study on equipment manufacturing policy_1to73

7/27/2019 Study on Equipment Manufacturing Policy_1to73

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This document is confidential and is intended solely forthe use and information of the client to whom it is addressed.

Telecom Equipment Manufacturing Policy

Developing an Actionable Roadmap


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Executive Summary (1/2) Industry is aligned to the overall vision of the government in making India a centre for telecom equipment

manufacturing

Critical to separate goals of manufacturing, innovation, and security to design an actionable policy that is tamperproof, least market distorting and consistent with international commitments.

Manufacturing

India will account for ~ 3% of the global market by 2020 (~USD 17 bn). Self-reliance is not a viable tool to driveglobally competitive economies of scale; further, no country is wholly self-sufficient in such a technologicallycomplex industry. Further, Indian manufacturing would require to grown by ~ 100% CAGR over the next 5 years tomeet TRAI mandates

Kick starting local manufacturing aimed at global markets- calls for developing specialized telecom clusters whileaddressing infrastructural, fiscal and legal issues, including labor laws.

Fiscal initiatives are key for accelerated development. Currently, the lack of a local cluster imposes an effective ~3% higher end cost on account of freight etc; government may wish to consider a time bound (5 years) incentive toovercome this and kick start the coalescence of a cluster in India

Without local IC fabrication facilities, not more than ~15-20% value addition is possible in India even over the next

3-4 years. To go beyond that figure requires for India to promote the entire electronics cluster PMA mandate should be consistent with WTO guidelines. To the extent applicable, government may consider

revising its PMA guidelines for value addition to incorporate substantial transformation to recognize transformationactivities and make policy more implementable.

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Executive Summary (2/2)

Innovation:

Encouraging foreign investment is key to transferring know-how and developing capabilities to enable end-to-endproduct development. Need to strengthen IP protection and infrastructure to facilitate this.

Initiatives providing seed funds and infrastructure for early stage ventures need to incorporate global best practices.

Lack of comparable commercial financing options costs local small players significantly in the market. This gapneeds to be plugged from both supply and demand perspective

A fund which allows local players to offer competitive contract financing options to buyers should be established

Operators may be incentivized via license fee rebates

To build the ecosystem, we need three or four independent mission mode taskforces to foster partnership betweenGovernment, industry & academia and focus on developing commercializable technologies

Security:

Local manufacturing does not necessarily have any correlation with security. Government needs to develop acomprehensive CIIP framework across all networks under threat financial, utilities, government etc. classifyingaction by critical services sought to be protected

Basic manufacturing threats and operational attacks can be mitigated by a comprehensive certification and testingprogram ( e.g., Common Criteria) which by design needs to run across all networks of all makes

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Setting the Objectives

Promoting Manufacturing

Fostering Innovation

Ensuring Network Security

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Draft NTP reiterates the governments intention to make India atelecom equipment hub; industry is aligned to the vision

Source: TRAI, Booz & Company analysis

Overall Vision & Key Policy Pillars

Area of Support

2011 National Policy on Electronics sets visionto promote India as ESDM manufacturing hub

In January 2011, TRAI released policyrecommendations for promoting domesticmanufacturers in telecom equipmentmanufacturing

DIT recently released notification highlightingpreferential sourcing for Governmentprocurement and security critical areas

Telecom industry agrees with the Governmentof India, TRAI and DIT on the vision to promotehi-tech manufacturing in India

However, recognize need to make key policyinitiatives actionable to collectively enhance thecompetitiveness of telecom manufacturingindustry

Make India a global hub for telecom equipmentmanufacturing and provisioning of converged

communication services. Draft NTP 2011

Sourcing

Finance &Taxation

FundingStandards &

MarketsMarket

Infrastructure

NTP Policy

TRAIRecom

mendations

Governed byrecent DIT Notification

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TRAI recommends 80% local sourcing with 65% value addition by2020 ; DIT has set a floor of 30% sourcing with 45% value addition

TRAI Recommendations on Sourcing% of total domestic demand

60%

80%

40%

2014-15

55%

2012-13

70%

DomesticallyManufacturedProducts (DMPs)

30%

45%

Imported/ LVAP

2019-20

20%

2016-17

Minimum ValueAddition

25% 35% 50% 65%

Note: LVAP refers to Low value Added Products, where the value added is below the stipulated percentage; Value addition refers to the value of the inputs or bill of material sourced within the countryand the value of IPR (TRAI) and value of domestic BOM per DITSource: TRAI, Booz & Company analysis

DomesticallyManufacturedProducts

Imported/ LVAP

2019-20

30%

70%

2016-17

30%

70%

2014-15

30%

70%

2012-13

30%

70%

25%-30% 35%-40% 45% 45%

DIT Notification on Sourcing% of total procurement

Acts as a floorwith individualministries free toenact incrementalregulations

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KeyRecommendations

Finance and Taxation Funding

Standards and Markets Market Infrastructure

Summary of Key Recommendations

Draft TRAI recommendations also include finance, taxation,funding and infrastructure

Establishment of Telecom Research and DevelopmentPark

Establishment of ten manufacturing clusters withadequate infrastructure

Establishment of two wafer fab facilities:

Cutting edge facility with government funding andsupport (upto 75% funding)

Second fab for general purpose chip fabrication,with upto 50% financing support

Autonomous Telecom Standards Organization (TSO) tobe established for carrying all works related to telecomsstandards

TCIL to be strengthened as a System Integrator forinstalling and operating networks in other countries

using telecom equipment sourced from India Leverage software presence for promoting bilateral

trade agreements to encourage export of telecomequipment

Establish a Telecom Research and DevelopmentCouncil (TRDC) with dual mandate

Manage the Telecom Research & DevelopmentFund with an initial corpus of INR 10,000 crores

Establish an R&D Park

Create a Telecom Manufacturing Fund (TMF) with aninitial corpus of INR 3,000 crores, to provide venturecapital to indigenous manufacturing in the form ofequity and soft loans

Preferential access to DMPs with turnover < INR 1,000crores for debt finance

6% for IMPs

3% for IPs

Tax rationalization/ incentives compared to imports for

telecom equipment, handsets and electroniccomponents1

1) Includes total incidence of excise and VAT to be limited to 12%; No CST on domestic manufacture/ 2% CVD on imports; Income tax holiday and no MAT for 10 years; deferment of Excise/ Salestax/ VAT/ GST for 5 years at nominal interest rates; for DMPs with < INR 1,000 crores turnover; Exemption from CVD/ excise for capital equipment


NOT EXHAUSTIVE

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Current TRAI recommendations conflate innovation,manufacturing and security, which are best dealt separately


Ecosystem RequirementsInnovation vs. Manufacturing

HumanCapital

Innovation Manufacturing

Infrastructure

Strengthen IP laws

Get recognized as havingstrong IP protectionevidenced by action

Regulations

Long Near-termTime to Market

Need to be separate -difference in inherent nature;longer lead time for innovationcompared to manufacturing

Funding

Friendly policies & easy

approval process Establish perception of

being favourable formanufacturing

Sustained funding in highrisk venture

Elicit private participation

High initial capitalinvestment

Easier to involve privatefirms

Strong environment forsharing of ideas- globallycompetitive universitynetwork

Physical power, water,land etc.

