Stratagem-TELECOM: MANUFACTURING

Depite a Humongous Growth in The Telecom Sector, The Country has failed to build an Ecosystem that Promotes Telecom Manufacturing, Forcing Operators to Import most of The Equipment for their networks.

Telecom equipment manufacturing in India took off just after Independence. In 1948, the first Public Sector Unit (PSU) – ITI– was formed. In the initial stages it met 50% of the domestic demand for telecom equipment. However, in 1993-94, the government withdrew the defrayment of its R&D expenditure. ITI, which had six manufacturing facilities then, was hit hard by the government decision. That was the time when telecom sector had started opening up and demand for telecom equipment had begun to grow considerably. ITI was not able to match the rising demand.

Today, handset is the only telelcom device, which is manufactured in India. Top MNCs, including Nokia, Samsung and LG have manufacturing facilities in the country. Some domestic players, including Mircomax, Karbonn and Lava have plans to start manufacturing in India. But for them manufacturing only make sense when they can sell 1 million units per month or have at least 10% of the total market share, which seems a difficult target for them to meet in the next few years.

On the other hand, telecom service providers in India are not happy with the recommendations of the regulator. Service providers are against putting a cap on the telecom equipment purchase from foreign vendors. They fear that it will kill competition in the market and inflate equipment prices. Telecom service providers’ industry body Cellular Operator Association of India (COAI) has expressed concern over TRAI’s recommendations. “It is good that the government is promoting equipment manufacturing in India. But there should be no binding obligation on telecom operators to buy from them. If the standard of equipment manufactured by local players matches the global standards and prices there is no question of not buying from them” says R.S. Mathews, Director COAI.

Apart from the dearth of local telecom equipment manufacturers, there are other reasons that have held down manufacturing. The law of the land itself supports imports over home manufacturing. Manufacturing needs the support of various electronic components but ironically duty is levied on the import of components as against there being no duty on import of finished products. Testing of wireless equipment is another problem. Spectrum is needed to test a wireless equipment of which there is again scarce availability. “Testing of equipment is one of the biggest challenge that we are facing. We need to test equipment for months before commercial launch. However, Indian authorities allocate testing spectrum for a maximum for 30-day-period, which is not enough. Besides, the entire process of getting spectrum is painful and lengthy,” says a senior official of a telecom equipment manufacturing firm, pleading anonymity. His company test its equipment in a foreign location.

Numerous challenges lie ahead before telecom equipment manufacturing can be pushed from its present abysmal level. The biggest is getting the Department of Telecom’s approval on TRAI’s recommendations in its present form. Also, other than rolling out incentives and tax waivers, the government has to make the entire process of setting up manufacturing units hassle-free. At present one has to take several NOCs to set up an unit, unlike in the East-Asian countries where it is a single window operation and takes a maximum of one week to fifteen days. If the existing roadblocks are not removed then making India a manufacturing hub will forever remain a distant dream.

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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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Painful but cathartic verdict

By terminating all 122 licences issued by former telecom Minister A. Raja, the Supreme Court has shown its utter disgust and contempt for policies that smack of bias and are rigged to serve partisan interests. Will the government now come up with a transparent policy for allocating licences?

Much muck and dust has been flying around ever since the 2G scandal prised open yet another egregious instance of the unholy nexus between our crooked politicans, complicit bureaucrats and compromised businessmen. The landmark Supreme Court judgement early this month, cancelling all 122 2G licences issued by former telecom minister A Raja, brings to an end the kerfuffle that had been reverberating in the nation’s corridors of power and business. The SC verdict marks the opening of a new chapter in an otherwise so far sordid saga that has dogged India’s telecom sector in recent years. Immediately, following the verdict, telecom minister Kapil Sibal announced at a hurriedly called press conference that his government welcomed the SC ruling, which would help “remove the uncertainties clouding the telecom sector.”

