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15% R&D cap in PLI shall lead to assembly, not telecom manufacturing

A section of multinational and local telecom gear makers said that the Department of Telecommunications’ (DoT) guidelines for the Production Linked Incentive (PLI) scheme, which caps R&D investment at only 15%, will only help companies that don’t plan on indigenous product development of telecom equipment, and will only lead to assembly.

They added that the scheme is skewed towards contract manufacturers at the cost of companies who are investing top dollars in R&D to develop the products.

“The challenge is that the guidelines will not really meet the ‘Atmanirbhar Bharat’ vision since it will lead to just assembly and not the real development of telecom products in India. They (the government) are capping R&D investment at just 15%. Thus, we can’t get a lot of more investments,” a senior executive with a leading home-bred equipment maker told ET, asking not to be named.

He added that capital investment should have been allowed in any form, sans land and building, and that investment shouldn’t have been restricted to just manufacturing plants and accessories.

The DoT had issued detailed guidelines last week while opening up applications for telecom equipment and networking products manufacturers to apply for the PLI scheme. Under the plan, 10 large manufacturers and 10 MSMEs will be selected to receive incentives worth Rs 12,195 crore over a five-year period by achieving stipulated production targets. Of this, Rs 1000 crore have been set aside for the 10 MSMEs, three out of which will be domestic companies.

Investment under R&D and transfer of technology has been capped at 15% and 5%, respectively, of the total committed investment with the exclusion of manpower cost in captive R&D, which is a significant component of R&D costs, say executives.

As per the guidelines, non-MSMEs will be eligible for incentives ranging from 4% to 6% of incremental production in a year. The scheme offers a higher incentive of 4%-7% to micro, small and medium enterprises that must invest Rs 10 crore, while large companies have an investment threshold of Rs 100 crore. FY19-20 will be treated as the base year.

The scheme will cover products such as 4G/5G next-generation radio access networks, IoT devices, customer premises equipment, routers and switches.

“R&D funds the core of any telecom product – software or hardware. And 70% of the cost is towards R&D. There is nothing in the policy (for R&D), since they have excluded manpower cost. This puts a lot of companies out,” said the CEO of another equipment maker.

He added that if a company is supplying globally and getting products made from manufacturers, then under the scheme, it’s the contract manufacturers who will get the money, not the main company which is investing in R&D and generating quality employment.

Another executive with a domestic vendor said that pre-selecting 20 companies will not help the telecom ecosystem in India. “What if those selected companies don’t perform. Incentive is based on sales…allow everyone to compete and whosoever increases the revenue will get incentives. Who will commit and who will deliver is not known.”

Earlier in April, the DoT had announced that Ericsson and Nokia were keen to expand their existing operations in India for global supply chains, while Samsung, Cisco, Ciena and engineering manufacturing service companies like Jabil USA, Foxconn Taiwan, Sanmina USA, and Flex USA have shown interest in setting up manufacturing units in India.

Local companies HFCL, Coral Telecom, Sterlite, Dixon and VVDN Technologies plan to expand their facilities.

A multinational telecom vendor also flagged issues related to custom duty on components for telecom equipment, which will impact the cost effectiveness of local manufacturing at a time when the duty on finished product hasn’t been increased accordingly.

“Government wants global players to bring the component players to India. But these players have already invested in ASEAN countries and are not planning to come to India. With this, local value addition will not increase under the PLI,” a senior executive with the multinational gear maker said.

Outside of the policy, large vendors have also asked the DoT to give a clear picture on the 5G spectrum timeline which will decide the capex cycle for Indian telecom operators.

“Telcos are not aggressively expanding networks and without 5G, it will be difficult for vendors to meet targets under the PLI since demand in ASEAN countries isn’t huge. Companies will make investment but won’t be able to meet targets,” another executive working with a vendor said. Koliasa

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