Global handset majors answer
India's call By Swati Lodh
Kundu
BANGALORE - A promising market for
years, India has now transcended that status.
Shedding that tag, the country is being
rechristened as the world's fastest-growing market
across various categories and sectors. What was a
promise seems to have turned into a reality now.
India is now the fastest-growing market in
cell phones, automobiles, travel and tourism,
DVDs, digicams and laptops, among other things. It
has been ranked the second-fastest growing travel
and tourism economy in the world ahead of China,
and right behind Montenegro, as per the latest
2004 competitiveness monitor released by the World
Travel and
Tourism Council.
In
automobiles, India logged the fastest growth among
the top 15 passenger car-producing countries last
year. As per the latest rankings by the
International Organization of Motor Vehicle
Manufacturers, OICA, India's car production grew
30% last year followed by Brazil at 17%.
That's not all. Indians are spending more
on luxury items than ever before, and the growth
in high-end consumer durables can vouch for that.
AC Neilsen Research figures for January-August
reveal it all. Home-theater sales grew 386.8%,
frost-free refrigerators 42.4%, air conditioners
116%, flat TVs 64% and fully automatic washing
machines surged 35.2%.
While certain
consumer-durables categories have grown by more
than 50%, some such as laptops have defied all
rules of gravity with a whopping 123% year-on-year
growth in the April to June quarter. According to
a Morgan Stanley report in June, the growth rate
of the consumer-goods sector was at a 10-year
high.
Apart from the low-base effect,
domestic demand is taking off due to fundamental
changes in the economy. Analysts believe the
strong growth can even be attributed to increased
borrowing. According to Chetan Ahya, a Morgan
Stanley economist, leveraging has gone up relative
to the gross domestic product (GDP) over the past
six years - something last seen only in the late
1980s. "Leveraging has gone up because, worldwide,
there has been a dip in the cost of capital and
that has pushed consumption in the system," he
said.
Another major driver is growth in
per capita income during the 1980s and more
particularly, in the 1990s, according to Rajesh
Chadha, chief economist for the National Council
of Applied Economic Research (NCAER). Between 1951
and 1980, average GDP grew by 3.5% per annum on a
population growth of 2.2% per annum. Per capita
GDP grew merely by 1.3% per annum. So India's huge
population base held a simple "promise".
"On the contrary, the 1980s and 1990s
witnessed a GDP growth rate of 6% plus, with
population rising at less than 2% per annum,"
Chadha said. "This resulted in a 4% plus growth
per annum in per capita GDP."
Changing
demographics have also played a role in growth of
the Indian market. A recent McKinsey management
consultant quarterly report suggests India's
consumer demand - increasing three to five times
faster than the economy - reveals the outlines of
an aspiring middle class that is vibrant, growing
and young. Indeed, 70% of India's citizens are
younger than 36 years old, and the country is home
to 20% of the world's population under 24.
"There has been a subtle shift in the
culture as well; it's no longer taboo to be in
debt," Ahya said. "In addition to this, support
from borrowing, the acceleration in per capita
income has also supported rise in consumption."
Not surprisingly, the mobile handset
market in India is growing at a whopping 60%. In
fact, India has become the second-largest mobile
handset market in the world. According to a study
by Research and Markets (Dublin, Ireland), the
Indian mobile-handset market is now worth about
US$2 billion and will surge by more than 60% in
two years.
The mobile phone population in
India crossed the 50 million mark in January. This
is in terms of mobile subscribers. According to
Gartner IT research company, in 2004 the total
number of mobile phones sold was about 21 million
and estimated to be 34 million in 2005.
According to the report, Indian mobile
subscribers are willing to pay for upgrades,
value-based services and advanced models that
offer better services. The growth has caught the
imagination of global handset majors. More than a
dozen large electronic-manufacturing service
companies are sprucing up plans to set up their
handset facilities in India. Apart from catering
to the burgeoning Indian market, they are also
looking at this country as a sourcing base for
low-cost phones.
The Korean consumer
electronics giant, LG Electronics, is one such
company. It has a facility on the outskirts of
Delhi and is setting up another near Pune. By
2010, LG aims to produce 20 million mobile phone
units of which 50% will cater to the export
market. The facility will involve an investment of
US$60 million by the year 2010.
Finland's
Nokia, a leader in India's US$2.5 billion
mobile-phone market, is building a unit in
Chennai. The manufacturing unit will be Nokia's
tenth mobile-device production facility globally.
