The growing distrust between local telecom equipment makers and their foreign counterparts is apparent. This writer met N.K. Goyal, Chairman of the Telecom Equipment Manufacturers Association of India (TEMA) - a group representing 150-odd local telecom gear makers, at the latter's office in New Delhi. For the first few minutes, he was reluctant to speak, and decided to speak on record only after verifying the identity through online searches. Once he started, there was no stopping him, as he detailed the pain points preventing local vendors from making it big in the domestic market.
Goyal said he was guarded in the beginning as he had recently received a visitor - a plant from one of the Chinese equipment makers - who claimed to be doing research on a telecom paper and wanted a copy of the report Goyal had been working on to point out security concerns over the Chinese telecom gear.
Local equipment manufacturers have been opposing the entry of foreign players for several years but their pitch has grown louder recently. Why? Despite the efforts of various government departments - DPIIT (Department for Promotion of Industry and Internal Trade) and TRAI (Telecom Regulatory Authority of India) - to promote local manufacturing, the buyers still mostly prefer imported products. Then, there is the recent chatter around the rise in security risk with the emergence of 5G, which is used for more vulnerable machine-to-machine (or IoT) communications. The US, Australia, New Zealand, Japan and Taiwan have already banned Chinese companies, Huawei and ZTE, over security concerns.
The Swedish gear maker Ericsson India refused to participate in the story, and Huawei sent an e-mail reply to Business Today's queries saying that "as a responsible corporate, we are complying with all the necessary laws and regulations of the land and will continue to do so. We have been involved with telecom service providers in India right from the 2G days. We firmly believe that Huawei can help India realise the digital economy vision through the 5G ecosystem. We are in the country to collaborate with the sector to build secure solutions as per the needs of the country."
India imports an estimated 90 per cent of its telecom equipment. As per TRAI, telecom instrument imports were $21.85 billion in 2017/18, growing at a CAGR of 14 per cent over the preceding three years. In comparison, exports were just $1.2 billion. A demand to ban foreign equipment is being made by some organisations, too. In mid-August, an RSS affiliate - the Swadeshi Jagran Manch (SJM) - cautioned against overdependence on telecom infrastructure from China. "Telecom must be declared a critical and strategic infrastructure vital to India's security so that import bans cannot be challenged at the WTO (World Trade Organization). Only indigenous equipment must be procured for telecom networks and the procurement guidelines of the DIPP must be strictly adhered to," the SJM spokesperson said at a press conference, attended by local players like Tejas Networks, VNL, and others.
The question is, can India do without foreign equipment?
Death By a Thousand Cuts
Making tall statements is easy but changing the situation on the ground can be daunting. Domestic equipment vendors are fighting a host of battles to counter foreign players. The most difficult to crack - for the time being - are the perception and price. At present, the demand for equipment is evenly divided between private and government sectors. But neither of them is ordering from local manufacturers. And if they do, the orders are small.
The government has been trying to promote domestic industry. Two years ago, it made a dedicated policy under Make-in-India. Last year, in a revised policy paper, it came out with a list of 36 items that can be sourced from domestic players with local capabilities. Incidentally, the policy applies to just government procurement (such as by BSNL and MTNL), and private operators have been kept out of its purview.
But why do even government organisations, despite mandated by the policy, do not prefer Indian manufacturers? Local vendors say that is because of the age-old perception that foreign products are superior, the price at which foreign products, particularly the Chinese ones, are sold, and a plethora of loopholes in the policy.
For instance, the smart cities project is a big grey area, as different models are being followed. When a smart city is formed under a Central-state partnership or through a special purpose vehicle, it's not necessary for it to comply with the Make-in-India rules. "Ninety-nine per cent smart cities are using foreign products because their consultants are Big Four, which have tied up with one of these foreign players. They add some clause in the tender which disqualifies Indian companies. Recently, a tender asked for certification from the US-based Gartner's Magic Quadrant. Getting that kind of certification is a long process and requires plenty of money," says a local equipment maker.
While the government is fully aware of the foreign certification clauses in tenders, it's moving towards sorting out the issue - though the efforts seem to be slow. India has its own equipment-certifying agency - TEC (Telecom Engineering Centre) - but its services are used rarely. In 2012, the Department of Telecom asked for mandatory testing and certification of telecom equipment from TEC by April 2013. Since then, the deadline has been extended several times. Finally, in August this year, TEC started testing with select products such as telephone instruments and EPBX. "The lobby groups say TEC certification is invalid since the government doesn't have testing capabilities," says Goyal.
Rajan S. Mathews, Director General of lobby group Cellular Operators Association of India (COAI), says telcos support Make-in-India and indigenisation, but indigenous equipment are sometimes not up to the certification standards. "All network equipment has to be certified by a competent certifying agency - either national or international. We are supposed to provide 99.99 per cent on-time connectivity, maintain quality of service and ensure security on our network. We do buy locally whenever they are competitive and meet quality standards. But it's not just equipment. Increasingly, equipment is driven by software. A lot of software we use is designed in India. The greatest value of network equipment is software," he says. As per some estimates, software is 30-40 per cent of the cost of equipment on an average, followed by components (30 per cent) and assembling. Indian manufacturers have capabilities in software and assembling, but nearly 90 per cent of the components are imported. That's the real catch, because if Indian vendors cannot make components, it will be difficult to beat the foreign players, who are spending millions to develop technologies and intellectual property rights (IPRs).
