Why Handset Giants Are Dialing Up India

Taxes have dropped, there's less red tape, and the market is booming

It was a far cry from the icy shores of the Baltic. On Apr. 11 a phalanx of Finnish executives sat stiffly in suits and ties as white-gloved waiters served tea, and traditional drummers and dancers performed in Bangalore's steamy midday heat. But for the execs, from Finland's Elcoteq Network Corp., the performers were a mere sideshow. The two dozen men and women were on hand for the inauguration of a facility that will churn out as many as 6 million phones a year for customers including Nokia (NOK ) and Sony Ericsson (ERICY ). "India is one of the rare countries with a huge commanding market as well as a sound base for technical education," says Elcoteq Network Corp. Chief Executive Jouni Hartikainen. "It's an ideal place for us."

Electronics manufacturing in India? An anemic supply chain, poor infrastructure, and government red tape have kept manufacturers away for years. But today an industry is rising as New Delhi cuts import duties and corporate tax rates and new highways, rail lines, and airports are built. Since October, LG Electronics, Nokia, Alcatel (ALA ), and Ericsson have announced plans to make telecom equipment in India. Contract manufacturers Flextronics International (FLEX ), Jabil Circuit (JBL ), and Solectron are expanding their India factories. And Motorola (MOT ) and Samsung are scouting for facilities. In all, $1 billion will be invested over the next two years by manufacturers hoping to cash in as mobile-phone subscribers in India are expected to nearly quadruple, to 180 million, by 2008.

One great benefit for India: The phonemakers are bringing component manufacturers along with them. Seoul-based Intellect Inc. is working on a $600 million chip-fabrication unit near Hyderabad. California companies Xilinx (XLNX ), Conexant Systems (CNXT ), and Spectra Electronics are considering building plants in India, say industry sources. Illinois-based plastic molder Nypro Inc., connector makers Tyco Electronics (TYC ) and Molex, and printed circuit-board maker Epcos (EPC ) are all planning to boost capacity at existing operations in India. And local component manufacturers such as Continental Devices India Ltd. and Hical Magnetics are gearing up to serve the global giants. "India is a very hot market," says Hical Managing Director Shashikiran Mullur. "Everyone in the global components industry is watching closely."


Software, naturally, plays a big role in this gold rush. With users demanding ever-more-sophisticated features from their handsets, as much as 40% of the cost of developing a new phone can be software. Elcoteq plans to set up a research and development center in Bangalore to offer design and engineering services. Rival Flextronics has bought three Indian software companies since 2003 and now employs 4,000 engineers in the country. And LG, Samsung, and Motorola each have more than 1,000 Indian software engineers.

Even Chinese manufacturers like India. ZTE Corp. is priming a unit to make mobile phones and DSL modems near Delhi, while rival Huawei Technologies Co. is awaiting approval from New Delhi for what industry insiders say will be a plant to manufacture handsets and other gear. Haier Group and Ningbo Bird Co. are also looking for an entry into the market. Using India as an export base is especially beneficial for Chinese companies, who can save 5% to 10% on shipping. "From China's perspective, servicing Europe or Africa from India is great as it is halfway there," says Vinnie Mehta, executive director of the Manufacturers' Association of Information Technology, an industry group.

India's telecom manufacturing industry is still nascent; the numbers are tiny compared with China. Mainland factories are expected to make more than 100 million cell phones this year, vs. fewer than 2 million in India. But with India just starting up a steep cellular growth curve, telecom manufacturers are ready to tap into the potential -- even if it means sweating in the midday sun.

By Josey Puliyenthuruthel in Bangalore

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