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Despite a Growing Domestic Demand, Manufacturing Remains the Weakest Link in India's Telecom Industry Value Chain

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Essay title: Despite a Growing Domestic Demand, Manufacturing Remains the Weakest Link in India's Telecom Industry Value Chain

Despite a growing domestic demand, manufacturing remains the weakest link in India’s telecom industry value chain

Ravi Shekhar Pandey

Tuesday, May 11, 2004

What do you think could be the biggest export to India from the US? Those pretending to be in the know are mostly likely to say computer products or defense equipment (the later perhaps influenced by the newfound Indo-US strategic bonhomie) or still others are likely to consider education as the biggest import by India from the US. None of these, if we were to believe the latest India Country Commercial Guide (2004) prepared by the US Foreign Commercial Service and US Department of State. The guide ranks the telecommunications equipment sector as the number one prospect for US exports and investment in India. While job exports (thought to be the biggest exports from US to India currently) is not the opportunity that Americans would like to rank as such, education services come second, computers and related products third, and defense equipment only a distant 11 in the guide’s ranking for opportunities.

Now consider the case of Finnish mobile handset and infrastructure vendor Nokia. According to its annual report, Nokia registered a 97 percent growth in revenues from its Indian operations at 1 billion in 2003, making it the biggest growth market for the company after the UAE. India is now among top ten markets for Nokia in the world. Nokia’s sales turnover from India in 2002 stood at 539 million. Its sales in India have more than tripled since 2001, when Nokia got just over 216 million. India’s share in Nokia’s total sales has also gone up from 0.8 percent in 2001 to 3.6 percent in 2003.

Only the cynics and chronically ignorant would disbelieve what the US commercial guide says or Nokia’s annual report says. After all, for the past few years India has been one of the two brightest spots (the other one being China) in the telecom business. The tremendous growth witnessed in telecom services in the recent years has been the most crucial factor that has defined India’s current primacy on the global telecom stage. While the cellular services have been the fastest to grow (more than 100 percent annually), services like fixed voice and broadband too have shown positive trends. No doubt, as India’s telecom infrastructure got a new push after 1994, telecom equipment vendors were one of the biggest beneficiaries and the country emerged as one of the fastest growing markets for global telecom equipment vendors like Alcatel, Ericsson, Lucent, Motorola, Nokia, and Siemens. And not just the equipment vendors, the growth in the telecom industry also heralded new opportunities for scores of large and small application developers, OSS/BSS vendors, turnkey service providers, and network integrators.

Too Few Shop Floors

There are three distinct parts of the value chain in the telecom equipment business. Top most in the value chain is product design where in the intellectual property (IP) is developed by the company. The next is marketing, sales and systems integration and support and the last is the actual manufacturing, where the global trend is towards outsourcing to specialized contract manufacturers who bring in economies of scale. Except for a few start-ups, Indian companies are yet to master any of these elements of the value chain.

What Indian manufacturers must do

пЃ® Process Innovation: Improving the efficiency of transforming inputs into outputs

пЃ® Product Innovation: Improving quality and differentiated products and up-gradation of models

пЃ® Functional Innovation: New ideas like contract manufacturing, outsourcing of marketing networks, and production logistics

пЃ® Inter-chain Innovation: Moving to new and more profitable product segments

Why there is an opportunity for India

пЃ® Internationalization of the production process across the countries

пЃ® Movement towards more efficient and low-cost locations

пЃ® Opportunities for developing countries, including India, to join in this model

пЃ® Increase in inter-dependency of countries

Source: An EXIM Bank Presentation

Event though the domestic telecom equipment-manufacturing sector has seen a growth during the past many years, the growth appears insignificant when one looks at the tremendous growth telecom services have seen during that period.

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