Project Report

Policy, Regulatory, and Organizational Constraints in Telecom Equipment

Manufacturing in India

INDIAN INSTITUTE OF MANAGEMENT AHMEDABAD

By

Atul Nahar

Amarendra R. Nargundkar

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1 Introduction ................................................................................................................................... 3

1.1 Objective ....................................................................................................................................................... 3

1.2 Scope ............................................................................................................................................................ 3

1.3 Methodology ................................................................................................................................................ 3

2 Global equipment Market .............................................................................................................. 4

2.1 Key Characteristics ....................................................................................................................................... 4

2.2 Global equipment market demand .............................................................................................................. 4

2.3 Emergence of Chinese vendors .................................................................................................................... 4

2.4 Alcatel Lucent Strategy ................................................................................................................................. 5

2.5 Impact of Nokia-Siemens Deal........................................................................ Error! Bookmark not defined.

3 Telecom Manufacturing industry in India ...................................................................................... 7

3.1 Industry Scenario/trends .............................................................................................................................. 7

3.2 Analysis of Industry’s attractiveness: Porter framework.............................................................................. 7

3.3 Major Players ................................................................................................................................................ 8

3.4 Regulatory/tax/policy constraints ................................................................................................................ 9

3.5 Demand estimation based on services ....................................................................................................... 10

Division of equipment market into product categories ................................................................................................. 10

4 Primary Research ....................................................................................................................... 29

4.1 Visits/interactions ....................................................................................................................................... 29

4.2 Analysis of data gathered from visits ......................................................................................................... 29

5 Predictions and drivers for future growth .................................................................................... 30

6 Recommendations ....................................................................................................................... 31

6.1 Regulatory .................................................................................................................................................. 31

6.2 Recommendations for existing /potential players ..................................................................................... 31

Appendix......................................................................................................................................... 32

1. Questionnaires ............................................................................................................................................. 32

Service providers ............................................................................................................................................................ 32

Equipment manufacturers/vendors ............................................................................................................................... 32

2 Interview excerpts ......................................................................................................................................... 33

Tata Teleservices ............................................................................................................................................................ 33

Nokia-Siemens ............................................................................................................................................................... 33

Vihang Telecom .............................................................................................................................................................. 33

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1 Introduction

1.1 Objective

To study the current status and future opportunities in the telecom equipment manufacturing

sector in India.

1.2 Scope

The study will cover policy, regulatory and organizational issues regarding the sector. We

will take a look at the mobile telephony ecosystem from the perspective of equipment

manufacturers, and bring out the various issues, concerns and opportunities in the industry.

1.3 Methodology

1. We will examine current status of telecom equipment manufacturing in India using data

available on the Web. This includes articles on websites, research reports, reports from

various industry bodies etc. We will study various issues related to capital, investment,

resources, regulation, tax, supply, demand, import, export etc. that affect the industry and also

gather data on global demand and supply, to help in analysis for export opportunities. We will

at various markets in some detail if possible.

2. We will interact with TEMs (Chennai, Gurgaon) to substantiate our information about the

sector and get their perspective on various issues. Questionnaires will be designed to serve as

basis of discussions with TEMs.

3. The information gathering and interaction with TEMs will be done to work towards sector

analysis of telecom equipment manufacturing in India based on Porter's five forces

framework or other framework.

4. We will present recommendations based on the analysis for growth of the industry in

general. We might want to look at some specific attractive segments in the sector closely.

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2 Global equipment Market

2.1 Key Characteristics

o The industry is highly competitive, with multiple vendors fighting to supply a concentrated base of telecom service providers that enjoy strong supplier bargaining power.

o Barriers to entry are somewhat high, as the market is a global business and demands scale economies

o Equipment suppliers are faced with the omnipresent threat posed by new technologies, as traditional products are regularly replaced by more efficient and functional equipment.

2.2 Global equipment market demand

o Global equipment market demand expected to increase at CAGR of 9% from 2007 to 2011

o APAC region is expected to register a CAGR of 11% from 2007 to 2011 and will contribute to ~ 22% of total Global telecom equipment market demand.

Countries like China, India, Indonesia, Philippines, Bangladesh, Pakistan

and Japan are major contributor to telecom demand from APAC region,

contributing to ~91% of total demand during 2007 to 2011

o Africa contributes around 12% of total global demand and is expected to grow at CAGR of 12%.

• South Africa, Nigeria, Morocco, Egypt, Algeria, Tunisia & Kenya are major

contributor to telecom demand from Africa region, contributing to ~81% of

total demand during 2007 to 2011

2.3 Emergence of Chinese vendors

ZTE

ZTE was founded in 1985 by a handful of state-owned companies affiliated with the

Ministry of Aerospace Industry and has grown along with China's big phone companies,

which are ZTE's top customers. ZTE also has had success abroad, largely with operators in

countries in Asia and Africa.

