India: The Land of 44 Million Cell Phones?
As Motorola's managing director in India, Narendra Nayak is used to being overshadowed by his counterparts in China. Motorola Inc. (MOT ) has poured $3.4 billion into making handsets and semiconductors there, while India has seen just a trickle of investment from the maker of phones and chips. The reason is simple: India has fewer than 8 million cellular subscribers, compared with China's 190 million.
Well, maybe India will get its turn in the spotlight after all. The Indian mobile market is now growing by a phenomenal 80% annually. In August, Motorola introduced three handset models in the country. With fresh products and more and more Indians clamoring to chat while on the go, Nayak is expecting sales to double next year: "India is really ready for accelerated growth."
After years of stagnation, telecom deregulation has finally kick-started India's cellular industry. No longer are cell phones the exclusive privilege of India's wealthiest. Today, taxi drivers, plumbers, and all manner of small tradesmen are buying phones. By 2006, India will have 44 million subscribers, predicts Gartner Group. That would make it the third-largest cellular market in Asia, after China and Japan. And with many industry experts expecting China's market to hit saturation level, India is looking all the more attractive to the likes of Motorola, Nokia (NOK ), and Ericsson (ERICY ), which can't count on much excitement from sluggish markets in the West. "India is picking up some shine," says Ross O'Brien, Asian director for telecom specialists Pyramid Research.
Chalk the rapid growth up to the intense competition triggered by reforms. Since 1999, new market-opening measures have allowed operators such as Bharti Tele-Ventures, Hutchison Telecom, and Idea Cellular to expand across the country. Today, two carriers have cobbled together networks that just about span the nation, while an additional seven have strong regional operations. Meanwhile, the sudden increase in competition has sent prices into a nosedive. Since 2000, average rates have fallen by two-thirds, and phone calls now cost as little as 2 cents per minute, the lowest price on the planet, according to the International Telecommunication Union.
A host of new entrants could drive prices down further. Reliance Group, India's leading private petrochemical company, hopes to sign up 5 million subscribers during the next three years to a new service featuring limited mobility. Reliance plans to use CDMA technology--the cellular standard developed by Qualcomm (QCOM ) and used by U.S. giants Sprint (FON ) and Verizon Communications (VZ )--to offer low-cost service that will work in a given neighborhood but won't allow much roaming. Established cellular players hate the idea. They say operators of CDMA service will have an unfair advantage because they get to pay lower license fees and cheaper charges for connecting to fixed-line networks. The existing operators have asked India's Supreme Court to forbid the service, but most observers expect the justices will allow it.
The reinvigorated competition isn't entirely good news for Indian phone companies. The low rates make it hard for anyone to make money: Bharti is the only player that's currently breaking even. And there has already been a wave of consolidation. In the past two years, Bharti and Hutchison have bought smaller operators, and Idea is planning to merge with BPL Mobile, a fast-growing upstart. "The competition could drag everyone down into a pretty nasty price war," says Shiv Putcha, an analyst with the telecom consultant Yankee Group.
And India has a long way to go before it rivals China in market size. Chinese carriers add 5 million subscribers monthly, compared with India's 500,000. That means China continues to buy far more equipment: Its capital expenditures for cellular networks will be $14 billion this year, compared with just $1 billion for India, according to Pyramid Research. So while the likes of Nokia, Motorola (MOT ), and Ericsson are rushing to supply India with new phones, China will continue to provide far more profits for the foreseeable future. Still, says Pyramid's O'Brien, India is heading "way, way up." The world's telecom giants are eager to hitch a ride.
By Manjeet Kripalani in Bombay, with Bruce Einhorn in Hong Kong
— With assistance by Bruce Einhorn