Dell_20181213

Matt Walker
Chief Analyst
MTN Consulting

Can India Use 5G To Improve Local Vendors’ Position In Global Supply Chains?

In the 6 years since India’s last telecom sector reform, operators have made big investments in their networks, the country’s subscriber levels have grown, and prices have declined. 4G is now well established, and fixed line broadband finally has strong prospects due to Jio’s expansion. Telecom network operator CaPex is up 14 percent year-over-year, totaling USD 14.9 billion for the year ended September 2018. India’s networks are built almost entirely from imported technology, though. That is not a situation the government wants to continue. 

Local (aka indigenous) vendors have sat on the sidelines, unable to keep up

While telecom has grown in India, local suppliers have not. India has many globally competitive companies in the IT services and software space, such as TCS, Wipro, and Infosys. But hardware manufacturing remains a challenge. The bulk of telecom CaPex goes to foreign vendors, who dominate Indian markets for wireless base stations, transmission equipment, and data/IP gear. Most local equipment vendors, such as ITI, HFCL, Sterlite, and even Tejas Networks, rely heavily on government set-asides.

This imbalance is reflected in trade data. Over the 5-year 2013-2017 period, imports of telecom equipment (including handsets) were an astounding USD 58 billion more than exports in India. Imports have been 10x the value of exports, or higher, in the last 3 years.

For the 2012-14 timeframe, 4G network equipment accounted for a good chunk of the deficit. Since then, the smartphone boom has driven deficits higher. Indian regulators started addressing this in 2017, by imposing a 10 percent duty on smartphone imports. That has been increased twice, and is now at 20 percent.

The import duties have encouraged foreign device companies to increase local production. For example, in August, Xiaomi announced it would build a factory in Tirupati with partner Holitech Technology. This facility will employ up to 6,000, and produce camera modules, transistors, touch screens, flexible PCBs, and sensors. This adds to Xiaomi’s already significant local production in India. Samsung, Huawei, and others also have facilities. Chinese investment in the sector has faced challenges, though, including labor unrest last month at a factory in Noida producing phones for Xiaomi and Oppo.

Even with some handset production now done in India, much of the value added still comes from overseas. Per Ministry of Commerce trade data, parts account for
30-40 percent or more of total telecom equipment imports (in value). High-end components for handsets are one part of this. The same issue arises with production of network equipment (e.g. routers): even when produced locally, many of the component parts are imported. That includes semiconductor content in particular.

Further, when foreign vendors set up factories in India, it is generally to sell gear into local markets, not for exports. There are notable exceptions to that, some in the network infrastructure space: for instance, Ericsson’s Pune plant exports microwave gear to Africa, Southeast Asia, and other markets. But the value of these exceptions are small, relative to the huge volume of locally produced and sold gear.

Regulators try again: TRAI’s latest report

As India’s telecom deficit has grown, the government has not ignored the problem.

In late September, the government formally approved a sweeping new set of regulations for the telecom sector. One key goal of the 2018 Telecom Policy is to promote manufacturing. The policy largely adopts a set of policy recommendations issued by the TRAI in an August 2018 report. The report identified a wide range of factors limiting the local vendor market and prescribes recommendations in each area: from university training to patent protection to customs reform to the creation of a number of new boards and agencies.

The new telecom policy’s support for local industry is promising. However, the policy has a little bit of everything, with little new funding. For example, the TRAIs recommended Telecom Research and Development Fund (TRDF) will be equipped with USD 170 million at the outset. That is better than the status quo, but hardware startups are expensive. One of the smaller US venture capital funds focused mainly on communications technology, Kodiak Ventures, manages USD 681 million or roughly 4x that of the proposed TRDF. The most promising India-based startups are not likely to work with a government VC fund that cannot offer competitive levels of funding and other support.