And ZTE's CDMA handset business may be threatened as the Chinese government loosens

restrictions on the number of companies allowed to make phones. Last year the three dozen

players made 240 million handsets, but some experts say production could double this year as

dozens more companies jump in -- which could take a big bite out of ZTE's profits.

http://www.businessweek.com/magazine/content/05_10/b3923071.htm

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Huawei

Ren founded Huawei in 1988, and it became a top builder of the Chinese army's

communication networks. Huawei today makes third-generation mobile-phone networks,

routers, switches—whatever moves data.

http://www.time.com/time/subscriber/2005/time100/builders/100zhengfei.html

In 2004, secured a US$10 billion loan from the Chinese Government to help customers

finance network purchases.

http://www.nzherald.co.nz/telecommunications/news/article.cfm?c_id=93&objectid=10428813&pnu

m=2

In the fixed-line market, Huawei and ZTE, along with vendors like Fiberhome, Datang, and UT Starcom, occupied 75% of the Chinese market in 2007.

With low prices, competent service, and an aggressive marketing strategy, domestic vendors have dominated the market in recent years.

In the wireless sector, although Huawei and ZTE accounted for only 8% of the market, Huawei's intensified focus on the domestic market will allow it to join ZTE in gaining a significant slice of a market hitherto dominated by vendors such as Ericsson, Alcatel-Lucent, and Nokia-Siemens.

Chinese telcos are likely to purchase increasingly from domestic vendors, due to low prices and the support or even subsidies of the Chinese government. Policy from the government and the changing attitude of carriers is only part of the story. Three key factors have contributed to the success of Huawei and ZTE in China.

The first, and most important factor is low prices. Price for the same products from domestic vendors is 30%-50% lower than those of foreign peers.

The second factor is heavy R&D expenditures on established technologies and areas with strong demand in near term have allowed Huawei and ZTE to compete effectively with foreign vendors.

A third factor is excellent after-sales service and highly customized design for clients. Both Huawei and ZTE have large teams for technical support and their local offices cover most areas in the country. The quick response of support engineers makes Huawei and ZTE the first choice of carriers in some equipment segments in China. And the two have also done well in the international market thanks to their aggressive pricing strategy.

2.4 Alcatel Lucent Strategy

Despite the merger between Alcatel and Lucent, one of the largest in the telecom infrastructure segment, business has been on the rise due to several factors such as main orders, smooth integration of the two entities, retaining main clients, retaining crème of the

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employees and introduction of a new brand that signified the two organizations flowing into each other.

South Asia is the fifth largest regional unit in Alcatel-Lucent and this is significant as Asia contributed 15% of Alcatel-Lucent's global revenue in 2006. Globally, services contributed 16%, enterprises 9%, convergence 12%, wireless 32%, and wireline 31%.

Alcatel-Lucent's global market rankings: #1 in wireline, #3 in wireless, and #2 in services, are recognized in India too. Thanks to all major orders, Alcatel is the undisputed leader in many segments in India. Some of the major orders with mobile operators are in the pipeline that could foster its future as well.

As Alcatel-Lucent has leadership position globally as well as in South Asia in most of the businesses that they are in, namely wireline (includes broadband, IP and optics) wireless (GSM, CDMA, WiMax and microwave transmission) convergence (IMS, IP-TV, IP/NGN, applications, etc), enterprise and vertical business and finally the service business, the company has very clear focus in all these growth areas with dedicated teams both globally as well as locally.

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3 Telecom Manufacturing industry in India

3.1 Industry Scenario/trends

• Telecom equipment manufacturing for local demand and exports

• Various multinational EMS companies setting up facilities in India

• High-growth market for telecom equipment in India and for exports

• Demand in emerging markets in Asia, Africa

• Large investments in manufacturing facilities required

• Economies of scale in products like chargers, basic equipment etc.

• Ecosystem still developing, raw material import necessary in many cases

• Talent pool of engineers available, relatively inexpensive

3.2 Analysis of Industry’s attractiveness: Porter framework

Buyers

Telecom service providers are the ultimate buyers for telecom equipment. Equipment vendors specialize in different type of network equipment and typically service providers will have tie-ups with a number of vendors. In many cases vendors have their own manufacturing/assembly facilities, while some components/equipment manufacturing can be outsourced. With increasing penetration of mobile services and broadband, coming years will see a huge demand of telecom equipment.

Suppliers

Many chipsets, components are still imported for use in assembly of telecom equipment. The entire ecosystem is not locally available. This is due to the large investments required in component/chipset manufacturing and possible availability of large capacity in other locations. Local R&D situation is also not very encouraging, though the country has a large amount of relevant technical talent - engineers and others – to be employed in this field.

Existing competition

While many MNCs are setting up manufacturing facilities in India to cater to local demand and also to some export demand, they face tough competition from low cost Chinese vendors. The differentiators of technology, quality and technical service are also gradually diminishing thus making the competition more intense.

Government

Lack of good infrastructure is the major hindrance for setting up manufacturing facilities. While a few state governments have offered incentives for R&D and manufacturing centres, more incentives will help.

Inordinate delays in policy decisions - as seen in the spectrum allocation for 3G and WiMAX also affect the demand estimations and business forecasts.

