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India Blocks Foreign Telecom Gear

Light Reading
News Analysis
Light Reading
10/11/2005
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India's partly state-owned telecom operators Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) have dealt Huawei Technologies Co. Ltd. a blow this week as the two carriers are aiming to keep India's telecom market as homegrown as possible.

Specifically, the carriers have decided that telecom equipment suppliers bidding on their business will have to either make their equipment in India or hire an Indian contractor to do it for them.

According to a release from the Government of India's Press Information Bureau, the decision was made last week "so as to ensure the quality, timeliness of delivery, [and] after sales service" of equipment. Shri Dayanidhi Maran, the minister for communications and IT, said the department is requesting that the country's private operators do the same.

The issue of foreign vendors supplying the Indian market has come to the fore with various reports that the government there is uneasy about Chinese vendor Huawei's expansion plans in the country.

Huawei has repeatedly faced security clearance hurdles in trying to do business in India; the latest instance came in March, when the vendor applied for a license that would allow it to bid on tenders issued by BSNL and MTNL. The government has stalled the application, citing concerns over exposing its telecom networks to a Chinese company, and is resisting Huawei's plans to invest $100 million in its operations there.

The Times of India has quoted the defense ministry as stating "there are general security concerns regarding activities of Chinese companies. Safeguards are practically difficult to implement in highly technical areas."

The government's intelligence agency, the Research and Analysis Wing (RAW) has accused Huawei of all kinds of things. "This company has been responsible for sweeping and debugging operations in the Chinese embassy. In view of China's focus on cyber warfare there is a risk of exposing our strategic telecom network to the Chinese," the agency writes.

Huawei officials hadn't responded to requests for comment as this article was published. It's worth noting that Huawei's equipment is already installed in BSNL's broadband network and the vendor has won contracts with MTNL, Reliance Infocomm Ltd., and Tata Teleservices Ltd.

Gururaj "Desh" Deshpande, founder of U.S.-based Sycamore Networks Inc. and India-based Tejas Networks India Ltd., notes that concerns over national security are hardly restricted to India. "It's part of the reason I think they’ve had very little penetration in the U.S.," he says.

The Indian government is mostly concerned about vendors from anywhere dumping cheap kit in the market and leaving the operators without long-term product support and maintenance, reckons Sanjay Nayak, CEO and managing director of Tejas, an optical transport vendor based in Bangalore. That's why the operators' decision focused on quality and after-sales support.

"People are skeptical," he says. "If anybody is offering their products at such low prices, one gets suspicious in terms of what kind of long-term support are they going to provide."

That reflects a growing fear of Chinese vendors, like Huawei and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), which are undercutting rival networking vendors on price and increasingly picking up business abroad. (See ZTE Makes International Headway and Huawei H1 Sales Hit $4.1B.)

BT Group plc (NYSE: BT; London: BTA), however, has attempted to allay such fears as it has repeatedly and openly stood by its pick of Huawei to supply some gear for its 21CN. (See Paul Reynolds, CEO, BT Wholesale.)

Huawei has said it wants to expand in India because it's been seeing interest from service providers, but most contracts stipulate the bidder should have some form of operations in the country. While the government mulls over what to do, the Cabinet Secretary has temporarily allowed Huawei to bid on contracts, as long as it partners with an Indian supplier.

Earlier this year, the vendor announced plans to invest $60 million to set up a manufacturing subsidiary in Bangalore, in addition to spending $40 million on expanding Huawei India, its software and R&D center. That would put it in compliance with the rules, but evidently isn't enough to allay concerns.

Nayak says carriers are "trying to make a decision" about whether to allow these companies into the market and buy their products. They're torn between wanting to buy cheap equipment and wondering what the catch is. "It’s very hard to articulate," he says.

Indian officials are not alone in questioning why Huawei's prices are so low, and many in the industry wonder how involved the Chinese government is with the company. Still, Huawei has repeatedly stated that it has no ties to the Chinese military or intelligence agencies.

The Indian telecom market has emerged as a battleground for international vendors as the government has loosened regulatory control over foreign investment. Although it's primarily known as an outsourcing destination, the domestic Indian market is booming -- particularly for wireless and data services. Even teledensity is improving: Following a series of changes by the government to open up the market, the number of telecom connections has climbed from about 0.8 per 100 persons a decade ago to 9 per 100 at the end of last year.