C-DOT could play an intriguing role

To improve India’s telecom equipment position, the TRAI report suggests creating several new boards and councils, some multi-agency. However, India already has a well-established organization charged with the development of local telecom equipment: C-DOT. The Centre for Development of Telematics (C-DOT) is an autonomous agency of the Indian government focused on R&D in the area of telecommunications, with just over 1000 employees.

C-DOT develops technologies and licenses them to both government-supported entities such as ITI, and local private sector companies like Tejas Networks. C-DOT has picked up the pace of its transfer of technology (T-o-T) announcements. Recent policy changes give C-DOT the charge to seek out overseas business more actively. Under the government’s Synergy Plan released in January 2018, C-DOT is to work with ITI and Telecommunications Consultants of India Ltd (TCIL) on future exports of products and services. That includes granting a manufacturing license to ITI for C-DOT’s terabit router. Several C-DOT partners, including ITI and BEL, are actively looking to increase exports with the help of C-DOT product. C-DOT executives have appeared recently at public conferences, making a direct pitch to help Indian manufacturers increase exports.

While C-DOT has potential to contribute to 5G and other areas, it is currently viewed as a slow-moving government R&D institute. To thrive, C-DOT will have to participate more fully in individual projects, getting their hands dirty and talking to customers. After all, many vendors – notably Huawei – include R&D engineers in all aspects of the process, through field deployment and maintenance. Further, India’s vendors can’t just rely on an R&D outsourcing body, and one which licenses its products to multiple players. For C-DOT to help Indian industry drum up more overseas business, functional changes will be needed, along with significantly more funding. As a reference point, C-DOT’s entire budget for fiscal year 2016-17 was about USD 60 million. In 2016, Huawei spent USD 32 million on R&D per day.

FTTx and 5G are both big opportunities for vendors

In the near term, one intriguing opportunity for vendors – whether local or not – is in fixed broadband, where FTTx rollouts are underway at several companies, including Jio, Bharti Airtel, and BSNL. As FTTx scales, operators are not just buying more access gear; they’re also building up much larger metro and core transport and IP networks. Ciena, ECI, Cisco, and Huawei are the main beneficiaries. In the longer term, the shift to 5G is a far bigger opportunity.

India’s telecom secretary, Aruna Sundararajan, has been outspoken in saying India should embrace 5G aggressively, not just for services but to help develop India’s export sector. She is also plugging C-DOT as a technology developer. At the MWC event in Barcelona this year, she met with a number of global tech vendors, commenting that all the players are positioning themselves for India as a big 5G market. One of the leading chipset [suppliers] in a meeting told us that India will have one of the biggest IoT user base[s] and the company is keen to partner with C-DOT for developing various IoT solutions.

Beyond enthusiasm, the government is making some modest direct investments in 5G. For instance, C-DOT announced in February 2018 that it would set up testbeds in Delhi and Bangalore. The goal is to set up the testbeds in phases, starting with the first in December 2018. C-DOT also signed agreements in June 2018 with three UK universities to conduct joint 5G R&D in several areas, including massive MIMO and mmWave.

In addition, India’s IITs recently announced a 5G commitment from the Telecom Department. Press reports suggest a budget of USD 75 million, supporting the work of around 200 engineers. The IIT 5G project will create testbeds across all five IIT campuses. At its Delhi campus, IIT will also work with Ericsson on a new 5G Center of Excellence, focusing on massive MIMO R&D.

The DoT has approached most 5G vendors in an effort to discuss 5G applications and trials. That includes NEC. This Japanese electronics company has ambitious plans for India, targeting USD 1 billion in annual revenues 5 years from now, from USD 400 million today. 5G is part of this: NEC is establishing a new 5G lab in Mumbai, to supplement an existing relationship with IIT-Bombay.

With all this new investment from foreign vendors like NEC and Ericsson, a larger share of production will take place locally in the future. The open question is, how much of the product’s value add comes locally? Will new, indigenous vendors emerge, with the potential to export their own designs?

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