As the government steps up its efforts to transform its Make in India vision into a reality, a matching dynamism can be witnessed in the otherwise sluggish domestic telecom manufacturing sector. The handset space, in particular, has become highly vibrant over the past few months as both local and international players have announced their plans and commitments to assemble and manufacture products, either independently or through third-party contracts, in the country. Meanwhile, telecom equipment makers such as Nokia Networks and Huawei Technologies are planning to increase the local content of equipment manufactured in India. The growing activity in this space is set to change the face of telecom manufacturing in the country, where 95 per cent of the market requirement is currently met through imports.

Growth in the domestic telecom equipment manufacturing industry has remained abysmally low, even as the country recorded a steep increase in subscribers and recently hit the 1 billion mark. However, the majority of the handsets in use are only assembled in India, with most components and parts being imported from other countries, mainly China. The government’s recent move to hike import duties on mobile handsets, coupled with incentives for local manufacturing under the Make in India initiative, has presented a compelling business case for handset players to consider setting up a production base in the India.

While companies are queuing up in large numbers to leverage this opportunity, government support and hand-holding are still required to help India become a promising telecom equipment manufacturing hub. The government needs to iron out issues such as poor infrastructure and lack of clarity on regulations as well as various tax and legal issues to attract the interest of foreign investors.

tele.net takes a look at the current status of the Indian manufacturing sector, emerging trends in this space, the key growth drivers, major challenges and the future roadmap…

Current status

Despite robust growth in the Indian telecom services sector, the country’s domestic telecom equipment manufacturing industry has not taken off so far. The country continues to rely heavily on imports. As per industry estimates, the Indian telecom market for core equipment (excluding batteries and towers) stands at around Rs 250 billion, of which the contribution of local firms is limited to Rs 10 billion. While several international players such as Alcatel-Lucent, Nokia Networks, Ericsson, ZTE and Huawei have set up facilities in India, the transfer of technology is not yielding positive outcomes as manufacturing is being done under foreign intellectual property rights. This results in low value addition in India. For instance,  the local content in Nokia Networks’ products in India currently stands at just over 20 per cent. The industry average is even lower, at 11 per cent, as per various estimates.

The lack of a well-developed ecosystem has been a key deterrent to the growth of indigenous manufacturing. The local supply chain in the telecom equipment manufacturing market is currently limited to mechanical components and packaging while the high-end electronic components across the value chain are not manufactured in India and are sourced from global vendors. Further, the domestic telecom equipment industry faces huge challenges such as high finance costs, large infrastructure gaps and taxation issues. Moreover, domestic companies do not receive any research and development incentives or soft loans for product development and their cost of working capital is very high.

Growth drivers

Over the years, the telecom ministry and the Department of Telecommunications have come up with various initiatives to give an impetus to domestic telecom equipment manufacturing. But these efforts have been largely unsuccessful. The National Telecom Policy, 2012; the preferential market access norms; the National Policy on Electronics, 2012; and the Electronic Modified Special Incentive Scheme Package for instance, have all been steps in the right direction, but have failed to create a momentum due to implementation hurdles.

In such a scenario, the new government’s Make in India initiative is offering hope as it aims to build an ecosystem conducive to equipment manufacturing. While a complete turnaround cannot be expected in the near term, early signs of change are visible with big-ticket investments being announced by a number of players who are looking to set up a manufacturing base in India over the next two to three years.

Recently, the Ministry of Home Affairs cleared Huawei’s proposal to set up a unit for electronics/telecom hardware and support services including trading and logistics at the State Industries Promotion Corporation of Tamilnadu Special Economic Zone, Sriperumbudur, in Tamil Nadu. This unit will enable Huawei to manufacture telecom equipment exclusively for the Indian market. Currently, it manufactures optical network transmission systems at its existing unit in Chennai but these are produced only for export markets like China, the Asia-Pacific region and the Middle East. In another development, Nokia Networks has announced plans to increase its localisation level in India to 45 per cent over the next three years.

The handset space in particular is abuzz with activity with most players, big and small, planning to set up manufacturing facilities in the country. In the initial phase though, the focus will be on establishing assembly units. Companies such as Karbonn Mobiles, Lava and Swipe Technologies will be looking at sourcing components both locally and from China, and will gradually reduce their dependence on imports and consider end-to-end manufacturing.