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3.3 Major Players

Elcoteq:

• Wireless communications network equipment, communication terminal products, and after sales services.

• Plant in Bangalore Flextronics:

• Cellular phones, base station modules, DSL modems and WLL wall-sets, outdoor and indoor cabinets/enclosures

• Flextronics Sriperumbudur Industrial Park was inaugurated in November 2006. Nokia:

• Handsets and network equipment

• Produced 60 mn handsets as of July 2007

• Currently, the Nokia factory exports to over fifty-eight countries in South East Asia, Middle East, Africa, Australia, and New Zealand.

Perlos:

• Handset mechanics

• The Perlos Chennai facility offers services like whole product design to manufacturing, logistics, and new product versions.

Salcomp: Manufactures chargers

Motorola: Manufactures handsets

Ericsson: Mobile communications products, broadband, BTS

LG: GSM handsets

BenQ: GSM handsets

The Top 10 Telecom Equipment Players 2007-08

Rank Company Revenue (in Rs cr) %Growth

2006-07 2007-08

1 Nokia 11,486 15,000 30.6

2 Ericsson 5,004 8,000 59.9

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Nokia Siemens

Networks 5,700 7,779 36.5

4 Alcatel-Lucent 5,000 7,000 40

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5 Wipro 3,471 5,585 60.9

6 Cisco 4,037 5,046 25

7 TCS 3,006 3,978 32.3

8 Infosys 2,681 3,600 34.3

9 Sony Ericsson 1,386 3,083 122.4

10 ZTE 2,596 3,000 15.6

3.4 Regulatory/tax/policy constraints

Key Issues in Telecom exports

1. Near absence of domestic manufacturing capability

2. Price competitiveness with global vendors: Low manufacturing volumes and differential

costs in India prevent domestic manufacturers from realizing economies of scale

3. Poor infrastructure for international trade at ports, airports, rail etc. results in cost overruns

and increased turnaround times.

4. Telecom export market requirements

4.1 Vendor financing is not possible due to low volumes and thin margin. Thus the

Indians are not able to compete with the Chinese vendors who are willing to forego

upfront payments

4.2 Turnkey solutions and Post sales support is increasingly becoming a necessity. It

requires a large support work force and establishment of offices in target countries

which is a challenge for domestic manufacturers.

Issues in Export related regulations

• Export incentives available in India are much lower than in China(also a WTO member)

• India based manufacturers are not able to obtain export incentives relating to duty paid on

inputs because of the value addition done in India renders them unidentifiable to the

authorities

• Not enough awareness among the SMEs of the prevailing benefits

• Unduly long time taken on availing refund of duty paid on inputs genuinely allowable to the

manufacturer

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• Countervailing Duty (CVD) paid on inputs not refunded due to non-implementation of orders

of Mof by the excise officials

• Tedious and long export procedures increase the exporters’ order turnaround time

Telecom exports from India: Recent Developments

1. Nokia has announced that already 30 mn handsets have been exported to 58 countries out

of the 60 mn handsets produced in the country since Aug 2007. Employs 9000 people

2. India has become the second biggest market by volumes after China in 2nd quarter of FY

2008

3. As part of its plan to build a manufacturing eco system, Nokia is understood to be inviting its

global component suppliers as well as developing domestic partners for the same

3.2 Perlos, largest maker of plastic parts for cellphones and a vendor for

Nokia has setup ops in the Nokia SEZ in Chennai. Perlos expects to offer

services to device manufacturers investing in India and especially in

regions close to Chennai and to companies providing electronics

manufacturing services

3.5 Demand estimation based on services

Division of equipment market into product categories

Enterprise Equipment

Switches

The market grew by 24.7% to Rs 1,980 crore during FY '06-07 up from Rs 1,587 crore in FY '05-06. Cisco continues to be #1 with a market share of 73% (including the unmanaged

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switches market, a segment wherein it does not have a presence) in fiscal 2006-07, improving its market share as compared with previous fiscal's 71.8%.

Growth Drivers

Investments in the IT/ITeS space and outsourcing still continue to be the key growth drivers. In addition, FY '06-07 witnessed a lot of government and defense led IT infrastructure initiatives, and expansions by telecom service providers. Commercial mid-market was another large growth driver.

ITeS contributed a huge 24% to the growth; while BFSI and BPO sectors were among the large buyers of networking equipment. Competitive pressures in BFSI resulted in continued investments being made towards expansion of communications infrastructure.

Emerging Technology Trends

The recent major trends in switching will be migration from 10/100 to Giga switches and also a lot of

up gradations from unmanaged to managed switches. The access layer contains devices that allow

workgroups and users to use services provided by the distribution and core layers. From an access

layer point of view access speeds would triple and we would see a transition from 1 Gb to 100 Gb.

The core layer is responsible for fast and reliable transportation of data across a network. The speeds

here would move from 1 Gb to 10 Gb and, with 40 Gb in the offing.

