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Indian telecom: $10 billion up for grabs
Surajeet Das Gupta | November 16, 2005
Hold your breath, and look into the air. See something? A big display of network acrobatics is about to begin, and you need a ringside seat for it. Up for grabs: $10 billion in revenues over the next two years or so.
It is the Indian market for mobile telephony equipment. No one wants to miss the action. Alcatel, Siemens, Ericsson, Nortel and Nokia have been around. But now come new entrants such as China's Huawei with the capacity to unsettle everyone else.
Penetrate or perish
Telecom equipment is in a peculiar phase. Globally, the first burst of business is over. Says Harish Gandhi, director, marketing and technology, Nokia: "While other markets are slowing down, India, Brazil and China are showing big growth. The market for mobile equipment in India will double in the next two years." In these markets, though, it's all about pushing the frontier: covering the yet uncovered. This means providing cheap telecom.
On current projections, in two years, India will account for a tenth of the annual world mobile equipment market (placed at some $50 billion). The government expects the country to have 250 million phone lines, both fixed and mobile, by the end of 2007. Most additions will be mobile, with the base expected to hit the 200 million mark by then, up from 70 million now.
Will it happen? After all, telecom projections have gone awry in the past. This time round, the state-owned phone operator Bharat Sanchar Nigam Ltd is aiming to lead the thrust. It intends to get itself at least half of India's subscriber base by 2007-end.
It is about to float a tender for equipment to handle as many as 60 million GSM lines -- with the option of going up to 90 million -- to be delivered over two years. This would be one of the world's largest ever phone contracts. That very ambition is enough to set private players scurrying to add on capacity.
GSM operator Hutch has decided to order 30 million lines over two years, and all this will do is keep its market share intact. Its GSM archrival Bharti, which operates Airtel, is to put up 10,000 base stations by March 2006, virtually doubling its capacity across the country. Idea, the Tata-Birla venture, has aggressive plans too.
The focus of attention is the BSNL business. India's Union Communications Minister Dayanidhi Maran has made it clear that the BSNL tender will insist that all vendors set up some manufacturing facilities in the country as a precondition. Confirms a senior BSNL official: "Yes, there will be a clause and weightage for manufacturing in India."
Says Ravi Sharma, president, Alcatel South Asia, "It is clear that the Government wants to develop an indigenous equipment industry. To give it a fillip, it has also changed the inverted duty structure regime in the Budget which used to make local manufacturing more expensive."
But existing vendors argue that there is already enough competition (there are five vendors supplying BSNL), so there is no need for more players to get in. Says Nortel India's vice president, Rajan Mehta: "It's important to keep each vendor to one region, because every time you bring in a new vendor, it leads to huge operational challenges as you have to shift the old system (owned by another company) somewhere else. And that effects quality of service."
New equipment makers who want to get in with BSNL dismiss that as self-serving logic. The tendering should be free for all, they say, to maximise overall benefits, especially since Chinese bids could be drastically lower.
By the sound of things, this is the view that is likely to prevail. As says DK Ghosh, executive director, Siemens Public Communication Network: "I think the view is that all companies will be allowed to bid for the tender."
While all that is under debate, contract hopefuls are not idle. They are already reworking their strategies. Nokia, for instance, is setting up a $150 million plant near Chennai that will make base station controllers.
Others are looking for partnerships that could help meet the local-manufacture condition. Alcatel, for instance, plans to support a bid by the state-owned Indian Telephone Industry, to which it is a technology provider; ITI qualifies as a domestic manufacturer (it has a unit in Rae Barelli, among other locations).
Siemens, meanwhile, is planning to roll out GSM equipment at its Kolkata plant. Ghosh says that given the sort of volumes sought, equipment can be made some 7-17 per cent cheaper than what imports would cost.
Other advantages are claimed as well. "Manufacturing locally helps in many ways," says Mats Granryd, managing director, Ericsson India, which has just set up a plant in Jaipur to make base station controllers and switching systems, "You are close to the customers, so you have more flexibility. And turnaround time is reduced, so capital employed for customers comes down."
Moreover, equipment needs to be adapted to local peculiarities. Cellular network towers need to be lighter on account of bad roads, for example, and other equipment needs to adapt to erratic power supply. Ericsson is in the game only tentatively. "We will never be price leaders," says P Balaji vice president marketing, Ericsson.
While Huawei has applied for a license to make equipment (under consideration), Nortel is looking at outsourced equipment.
Gasping for breath
While a lot of acrobatics is likely to occur, there will be some casualties once competition gets tighter to crash costs. Yet, companies are eager for business. Nortel Inc, for instance, has booked losses of over $266 million on a contract it is executing for BSNL, which generated revenues of just $228 million. Does this make much business sense? According to Mehta, all it has done is challenge the company's R&D team to build products at much lower cost.
Other players are gasping too. Industry insiders say that a bid price of even $70 per GSM line (the last rate that BSNL struck a deal at) makes it impossible to make money.
Says a senior executive of a European telecom equipment major, "The cost price is about $80-85, so you can make money if your Government is subsidising you to keep you going, or you are ready to incur the losses to gain a foothold in what will be a key market you cannot ignore. Or of course you cut corners and quality suffers."
So who is going to win? The big aggressors that everyone is looking at, askance, are the Chinese. They recently offered equipment for GSM lines at -- take a deep breath -- $4 in Nepal. If that's not dumping, nothing is -- say other players.
Is Huawei going to dump lines in India? Western players are afraid of precisely that. Says Gandhi, "They have not been able to make inroads in US and Europe, but will try aggressively in India to prove that their products are acceptable."
At the moment, Huawei is in a fight with BSNL. It has been shot a notice asking why it should not be banned from BSNL tenders for a failure to supply one million CDMA lines as per a contract it had won.
Says a senior official of BSNL, "We have still not decided what action we should take against them, but non delivery has adversely impacted our plans."
He admits, though, that the safety clauses in the deal against non-delivery were weak. Huawei, for its part, refuses to comment, but says it might consider putting a bid together.
Everybody expects the bids to hit record lows, though nobody wants to guess just how low. "Indian prices are the lowest in the world already," says Sharma, "You cannot go on operating at a loss."
Adds a senior executive of a European vendor: "I don't think the Chinese can afford to dramatically lower prices anymore. Their headquarters are saying they must make money."
The other uncertainty is whether the Indian market can actually realize the fancy projections. Admits Nokia's Gandhi, "Considering the massive deployments being planned, I am sceptical whether those number of subscribers will really come."But then, Maran is going all out to reduce "barriers" in telecom, a clear signal of intent. Moreover, different players always place different bets on any fast-changing market. And winners are not always those that think alike.