A few companies have already started partial local production and will continue with the model in future as well. Intex, for instance, has started manufacturing some components such as batteries, earphones and chargers in India, and is also doing the packaging in India. This accounts for about 20 per cent of the overall product. The company now plans to initiate the glass-cutting process in-house as well.

Contract manufacturing of mobile handsets is set to gain traction as young companies and new entrants will find it difficult to establish exclusive units. Taiwan-based Foxconn, which has emerged as a global leader in this field, has big plans for the Indian market. It plans to invest around $2 billion in setting up 10-12 factories in the country over the next five years, catering to smart power transmission, energy efficiency, hardware and software integration, and the internet of things. In June 2015, the company started manufacturing smartphones for China’s Xiaomi at a leased facility in Andhra Pradesh and recently added US phone brand Infocus to the list.

Karbonn Mobiles has also formed a joint venture with China’s contract manufacturer Water World Technology Company Limited to set up a handset assembly plant in Greater Noida. The brownfield plant, which will initially make 1.5 million feature phones and smartphones per month for Karbonn with an investment of Rs 500 million, will be scaled up to 3 million units at an investment of Rs 1 billion in 2015-16. The joint venture, Million Club Manufacturing (MCM), will soon start handset production for other brands as well.

Recently, Taiwan-based HTC Corporation confirmed that it is looking for two contract manufacturers in India. Asus is another Taiwanese handset company that is keen on contract manufacturing in India. The company plans to manufacture 70 per cent of its smartphones in the country. However, it wants to focus on the product side and thus has decided to contract the manufacturing part of the business.

Stumbling blocks

While the Indian manufacturing space has been witnessing increased activity, several issues remain, leading to industry skepticism over the potential of the Make in India initiative to give a push to this segment.

Thus, although the hike in import duty is likely to improve the potential cost savings from local production, most of the smaller brands will continue to import equipment till the time they can build scale and become capable of investing upfront in the local market. Further, a steep hike in duty may encourage grey market imports, which would hurt government revenues and result in the entry of flawed, non-warranty devices into the market.

The country’s mobile device manufacturing ecosystem remains immature. Even incumbent brands are reluctant to invest in local manufacturing owing to the rapidly advancing nature of mobile technology. In India, handset players typically launch multiple versions of a device, although they do not sell millions of units. It is more beneficial to import such variants from mass production markets like China and Taiwan. This is because economies of scale do not set in if a company manufactures a handful of each version in India. Further, since the Indian handset space is hypercompetitive and most companies lack a robust market share, undertaking production for a limited customer base seems difficult.

Another key challenge is the limited capability to undertake end-to-end product development. At present, India does not have fabrication plants to manufacture chipsets locally. A high level of expertise and skill sets would be required to develop such plants, in addition to huge financial investments. There is a high probability that companies will manufacture some parts in India while importing others and assembling the end-product locally. While Indian companies have started producing cases, screens and other components locally, chip-related and fabrication-related production seems unlikely in the near future.

Even from a business growth point of view, it makes little sense for companies to start manufacturing from scratch. This is because operations will take at least three years to stabilise and by then, the wireless market may have hit saturation. As per industry estimates, the number of smartphone shipments in India dropped by 7 per cent in the first quarter of 2015. Moreover, the device market, which currently ranges from 160 million to 180 million devices per year, is expected to shrink in volume from 2018 onwards.

Conclusion

The key advantages of manufacturing in India at present include favourable labour costs, a shorter time-to-market and low shipping charges. However, the industry would need significant government support to make India a manufacturing hub. Effective implementation of the Make in India programme will also provide a major fillip to the government’s other flagship schemes, such as Digital India. Besides, significant tax rebates can go a long way in driving investor interest. Export incentives will also help attract global players who can export products manufactured in India.

As companies have increasingly started aligning with the government’s Make in India programme, the telecom equipment manufacturing industry is set to witness a major turnaround. In this, technology companies can play a key role by driving cutting-edge innovation and research, and not merely focusing on assembling or component processing. Thus, a relevant and gradual transition from Make in India to Design in India will be crucial in the coming years.