With emerging services such as IPTV, there is an increasing trend of multilayer (L3/L4) Ethernet

switches being deployed in the aggregation. Layer 2 switches are popular in last mile and in CPEs,

continue to be widely deployed. Layer 3 switches are used more in value-added networks.

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Major Players

Top Players (FY '06-07)

Rank Company Revenue (in Rs crore) Growth(in %age)

FY '05-06 FY '06-07

1 Cisco 1,139 1,447 27.0

2 D-Link 117 129 10.3

3 Nortel 101 126 24.8

4 3Co 66 79 19.7

5 Dax 19 24 26.3

6 Enterasys 15 17 13.3

Others* 130 158 21.5

Total 1,587 1,980 24.8

*Others include HP ProCurve, Accent Net Technologies, LinkQuest Telecom, Raychem RPG, etc

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Routers

The router market has grown substantially thanks to the growth in enterprises needs. The market grew by 36% to touch Rs 1,437 crore during fiscal 2006-07 from Rs 1,059 crore in 2005-06.

The market is dominated by Cisco, which grew its revenue by 30% to Rs 1,164 crore in 2006-07 from Rs 893 crore in FY '05-06. Juniper is the nearest competitor to Cisco with a market share of 10.6%.

Growth Drivers

The biggest growth driver for this segment in the domestic market continues to be telecom service providers, banking industry for centralized core the banking application providing anywhere-anytime banking, and the various e-Governance projects. There is also a lot of investment in retail and commercial mid-market this year, which is also driving growth.

Overall, the growth in the router market is being fueled by the convergence phenomenon-integration of voice, data and video services, increasing demand for IP-based virtual private networks (VPN) by businesses, growth in the IDC and the ISP segment.

Emerging Technology Trends

Routers, as a product, are no longer restricted to do only IP routing. Over the years they have evolved to become multi-services devices. Today's multi-services routers are capable of routing, switching, QoS, traffic engineering, voice services, storage area networking services, etc.

Major Players

Top Players (FY '06-07)

Rank Company Revenue in Rs crore Growth

(in %age)

FY '05-06 FY '06-07

1Cisco 893 1,164 30.3

2Juniper 80 152 90.0

3Dax 43 53 23.3

4Huawei 20 38 90.0

5D-Link 9 10 11.1

Others* 14 20 42.9

Total 1,059 1,437 35.7

*Others include Nortel, 3Com, HP Procurve, Allied Telesyn, Enterasys,

Multitech, BA Systems, ZyXEL Technologies, Matrix

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Modem

The modem market has grown by 30% in terms of units, but less in terms of revenue due to drop in

prices. This is also because there are changes in technology for the SME and SOHO market as low-

cost solutions are now available. In terms of revenue, the market has grown by 26%.

Growth Driver

The number of broadband subscribers (with a download speed of 256 kbps or more) was 2.06 mn

subscribers at the end of the December 2006 quarter, growing by 120% compared to same period

last year. Dialup modems are slowly dying. ADSL on the other hand is gaining market share with a

wider penetration of broadband.

Major Players

Top Players (FY '06-07)

Companies Revenue (in Rs Crore)FY '05-06 FY '06-07 Growth (in %age)

Atrie Technology 76 157 106.6

MRO-Tek 74 55 -25.7

Bharti Teletech 36 49 36.1

D-Link 48 37 -22.9

Others* 32 37 15.6

Total 266 335 25.9

*Others includes Dax Networks, Artek Enterprise, Gemini Communication, Linkquest Telecom and

Sterlite

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Structured Cabling

The structured cabling industry has grown by 38% during FY '06-07 and the market is led by major

world leaders like Tyco with a market share of 29%, closely followed by Systimax Solutions with a

market share of 23%, and D-Link with nearly 18% market share. The overall industry size is estimated

to be worth Rs 817 crore in FY '06-07 compared to previous fiscal's Rs 594 cr.

The break up for the standards would be Cat6: 60%, Cat5e: 30% and Cat6A: 10%. Fiber has gained

marginal acceptance while copper continues to command 85% of the total deployment.

Growth Drivers

Most of the installations were for ITES, BPOs, KPOs, and BFSI segments. Data center cabling has emerged as another niche area for structured cabling solutions vendors. There are promising business opportunities for both fiber and cable solution providers.

The industry expects retail and manufacturing to be the booming segments for cabling business. With new technologies paving way for converged systems that include secure access to homes, cable television and broadband Internet, RFID, etc there is huge scope for expansion of the structured cabling market.

Among the emerging potential segments, residential cabling is a significant one. The market drivers

for this is broadband subscribers, VoIP, IPTV, multimedia networks (Windows XP Media Center-

digital streaming audio/video and live recorded TV, photos, etc), online gaming (X-BOX 360), and

fiber-to-premise (FTTP).

Emerging Technology Trends

With more and more ITeS installations, knowledge centers, BPOs with high number of MACs, and their need for tracking IT in real time, justified huge deployment of intelligent cabling or physical layer management (PLM), leading to a sizeable growth in adoption of this technology last year. Although it is still small in terms of number of deployments, intelligent cabling is finding wider acceptance.