Supplier network

Highly qualified researchteams

Education system gearedto support innovation

Large low-medium skilledlabour force

Vocational traininginstitutes

Current policy conflatesinnovation and manufacturing;sets concurrent targets

Security needs to beaddressed separatelyand comprehensively local innovation &manufacturing do not

ensure security

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Our work on policy analysis has drawn on extensive interviewswith government, industry and academia

Government Industry Academia

Booz SME Network

Experts in global manufacturing clusters

Experts in innovation networks

Labor law experts

Telecom technology experts

Interview Sources For Perspective Mapping on Policy

PrimaryInterviews

Conducted interviewsto engage 90% of all

stakeholder typesacross manufacturing

ecosystem

OtherSourcesof Inputs

Booz Proprietary Models Secondary DataBooz IC

Source: Booz & Company analysis

Domestic EquipmentManufacturers

Global EquipmentManufacturers

Operators

Industry Associations

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While Government can aspire to achieve its multivariateobjectives, resulting policy should ensure key design imperatives

PreservingNationalSecurity

Generating

Employment

EnsuringBalance of

Trade

Fostering

Innovation

Seek to promote jobintensive activities

Provide incentives topromote manufacturingand build skilledworkforce for innovation

Multivariate Objective led Policy

From our interactions with the Government, four objectives and select deign considerations have come to the fore

Encourage product

innovation and IPregistration to help accrueprofits

Fund R&D, createinnovation networks andstrengthen IP laws

Ensure network security

and stability

Ensure network integrityand prevent externalattacks

Look to keep import billin check

Establish self-balancingmechanism by promotingexports

Source: Interviews, Booz & Company analysis

Transparent and

Non-subversible

Implementable

Relevant OverLong Time-

period

Key DesignImperatives

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Market Overview and Key Challenges

Manufacturing Ecosystem Imperatives

Stakeholder Considerations

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4

7

10+10%

Mobile Handsets

Wireless NetworkDemand

BroadbandEquipment

Wireline Equipment

2019-20

37

19

8

2015-16

25

13

5

2010-11

16

9

3

0

0

0

The Indian telecom equipment market is expected to grow at ~10%between 2011-20 to reach ~USD 37 billion by 2020

India Telecom Equipment Market 1

In USD Billion

CAGR2011-2020

-13%

10%

13%

11%

Market Demand Estimation ComparisonIn USD Billion, 2020 Forecasts

1) Does not include end user equipment; Broadband equipment includes xDSL and FTTx etc. related wire line broadband equipment demand; Wireless network includes mobile operator demandsNote: Telecom equipment demand forecasts are based on Booz and company proprietary modelsSource: World Energy Outlook, TRAI, Ovum, Booz & Company analysis

HandsetsMarket

Rs 000 Crores

NetworkEquipment

MarketRs 000 Crores

20019

TRAI / Ovum

TRAI / Ovum

Booz Analysis

Booz Analysis

14

2002418

TRAI / OvumBooz Analysis

2003837

TotalMarket

Rs 000 Crores

Telecom sector report for 12th 5 yearplan has projected total market for

telecom equipment to be ~ $38 billion(based on TRAI numbers), includingmarket of ~ $24 billion for network

equipment

37% more than TRAI

25% less than TRAI

Much less than theoil import bill: ~

$84 billion (2010)and ~ $186 billion

(2020)

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2 2

3

2

4

+12.6%

2G+ Core

3G

4G/LTE

2019-20

8

1

2015-16

5

1

2010-11

3

1

0

The wireless equipment demand is expected to grow at 12.6%,primarily driven by newer technology equipment

India Wireless Equipment MarketIn USD Billion

CAGR2011-2020

NA1

7%

-4%

1) 4G/LTE network rollouts are expected to begin 2015-16 and so equipment demand for 2010-11 was negligibleNote: Telecom equipment demand includes telecom active equipment and excludes handsetsSource: TRAI, Ovum, Booz & Company analysis

10

8

TRAI/OvumBooz

Demand for networkequipment servicing 4G/LTE

technologies is expected tocomprise ~50% of market by

2020


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Broadband equipment market demand is expected to grow by~10% to reach ~USD 10 billion by 2020

India Broadband Equipment MarketIn USD Billion CAGR

2011-2020

4%

11%

1

3

3

2

3

3+10%

BroadbandEquipment

IP and PacketSwitchingEquipment

Backhaul andTransmissionEquipment

2019-20

10

4

2015-16

7

1

2010-11

4

1

13%

Source: TRAI, Ovum, Booz & Company analysis

13

10

TRAI/OvumBooz

Broadband equipment demand

in this analysis includes xDSLand FTTx etc. related wire linebroadband equipment demand


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Despite strong forecasted growth, Indian market will be a smallfraction of global demand

18

7

0

20 9%

8%

7%

6%

5%

4%

3%

2%

1%

+11%

2019-20

3%

2010-11

2.9%

India Telecom Equipment Market(Excluding Handsets 1)

Note: Task force report on IT&ITEs hardware estimates telecom products and equipment's to be USD 154 billion by 20201) The global handsets market was valued at $263 billion in 2010 with 1.4 billion units sold which would give India a share of 3% by value and 12.5% by volume2) Global equipment market is as reported by TRAI at $260 billion in 2010 which gives India a 2.9% share in 2010 and $510 billion by 2020 which would keep Indias share at 3% in 2020.Source: Bloomberg, Datamonitor, TRAI, Ovum, Booz & Company analysis

% Share ofGlobal Market 2

Telecom Equipment

Market (USD Billion) Demand for Telecom Equipment-2011

Country MarketShare of

Global

% ofGDP

USA $47 Bn 18% 0.32%

China $30 Bn 11% 0.51%

Brazil $12 Bn 5% 0.43%

India $7 Bn 3% 0.57%

Indian telecom equipmentmarket will not offer scale

needed by local manufacturersto be globally competitive

France $8 Bn 3.3% 0.34%

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Recent Gazette notification stipulates Preferential Market Accessfor government procurement and on security concerns

Analysis of Gazette DIT Notification: 15 February 2012Relevant Clause(s)

Scope

Electronic products having security implicationsand agencies deploying them - Cl 2.2.1.also applicable for procurement of electronic

hardware as a service from managed ServiceprovidersCl 2.2.4

Coverage

,,,percentage of procurement to be made fromdomestically manufacturedelectronic product or products but it shall not beless than 30% of the total procurement value of thatelectronic product or products- Para 2.2.3.

Administration:Value Addition

These electronic products shall meet the followinggraded domestic value-addition in terms of Bill ofMaterial (BOM) from domestic manufacturers-Para

2.3

Administration:Compliance

Individual Departments/ Ministries may provide forsuitable incentives/disincentives for complianceunder the policy- Para 5.3

Ex 3 of notificationspecifically mentionsTelecom licensees

Provisions Concerns

Procurement on securityimplications for countryclause being notified byconcerned ministry/ ies

Different ministries maycome with differingrequirements

Mandates floor of 30% for

procurement of domesticallymanufactured electronicproducts

Extends to electronichardware procurement byMSPs

Does not specify if 30%

mandate applies to eachoperator for each individualtransaction

For managed services,unclear how 30%coveragewould be calculated

Percentage of value add interms of BOM fromdomestic manufacturersstarting 25% in year 1 andgoes up to 45% in year 5

Does not define role ofdomestic manufacturer thatsupplies componentscould lead to a label changeregime

Through suitable selfcertification system fordomestic value addition byvendor

Checks to be provided bySTQC

Consistency of interpretation Does not describe recourse

if no DomesticallyManufactured products areavailable

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PMA mandate to source 80% locally may be challenging; requiresunprecedented expansion of domestic production capacity

6

7

4

+11%

Others(Imports)

2019-20

18

2015-16

12

2010-11

7 DomesticallyMfg.Products

1

5

14

India Telecom Equipment Market DemandIn USD Billions

CAGR2011-20

-6%

Key Points: 2011-15 Scenario

Domestically Manufactured Products(DMP) would have to grow by ~40% in thenext five years to meet PMA provisions

Indian Products (IP) are estimated to becurrently ~Rs 0.9 K crores by value. As perpolicy provisions this must be increased to~14K crores by 2015 requiring a CAGR of102%

Meeting these targets would require

substantial existing infrastructure on theground to support manufacturing andinnovation

Note: TRAI estimates the percentage of domestic demand being met through exports as being 12.3% in 2010. Indian Products were estimated by TRAI to be 2-3% of total demand.Source: TRAI, Ovum, Booz & Company analysis

DIT notificationmandates a minimum

of 30% production,which will still implysignificant growth

requirements

34%

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... especially given that currently a manufacturer imports ~90% ofthe product cost


10%

Packaging

1%

Hardwares &Cable Harness

Otherelectronics

5%

Passives8%

Diodes &Transistors

20%

Memories

1%

FibreOptics

2%

PWB

15%

Custom IC18%

Generic IC

21%

ProductDesign

ComponentMfg.

