Even though it was one of the first sectors to be opened up for private competition (as early as 1984), equipment manufacturing in telecommunications never really took off. Even when the Indian telecom services market began to show huge potential and thereafter witness exponential growth, manufacturing was not seen as India's forte. There was never any significant local initiative like in China where the likes of ZTE and Huawei flourished not only locally but globally too. This was despite some favorable government incentives for local companies (though local companies often term government policies as unfavourable especially with regard to duties on components). The biggest symbol of local equipment manufacturing in India, ITI, is today almost a sick enterprise and has become more of a trader, according to a department of telecom (DoT) status paper on manufacturing in India.

On the other hand, foreign companies did not seriously consider India for manufacturing. Lack of enough domestic volumes to sustain a profitable manufacturing was often cited as the reason for their lack of interest. Manufacturers also argued that India's inadequate infrastructure and absence of a components base made it uninviting for manufacturers. As such, for most of them India was a market that was good only for trading, something which became more attractive because of the lowering of duty barriers. For instance, most handset manufacturers, the fastest growing equipment business, prefer trading under the 'cash and carry wholesale trading' license granted by the government.

India appears to be turning a different chapter now. In the recent months, leading vendors like Elcoteq, Ericsson, Nokia, LG, and Hyundai have announced their intentions of setting up manufacturing in India. While no concrete announcements have been made by Motorola and Sony Ericsson with regard to their plans, Nripendra Mishra, secretary, DoT, recently told an Assocham conference that his department had "definite information that Motorola and Sony Ericsson will soon be setting up manufacturing plants in India."

Why Now?
It is a fact that nothing much has changed as far as the Indian environment for manufacturing is concerned. Government policies more or less remain the same. India's infrastructure remains utterly inadequate. The component base is still not sufficient to sustain manufacturing. Why is there a sudden rush among global manufacturers to set up shop floors here?

Mobile Subscriber Base (As on 30 November, 2004) Source: COAI & AUSPI

One major factor driving the manufacturing initiatives of most of these vendors is the growing demand for telecom services in the country. That may explain why most of the manufacturing plans pertain to mobile handsets, demand for which has grown many times faster than any other equipment in the past couple of years. The likes of Nokia, LG, and Hyundai appear to realise that as India begins to emerge as one of the largest markets for mobile phones in the world, it would be wise to have a manufacturing base here. "Every body has been always optimistic about India in the long term but the growing market is now making things happen," says Venkat Rajendran, Head of Flextronics Design Asia.

Also 'be as close to the market as you can be,' seems to be everybody's strategy now.

So it's not surprising when a vendor like Nokia says it is investing in a manufacturing facility in India to "better meet burgeoning demand for mobile devices in the country". Pekka Ala-Pietilä, president of Nokia, during a recent visit to India said that India's position at the heart of a rapidly growing mobile communications region makes it an attractive option for establishing their new manufacturing facility.

Ssang-Su Kim, vice-chairman and CEO of LG Electronics had told VOICE&DATA in an earlier interview that his company planned to set up a handset manufacturing plant in India, as it would give it an edge over other players in terms of quality, production, and market share.

These companies are also looking at India as a manufacturing hub for South Asia and even the entire Asia-Pac. This is what Ala-Pietilä meant when he said that the planned Nokia factory in India "would be an integral part of our global manufacturing network". Hyundai and LG Electronics have also said that fifty percent of the output from their Indian plant will be earmarked for exports. "Fifty percent of the output will be earmarked for the domestic market while the rest will be for the global market, primarily in the Asian and SAARC belt," Vijay R Singh, managing director, Hyundai India Telecom recently told the media.

Key Market Indicators Source: V&D 100

Many observers also feel that vendors with a local manufacturing base would be more competitive because imports could be relatively expensive even after April 2005 when all duties have to go. Poor efficiency of Indian ports and other infrastructure makes import to India expensive compared to most other important markets. So it would be better to manufacture locally and take advantage of the cheap labour costs and other available resources to drive costs down and thereby make the products reach a wider market.

The other key factor driving their eagerness to set up manufacturing base in India is obviously the large and highly skilled engineering talent pool available in the country, which can play a crucial part in design of high-end and sophisticated components. Also, as telecom hardware (including mobile phones) becomes more and more software dependent, a country like India with its software skills becomes a natural choice for these vendors. Given all this, it would not take much time and effort to develop an ecosystem of component suppliers. Already, leading electronic manufacturing service providers (or contract manufacturers, as they are more popularly known) like Solectron and Flextronics are exploiting India's design prowess. Solectron is using India for design and production of advanced electronic components, subsystems, and systems. Similarly, Flextronics which has a relatively small manufacturing operations based out of Bangalore where it makes telecom infrastructure equipment and also offers design services is continuously evaluating India.

For long, India and Indians have cribbed about the lack of any significant manufacturing activity in telecom in the country and have seen themselves as losers when compared even with some Southeast Asian countries as well as with China, which is emerging as a shop floor of the world. It goes without saying that the intention of the global vendors to set up plants here augers well for telecom equipment manufacturing in India. However, India still has a long way to go if it really has to emerge as a serious player on the global manufacturing stage. A lot that has not changed must change.

Ravi Shekhar Pandey