And there's little home-grown competition. "India was not used to having Indian manufacturers," Deshpande says. When domestic technology companies did begin to emerge, "it was difficult to convince people" that Indian companies could deliver. So while Indian suppliers are emerging, the majority of the country's networks were built using gear from the likes of (Nasdaq: ERICY).

The government recognizes that if India is to meet its goal of reaching 250 million phone users by 2007, operators will need to build out their networks with the help of foreign suppliers and investors. At the same time, they want the local talent and the regional economies to benefit. (See India Appeals to Foreign Carriers.)

"I’m pleased with the way they are responding," says Deshpande. "The rules are clear and explicit... The general concern is just making the market fair."

— Nicole Willing, Reporter, Light Reading

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hitekeng
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hitekeng,
User Rank: Light Beer
12/5/2012 | 2:58:03 AM
re: India Blocks Foreign Telecom Gear
Indian government will only be able to hold off China's slow-moving "hardware technology Tsunami" for so long. Not matter how they cut it or slice it, they will let it go one way or another and "it will most certainly make sense since in the end it is a matter of dollars and cents".

When you consider for instance that Huawei bid a DWDM network for $8M when its neatest competitor was at $14M, ZTE & Huawei under-bid each other for a WLL network at $7M with the nearest competitor at $12M, would you NOT deploy their equipment. Depending on customers and regions, heavy discounts or FOC (Free Of Charge) items are alernatively used. Service and local support used to make or break but Chinese vendors are getting much better there as well. Marconi knows best...
Like it or not and if we zoom forward 20 years from now, China will have the "earth light switch" in its hand. Add over $950 billion in US bonds (in today's estimates only) between Japan & China and wonder...
scs_reader
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scs_reader,
User Rank: Light Beer
12/5/2012 | 2:58:02 AM
re: India Blocks Foreign Telecom Gear
The scary thing here is that the reason these Chinese Telecom companies can provide such low pricing is because they are definitely subsidized by the Chinese government. Look at a company like UT Starcom. While China is their major market they are a US firm and thus not subsidized. Just look at their fortunes in the market and what has happened to them. They have the same economies of scale in R&D and Manufacturing that Huaweii does given their facilities in China but they cannot compete price wise given the lack of this government funding. There is no doubt in mind that this is going on, and I don't think it is unfair for any country to resist this vendors equipment on this basis.
Peter Heywood
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Peter Heywood,
User Rank: Light Beer
12/5/2012 | 2:58:00 AM
re: India Blocks Foreign Telecom Gear
sc_reader, when you refer to Huawei's Chinese government subsidies are tou refering to its export credit guarantees or something else?

http://www.lightreading.com/do...

http://www.lightreading.com/do...

Peter

Peter Heywood
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Peter Heywood,
User Rank: Light Beer
12/5/2012 | 2:58:00 AM
re: India Blocks Foreign Telecom Gear
sc_reader, when you refer to Huawei's Chinese government subsidies are you refering to its export credit guarantees or something else?

http://www.lightreading.com/do...

http://www.lightreading.com/do...

Peter

Roshani
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Roshani,
User Rank: Light Beer
12/5/2012 | 2:57:59 AM
re: India Blocks Foreign Telecom Gear
With Indians it has not been always dollar and cents. If you look at their history Indians have made seemingly illogical decisions be it handing over land and money to what is today Pakistan or siding with Russia because they loved Bollywood movies (just kidding with this one :).

Basically it hasn't always been dollar and cents with Indians. I hope they can defend and afford such decisions rather than succumbing to "dollars & cents" pressure like others.

My two "spiritual" cents..
voyce_overipee
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voyce_overipee,
User Rank: Light Beer
12/5/2012 | 2:57:57 AM
re: India Blocks Foreign Telecom Gear
the irony is India's successfully selling products into other markets simply because of cost. its just the product is software or software developers, vs. hardware. so if the US or China instituted the same scheme in reverse, it would hit India as hard or harder, no?
chook0
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chook0,
User Rank: Light Sabre
12/5/2012 | 2:57:53 AM
re: India Blocks Foreign Telecom Gear
Like all the other big telco companies Huawei gets a helping hand from its government, whether it be export soft loans, tied aid money, or political pressure, but that's not why they are so cheap. They can bid for deals at well below other company's COGS and still make money. Govt. subsidies can't magically make that profitable.

BTW Huawei isn't the only company that has achieved this. Alcatel ruled the DSLAM market for a while with the same equation. Mayvbe they still do.