(incl. PCB)

BoardMfg.

(SMT &Test)

Assembly(Device)

Packaging

Testing

~$65

~$5

~$5 + ~$25 material cost

Finished

Product

Product Cost= $100

+ margin (productdesign cost)= Selling Price

EXAMPLE

PCB and basic components

+ packaging materialaccount for ~90% of productcost.

Overheads and processingvalue add account for

remaining ~10%

Components are a large fractionof product cost.

but very few are made inIndia today

Distribution ofComponent Cost

% cost of BTS/Access Component

Currently Imported

Locally ProcuredIn India

In order to go beyond ~20% value addition, India needsclusters encompassing multi-layered PCB boards, ATMPfor custom IC, special purpose active and passiveelectronic components

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No country is wholly self-sufficient, necessitating India tounavoidably plug into the global supply chain

1) ISIC Rev 3, Communication Equipment (D32): Manufacture of radio, television and communication equipment and apparatus. Includes electronic valves and tubes and other electronic components;television and radio transmitters and apparatus for line telephony and line telegraphy; and television and radio receivers, sound or video recording or reproducing apparatus, and associated goods

Note: Bubble Size represents GDPSource: Global Insight and Booz & Company analysis

National Strength Communications Equipment1)2010

Import Dependent Export DrivenSelf Sufficient Balanced Trade

0%

20%

40%

60%

80%

100%

UK

Japan

India

China

AustraliaRussia

NorwayFinland

France

US Canada

Germany

60%40%20%

Imports / Production

260%0%

Brazil

Israel

100%80%

Taiwan

South Korea

Exports / Consumption

No country isable to imposestrict PMAs and

become self-sufficient in the

long run

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Furthermore, it will mandate an impractical objective of buildingan end-to-end play across the value chain

NON-EXHAUSTIVE

High Value Low Value

AssemblyComponent

ManufacturingTesting

Board

Manufacturing

Product

DesignPackaging

SwitchingSystems

Radio/Signaling

Equipment

TerminalEquipment

TransmissionEquipment

Manufacturing Value Chain

KeyEquipmentCategorie

s

ValueIn USD Billion 2010-11

1.2

2.8

1.4

1.9

7.3TOTAL

The entire manufacturingvalue chain and all key

products would be neededdomestically to enable

80% DMP

Hi-Tech Equipment Value Chain

Note: Servers are included as part of Switching Systems and Radio/ Signaling EquipmentSource: Booz & Company analysis

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End-to-end value chain play is infeasible- successful countrieshave developed expertise in select areas

DOMESTIC PLAYERS


Hi-Tech Equipment Value Chain

Global Leaders Across Value Chain

US

Israel

China

Taiwan

Thailand

Singapore

US & Israel focus on

product innovation in-house IPR development

China and Taiwan have a strongmanufacturing and assembly focusChina contributes 12% of global hi-techproducts & Taiwan hosts top 5 ODMs

Thailand focuses primarily onmanufacturing - it has a strong tier 1 totier 3 supplier network feeding to OBM

Singapore focuses manufacturing andassembly as well ICT manufacturingcontributes to 25.7% of GDP

AssemblyComponent

ManufacturingTesting

Board

Manufacturing

Product

DesignPackaging

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and then plugged into the global supply chain to seamlesslysupport the global hi-tech industry

Apple Designs the Product Toshiba builds Disk Drives

Toshiba & Matsushitaprepares Display Modules

Broadcom integrates Video Processors

Inventec completes the

Final Assembly

30 GB iPod Value ChainInnovation & Business Networking

Apple leveragesInnovation & Business

network across itsproduct life-cycle

Apple Markets theFinished ProductAcross the GlobeUnder its Name

ILLUSTRATIVE

Country Activity Company


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In summary, current manufacturing target present significantchallenges Government needs to set up water tight initiatives

No country is self-sufficient -India will need to plug into theglobal supply chain to achieve

target growth

No country is self-reliant - India

will need to assess it corecapabilities across the value

chain to realize its marketpotential

Government needs to identify theoptimal strategic imperatives tobuild a robust manufacturing eco-system

Government needs to identify the

key issues in manufacturing anddesign robust incentives accordingly

Focus onbuilding arobustmanufacturing

eco-system

Government needs to assesspotential issues faced by allstakeholder types (manufacturers,operators, etc.)

Government needs to define valueaddition in a robust andimplementable manner in order tomake the policy relevant andeffective

Designtransparent /implementable

policies forstakeholderqualifications


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Kick starting domestic manufacturing calls for developingspecialized telecom clusters with anchor and synergistic tenants

Synergistic tenants are ones whose proximity tothe anchor are critical for clusters success

e.g. Auto, synergy results from optimizing oflogistics flows and reduction in inventory

e.. Petrochem, synergy yielded from thermalintegration and optimization of side streams

On-site presence not as critical if a robust logis-tics system in place allows for virtual proximity

Anchor

Tenants

SynergisticTenants

Optional Tenants

Optional tenants may be synergistic but their

presence is not critical for the clusters success

Large tenants are established to provide criticalmass for other tenants as either one of theirprimary buyers (i.e. OEMs for Auto Cluster) orsuppliers (i.e. smelters for Metals Cluster)

Product can be for both inside or outside thecluster

Cluster ParticipantsElement Rationale

A cluster is a geographically proximate groupofinter-connected companiesandassociated

institutionsin a particular field, linked bycommonalities and complementarities

Specialized Cluster in TaiwanIC Cluster

LogicDesign

Mask

Fabs

Packaging

FinalTesting

Design Houses (~260 in total)

IC masks manufacturers (~4 in total)

Fabrication, WaferProbing & Dicing(~13 in total)

Packaging (34)

Testing (~34 in total)

Wafer (8) Chemicals

(18)

PCBBoards (14)

LeadFrame (4)

Highly integrated value chain with synergy of cluster Well developed supporting services Agile and fast-responding supply network

Proposed byTRAI inSec.2.93


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Government needs to adopt a comprehensive strategy for clusterdevelopment, including infrastructural, fiscal and legal initiatives

Infrastructure Fiscal Legal

FactorConditions

Availability of inputs forcompetitivemanufacturing

Provide access to Power (energy) Transportation Skilled labor for hi-tech

manufacturing

Offer time boundincentive toovercome logistics/freight costs

Build regime withfavorable labor lawsamenable to employerand employee

DemandConditions

Easy access to local andglobal markets

Promote export viazones aligned for thispurpose

Context for FirmStrategy and

Rivalry

Promotion of healthycompetition via ownershipand business policies

Ensure certainty inpolicies

Streamline approvalprocess (especiallyenvironmental

clearances)

Related &SupportingIndustries

Prevalence of ancillaryindustries required formanufacturing

Access to sufficienttechnologyinfrastructure (testingfacilities etc.)

Proliferation ofcomponent supply base

Cluster DevelopmentConditions

Government Role PRELIMINARY


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Current infrastructure is a significant roadblock for manufacturingactivities - strong initiatives are key to develop clusters

Infrastructural

Energy

Key Issues

High tech manufacturing needs uninterrupted andassured power supply

Power supply is in-consistent and in short supply. Current cost of power to industry does not provide

any distinct manufacturing advantages

Recommendations

In Section 2.93/94, TRAI recognizes need for developinginfrastructure

However, regarding power generation for telecommanufacturing, DoT can work with Ministry of Power toset-up dedicated generation facility for clusters

Transportation

Need improved ports, road network and

warehousing capabilities to build capacity forfuture

Prioritize road and transport network development in

areas marked for clusters catering to telecommanufacturing

Invite logistics firms as synergistic and optional tenants toset-up base in ear-marked clusters

Hi-TechManufacturing Skills

TechnologyInfrastructure

China plugs in 9% of GDP intopublic works compared to 4% in

India

Source: Interviews, TRAI, Booz & Company analysis

Requires adequately trained manpower to meetbasic manufacturing and plant management needs

Currently low cost yet skilled labor for hi-techmanufacturing is in short supply; can beaugmented

Requires good primary and secondary componentsupplier base

Need centralized testing and certification agencies

Good to have additional support services likeprototyping, shared infrastructure etc.

TRAI (Section 2.93) recommends setting up of clusters forcomponent development industry supports this.

In Section 2.5, TRAI recommends setting up a standardTest and Certification Agency.. However, need toestablish certification centers in each cluster

Can provide capital support for development of ancillaryindustries like prototyping etc.

In Section 2.78, TRAI recognizes need for skilledmanpower and recommends training institutes for on-demand training

Suggest that these institutes can be co-located in/nearclusters with telecom specific training (similar to NMP planto set up ITIs in NMIZs)

Can establish with foreign investment and partnerships

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Infrastructural disabilities lead to cost disadvantages; Governmentcan incentivize manufacturing via lower duties and special credits

Key Issues: Duties

Application of CST/ State VAT renders domesticmanufacturing uncompetitive as State VAT (2-12%) is

often greater than Special Additional Duty

Underdevelopment of domestic supplier base and

infrastructural handicap translate to higher cost

structures for domestic manufacturers

Recommendations

Institute scheme to offset infrastructural and freight

disabilities, as also state VAT rates:

Devise scheme similar to Focus Products Scheme

to include all telecom equipment and componentsmanufacturing locally in line with DIT requirements

Offer Duty Credit Scrip as fixed % of exports andDTA sales for fixed period (5 years)

Allow for Credit Scrips to used against excisepayments

Note: Assume power costs contribute to 5% of overall costs. Assume other overhead costs are same between India and ChinaSource: Interviews, DIT Task Force, Study , Booz & Company analysis

CostAccount

India China Comments

Raw MaterialCost

85 85 Assume CST waiver

Raw MaterialFreight Costs

3 1.2 Difference arisesfrom absence ofcomponent supplybase

Labor 2 2 Similar labor costsdue to lower wagesin India offset bylower productivity

Power andOverheads 10 7

Higher power costsand uncertain supplyin India

Total Cost 100 95.2 ~5% cost differential

Impact of Disabilities on Cost Structure%

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The Government needs to harmonize fiscal regulations acrossmanufacturers and modify the current refund system


ComponentManufacturer

FinishedGoods

ManufacturerOperator

Key Issues

Government

Imperatives

ComponentImports

Transformation Sale

Current regulations do not recognize intra-SEZsale as foreign exchange earning transaction

Precludes development of component eco-system as they grapple meeting Net ForeignExchange requirements at SEZ

Export benefits need to propagate tocomponent manufacturers withinmanufacturing zone

Streamline process for obtaining refunds and CENVATcredit accrual

SEZ DTA

DeemedExports

PRELIMINARY

?

Induced Cash-flow IssuesUn-harmonized Regulations

Interest loss due to difference in time between cash outflowfor import duties and taxes and point of reconciliation andrefunds after product sale

Unpredictability in refund amount

Non-accrual of balance CENVAT credit

CashOutflow

for importduties

CENVATCredit inaccount

- no physicalcash flow

Actualpoint of

cashoutflow

Interest Loss CENVAT Loss

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Current recommendations do not impact labor laws critical tomodify restrictions clauses in order to develop effective clusters

Flexibility to ScaleProduction Based onDemand Fluctuations

Concerns Problem Areas

Telecom equipment industry considered to highly seasonalwith fluctuations in demand which can vary significantly basedon available projects at any given time

Existing manufacturers restricted by lack of flexibility on laborforce employment that would enable them to optimizeworkforce to meet demand

Contract labor gaining precedence in the market in a bid to

bring in this flexibility

Relevant Laws and Chapters

Section 25M of Industrial Disputes Act of1947 that covers the provisions regardingprohibition of lay-offs for factory workers

Section 25G lays down the procedure forretrenchment and imposes the last-come-first-go principle which restricts theemployers intention to keep the best workers

Provisions andConditions RegardingEmployment of Labor

Provisions relating to number of permissible hours of work forduring a day or week

Restrictions on overtime and payments deemed necessary tocompensate for overtime

Section 51 of the Factories Act 1948,covering the maximum number ofpermissible hours for factory workers inweek

Section 54 of the Factories Act 1948,covering the maximum number ofpermissible hours for factory workers in day

Section 64 of the Factories Act 1948,covering the maximum number of workinghours (including overtime) permissible understate amendments

i

We do not envisage any

required dilution onOSHA and right to

association

ii

iii

iv

v


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Amendments Proposed

Sub-Section 1 needs to be modified toallow:

No quantitative restrictions on hire

and layoff across any categoryof employment- subject toappropriate contributions to thesocial security and othercontributions

Sub-section 3 creates a bureaucraticprocess and delays even in case of lay-offbeing due to reasons prescribed in sub-section 1

Industrial Disputes Act: Section 25M

Covers restrictions on lay offs of factory workers

No workman (other than a badli workman or a casual workman) whosename is borne on the muster rolls of an industrial establishment to whichthis Chapter applies shall be laid- off by his employer except 1[ with theprior permission of the appropriate Government or such authority as may bespecified by that Government by notification in the Official Gazette(hereinafter in this section referred to as the specified authority), obtainedon an application made in this behalf, unless such layoff is due to shortageof power or to natural calamity, and in the case of a mine, such layoff isdue also to fire, flood, excess of inflammable gas or explosion]. - Section25M , Sub-Section 1

Where the workman (other than badli workmen or casual workmen) of anindustrial establishment, being a mine, have been laid- off under sub-

section (1) for reasons of fire, flood or excess of inflammable gas orexplosion, the employer, in relation to such establishment, shall, within aperiod of thirty days from the date of commencement of such layoff, apply,in the prescribed manner, to the appropriate Government or the specifiedauthority for permission to continue the layoff- Section 25M ,Sub-Section3

Section 25M of IDA 1947 restricts manufacturers from optimizingworkforce hiring to meet demand fluctuations

Currently IDA contains 27different forms pertainingto disputes that may arise

from the Act


Section 25M of IDA 1947: Clauses and Amendments

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Amendments Proposed

This clause of the IDA allows for legaldisputes since employer is bound to showreasons for retrenchment of any workmanunless this was based on last come first

go principle

This clause under the IDA may beamended to allow the manufacturer toretrench without provision for disputebased on accepted criteria for determininglack of performance of a worker

Industrial Disputes Act: Section 25G

Covers procedures in case of retrenchmentof workers of factory workers in the

Where any workman in an industrial establishment,who is a citizen of India, is to be retrenched and hebelongs to a particular category of workmen in thatestablishment, in the absence of any agreementbetween the employer and the workman in thisbehalf, the employer shall ordinarily retrench theworkman who was the last person to be employed inthat category, unless for reasons to be recorded theemployer retrenches any other workman. - Section 25G

Section 25G of IDA 1947 allows for legal action against layoffs;dispute may be filed for any reason other than time of hire

Any departure from theprinciple of the clause

requires prioragreements betweenemployer and worker


Section 25G of IDA 1947: Clauses and Amendments

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Amendments Proposed

Overtime is an opportunity for ableworkers to earn extra income and so limitsmay be amended as current provisions offifty hours a quarter implies less than one

permissible overtime hour in a day

Weekly, daily and quarterly working hourrestrictions may need to be aligned withinternational labour best practices e.g., 12hours, subject to overall existing weeklycaps

Factories Act 1948

Covers provisions governing overtime andhours of employment

No adult worker shall be required or allowed to workin a factory for more than forty-eight hours in anyweek. - Section 51

Specific provisions of the Factories Act of 1948 governing overtimeand permissible working hours also needs to be re-evaluated

Weekly Hours

Subject to the provisions of section 51, no adultworker shall be required or allowed to work in afactory for more than nine hours in any day. -Section 54

Daily Hours

the total number of hours of work in a week includingovertime, shall not exceed sixty;The total number of hours of overtime shall notexceed fifty for any one quarter- Section 64

Overtime (State Legislative Provisions)

Mandating shorter working hoursadds significantly to transport costs,especially given the poor state of the

public transport infrastructure.Malaysia currently allows 12 hours a

day as permissible working limitwhile China has more flexible

overtime limits


Factories Act 1948: Clauses and Amendments

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There is a need for a comprehensive framework of labor laws thatbalances the needs and concerns of both employer and employee

Recommendations: Layoff provisionsneed to be f lexible without compromisingwelfare

Quantitative restrictions on layoffs:No quantitative restrictions on layoffsto allow seasonality based

adjustments on hiring. This is to beuniform across industries with nodifferentiation based on nature ofcontract

Wages: Wages on termination to beuniformly addressed as being equal to15 days of wages for every year ofemployment with the employer,prorated over the duration of totalemployment

Layoff Provisions

Recommendations: Benefits distributionhas to include:

Single account linkage:Anyemployer, irrespective of nature ofcontract, must deposit contributionsunder all labour schemes (EPF, ESI

etc.) under different sub-accounts or asingle account but which are linked tosingle AADHAR number or account

Self Declaration: Employer andemployee have to self-declare theaccounts that they are paying into orreceiving benefits into respectively

Wages and Benefits Provisions

EPF

AADHAR

Recommendations: Rights to associationshould remain; however

Employee Welfare Board (EWB):Every employer should have a labourwelfare board on which representativesof management and labour are present

. Representations of proposed changesshould be made to EWB

Work Stoppage Provisions: No workstoppage unless 70% of employeesvote for this using secret ballot

Wage Disputes: Wage disputes will beeffective from date referendum ispassed

Unionization Provisions

ESI Wages

DisabilityAllowance

HealthInsurance

OtherPayments

Labor Management

Employee Welfare Board

+We do not recommend any

dilution of the occupational safetyand employee health relatedprovisions contained within

existing labor laws

Key Elements of Recommendations on Labor Law Framework PRELIMINARY


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Regulatory processes need to be streamlined in line with NMP;mechanics need to be detailed with additional considerations

Source: Interviews, National Manufacturing Policy 2011, Booz & Company analysis

Key Issues Relevant NMPRecommendations

AdditionalConsiderations

Complex Certification &Monitoring Process:

Involvement of multipleagencies seen as a source ofcorruption and harassment

Single window clearancedoes not work well. Oftenopens to multiple windows

Lack of Transparency: Noclear understanding of rules andprocesses that need to befulfilled

Long Clearance Time: Lengthy

approval process delayscommencement ofmanufacturing

Simplified Clearances &Monitoring:

Streamlined clearance procedurewith official of State PollutionControl Board to be posted inzone

Involvement of third-partyagencies to supplementGovernment agencies forcompliance monitoring

Institute web-enabled process

Well-defined Clearance Time:Defined timeline with respect to allclearances beyond which applicationshall be deemed approved

Plan NMIZs properly to reducenumber of clearances required

Clear Definition of Roles:

Need to ensure proper divisionof roles and responsibilities withintroduction of third partyagencies and online processes

Can afford greater autonomy to

third-party agencies Can institute special process for

NMIZs

Ensure Transparency withOnline Process: Web-enabledprocess should target to providegreater transparency regardingapprovals required, criteria tosecure approval and reasons for

rejection Competitive Clearance Window:

Define clearance time in line withinternational best practices

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Guaranteed time bound incentives that are stable over the durationof the concessions are needed to attract investment

Government Prior IncentiveRollbacks: Examples

Implications

Investor confidence needs to be built up withguarantees on length of tax incentives

Incentive structure should allow continuationin the face of changing governments andrespective policies

Implications and Current Plan

Tax

Deferment 5 year tax holiday to new

companiesRs 3,154Crores

Initiatives Description Budget

Tax

Benefits Limiting Excise and VAT

to 12%Rs 37,450Crores

InterestSubsidies

6% interest subsidy for IPand 3% for IMP

Rs 22,782Crores

TOTAL Rs 63,386 Cr

Central government needs detailingon current incentives to encouragecompanies across the value chain

CurrentPackage


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Fostering InnovationEnsuring Network Security




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Proposed policy puts the onus on operators to drive PMA non-optimal definition of value addition makes the policy impractical

Domestic

EquipmentManufacturers

Global EquipmentManufacturers

TelecomOperators

Imports

Local Products

Indian Government plans tomandate operators to source

a minimum of 30% of theiroverall BOM from domesticequipment manufacturers

To qualify as a domestic equipment manufacturer onehas to ensure the mandated value addition which iscurrently defined as percentage of local procurement

Government should re-

evaluate its definition ofvalue addition in order

to design a moreimplementable policyas well as maximizepotential to plug into

the global value chain

Current Policy Stakeholder Implications

Both TRAI and DITnotification allude to

these stakeholderimplications


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Applying PMA to other than non-commercial Government and forsecurity critical procurements will need WTO verification

1) Definition of Value Add based on DIT NotificationSource: Booz & Company analysis

WTO Compliance for Commercial ProcurementRelevant Clauses from GATT

Paragraph 1: The [Members] recognize that internal taxes and other

internal charges, and laws, regulations and requirements affecting the

internal sale, offering for sale, purchase, transportation, distribution or

use of products, and internal quantitative regulations requiring the

mixture, processing or use of products in specified amounts or

proportions, should not be applied to imported or domestic products so

as to afford protection to domestic production.

Paragraph 5: No contracting party shall establish or maintain any

internal quantitative regulation relating to the mixture, processing or use

of products in specified amounts or proportions which requires, directly

or indirectly, that any specified amount or proportion of any product

which is the subject of the regulation must be supplied from domestic

sources. Moreover, no contracting party shall otherwise apply internal

quantitative regulations in a manner contrary to the principles set forth in

paragraph 1.*

Paragraph 7: No internal quantitative regulation relating to the mixture,

processing or use of products in specified amounts or proportions shall

be applied in such a manner as to allocate any such amount or

proportion among external sources of supply.

Proposed PMA QuantificationTRAI Proposal & DIT Notification

Conflict inareas of non-

security criticalcommercialprocurement

Value Add1 =Local BOM

Total BOM

100x

Mandate that certainpercentage (quantitative

requirement) of operator /Licensee procurement arises

from products meetingthreshold % of local valueaddition with value addition

defined as below

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If applicable, PMA guidelines for value addition should beamended to incorporate substantial transformation


Key Proposed PMA AmendmentsSubstantial Transformation

Definition: Substantial transformation is said to have occurredwhen the article or commodity has a new name, new character ornew use compared to the inputs used to produce the article orcommodity

Tests of Substantial Transformation: Countries measure thedegree of substantial transformation using 3 tests:

- Change in namerequires change in commercial designation orcommercial identity of the product, which may be shown bytrade literature, catalogues or brochures

- Change in characterrequires change in physical aspects ofthe product such as change in physical dimensions, chemicalcomposition or physical qualities

- Change in userequires a product to be transformed into aproduct with a different use or a change of a product with manyuses into a product with a single use

Advantages for India:A substantial transformation measure will be:- Compliant with WTO regulations- Accompanied usually by significant value addition which can be

used to offset the import bill

Making India a hub for

substantialtransformation will meetthe objectives targeted

by the government

Balance Imports Through SubstantialTransformation: Equipmentmanufacturers can perform substantialtransformation to offset import bill forcomponents

Objective of Amendment: Asmanufacturers offset imports viasubstantial transformation they will bringstrong manufacturing skills as well asboost demand for local products

Accountability: Operators be maderesponsible for ensuring import balancethrough substantial transformation criteriais met by all its vendors

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to help Government design an implementable and robust policyto fuel local manufacturing and create jobs

SubstantialTransformation (%)

Price of Product=

Price of Product Total Imports-

$90 $10

$10

$110

$135

ImportComponents/

sub-components

ProcureLocally

TransformProduct

Sell Product

Develop FinalProduct

SubstantialTransformation

=135

135 90-= 33%

Potential Approaches to Meet Criteria

Foster in-house substantial transformation

Build and foster key design andmanufacturing activities in order to increasethe value add on procured imported andlocal products

