Make In India Attracting More FDI, But Structural Issues Remain
Local media reports suggest that ZTE is studying plans to begin manufacturing handsets in India, while Huawei is considering resuming production of its carrier and enterprise products in the country. Separately, Ericsson is outlining plans to expand its domestic manufacturing capabilities to meet export demand for its telecoms equipment. The developments come on the back of investments by other big technology companies, including Samsung and Xiaomi, which have all established domestic manufacturing lines under Prime Minister Narendra Modi’s ‘Make in India’ import substitution initiative.
We believe that India will remain a big market for the two Chinese telecoms manufacturers as based purely on economic considerations, the proven reliability and cost-effectiveness of Huawei and ZTE equipment will likely be sufficient to override alleged security concerns on Chinese-made equipment. Such concerns in 2010 had led the Indian government to ban the import of core network equipment made by the two Chinese manufacturers, although the directive was overturned eight months later. The three mobile operators – Airtel, Vodafone Idea and Reliance Jio – all currently rely on equipment manufactured by both Huawei and ZTE in both the core and non-core sections of their networks. The two Chinese telecoms majors are also involved in pre-5G trials in the country, and in November 2018, the duo, together with Ericsson and Nokia further signed a 4G network pact with Vodafone Idea worth USD1.4bn. Disclosures from the Indian government and the Cellular Operators Association of India (COAI) further suggest that a ban on the two equipment manufacturers is unlikely, making the decision to invest in India a practical one.
ZTE will be successful in penetrating India’s ultra-competitive smartphone market if it adopts an ‘India-first’ focus. ZTE is likely motivated to assemble its handsets locally to avoid a 20% electronics import tariff and to wrestle market share from Samsung and Xiaomi, which both control the market with their low and medium-end models (see ‘India The Focus Of Apple, But Returns To Remain Limited In The Near Term’, January 2 2019). While ZTE has a strong line-up of low-cost smartphones in its budget-focused Blade A-series, we expect that it will only be successful in India if it adopts a localized approach to selling its smartphones; Samsung, for example, has launched several India-first models, such as the Galaxy M series of smartphones. ZTE will also need to ramp up its domestic presence by investing in retail channels and marketing; its retail presence in India is largely through its associate Nubia, in which it owns a 49.9% stake. It is still unclear whether ZTE will build its own facilities or rely on a contract manufacturer: Xiaomi, Apple and Huawei’s sub-brand Honor all produce phones in India through contract manufacturers such as Foxconn, Flex and Wistron. Samsung, Vivo and Oppo (both owned by BBK Electronics) own manufacturing facilities in India.
More Handsets Being Made In India
India Handset Imports
Ericsson’s focus on India is to meet elevated demand for base stations within 5G deployments and mitigate the impact of deteriorating trade relations between US and China. North America, including the US, accounted for roughly 28% of Ericsson’s 2018 revenue, and the Swedish company will likely be keen to circumvent any supply disruptions from potentially worsening US-China trade relations by shifting more production elsewhere. At the same time, 5G will require a higher number of base stations to operate, and Ericsson will need to improve its production capabilities to meet the elevated demand and to serve the 43 5G partnerships and 16 5G agreements it has announced (as of February 2019 and March 2019 respectively). Besides India, Ericsson currently operates production lines in Brazil, Estonia, China, Mexico and the US.
While Prime Minister Narendra Modi’s ‘Make in India’ initiative has attracted greater foreign direct investment (FDI) and generated employment in the electronics manufacturing sector, we believe that job creation has mostly been in the labor-intensive assembly segment. Further, overall job growth has not kept pace with population growth, with media reports suggesting that unemployment is at a 45-year high, and youth between the ages of 15 and 29 are facing higher rates of unemployment than others, based on data from the National Sample Survey Office (NSSO). Structural issues, such as the lack of physical infrastructure and a bureaucratic operating environment continue to pose challenges to businesses seeking to invest and operate in the Indian market.―Fitch Solutions
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