The Telecom Industry in India-China Trade

IITM CSC Special Report No#2

July 2013

The Telecom Industry in India-China Trade

The visit of Chinese Premier Li Keqiang to India on 19-22 May 2013 came after a two week standoff between two countries in the border region of Ladakh. So naturally, the major headlines on Li’s visit revolved around border and water issues.

However, the predominant agenda behind Li Keqiang’s visit remained economic. Li Keqiang was accompanied by a large business group with diversified interests in Indian market from telecom to power projects to information technology. China is currently facing an economic slow-down with a growth rate of less than 7.5 percent, decline in exports with a weaker demand from west and volatile inflation rate at home. Increasing India-China trade is part of the larger Chinese strategy to address its economic slow-down. It is expected that the nature of the trade relationship will change as India emerges as the biggest destination for project contracts for Chinese companies. According to Chinese statistics as of March, 2013, Chinese companies had completed projects in India worth US$35.1 billion and reportedly the Chinese investment in Indian infrastructure has reached to US$55bn.

A major agenda of the visit was to offer investments and industrial loans to buyback Chinese commodities and equipment. Specifically, executives from the Aviation Industry Corporation of China, China Harbour Engineering Company Group, heads of two major power equipment makers, Shanghai Electric Company and Shandong Electric Power Construction Corporation were present. Indian industries however, are to bear the brunt of greater economic engagement with China as cheap products emerging from China have killed off a number of these industries, particularly the industries like furniture, gift items, toy industry as well as higher end sectors like automobile accessories and parts and technological products like telecom equipment are grievously injured.

The Telecom Industry

The telecom a strategically important industry has been one of the hardest hit, struggling to cope with cheap Chinese products. In today’s world, telecommunication networks are a critical element for defense and national security. They are also key growth drivers for the economy and play a vital role in many critical sectors such, power, railways, oil and gas. They are the delivery vehicles for a large number of services: health-care, education, financial services and e-governance, UID etc. According to the industry experts China has taken a very strategic view of supporting its telecom equipment companies and over the last 10 years, it has aggressively provided sustained fiscal and strategic support to their top telecom equipment companies. The situation in China is quite different from India and Indian policy makers have much to learn from China, where the ‘Chinese state’ supports their strategic industries in various ways regardless of whether it is SOEs or a private company.

Today, Huawei and ZTE are global telecommunications powerhouses and China’s truly successful technology-based multinational companies. Huawei is the world’s second largest telecommunications supplier, and ZTE is the world’s fourth-largest mobile phone manufacturer, as measured by 2012 unit sales and the world’s fifth-largest telecoms equipment maker, which derives 70 percent of its revenue from outside China.[1] ZTE is a publically-traded company and Huawei claims the government has no stake in it despite an opaque ownership structure, but both have relied on various forms of government support since their inception—and both have strong links to the government and the People’s Liberation Army (PLA). ZTE was founded in 1985 by state-owned companies affiliated with the Ministry of Aerospace Industry.[2]The PLA and State Administration for Science, Technology and Industry for National Defense (SASTIND) are believed to have provided substantial R&D funding to Huawei to develop tailored products for military use. ZTE, for example, supplies high-side and trunk-line optical network systems to the PLA.

Both companies are facing serious scrutiny from the western governments and are subject to restrictions while doing business in U.S, Australia and Europe. In October 2012, Permanent Select Committee on Intelligence of U.S Congress released a report following an 11-month investigation. The report made five major recommendations to the US government. The main finding was that Huawei and ZTE pose a threat to US national security. It would be relevant to take note of two major recommendations of the committee given that it is of great concern to Indian authorities also.

• U.S. government systems, particularly sensitive systems, should not include Huawei or ZTE equipment, including component parts. Similarly, government contractors – particularly those working on contracts for sensitive U.S. programs – should exclude ZTE or Huawei equipment in their systems.

• Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services. U.S. network providers and systems developers are strongly encouraged to seek other vendors for their projects. Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.[3]

Though the report didn’t call for a complete boycott of the firms’ products, it suggested that the two firms should be barred from any US mergers and acquisitions. On the other hand, European concerns with regard to Chinese telecom companies are more business rather than security concerns. On May 18, 2013 Reuters reported that Europe’s top trade executive cited Chinese telecommunications equipment makers Huawei and ZTE Corp for violating anti-dumping and anti-subsidy guideline. European Union Trade Commissioner informed that they are investigating anti-competitive behavior by these Chinese companies in order to protect a “strategic” sector of Europe’s economy.[4]Cheap capital and Chinese state support for these companies are enabling them to dump their products in international market including India.

