieving 250 million subscribers by 2007, "spending on wireless infrastructure equipment and handsets is set to explode as telecom operators execute aggressive network expansion plans", points out Prashant Singhal, telecom industry leader at Ernst & Young.

He explains: "The mobile subscriber base in India has grown fivefold in the last two and a half years, to about 74 million at the end of December 2005. This has been possible because of low tariffs and the availability of affordable handsets for the masses. All the leading global handset vendors have realised the growth potential of the Indian market and have begun offering consumers a wide array of phones –­ from entry-level to high-end PDA phones, with prices ranging from $45 to $1,000.

In other words, as market analysts see it, India is at the inflection point of an exponential growth trajectory. It is poised to have the largest telecom network after China in the next five to seven years. Ravi Sharma, president, South Asia, Alcatel notes: "The conducive environment provided by the government coupled with the tremendous growth opportunity in the telecom sector has truly made India a prospective hub for companies to set up manufacturing units. This is a good trend and will benefit India in the long run."

The increasing involvement of global manufacturers in the Indian telecom sector bodes well for the overall investment and growth climate of the country. It will help the Ministry of Communications realise its target of attracting $22 billion in foreign investment commitments in 2006, double last year's level. For this it has been aggressively wooing international handset and equipment providers to set up manufacturing bases in the country.

According to the Department of Telecommunications (DoT), at least 10 multinationals have committed more than $5 billion to the telecom manufacturing sector in the last 18 months and are likely to commit another $5 billion soon. While the amount may not be that large compared to how much other Asian countries have attracted, it is still no mean amount. Besides, it is just the beginning.

In fact, Minister of Communications Dayanidhi Maran's positioning of India could not have been better timed. The combination of robust economic growth, favourable government policy, and a young, upwardly mobile workforce is making India ripe for telecom investment. "Over the next three years, wireless infrastructure spending in India is expected to grow by an average of 12 per cent annually and handsets could average about 26 per cent of the annual shipment growth," says Singhal.

While it is a given that the Indian telecom industry will benefit from the infusion of funds, what is it that drives the hard-nosed, multinational veterans to invest billions of rupees in setting up manufacturing facilities in a relatively unknown market, especially in the handset segment where import duties have now come down to zero

Anticipated growth is perhaps the most obvious answer. Faced with relatively flat growth in their home territories, getting a slice of the Rs 170 billion handset market for 2006 presents a very lucrative picture. Moreover, the market can only grow from here on. Several factors such as increasing income, low coverage, government targets to increase teledensity (which is currently as low as 2 per cent in the rural areas), rapidly swelling mobile subscriber numbers and a relatively relaxed regulatory environment are all likely to play a role in driving wireless equipment, and particularly handset, growth in the country.

During 2004, Indians purchased 25 million mobile handsets worth Rs 125 billion ($2.8 billion). This figure is expected to go up to 50-60 million in 2006 and 100 million by 2010. The sale of GSM handsets accounted for 74 per cent of total sales in 2005 and CDMA phones made up the rest. With the penetration rate for GSM mobile phones in India only 6 per cent of the population, the potential is immense. Says J.S. Sarma, telecom secretary: "At least 8090 million handsets will be sold between now and December 2007. So there is tremendous scope for the market to grow."

Jorma Ollila, chief executive, Nokia agrees. While inaugurating Nokia's production facility, he remarked: "India is amongst the top five telecom markets in the world. We anticipate that there will be a long-term sustainable demand for mobile telephony in the fast-growing Indian market. In fact, we estimate that India will become the world's second biggest mobile device market in terms of volumes by 2010. There is tremendous potential to bring mobile communications for the very first time to many in India who do not yet have any access to communications."

The two things that can push handset growth in a big way are, one, the almost negligible teledensity in the rural areas, where the cost of building a network favours wireless over wireline and two, low-priced handsets. Analysts as well as mobile service providers are convinced that ultra-low-cost phones –­ less than Rs 2,000 –­ will trigger the growth of mobile services in a big way in a cost-sensitive market like India. "Telecom handset manufacturers entering India may be able to target the domestic market if they can price their handsets in the $20-$30 range," says a senior official of BSNL.

The other less obvious reasons as to why international manufacturers are looking at India seriously is that rival China, even with its vast market, will eventually adopt its own homegrown telecom standards. This will, in the long run, affect global manufacturers. It is therefore important for them to look at alternative manufacturing locations. Also, telecom equipment manufacturers undertake very little of their research and development (R&D) in China due to the shortage of skilled R&D engineers. Most R&D, which typically accounts for over 40 per cent of a product's development, is being done in labs in the US or Europe. This adds to development costs. With India there is no such problem as it has skilled engineers with R&D capabilities. For instance, a lot of the work on Motorola's signature MotoRazr phone was done in India and, therefore, it would be easier for the company to get the phone manufactured in India than elsewhere. Further, once the volumes are established, it will be very easy for manufacturers to customise models for India, like Nokia is already doing.

Finally, exports from India, particularly of mobile handsets, present a huge possibility for international companies. If the announced plans of companies like Nokia, Samsung, Elcoteq and LG are on target, starting 2010, more than 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 per cent of its production in India by 2010. In other words, global manufacturers can look at India as a handset sourcing hub for catering to the Southeast Asian countries.

On the whole, the arrangement is positive for both the Indian telecom industry and global manufacturers. A lot, however, rides on whether the Ministry of Communications is able to formulate a comprehensive policy on FDI that suitably addresses the apprehensions of global telecom players.