Huawei have been shaped by the iron law of the Asian market - you have to achieve cost reduction of 15% per year, year after year in order to even stay still in the Asian market. They have focused their R&D on CR and that has paid dividends in developing countries. This has a cost in terms of features - you are always somewhat behind the leaders in technology. If you happen to have the *right* features you can still win in the developed world, but it is much more hit and miss.

Most of the big NA and European companies do CR as an afterthought. No wonder they are not the price leaders. If, like many, they are also no longer the technology leaders (and I am not saying Huawei is a technology leader. By strategy they are not.) then they have to have something besides technology or cost to differentiate themselves. It used to be the ability to do endless customisation to local telco standards, but that is no longer the factor because of rampant global standardisation. It used to be scale and the ability to provide superior service, but their service now sucks compared to smaller companies. It used to be "we're big and we'll be here in 20 years' time when the kit is still running" but most of them are struggling for survival, and anyway the lifetime of kit has shrunk to under 10 years.

The big NA and European telco vendors need to rediscover their reason for existence. To my mind, only Cisco and Alcatel seem to be doing this with any degree of effectiveness.

As for UTStarcom, I think their main reason for decline is the decline in the market for a few things they do very well. To say they have the economies of scale of Huawei is Asinine. But they did cotton onto economies of manufacturing in China earlier than most. For a while they were a technology leader *and* a price leader in their niche(s), but they have to find new niches, or die.

--chook

-------------------------
The scary thing here is that the reason these Chinese Telecom companies can provide such low pricing is because they are definitely subsidized by the Chinese government. Look at a company like UT Starcom. While China is their major market they are a US firm and thus not subsidized. Just look at their fortunes in the market and what has happened to them. They have the same economies of scale in R&D and Manufacturing that Huaweii does given their facilities in China but they cannot compete price wise given the lack of this government funding. There is no doubt in mind that this is going on, and I don't think it is unfair for any country to resist this vendors equipment on this basis.
sigint
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sigint,
User Rank: Light Beer
12/5/2012 | 2:57:52 AM
re: India Blocks Foreign Telecom Gear
This would have been true a few decades back, but circumstantial evidence (aka, the fate of LU and NT) would seem to suggest that the governmental helping hand is increasingly reluctant.

I do not necessarily think Government help in the form of reasearch grants, and an *initial* helping hand is a bad thing. However, with a closed system like China, it's nearly impossible to say how pervasive government help is.
_________________________________________________
Like all the other big telco companies Huawei gets a helping hand from its government, whether it be export soft loans, tied aid money, or political pressure, but that's not why they are so cheap.
sigint
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sigint,
User Rank: Light Beer
12/5/2012 | 2:57:52 AM
re: India Blocks Foreign Telecom Gear
FWIW - China did apply the anti-dumping duty on Indian steel last year in an effort to protect their local industry. And the US did that to everyone.

Software services are a very small part of India's exports. Growing fast, but a really small fraction of the absolute.

This isn't really about protecting local industry - the party that's presently in power has always had the "transfer of technology" fetish. Somehow, they forget that technology has the shelf life of a ripe banana and would be stale by the time it has been "transferred".

On the flip side - there was a transfer of technology (TOT) of some Alcatel big iron during the 80s (primarily line cards for the E10B/S12 switch) which turned out to be win-win. Alcatel could easily move out from many stale product lines while the Indian partner stepped in to support Alcatel's customers worldwide replacement/repair.

________________________________________________
the irony is India's successfully selling products into other markets simply because of cost. its just the product is software or software developers, vs. hardware. so if the US or China instituted the same scheme in reverse, it would hit India as hard or harder, no
trzwuip
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trzwuip,
User Rank: Light Beer
12/5/2012 | 2:57:52 AM
re: India Blocks Foreign Telecom Gear
Huawei can still win if it partners with the local companies. We're talking about the Indian Government, unless they can prove espionage, they can't just block the Chinese. What India is looking at is whoever wins the contracts (of the magnitude of up to $5 billion) in the next few years, should manufacture locally through technology transfer. This is fair for a contract that size and even China adopted this model. This whole issue has a lot to do with feeding the right pockets in India. The non-Chinese telco consortium has been succesful in their lobbying efforts lately. But the Chinese aren't going to sleep over this. I won't be surprised to see some high-level political and monetery pressure from China in the coming months.
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