Nokia anticipates investing an estimated $100
million to $150 million in the India production
plant. "We selected Chennai to be the location for
the factory thanks to the availability of skilled
labor, friendly business environment, support from
the government, good logistics connections and
overall cost-efficiency," Nokia President Pekka
Ala-Pietila said.
Construction work at the
facility has already begun. Production is expected
to begin in the first half of 2006. Nokia foresees
ramping up the factory gradually and the work
force reaching about 2,000 employees when
production is full scale.
Another Finnish
firm, Elcoteq, the world's third-largest supplier
of handsets to original equipment manufacturers
(OEMs), has already set up a facility in
Bangalore. Elcoteq's Indian plant is relatively
small compared to its plants elsewhere - it will
produce about 4 to 6 million handsets in a year,
similar in size to the company's unit in Russia.
But it could set a trend for smaller manufacturers
to begin looking at India. More importantly,
Elcoteq is also trying to integrate the
manufacturing process with the local supply chain.
Plastics, electro-mechanical/mechanical parts and
packaging materials will be sourced from local
firms with whom Elcoteq is in discussions. Once
key components are made in India, it will achieve
globally competitive costs and show the way
forward for other manufacturers as well.
Several other companies are drawing up
plans. Sony Ericsson, the world's sixth-biggest
mobile-phone maker, has asked its vendors to look
at manufacturing phones in India. Motorola
established its research and development facility
in Bangalore in 1991 and has identified India as a
R&D base. Motorola Inc's chairman and CEO,
Edward J Zander, on a recent visit to India, said,
"We might look at setting up back-end operations
and assembling units something like a SKD
(semi-knocked down) unit in India."
Even
Chinese manufacturers seem to be eyeing India.
Business Week has reported that ZTE Corporation is
priming a unit to make mobile phones and DSL
modems near Delhi, while rival Huawei Technologies
is awaiting approval to manufacture handsets and
other gears. The Haier Group and Ningbo Bird are
also looking for an entry into the market. Using
India as an export base is especially beneficial
for Chinese companies, which can save 5% to 10% on
shipping. From China's perspective, servicing
Europe or Africa from India is easier as distances
are shorter.
The cost-effectiveness of
manufacturing in India seems to be the most
alluring bait for handset manufacturers.
Increasingly fierce competition in the handsets
market (call rates at 1-2 cents are among the
lowest in the world) has created an environment
where on an average, 1.5 to 2 million users are
coming aboard every month. This in turn allows
manufacturers to spread their fixed costs more
easily compared to other markets.
There
are also two human resources-related factors
working in India's favor. Foremost among these is
that the wage costs are lower compared to several
countries in Asia and Europe. Added to this is
abundance of skill. According to Mike S
Zafirovski, president and chief operating officer
of Motorola Inc, "Not only are there brilliant
engineers [in India], I've been seeing that the
entrepreneurial spirit of the businesses is second
to none."
But, even if a country competes
with India in terms of low-wage costs, India
offers a demographic profile that few countries
can match. About half the population, which forms
the prime low-cost working group, is younger than
25 years. In developed countries, or even in
Southeast Asia, handsets are changed every six
months. However, buying patterns are different in
India. People do not change their handsets as
frequently. The challenge therefore is to produce
more robust handsets at a lower cost, or to
produce handsets that are cheap enough for people
to afford to change them at least every year and a
half.
The big question, however, is: Can
India catch up with China as a mobile-handset
manufacturing giant? China started early and
actually gained from some of the large global
manufacturers' reluctance to invest in India in
the 1990s. For instance, Motorola opened a factory
in China after pursuing a proposal in India for
some time. China now boasts of huge production
centers. Nokia's production facility in Beijing
produces 35 million units a year and is the
largest handset-manufacturing facility in the
world. China produced 182 million units of the 300
million units produced in Asia in 2004.
However, India is now very much in the
reckoning. Like China, India has low labor costs
and a potentially large domestic market.
Manufacturers worried about the bulk of their
low-cost investment in China may want to spread
their risk by investing in India. For instance,
senior officials at Elcoteq project that in five
years the size of their India operations would
match that of their China facilities. The boom in
the Indian market is part of a global trend. The
research group, Gartner, has predicted that the
global mobile-handset market would rise by 16% to
780 million units in 2005. The overwhelming bulk
of growth is expected to come from China, India,
Russia and Brazil.
Swati Lodh
Kundu has a Masters in Economics from the
University of Calcutta.
(Copyright
2005 Asia Times Online Ltd. All rights reserved.
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