Meanwhile, in the aftermath of the apex court ruling, several telecom operations seem to be in a state of funk. Many of them snapped up licences thinking they were buying into India’s telecom success story. But the SC ruling, some people say, seems to have thrown out the baby with the bath water. Copping the blame on the telecom players for obtaining a licence given out by the government on the basis of a policy that the Supreme Court has now repudiated seems a tad rich. Unfortunately, in light of the cancellation of telecom licences, these operators now look like having become dupes of the con played out by Raja and his underlings. The court’s ruling also comes as a stinging excoriation of the UPA government which, despite being alerted by various quarters to the flimflam orchestrated and pulled off by Raja and his minions, chose to string along with the first-come-first-serve policy for granting 2G licences.

Some players are certain to bear the brunt of the SC judgement more than the others. Already, Bahrain Telecommunications Co (Batelco) has announced that it is pulling out of its joint venture with STel and exiting India. The C. Sivasankaran-owned STel was among the beneficiaries of Raja’s 2G spectrum allocation. United Arab Emirates operator Etisalat, Norway’s Telenor and Russian company Sistema are the other foreign firms affected most as they had bought shares in the Indian companies whose licences have been scrapped. The court has given these companies four months’ time to shut shop. With the cancellation of all its 22 licences, Uninor (Telenor’s JV with Unitech) is the worst affected by the judgement. Though the company has one of the lowest average revenue per user of Rs 98, Uninor has the highest number of subscribers (36 million) amongst the greenfield operators. It has a workforce of around 17,500 and is operational in 13 circles. Uninor has also made substantial investments of around Rs.140 billion in the market.

Not everybody stands to lose though. Older incumbents such as Airtel, Vodafone and Idea stand to gain a lot since they are the ones who have been in operation well before 2008 when Raja gave out the new 2G licences. Idea has not done too well in the new circles it had won and hence its loss of nine circles does not amount to much. These players will most likely bid for maximum circles when fresh auctions are held so as to expand their reach further. “The court has said the government must now get the market value of these licences,” said a visibly elated Subramanyam Swamy, who was one of the parties that challenged the 2G licence allocations in the court.

While the angst of players adversely affected by the judgement is understandable, the SC has, in one deft stroke, dispelled the fog and murkiness surrounding Raja’s 2G licence allocations. The court’s verdict has ensured that the law of the land prevails. It has sent out a strong message to both the industry and government that crony capitalism will not be tolerated and that corrupt business deals facilitated by a collusive government will be subjected to judicial scrutiny. Says Member of Parliament Rajeev Chandrashekhar, “This is the first time that there has been such a detailed judicial scrutiny of the licence issuing process. This judgment signals that the sector is finally open to only those investors and stakeholders who wish to invest, build and succeed by following the laid down rules and laws.” He adds that the judgement clarifies many policy confusions and also lays down the mammoth task of cleaning up and reorganising the sector over the next year or so. “This scrutiny and the judgement establishes the unambiguous basis for licence grants through auctions or market-based mechanism by the government today and in the future.”

In order to prepare the ground for a fresh round of 2G spectrum auction, the Telecom Regulatory Authority of India (TRAI) has come out with a pre-consultation paper. The regulator has also sought to allay fears of existing subscribers in circles where telecom licences of operators have been cancelled. According to TRAI, subscribers need not fear about their connections as they can port to other service providers in their respective circles. While the modalities for holding the auction are being worked out, the government expects the auction to fetch a revenue of about Rs 750 billion. However, following the cancellation of licences there is likely to be an overabundance of spectrum in the Indian market, which will ensure that prices remain low. Besides, incumbent operators have already paid through their noses for 3G and Broadband Wireless Access (BWA). These investments will take a long time to turn profitable. In such a scenario, it seems doubtful whether these service providers will warm up to participating in another round of auction. Moreover, the incumbents (whose licences have not been cancelled) have enough 3G spectrum which can be used to accommodate new subscribers. Says Rajan Mathews, Director General of the Cellular Operators Association of India (COAI), “I don’t think that kind of money is available with domestic players. That is why the government itself indicated that it will raise the FDI limit to 74%.” Just to ensure that his reasoning comes across more convincing, Mathews draws your attention to 12th Five Year Plan proposals for the telecom sector. “The preliminary numbers put out by the Planning Commission suggest Rs 6,500 billion as the outlay for rolling out various initiatives by government. They themselves admit that 80% of that would have to come from international sources.”

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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.

IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting