India needs a vibrant domestic telecom equipment manufacturing: By Sanjay Nayak, CEO, Tejas Networks

In the last 10 years of our telecom growth, networks were built using imported equipment totaling over Rs 500,000 crore. A combination of flawed trade policies and lack of government policy support for domestic industry killed the opportunity for the domestic telecom product industry.

In contrast, China used a similar opportunity to create a vibrant Chinese telecom product industry that generates annual revenues of $100 billion. The next-phase of telecom growth in India will be fueled by broadband and large government investments will be made in strategic telecom networks. This will result in a demand of at least Rs 500,000 crore of telecom equipment- an opportunity which must be used to help create a vibrant domestic telecom industry.

Today, telecom networks are one of the most mission-critical elements forming the backbone for secure and timely communications. Unless we have the “know-how” and “know-why” of critical technologies within the country, we cannot address our security concerns. As a matter of national security and self-reliance, India must accelerate the implementation of various government policies that have been formulated and help create domestic telecom products.

In addition to strategic/security benefits, a strong domestic industry will help reduce our import bill, create several million jobs (both in manufacturing as well as R&D), enable us to become an export hub for telecom products, support a larger electronics component eco-system and also ensure that India moves up in the ICT value chain, by creating our own IPR and products.

India must focus on “value-addition”
The benefits of local manufacturing in the country will not accrue if they don’t come along with significant domestic value-addition. In the earlier efforts of the government, attempts were made to attract foreign telecom product companies to start local manufacturing. This did not yield any positive results since the traditional route of transfer-of-technology from foreign companies is no longer a viable/practical approach. No foreign company will ever give their IPR to Indian companies without ensuring that they milk-out all the profits or will do it only when technology becomes obsolete.

We must leverage foreign investment, but that should be targeted towards attracting component manufacturing in the country. This component eco-system can be used not just for telecom products, but for all the electronics products that are needed in the country. Investments in electronic manufacturing services (EMS), semiconductor fab, printed circuit board (PCB), connectors etc., are all large ticket investment and we should attract leading global players in each of these areas to set up manufacturing operations in India.

Our major focus needs to be in promoting entrepreneurship, R&D and Innovation, which will help create Indian telecom products with local IPR. The good news is that we already have the critical ingredients needed to build a globally competitive telecom products from India— world-class technical talent, a large domestic market and a strong academic system. The new generation of telecom equipment is differentiated by R&D and software- areas where India already has proven expertise. In fact, we already have a few Indian companies who have developed world-class products in optical and wireless areas and proved that Indian innovation and engineers can indeed compete with the best globally. Such efforts need to be encouraged and scaled-up and many more entrepreneurs need to be nurtured.

Challenges faced by domestic telecom product industry
For telecom equipment imports (unlike many other manufacturing industries with domestic demand, such as automobile) there are no tariff barriers and we have zero import duties. In addition, the domestic telecom industry faces many challenges as highlighted below.

Fiscal disability of 26 percent as compared to foreign companies: As per study done by E&Y in Jan, 2014 and earlier by CII, Indian product companies face a disability factor of 26 percent. This is on account of high cost of finance, infrastructure bottlenecks, taxation issues etc.

Inability to access domestic market: Instead of promoting domestic products (as per PMA policies), many government tenders have restrictive eligibility conditions and proven-ness requirements which make young, innovative Indian Product companies ineligible to bid.

Lack of economies of scale: This is a chicken-and-egg problem, where without high-volumes the domestic companies don’t get the required pricing support from component suppliers, but they still have to compete on L-1 price against much larger foreign companies.

High cost of working capital; lack of R&D incentives/funding: Indian companies face very high cost of capital (upto 14 percent per annum) versus LIBOR+0.5 percent  that is availed by foreign competitors. They also don’t get any R&D incentives (like soft loans) compared to their foreign peers.

Competing against foreign manufacturers backed by their countries: Most government (via EXIM banks) offer long-term, low-cost financing to win business for their country. They also use telecom equipment exports as part of bi-lateral trade to promote their companies.

Hurdles in implementation
After many rounds of stakeholder consultations, the government came up with a supportive policy framework in NTP-2012 to promote a complete value-chain for telecom equipment- starting from R&D, IPR creation and manufacturing, so as to cater to at least 80 percent of domestic demand by the year 2020. These policies recognize the need to focus on high domestic value-addition, rather than just on low-value-addition manufacturing that doesn’t result it any economic benefit. While the policy steps are in the right direction, there are many implementation hurdles that need to be removed. The major ones are highlighted below:

Implement the Preferential Market Access (PMA) Policy strictly for all government telecom tenders (including BSNL/MTNL/Defense): There should be no restrictive eligibility conditions for domestic products. In addition, the private telecom operators should be incentivized to buy domestic products, by giving them tax concessions if they procure a certain percentage of their requirements from domestic companies.

Set up Telecom Manufacturing Promotion Fund (TMPF): Telecom R&D, product development and manufacturing are capital intensive with long gestation period. The Telecom Sector Working Group under the 12th Five Year plan had therefore proposed to create a government corpus of Rs 17,500 crore for promoting telecom R&D, manufacturing, entrepreneurship and commercialization. The expert committee (consisting of all concerned stakeholder- from industry, academia as well as government) suggested 3 funds to be setup- Telecom Manufacturing Promotion Fund (TMPF), Telecom Research Development Fund (TRDF) and Telecom Entrepreneurship Development Fund (TEDF) for this purpose, along with specific recommendations for each. However, the budget allocation as well as operational/implementation guidelines for these funds are yet to be put into action and there is an immediate need to get these operationalized.

Telecom Export Promotion: This should be a priority area and adequate funds (at least Rs 100 crore per year) must be set earmarked for various marketing and trade promotion activities and building “Brand India” for Indian telecom products in international markets. The recommendations made by Telecom Export Promotion Council (TEPC) for trade-promotion, incentives, market development, bi-lateral trade and grant-in-aid programs need to be implemented at the earliest.

Making government schemes more practical: There are many government funding/incentive schemes such as M-SIPS (under Dept. of Electronics and IT), TDB (under Dept. of Science and technology) which exist, but are hardly used by the industry. These schemes need to be more practical (e.g., recognizing that manpower is the largest cost item in telecom product development) and approvals should be timely.

The country is now at the threshold of a decisive moment in our telecom growth, where if the government takes proactive steps and accelerates the implementation of various policies to nurture and support the domestic telecom product industry, we can not only become self-reliant and secure in this strategic technology sector, but also create a $100 billion telecom product industry from India and create a precedence of using Indian innovation to make India a global provider of ICT products in the years to come.

Sanjay Nayak is CEO, Tejas Networks

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