Product pricing and specifications are the other big issues apart from certification. Indian operators don't get volumes because of their inability to offer financing to customers. One local manufacturer says that in case of Chinese firms, they get loans from lenders who are least bothered about the profile of the end-customers (telcos). When Chinese firms sell equipment, they allow telcos to pay over a few years. This is an attractive proposition for telcos, who are saddled with huge debt. The telcos will have to take loans on their own to fund their equipment if they switch to Indian vendors. "Indian OEMs have to be competitive in offering us financing options. We look at the total package, which includes hardware, software, support, maintenance, quality of equipment and lender financing. All these have to be looked at to get the best value for operators," says COAI's Mathews.
Local manufacturers say they have to struggle to meet the specifications of government tenders. A local vendor says that the purchase departments of railways, ONGC, PWD and defence add new specifications in every tender. "The government has issued orders against such restrictive practices, but it's an issue of mindset and lobbying power of foreign vendors," says a local vendor quoted before. Government agencies also change the nature of tenders to circumvent rules. For instance, the Make-in-India order doesn't apply on expression of interest and other types of tenders. So, if railways wants to instal surveillance cameras at a particular station, they will issue a works tender, which means applying Make-in-India becomes difficult.
Not Up to the Mark
In a market where foreign players have held sway for long, local vendors are often knocked down with the argument that they lack capabilities, especially in areas like component manufacturing, and questioned whether they have the ability to work on a large scale.
Mahesh Uppal, Director at consultancy firm ComFirst, says India is not competitively placed in the short term. "It is difficult to achieve scale unless a vendor is seeking to address the global market. Even a large market like India is not big enough to sustain large-scale costs. Huawei, ZTE, and Ericsson are global players addressing large needs. It's not easy to beat them. They are more experienced and have resources. The central part of equipment manufacturing is semiconductor. We have not met with great success in producing semiconductors so far. Also, we have had limited success in making chips. These are expensive technologies. The ability of Indian vendors to invest is restricted," he says.
Indian vendors say it's a chicken-and-egg situation. Since they don't get orders, they have not been able to prove their mettle.
"Technical capabilities are not an issue. We can make anything in telecom technology (5G, 6G), provided we get market access. If the government says it will buy 5G telecom gear that is made in India, domestic design-led ecosystem will grow," says Sanjeev Kakkar, President and Chief Strategy Officer, Vihaan Networks (VNL).
TEMA's Goyal says Indian players can buy technology from Ericsson, Nokia and Samsung wherever required and pay royalty. "As an association, we are already working on 6G. We believe that when 5G arrives, people will start talking about 6G," he says.
Over the past few years, the telecom equipment space has undergone many changes, which makes it difficult for local vendors to compete for private demand. For instance, when Bharti Airtel and Vodafone started out, they used to hire thousands of technical people to design network, plan equipment requirements or installations and control the network. Today, all this is outsourced to foreign vendors, who manage the networks remotely. Telcos, on the other hand, are focussing on selling data plans. It would be unthinkable for telcos to hand over network management to a new vendor.
"It's difficult to break the partnership between global vendors and private telcos as a simple box supplier. There are just four-five vendors across the globe. Why is there no cottage industry like in mobile handsets? There has to be something. It's about strategic control of the market," says VNL's Kakkar.
Local manufacturing has been high on the agenda right from the first national telecom policy in 1994. The idea was that if we didn't promote local manufacturing, the import bill of telecom products, including mobiles, would exceed the oil bill. But local manufacturing didn't pick up.
Last year, TRAI had recommended incentivising local design and manufacturing through a Rs 1,000-crore fund. "India should aim to achieve the objective of net zero import of telecommunication equipment by 2022. For this purpose, the Telecom Equipment Manufacturing Council should recommend priority areas," it said.
Despite limited success, government is trying its best to support domestic manufacturing. The DPIIT's Public Procurement (Preference to Make-in-India) Order is an example. Although the order gives preference to local manufacturers, its implementation has been weak due to various reasons. For instance, under the policy, foreign players are allowed to bid alongside Indian vendors, and despite giving preference to Make-in-India, the policy says that the difference between the bid amount of Indian companies and the lowest bidder (L1) should not be more than 20 per cent, otherwise, the project will go to the lowest bidder. There are some recent examples where prices quoted by Chinese companies were far lower than the tender price. The budget of a global tender by BSNL (10G DWDM Network) was Rs 274 crore. ZTE quoted 40 per cent less than the budget (Rs 162 crore). The next closest bid was from Tejas Networks, which bid Rs 232 crore.
"Chinese operators are working like a cartel. In some recent tenders, they quoted 40-70 per cent less than the other global and Indian players. After getting banned in other countries and ring-fencing their own market, Chinese firms have increased their efforts in India by using predatory pricing to nullify the Make-in-India policy. These points are frequently discussed in DPIIT meetings. We have many companies that are building best products," says a local vendor who didn't wish to be quoted.
Similarly, the Department of Electronics and IT opposed ITA-2 (Information Technology Agreement-2) - enforced by WTO - that aimed to expand the list of telecom and IT products to be covered under zero customs duty. In 1996, the government had signed ITA-1, which covered about 215 telecom products, but many of those are now obsolete. Instead, the government has been gradually increasing customs duties on smartphones, printed circuit boards and select telecom equipment to promote local manufacturing.
But these measures have proven ineffective since a number of equipment makers have set up shops in countries such as Vietnam and Indonesia that are covered by free trade agreements. This means most imports remain duty free.
The domestic manufacturing is a big puzzle that requires a lot of pieces to come together. As things stand right now, solving this jigsaw is going to be one tough job.