Chinese Telecom Companies in India

India, in particular, faces serious security as well as commercial implications due to this strategy of China. Top executives from two Chinese telecommunications giants Huawei and ZTE were also accompanying Li Keqiang during his visit to India. Huawei & ZTE started their operations in India in 1998-1999 by setting up software outsourcing centers. In the initial years, from 1998 to 2005, their successes in the Indian telecom sector were limited due to widely-held perceptions of poor equipment quality as well as significant national security concerns.

2005-2006 was a breakthrough year for Huawei as they won over business with ITI, BSNL, MTNL by using low price tactics and a variety of other methods. Huawei’s credibility became strong as it managed to enter important government networks and as a result of this credibility, Huawei managed to gain entry into private telecom players rather soon. Huawei’s predatory pricing strategy made the larger private operators in India easy baits as they were reeling under the impact of hyper competition and low average revenue per unit. The growth of Huawei can be easily understood from the fact that it had only $170 million in revenue from its India operations in the year 2005, which has grown at a scorching pace and reached a turnover of $1.3 billion by the end of 2008.

The global financial crisis in 2009 was another opportunity used by Huawei and ZTE to offer attractive financing schemes from their state banks (such as China Development Bank) to win significant business by extending over $10 billion in credit to cash-starved Indian telecom customers.[5]This strategy worked well for these Chinese companies as the leading players of Indian telecom companies and their parent companies were depending on Chinese finances and market access to China for their other businesses. The prime concern of the Indian companies was to protect their business interest with national interest and security issues becoming peripheral. Therefore, Indian companies are vehemently opposed to any move from the government to impose any restrictions on imports from China, to the detriment of the Indian telecom companies. There are a number of reputed companies in India such as Tejas Networks, CDOT Vihaan Networks Ltd, Shyam Telecom, Coral Telecom, Inventum Technologies, Matrix Telecom, NMS works, Midas Communication engaged in exports of their products and solutions. Large Indian IT companies like Infosys, Tata Elxsi, HCL Tech and some other service companies are also involved in some telecom products. It was believed that in the long run, innovative R&D companies from India having similar R&D cost advantage like Chinese companies would become competitors and challenge the global plans of the Chinese companies. Chinese companies realized this and in order to drive the Indian companies out of business, from 2007-2008, Chinese companies started dumping equipment, at artificially low prices in categories where Indian products existed in order to get rid of the problem of global competition.

In 2009, an anti-dumping investigation was initiated by the Ministry of Commerce and Industry against several leading Chinese telecom equipment suppliers, including Huawei and ZTE. The investigations confirmed these unfair trade practices and led to a penalty of 266% in the form of anti-dumping levies against Huawei for causing grievous injury to the domestic telecom equipment industry.[6]

Currently both Huawei and ZTE are doing good business in India. Huawei employs around six thousand people out of which 2500 are working in the R&D sectors. It operates a Global Network Operation Center (GNOC) and one center of expertise (COEs) in Bangalore. It also manages one R&D centre and is in the process of opening another R&D centre with an investment of 150 million. In addition, Huawei has created two international business units in India - the Global Service Resource Centre (GSRC) and Global Solutions Service Centre (GSS) - to manage overseas telecom client interests across multiple geographies. The company reported revenue of $ 1.2 billion in 2011, registering a growth of around 30 per cent compared to the previous year and expects sales revenue of $2.7 billion in 2013. The company targets sales revenue of $10 billion by 2017. With product lines that cover various ICT fields, including enterprise networks, information technology, unified communication and collaboration and enterprise wireless technology, the company manages services for Idea Cellular, Aircel, Reliance Communications and Tata Teleservices.ZTE, which has 23 offices throughout India, is one of the leading telecommunications company in India. Starting with a modest investment and overcoming suspicion from different quarters, it has emerged in better shape in recent years in Indian market. In 2012, ZTE India posted a small rate of growth, realizing revenue of $700 million, around half the $1.5 billion it received in 2009. Facing a dim market and high competition from its peers, the company has decided to shift focus from telecom equipment to smartphones, which now accounts for around 10 percent of ZTE’s sales in India. According to the media reports, ZTE and Huawei account for around 30 percent of India's smartphone market in the first quarter of 2013, up from 13.2 percent a year ago. ZTE also won a big contract recently from the Power Grid Corporation of India to provide fixed-network transmission services across the country.