Drive transfer to technology know-how andskills as well as create significant jobsthereby meeting key Government objectives

Reduce value of imported components

Telecom equipment manufacturers canincrease adoption of local components inorder to ease the requirements on in-housesubstantial transformation

Increasing demand will drive growth for localmanufacturing thereby meeting keyGovernment objectives

Substantial Transformation - Overview


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The innovation ecosystem typically evolves in three stages with abuild up of local capability and participation levels

Innovation Ecosystem Maturity

Product & ServicesSupport

End-to-EndProduct & IP

Development

Entrepreneurship& Product IPDevelopment

Valueto

Nation

Evolution with Time

Perform well-defined taskscontributing to sub-part

development with little or novisibility of finished end product

Builds basic technical capabilities

e.g. Smaller design projects atglobal R&D centers

Has a view of product roadmap,defines problem and managesend-to-end productdevelopment

May register the IP in India

Builds advanced technical andinnovation capabilities

e.g. Cisco ASR 901 BTS router

Product conceptualization, end-

to-end development of pathbreaking futuristic technology

Registers IP in India

Captures value in India mostcommonly via an Indianshareholder

e.g. Emerging ventures, JVs ofIndian firms with GlobalCorporations

Capability Transition Capability & OwnershipTransition

1

2

3


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Evolution provides incremental benefits to the nation; initial phaseprovides jobs, latter stages help drive innovation and forex

Product & Services Support

End-to-End Product &IP Development

Entrepreneurship &

Product IP development

Jobs

InnovationCapability

Fiscal/Forex

Builds basic technicalcapabilities

Increasing benefits tothe nation

Requires advancedtechnical knowledge withend-to-end productdevelopment skills

Requires path-breakinginnovation ability inemerging technologies

1

2

3

High volume ofrelatively lower skilljobs

Emphasis on low volumehigh skill jobs

Emphasis on high skilljobs but may supportmanufacturing jobs

Forex inflow fromexporting engineeringservices

Forex inflow from exports Forex inflow from exports Fiscal impetus from profit

accruals


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Global players are critical to drive the first two stages of evolution;they bring in large spend and transfer know-how

Activities at India Research Centers

NON-EXHAUSTIVE

Largest development center outside US

Employs ~5000 people with ~370+patents granted

Perform end-to-end product developmente.g. ASR 901 router for BTS; also hadmanufacturing support

Joint research center with C-DoT (~250-500 employees)

Provides hardware, software design andtesting services

Develops complete terminals, small cellsand base stations

Source: Interviews, UNESCO, Booz & Company analysis

Large center in Bangalore with ~2500+engineers

Provide hardware and support for global

processor development+ small groupfocusing on end-to-end products for India

Large scale employment and infusion oftechnical knowledge helps build basic and

advanced capabilities in the ecosystem

Telecom R&D Spend2008-09, USD Bn

0.60.7

2.3

3.84.1

5.05.2

8.2

Dept. ofSc.

& Tech,IndiaFY 12

JuniperNetworks

QualcommAlcatelLucent

MotorolaEricssonCiscoNokiaTotal R&DSpend in

India

10-15Total R&D spend in India acrossall sectors and Govt +Industryonly slightly > large corporations

Investments in India2009

Offshoreable

Total R&D Spend

21%

79%Non

Offshoreable

OffshoreableSpend

70%

30%

Rest of World

India

Sizeablefraction of

offshoreableR&D spend is

invested inIndia

Total = ~$40Bn Total = ~$8Bn

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However, currently investments are limited by weak technology, IPand education infrastructure

EducationalInfrastructure

Engineers grapple with ramping upto speed andconceptualizing new products

Engineering curriculum places minimal importance onpractical experience - takes ~10months to bring Indianengineer to full productivity vs. 2-3months in maturegeographies

Lack of engineers with advanced degrees- Doctorate:Bachelors is 0.4% in India vs. 11.3% in US

IP Infrastructure &Protection


Need support for testing, certif ication and prototyping

Helps broaden innovation activities to include completeproduct development

Weak IP infrastructure with four offices across India

Sluggish process takes ~4 years for patent grantwhereas entire process takes ~2.5 years in US

Not recognized as a destination with strong enforcementof IP protection

Source: Interviews, USPTO, Booz & Company analysis

While the IPR regime in India consists ofrobust IP laws, it lacks effective enforcement,for whichleast priority given to adjudicationof IP matters is often quoted as a reason

- FCCI, World IP Day, 2010

To build another Silicon Valley, India needs tocreate an ecosystem with adequate contractmanufacturers for prototyping, productqualification and compliance labs- Senior Executive, Global Technology Company

Current Industry Concerns

There is also a lack of talent for productconceptualization and product management

for the emerging markets. Systemsmanagement for captives still continues to bedriven by headquarters, so talents for thisarea need to be nurtured.

- Indian Semiconductor Association

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To usher international investments , the Government needs to bemore proactive in building an ecosystem with sound infrastructure

Upgrade engineering curriculum to include latesttelecom technologies and practical know-how

Encourage collaboration between academia,Government labs and industry; can facilitate PhDprograms on specific topics at IITs and IISc withindustry support

Policy recommendation proposesconverting Telecom EngineeringCentre into an autonomous testingand certifying agency (TRAI- 2.50)

Ease the IP application process using global best

practices. e.g. US

Strengthen IP protection by taking action againstviolators

Reinforce Indias brand image as IP destination

Source: Interviews, USPTO, Booz & Company analysis

Imperatives for Government

EducationalInfrastructure

IP Infrastructure &Protection


However, ecosystem needs to extend beyondtesting to include shared labs, prototyping etc.

Provide funding and extend subsidies (e.g. SEZbenefits) to promote development of SMEengineering services organizations.

While the Authority delves briefly onthe topic in TRAI-3.44, there areno clear steps highlighted

Training institutes at the polytechniclevel to promote manufacturing

have been considered (TRAI-2.78)

Engineering education has notbeen addressed

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3 Entrepreneurship & Product IP Development


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Nascent

Emerging

T=0

In parallel, we need to start developing an ecosystem to fosterentrepreneurship - typically requires much longer gestation period

Company Revenue

Time

Key Steps in Evolution of New Ventures

Concept$0

Early- StageA$10Mn

$100Mn

$1Bn+Mature

2-3 years 4-6 years 10-15 years

Stages of Evolution

Early-Stage:

Evolution of product from concept to prototypewith initial roll-out.

Concept : Disruptive product concept based oncost and/or technology advantage

Growth Stage: Evolution of companies from small-contract

based sustenance to mature self-sustainingglobally competitive levels

Nascent :

Completely developed product with patent filed

Basic pilot runs in progress

Emerging:

Achieved break-even or profitable

Established scale in home market or region

Beginning to export

Mature:

Globally established player

Drives economies of scale at global level

A

B

GrowthB


47

A h l d l l i f d

3.A Product IP Development: Early Stage


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Across the early stage development cycle, companies are facedwith lack of VC funding and absence of adequate infrastructure

ProductDevelopment

ProductConceptualization

Field Testing&

IP Filing

Early Stage Development

Lack of seed funding todevelop on concept and

prototype

Insufficient physical andsupport infrastructure

Ideation and business plandevelopment

Typically involves smalltechnical team + business

lead

Refining concept Prototyping Build team to include sales,

marketing, support functions

Obtain field trial contractsfrom operators File for IP

Key Activities Challenges

Early Stagecompaniesinclude thoseincubated at


48

TRAI h d th TRDF t id d f di d t il d



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TRAI has proposed the TRDF to provide seed funding; detaileddesign is yet to be fleshed out

Sufficient early stage VC funding is notavailable to cover large development costs

While VCs are willing to invest a few

crores in ventures, product development

from basic research to

commercialization requires several tens

of crores Entrepreneur

With relatively low volume of fundingearly stage VC funding:

spreads too wide across sectors and..

lacks risk appetite to providesustained support for productdevelopment

As TRAI highlights, may also apply toprojects within larger organizations thathave long lead time and may not receivefunding