The Power over Ethernet (PoE) technology, though nascent at present, is set to take off in a big way,

especially in areas where traditional cabling is difficult to deploy. These find applications in wireless

environments for powering WAPs, remote surveillance cameras, etc. Currently, leading vendors

including Tyco, Systimax, ADC Krone, and Molex are offering PoE over mid-span that is largely

preferred for existing installations and few end-span solutions for new installations.

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Major Players

Top Players (FY '06-07)

Rank Vendor Revenue (Rs crore) Growth

(%) FY '05-06 FY '06-07

1AMP NetConnect (Tyco Electronics) 164 234 42.7

2Systimax Commscope 156 187 19.9

3D-Link 110 146 32.7

4Molex 38 70 84.2

5ADC Krone 26 36 38.5

6TVSICS 16 24 50.0

7Panduit 20 23 15.0

8CDT Belden 15 22 46.7

9Clipsal Datacomms 3 15 400

10Dax Networks 9 10 11.1

Others* 37 50 35.1

Total 594 817 37.5

*Includes: Siemon, Finolex, BNA Technology, Legrand, R&M

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WLAN System

The WLAN equipment market stood at Rs 150 crore in FY '06-07 as against Rs 104 crore in the previous fiscal.

Cisco's revenue registered a growth of 46.7% to touch Rs 66 crore, and it retained its number one position. Cisco's major customers were Reliance Communication, Idea, and Infosys. Maintaining and conforming to international security standards were main reasons for Cisco's performance.

Growth Drivers

One key factor that has lead to wireless adoption is growth of the notebook PC and broadband in the small business sector. Mobility is another important driver for the WLAN equipment market, and the flexibility to access and communicate through the network in public places has resulted in greater adoption of WLAN. WLANs have gained popularity in a number of verticals like hospitality industry, academia, and public places.

Major Players

The Top Players (FY '06-07)

Rank Companies

Revenues (in Rs crore) Growth

(in %age) FY '05-06 FY '06-07

1 Cisco 45 66 46.7

2 D-Link 26 31 19.2

3 Netgear 9 17 88.9

4 Dax 4 6 50.0

Others* 20 30 50.0

Total 104 150 44.2

*Others include: 3 Com, Brovis, Proxim, Multitech, and Allied Telesyn

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Carrier Equipment

Telecom Cables

Despite substantial increase in fibre optic cables demand, most of the companies have registered a

negative growth rate due to a significant drop in copper cable deployment. As per our estimates, the

industry showed a negative growth rate of 34%. Demand for fibre optic cables showed an increase in

demand in FY '06-07 to 3.1 mn km of cabled optical fiber. This represents a y-o-y growth of about

33% in FY '06-07 over FY '05-06. But, copper cable demand plummeted by more than 80%.

Major Players

The Top Players (FY '06-07)

Rank Companies Revenues (in Rs crore) Growth(in

%age)

FY '05-06 FY '06-07

1Sterlite 547 414 -24.3

2Finolex Cables 164 153 -6.7

3Birla Ericsson 101 61 -39.6

4Paramount Cables 129 60 -53.5

5Vindhya Telelinks 170 57 -66.5

6Aksh Optifibre 113 52 -54.0

Others* 235 164 -30.2

Total 1,459 961 -34.1

*Others include: RPG cables, Telephone cables, Surana Telecom, Bhagyanagar

Metals, Gujarat Telephone Cables and Andrew Telecom

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Fixed Phone

The wireline subscriber base in India as on March 31, 2007 was 40.38 mn, an 18.7% dip from FY

2005-06. With the mobile subscriber base booming, and enterprises opting for IP telephony, fixed

phone segment saw a reasonable growth in FY 2006-07. This was due to the CLI, and cordless

segment, which showed little growth, and are set to spearhead the growth in the market. The fixed

phone segment in FY 2006-07 stood at Rs 430 crore, growing 23.2% from FY 2005-06. The leader in

the fixed phone segment was Bharti Teletech with revenues of Rs 272 crore, growth of 21.4%, and

market share of 63.3%. National Panasonic, who grew 19%, and registered revenue of Rs 113 crore

with 26.3% market share, followed it.

Major Players

Fixed Wireless Phone (FY '06-07) Rank Companies Revenue (in Rs Crore) Growth

FY 2005-06 FY 2006-07 (in %age)

1 LG 778 792 1.8

2 Axesstel 191 238 24.6

3 ZTE 105 185 76.2

4 ITI 107 78 -27.1

5 Huawei 253 75 -70.4

Others 123 220 78.9

Total 1,557 1,588 2.0

Others include Pantech Curitel, Bharti Teletech, JinPeng, Hisense, Tilean, and

Thompson CCT

Fixed Phone (FY '06-07)

Rank Companies Revenue (in Rs Crore) Growth

FY 2005-06 FY 2006-07 (in %age)

1 Bharti Teletech 224 272 21.4

2 National Panasonic 95 113 18.9

3 Others 30 45 50.0

Total 349 430 23.2

Others include ITI, BPL, Siemens, UTL, and Chinese Players

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Wireless Infrastructure

The wireless infrastructure market has shown a steep rise and come out from a flat growth recorded

in FY '05-06. Despite BSNL not giving large orders to vendors, the market grew by 46.1% which shows

that private operators are now investing in network for increasing capacity in existing locations and

also increasing coverage in newer cities. This will continue further till we plan to cover around 80-

90% of India from present coverage of around 55-60%. In FY '06-07, the Indian wireless

infrastructure equipment is estimated to be around Rs 16,677 crore ie $3.79 bn registering a growth

of 46.1%.

Growth Drivers

This high growth can be attributed to large expansion initiatives undertaken by Bharti Airtel,

Hutchison Essar, BSNL, Reliance Communications, and Tata Teleservices in FY '06-07.

Even in the future, things look rosy for wireless infrastructure vendors as we have mobile expansion

on 2G and 2.5G both on CDMA as well as GSM. Not only this, we are also expecting 3G finalization

this year resulting in 3G deployment in FY '07-08 and beyond. In future, due to 3G orders, we might

see some realignment in the vendor space, and thus everybody is focusing on 3G and WiMax.

Major Players

Wireless Infrastructure (FY '06-07)

Rank Companies Revenue (in Rs Crore) Growth

FY 2005-06 FY 2006-07 (in %age)

1 Ericsson 2,336 4,664 99.7

2 Nokia 4,170 4,405 5.6

3 Alcatel Lucent 1,950* 2,995 53.6

4 Motorola 856 1,543 80.3

5 ZTE 118 1,320 1018.6

6 Siemens 236 585 147.9

7 Huawei 150 445 196.7

8 Nortel 1,375 440 -68.0

9 UTstarcom 10 50 400.0

Others 210 230 9.5

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Total 11,411 16,677 46.1

*Alcatel was Rs 533 crore and Lucent was at Rs 1,417 crore in FY 2005-06

Nokia and Siemens figures has been taken separately in FY 2006-07 as till

March 31, 2007, they were separate companies. Presently, it is one entity

called Nokia Siemens Networks and if we combined their figures,

the cumulative revenue for FY 2006-07 is Rs 4,990 crore and has a combined

market share of 29.9%

Semiconductors

The semiconductor market in the country, which was pegged at $1.6 bn in 2006, is expected to reach about $2.2 bn in 2007 and $5.5 bn by 2010. The semiconductor policy announced early in March this year has also given an impetus to the industryï’s growth. Despite the dilution of incentive (from 25-30% to 20%) the policy has brought cheer by according it SEZ (special economic zone) status, and exempting countervailing duty (CVD) for non-SEZ entities.

A survey by the Indian Semiconductor Association (ISA) and Frost and Sullivan (F&S) done last year suggested that India's chip industry could generate a turnover of $202 bn by 2015, compared with $14.3 bn in 2005, with the potential to employ some 3.6 mn workers by 2015, against 520,000 workers in 2005. By 2015, the ISA study indicates, the industry will account for around 12% of the national GDP.

With the right ecosystem and major telecom manufacturing companies setting shops here like

Elcoteq, Nokia, and Ericsson to name a few, the semicon industry in India has a vast greenfield right

at its doorstep.

Telecom is a key end-use segment in India; firstly, due to the high demand for telecom services owing to its strategic importance to the country, and secondly, it has high semiconductor content.

The global chip design market currently caters mainly to consumer electronics and some IT areas, but future growth areas will include telecom, wireless, broadband, automobile, medical equipment, aviation, and Internet appliances including embedded chips. With the Indian telecom sector growing at an enviable pace, gear manufacturers, handset makers, and component production companies are making a beeline to get a share of the market.

In India's telecommunications segment, the manufacturing index was only about 0.07 in 2005. The manufacturing index reflects the extent of manufacturing that takes place in a particular segment, in a country. The closer the manufacturing index is to 1, the better is the capacity to meet demand through local manufacturing. A low telecom-manufacturing index shows that it is a long way before a major proportion of the demand is met through local manufacturing. By 2015, the ratio is expected to be almost 0.3.

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By 2010, communications is anticipated to be the major contributor to semiconductor consumption. India is poised to have its very own elite semiconductor ‘eco-system’ moving up the global value chain.

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Transmission Equipment

In terms of revenue, transmission equipment market in FY '06-07 is estimated to be Rs 1,266 crore,

an increase of around 65.5% from last year's figure of approximately Rs 765 crore. Private operators

were the major business providers as compared to incumbents.

Growth Drivers

Network expansion and increase in traffic because of reduction in roaming services by up to 56% and

reduction in STD and ISD tariff by private and incumbents players was the success mantra for

transmission vendors.