TRAIs Proposed Incentives

Establishing Telecom Research &Development Fund to finance R&Dprojects

Fund setup with a corpus ofRs.10,000 crore and interestaccruals of ~Rs.800 crore used tofund projects (3.43)

Plan to fund ~Rs.20 crore perproject over 2 years with 40 activeprojects at any time (3.41)

Research center to bear 50% of the

cost. Funding for educationalinstitutions could be 100%

Fund managed by government,industry and academia jointly

Programstructure andadministration

mechanism is yetto be detailed

Need for Funds

May need to reworkfund size asprojects may require>20crores or mayneed investmentsfor >2years

Source: Interviews, IVCA, Booz & Company analysis

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Gl b l b t ti b i t d i d i f



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Global best practices can be incorporated in program design forthe seed fund

Recommendations for Program Mechanics

Structure:

Based on venture capital model

Can be modeled along lines of DSTs TechnologyDevelopment Board providing loan assistance,equity subscription and grants

Need to cater to start-up proprietary venturessimilar to TePP

Design:

Appropriately leverage foreign and best domesticexpertise

Adopt strategies to raise sufficient capital withoutbleeding Government exchequer

Offer additional incentives to entrepreneursincluding mentoring, additional upside from stakesale etc.

Utilize similar selection parameters as DSTsgrants need to measure meritscomprehensively including merit, team, plansetc.

Case Study:

Yozma I Fund 1

Fund 2

Fund 10

Foreign VC

Govt. invested $8Mn each in 10 funds+ $20Mn

Fund had to engage one foreign VC institution andwell-established Israeli financial institution

Government would invest about 40% of fundsraised. $100Mn of Govt funds, called for $150Mnprivate funds

Each fund had call option on Government shares at

cost plus interest for 5 years

Provided funding and risk sharing to start-ups butalso upside from acquisition of Government shares

+

Israeli finance inst.40%

60%


50

Th i i f i f t t l t d t b



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Developing office infrastructurerequires upfront capital investment

Can mitigate the burden for selectstart-up firms with plug-and-play

offices in proposed R&D park

The provisions for infrastructural support need to be morecomprehensive than currently proposed to cater to early stage firms

Office Infrastructure


GuidancePatent

Submission

Proposed R&D Park to co-locateinnovation firms (TRAI-3.39)

Provide shareable resources for basicequipment assembly and testing.

For instance, establish sharedEMI/EMC test facilities in R&D park for

ongoing testing during developmentphase

Centralized testing agency for allcompanies (TRAI-2.50)

No specific provision

Nurture selected firms by establishingmentoring network and facilitatingperiodic interactions with business andtechnology experts

Support for IPR filing fee (TRAI-3.45)

Recommend this extends to accessto legal support beyond filing feereimbursement.

Extend specialinfrastructural support

to funded-ventures

Comprehensive Infrastructure Support

+

+ +

+

Current Provisions inRecommended Policy

Suggested AmendmentsSource: Booz & Company analysis

51

As they seek to attain scale companies face challenges in offering

3.B Product IP Development: Growth


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As they seek to attain scale, companies face challenges in offeringcompetitive prices and attractive financing options

Growth Phase Development

Break-even

ProductCommercialization

Scale inGlobal

Markets

Stay competitive in pricing bybalancing vendor contracts anddemand

Establish supply chain,manufacturing andcompetitive vendorcontracts

Focus on marketing and

sales

Balance supply and demandto optimize inventory levelsand cash-flow

Achieve sufficient traction indomestic/primary market tomeet production threshold

Focus on growth andincreasing market share viaexports

Key Activities Challenges

Offer attractive financingoptions in line with globalplayers

Growth phasecompaniesinclude:


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For instance post liberalization a large telecom PSU failed on the



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Reasons For Failure

For instance, post liberalization a large telecom PSU failed, on thelack of a sustainable advantage

Since 1975 Post 1990 - 1999

Preferential Access

Domestic manufacturerssupplied telecomequipment to Defensesector

Failed to achieveeconomies of scale andupgrading thetechnology

Liberalization

Accessed Japanese technology in 1992

Followed broad banding

NTP 1994 disturbed nascent liberalized

telecom sector Revenue Sharing: License fee

annually @ 17% of Adjusted GrossRevenue for the Metro cities &Telecom Circles

Resale of business / assignability/transferability of license

1998-99

Recorded a negative growth of ~75%

Net Loss of ~ 139 Cr.

1996 1997 1998

-56

-28-9

PAT (INR M.)

In 2006, PSU wasdisinvested

Failed EquityProposals

UnfavourableEnvironment

CashCrunch

Consequently, PSU had to undergo multiplefailed equity proposals: 1997: Telia backed out pick up Rs. 125 Cr.

of equity on adverse effects of NTP 1997:AIG refused Rs. 100 Cr support

because of absence of Telia

NTP 1994 had clauseslike revenue sharing &assignability of license

Additionally, political instability led todecreased investor confidence

Failed to execute the orders worth Rs. 140 Cr.

Faced legal issues due to non-payment shortterm borrowings Faced legal cases for non-payment to

creditors, suppliers, depositors, etc

PSU Wireless Communication Equipment(1975 1999)


53

Facilitating competitive pricing calls for a broader strategy beyond



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Facilitating competitive pricing calls for a broader strategy beyondcurrent proposals of demand assurance and capital funding

Pricing Dilemma

Start-up vendors face a chicken and egg situation. Point ofSale/

Demand

Point ofEntry/Supply

Proposed TelecomManufacturing Fund tosupport need for upfrontcapital (TRAI 3.67)

Supplier cost variesby scale offered

Telcos purchasefrom low cost

vendors

Componentsuppliers

drive vendorprice

Vendorscannot

offer scalesans telco

contracts

Governments Proposed Initiatives

Transformation

Preferential Market Access withdomestic demand assurance(~80% of value to beDomestically Mfg. Products)(TRAI - 2.15)

Point of

Sale/Demand

Point of

Entry/Supply

Transformation

Domestic demand assurancemay not be sufficient to driveglobally competitiveeconomies of scale

Vendors need: Upfront capital

for capexinvestment to

build capacity Lower prices

from suppliers

Proposed Telecom ManufacturingFund to support need for upfrontcapital (TRAI 3.67)

Government may co-invest via JV ortechnology transfer to bring mid-sizecomponent manufacturers to cluster

Provide tax incentives to start-ups toenable favorable pricing

Policy Recommendation

Can incentivizeoperators to procureDomesticallyManufactured Productsor Indian Products vialicense fee rebates

?

Doesnt address issue oflack of mid-scale suppliersto provide competitiveprices at lower volumes


54

Attractive credit lines will enable growth stage ventures to offer



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Attractive credit lines will enable growth stage ventures to offerfinancing options in-line with large global players

Government needs to help growth stage ventures inproviding financing in-line with large global players

currently not addressed in policy

Global Banks InternationalVendors

Buyers(e.g., Telcos)

Offer multi-billion dollar creditlines to end-buyers for

purchase of telecom equipment

from select vendors

Helps reduce capex andimproves cashflow

The Credit Issue

Global players benefit from attractive financing optionsprovided

Proposed Recommendations

Objective

To offer buyers comparable benefitsin cash-flow management andexpenses as globally prevalent creditlines

Structure

Establish master fund to offer creditlines to buyers of telecom equipmentfrom select Indian ventures

Evaluation criteria: Indian Ventures can be from

among those funded by TRDF orsimilar Government initiatives

Need to evaluate credit worthinessof end player to manage risk profileof portfolio

Credit lines to cover sale in domesticas well as international markets

KeyConsiderations

Risk management for Government Value of fund provided Mechanism balancing operator cash

flows

+

Huaweis $30 Billion China CreditOpens Doors in Brazil, Mexico

MTS seals670m Ericsson

vendor financing deal

Source: Interviews, Secondary Research, Booz & Company analysis

55

Government needs to establish mission task forces for program


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Government needs to establish mission task forces for programmanagement and to facilitate ecosystem evolution