Major Players

The Top Players (FY '06-07)

Rank Companies

Revenues (in Rs

crore) Growth

(in %age) FY '05-06 FY '06-07

1ECI Telecom 202 466 130.7

2Tejas 128 234 82.8

3Alcatel-Lucent 103 110 6.8

4Siemens 55 95 72.7

5Nortel 85 61 -28.2

6ZTE 28 57 103.6

7Huawei 9 44 388.9

Others 155 199 28.4

Total 765 1,266 65.5

The outlook for the transmission equipment industry looks good, as it is one of the key ingredients

for fueling 3G and broadband. Also service providers are improving their reach in remote areas of

the country and cellular penetration will increase resulting, in growth of transmission segment.

25

Mobile

4 In terms of numbers, India's mobile handset market has grown by 50% to touch revenues of

Rs 21,434 crore in 2007.

5 Mobile phone production in India is expected to grow at a compound annual growth rate

(CAGR) of 28.3 per cent to reach 107 million units in 2011.

6 Mainly the expanding mobile subscriber base in India and favourable local government

policies promoting local electronics manufacturing in India will drive the growth in

production.

Concern

India''s production of vital components for mobile phones is very limited because much

of it is imported. This may not be viable in the long term, especially with demand for

handsets expected to grow rapidly. Therefore, establishing a reliable component supply

base will be vital for the Indian handset manufacturing industry to stay competitive in

both the domestic market and the export market.

Estimation of demand

WiMAX

[ WiMAX-enabled notebooks and handheld device shipments will reach 14 million units in

2014.

[ WiMAX-enabled stand-alone CPE shipments will peak at 3.6 million units in 2012 before

declining.

[ The accumulated WiMAX subscriber base in India will reach 21 million in 2014.

[ By 2014, approximately 66% of WiMAX subscribers will be using 802.16-2005

(predominately residential), while 802.16-2004 will continue to be driven by large

corporations and, to a lesser extent, by SME customers.

CPE: Customer Premise Equipment [Modem, Card etc.]

26

http://www.maravedis-bwa.com/Article-INDIA-Wireless-Broadband.html

Impact on equipment industry:

3 Increase demand of BTS and CPE

VSAT

Drivers of growth:

• The numerous rural connectivity projects being rolled out by the government.

• The banking sector—the more they go rural, branches and especially ATMs will need VSAT connectivity. In many instances, VSAT is used a backup even at those centres that are connected by fibre.

• Bharti has become the largest VSAT operator. The emergence of organised retail in India is another positive development. From point-of-sale devices to storage facilities, all such places need reliable connectivity. Unlike pure VSAT operators, Bharti can offer fibre, VSAT connectivity and a combination of other solutions to medium and small enterprises.

3G

"We expect to see 10 to 15 million 3G subscribers in India by the end of 2009," said

Madhusudan Gupta, senior research analyst at Gartner.

http://www.eetindia.co.in/ART_8800540141_1800005_NT_1788a342.HTM

Impact: Wireless Infrastructure and handsets

Mobile

• In terms of numbers, India's mobile handset market has grown by 50% to touch revenues of Rs 21,434 crore in 2007.

• Mobile phone production in India is expected to grow at a compound annual growth rate (CAGR) of 28.3 per cent to reach 107 million units in 2011.

• Mainly the expanding mobile subscriber base in India and favourable local government policies promoting local electronics manufacturing in India will drive the growth in production.

27

Concern

India''s production of vital components for mobile phones is very limited because much of it

is imported. This may not be viable in the long term, especially with demand for handsets

expected to grow rapidly. Therefore, establishing a reliable component supply base will be

vital for the Indian handset manufacturing industry to stay competitive in both the domestic

market and the export market,

Broadband and IPTV

• Many telecoms are betting on broadband and telephone business. Their objective is to have presence in cities with high revenue potential. For them, the product offering in this segment includes supply and installation of fixed-line telephones providing local, national and international long distance voice connectivity and broadband Internet access through DSL.

Impact: Wireline Infrastructure

Product Categories Revenue (in Rs Crore Growth(in

%age) FY 2005-

06

FY 2006-

07

ENTERPRISE EQUIPMENT

Voice Solutions 1,106 1,413 27.8

Router 1,059 1,437 35.7

Switch 1,587 1,980 24.8

Modem 266 335 25.9

Audio Video

Conferencing

74 100 35.1

WLAN 104 150 44.2

Network Storage 559 995 78.0

Network Security 539 916 69.9

Structured Cabling 594 817 37.5

Network Integration 905 1,279 41.3

NMS 526 709 34.8

Others* 614 824 34.2

Total 7,933 10,955 38.1

CARRIER EQUIPMENT

28

Broadband

Infrastructure

642 895 39.4

Wireless Infrastructure 11,411 16,677 46.1

WiMax 0 88 NA

Telecom Cables 1,459 961 -34.1

Transmission 765 1,266 65.5

Test & Measurement 358 407 13.7

Telecom Software 11,519 17,871 55.1

Telecom Turnkey 2,837 3,688 30.0

VSAT 327 360 10.1

Others** 380 550 44.7

Total 29,698 42,763 44.0

PHONES

Mobile Handsets 14,258 21,434 50.3

Fixed Phone 1,906 2,018 5.9

Total 16,164 23,452 45.1

GRAND TOTAL 53,795 77,170 43.5

29

4 Primary Research

4.1 Visits/interactions

Tata Teleservices

Nokia Siemens

Vihan Telecom

4.2 Analysis of data gathered from visits

Service providers have tied up different equipment vendors for different type of network

equipment.

Service providers and equipment manufacturers are looking at quality and service as

differentiators rather than low cost of equipment.

Infrastructure and government policies are major obstacles in the growth of telecom

equipment manufacturing in India.

The large increasing demand of telecom equipment in India is making manufacturers to

set up base in India.

30

5 Predictions and drivers for future growth

The increasing penetration of cellular phone services and deployment of new technologies

like 3G and WiMAX would drive future growth in the telecom sector. Following are sample

calculations for demand estimation.

WiMAX

Revenues: Overall Rs. 52,000 crores by 2012.

Number of cities

Number of subscribers: 1.9 crores WiMAX subscribers in 2012. (19 mn)

Number of CPE: 1.9 crores @ Rs. 3000

Number of BTSs: Calculation: 1 BTS per 400 CPE = 50000 BTS

Installed/contracted capacity:

Opportunity:

Spectrum allocation status: Expected Jan 2009

Players: Alcatel-Lucent, Motorola, Huawei, Samsung

Source : http://www.hindu.com/2008/10/19/stories/2008101953311700.htm

3G

Number of subscribers: 140 mn by 2012

Number of CPE: 140 mn

Number of BTSs: Calculation: 1 BTS per 1000 CPE = 141000 BTS

Installed capacity:

Opportunity:

Spectrum allocation status: Expected Jan 2009

Source: http://www.hindu.com/2008/08/10/stories/2008081055231300.htm

31

6 Recommendations

6.1 Regulatory

a. Speedy policy decisions for spectrum, SEZ incentives for R&D etc.

b. Incentives like tax holidays, financing should be given

c. Infrastructure provision/improvement is urgently required

d. Lower import restriction for raw material for manufacturing will also help both

domestic and foreign players

6.2 Recommendations for existing /potential players

e. They should try to locate component manufacturing for supplying locally rather than

importing

f. They should have equipment as well as service focus

32

Appendix

1. Questionnaires

Service providers

• Who are your equipment vendors for network equipment?

• Preferences/Differentiators for EM

• Network Finance

• Technology [Standards]

• Technical Support

• Reputation

• Cost

• Rollout plans for

• WiMAX

• 3G

• Expected subscription market size

• Tie-ups/Contracts with Equipment Manufacturers

• Please comment on Indian telecom equipment manufacturing and how well are Indian vendors received by service providers.

• Please comment: Existing/expected/recommended government incentives to boost telecom equipment manufacturing in India, SEZs etc.

Equipment manufacturers/vendors

• Kind of equipment manufactured, type of services

• Local/export focus? Who are your customers?

• Estimated total local demand, your capacity, tie-ups etc.

• Ecosystem: How developed is it? How easy to get components? Imports necessary?

• What are the systemic/operational/regulatory constraints? For imports, manufacturing capacity etc.

• Availability of labour: Is that a differentiator?

• Major competitors. Local/Global.

• What measures by government can help? Regulation change, protection etc.

33

2 Interview excerpts

Tata Teleservices

• Setting up a manufacturing unit requires for a telecom component requires most of the

• Component suppliers at close range which is why there hasn't been a big rush of international players coming in

• Not enough incentives from Indian government to boost research in this area

• Government owned entities like ITI have been neglected

• Should provide more incentives for MNCs to set up shops here

• Have already Launched WiMax services in 400 cities

• Have plans to launch 3G services in Metro and tier 1 cities

• Major Suppliers:

• Cisco

• Huawei

• ZTE

• Sun Microsystems

• Alcatel Lucent

• Ericsson

Nokia-Siemens

• Nokia-Siemens manufacturing equipment in India [Chennai]

• Quality better [ref. to Chinese manufacturers]

• More manufacturing in India needed

• Makes business sense - lower costs

• Domestic market - closer to market, inputs from customer, especially big customers

• Lot of time and investment needed

• Business analysis + gut feeling

• Nokia-Siemens: Headquarters services in India

• Infrastructure poor compared even to China

• Problems: Transportation, connectivity, water

• Labour: ok, among the cheapest

• Short term, long term advantage: talent pool

• Infrastructure is the problem: but gradually developing

• Competition: Ericsson [mobile network business]

• ZTE, Huawei: Low cost stuff, presence/market share low, don't see them as competition

Vihan Telecom

• Are in the final stages of developing a low cost end to end GSM infrastructure for rural areas which consumes less power and can work in extreme conditions

• This will address the infrastructure and low ARPU concerns

• Major problem is in finding customers who are ready to try out their product

• Not enough focus on original research in India

• India's education system partly is to blamed for this

• Regulatory problems: Government has not given any incentives for encouraging domestic players