CapabilityDevelopment

Networking

ProgramManagement

Government

MissionTask Force

Academia Industry

Provide strong mentorship to build keycapabilities required to establishventures across multiple growth stages

Provide access to academia andtechnology infrastructure

Facilitate strong networkingopportunities to broaden the reach andsuccess potential of the venture

Introduce venture to relevant platformsto access necessary talent/knowledge

Provide program managementassistance across different growthstages building on proposed TRDC

Help control finances in development,integration and testing phases

Mission Task Force Structure and Key Objectives

Can have 3-4 nodalgroups working with SDO

to createcommercializable

technologies influencingglobal development

activities and standardslike 3GPP


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Security is on-going issue; countries have been struggling to come


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Security is on going issue; countries have been struggling to comeup with a comprehensive policy

Key Issues in Telecommunications Equipment National Security

Dependence on foreign innovation andmanufacturing for critical components(ICs embeddedin routers, switches & hubs & fiber networks)

Growth of foreign MNCs & related M&A deals withdomestic players shifting the greater control to foreignnations (Merger ofHuawei & Symantec providingcritical internet security)

Key IssuesCountry

US

Few Initiatives

Restrictive role played byCFIUS on Telecom

mergers & other deals

Established commoncriteriato set-up technicalstandards &

configurations

Complete access to design standards for telecomequipment & software forlegal surveillance yet to bemet

Potential information interception from signalintelligence (SIGINT) which carries certified nationaldata

CanadaDedicated Departments

DCA (DepartmentalCOMSEC Authority)

Member in establishingcommon criteriavia

CTCPEC


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Security threats can undermine several critical activities by acting


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Security threats can undermine several critical activities by actingon a network component; can be stimulated at multiple stages

Security threats can be targetedacross multiple functions of a telecom

network operations each type ofsecurity threat can be planted acrossmultiple stages of product lifecycle(development, sourcing, operations,

etc.)

Information Leak

Service Denial &Degradation of

Service

Abuse &Fraudulent Use ofTelecommunicati

on Resources

TechnologyDependence

Natural Disaster

DesignThreat

Manufacturing &

LogisticsSabotage

NetworkOperation

Threat

SupplyCut-Offs

Security threats can be implanted acrossstages

Security threatsacross different

functions ofnetwork operations

PDA w/ Type 1inline encryptor

(802.11 connection)

FirewallCrypto(HAIPISCompliant)

Router

Premiserouter

Mobile PC w/ Type 1inline encryptor

GuardSwitch

SIPRnet

Internet

PublicHot Spot

PublicHot Spot

Telecommunications Network EcosystemWireless Technologies

Routers forwards datapackets betweencomputer networks

Interception canjeopardize entire network

Firewall protects networksfrom unauthorized access

Breaking firewalls makesclassified data vulnerable tomodification / theft

Source: Telecom Security Policy, Booz IC and Booz & Company analysis

Critical Components

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Security threats can classified into six distinct types - each one can


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Types of SecurityThreats

Type of Security Threats vis--vis its Form

y ypbe stimulated at multiple stages

Information Leak


Service

Abuse & FraudulentUse of

TelecommunicationResources


Natural Disaster

Description VulnerabilitiesStage of

Stimulation

Unauthorized access can lead to leak of criticalinformation which could be personal, commercial orclassified

Existence of Spyware Remote Access Physical Access

Intended to disrupt the service either by crashing thecomplete network or flooding it with unnecessary

traffic

DoS / DDoS PDoS, LDoS ICMP, SYN Floods

Illegal access to CPEs due to poor protection (bothsoft & hard)

Theft Modification of data,

information or networksoftware

Complete dependence on imported equipmentrenders critical component vulnerable because of thecomplete developers control

Non-supply Remote Access Kill Switches

Infrastructural damage NA

Design Manufacturing &

Logistics Network

Operations

Network

Operations

Manufacturing &Logistics

NetworkOperations

Supply

Design Network

Operations Supply


Logistics & Supply


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These security threats can be targeted across multiple stages


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y g p gNetwork Operations are most vulnerable

Security ThreatsAcross Stages

DescriptionEase of

Interception

Various Forms of Security Threats Telecommunications Ecosystem

Design Threats

Manufacturing &

Logistics Sabotage

Network OperationAttacks

Supply Cut-Offs

Alternate circuit schematics renders the equipment vulnerable Interception needs expert skill set and ill-intentions at the vendors design labs Damages the entire network, difficult to diagnose & requires complete infra replacement

Interception at the hardware level Tampering via direct access & could be executed subject to the security around the

equipment Recovery through maintenance services / complete replacement

Interception by malicious spywares Attackers access the network remotely and NetOps attack is common as could be

executed from anywhere Recovery through more efficient algorithms and procuring certified critical components

Supply cut-offs of critical component disrupts services & makes the network vulnerableto further soft attacks

Depends on suppliers, international relations, etc. Complete cut-off freezes entire network and causes substantial damage

2

3

4

1


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A comprehensive CIIP framework can be designed and


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Map of Security Threats

p gimplemented to arrest security threats types across all stages

Comprehensive CIIP Framework

Stages of Threat Types of Threat

Critical Information Infrastructure Protection

Robust methodology to tackle all the nationalsecurity threats

Mechanism to identifying security critical areas &

designing well monitored roadmap for its execution Policy Levers for nation wise impact

GOI has proposed establishment of NTNSCBto formulate the telecom security policy and

telecom equipment security framework

Information Leak


Service

Abuse & FraudulentUse of

TelecommunicationResources


Natural Disaster

Design


Network Operation

Supply


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CIIP program design involves three stages approach definition,


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p g g g ppevaluation criteria selection and operator engagement assessment

Key Components of Various National CIIPApproaches

Approach &Scope

Definition

Processes generally begin with identifying cross-sector services (key functions, vital societalfunctions, critical sectors like financial services,government utilities etc.) supported by ICT servicesor operators

EvaluationCriteria

Objective:

Population affected, financial loss, environmentalimpact, public order, restoral time, psychological(Services Dependent)

Redundancy, revenue, employment, coverage,number of subscribers (Operator Dependent)

Subjective: Evaluation commonly made onexperience, sensibility, and stakeholder consensusrather than quantitative matrix

OperatorEngagement

All approaches involve national operators at somepoint, butnot all label them critical operators

Risk Assessment usually performed by operators

Private operators are in the best position todetermine which physical infrastructures support keyservices

OperatorEngagement

How does the national approachdefine the whole set of objects

(services, operators,infrastructures, ) to be

evaluated for criticality?

What criteria should beused to determinewhich subset of

objects and servicesare critical?

Once an object is identified as critical, how does the nationalauthority manage its relationship with owners/operators toensure / improve the protection of critical infrastructures?

Elements of National Approaches to CIIP

ii

iii

i


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While implementing this program in the EU, each country decided


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p g p g yits own approach and scope; few chose the asset-oriented approach

Approach & Scope DefinitionAnd Evaluation Criteria

Elements of National Approaches to CIIP

Service-Oriented Approach

Asset-Oriented Approach

Operator-OrientedApproach

CI are identified starting from vitalservices / functions and then lookingat supporting infrastructures

CI are identified by categorizing theexisting infrastructures & evaluatingtheir impact on supported services

Identify critical operators and then askthe operators to identify their own CI

Objective Criteria

Quantitative analysis of estimatedimpacts across various categories(population affected, financial loss,)

Subjective Criteria

Consensus-based opinion that can bedifficult to estimate accurately(interdependency, alternatives)

Recommended RiskManagement

Cooperation-based operator engagementmodel involving awareness raising andsuggested approaches to risk management

Mandated RiskManagement

Legislation-based operator engagementmodel with specific mandated requirements,timelines, and reporting procedures

Approach&ScopeDeiniftion

Evaluation

Criteria

Operator

Engagement

Mixed Approach Combination of the approaches listed

above and / or other alternatives

ii

iii

i

Austria

Belgium

CzechRepublic

Denmark

Estonia

Finland

France

Germany

Hungary

Italy

Netherlands

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