This network will carry the traffic of both the National Knowledge Network and well as the Rural Broadband Project. Indian telecom networks are highly vulnerable given that most of the network equipment is imported. In fact, more than 60% of the network equipment currently being used in India is of Chinese make, and even the imported products from US/Europe, have a lot of manufacturing physically done in Chinese factories. Telecom equipment imports are the second largest trade deficit item for the country after oil and gas. While the domestic telecom services market grew rapidly in the last 10 years, there has been a lack of focus on building a domestic telecom product industry. In addition, flawed trade policies, whereby India signed and implemented the ITA-95 agreement (resulting in 0% duties on imports) even before creating a vibrant domestic industry, have not helped the cause either.[7]

 

Figure 1: The major items of export and import between China and India

 

Source: WorldEx India, based on Department of Commerce data base,

 

The figure shows that telecom equipment makes the single largest export item of China to India which was equal to 6.68 billion US dollar in 2011. Even though Huawei and ZTE operate in the Indian market, they still import a large chunk of their products from China to supply to both private and state-owned mobile phone companies in India along with other importers. Power plant equipment and other machineries related to mining constituted the second biggest item of Chinese exports. As India is one of the largest steel producers of the world it is interesting to note that India exported iron ore and concentrates to China worth of 4.38 billion USD and imported finished iron and steel products worth of 997 million in 2011. Surprisingly the table also shows that India imports 738 million worth of antibiotics from China, though the country boasts as leading pharma and generic producer of the world and asks Chinese for greater market access to its pharmaceutical companies.

This is not just about trade figures of a particular industry. India should see this sector as a strategic industry and should support and nurture its domestic industrial base. The country cannot depend only on services sector and particularly the IT industry if it aspires to be at least a regional power. A demographically young India will be the largest contributor to global labour force in the coming decades, and will add about 110 million workers by 2020. How India would assimilate this ever increasing workforce is dependent on how fast it can expand its manufacturing and industrial base beyond services.

The telecom industry can generate Rs 250,000 crore of annual revenues within a decade as it is estimated that the demand for telecom equipment in India constituted 6.2% (Rs 76.940 crore) of the global demand (Rs 1,638,255 crore) in 2012-13. A failure to initiate domestic manufacturing would force the country to import $150 billion worth of equipment during the next ten years.[8] Telecom equipment should be considered a strategic sector where India must focus and build strong capabilities and leverage the available skills to become self-reliant considering at the very least the security angle.

In case of the telecom equipment sector and when the contingency arises; China has the means, opportunity and motive to use Chinese telecommunications companies operating in India for malicious purposes and Chinese state influence on these companies poses a security threat. The Indian attitude towards this issue is exemplified by the External Affairs Minister Salman Khurshid’s response a quoted below. When asked about India’s heavy dependence on Chinese companies and the eventuality that China can control the supply of critical equipment to India related to telecom, energy, power grids and spare parts, Minister’s reply was “We have not heard of such issues, if someone brings it to our notice, we will certainly look into it”.[9]

Some initiatives are already underway vis a vis on security issues related to Chinese telecom equipment imports. Government has recently promulgated that for any new equipment being imported in the country, strict certification and testing norms need to be established, before they are deployed in any network- public or private. New Delhi is also planning to set up a ‘Telecom Security Directorate and Department of Telecom (DoT) is setting up a Centralised Monitoring System (CMS) for interception and monitoring along with establishing a laboratory at IISc Bangalore for Telecom Equipment and Security Certification.

Will these piecemeal policies work? Industry experts point out that unless the know-how, know-why as well as “control” is in India, it is practically impossible to “screen” any telecom equipment for security holes, traps and malware.

Given that telecom systems consists of:

• Millions of line of software (both system and embedded) is running (which also can be updated/downloaded on systems remotely, and

• Custom chips that have several million logic gates, and in which the logic can be reprogrammed remotely (via software upgrade)

It is like finding a needle-in-the-haystack and no amount of screening/testing can be effective in giving us a fool-proof solution.

The ultimate way out is to develop core technology in India.

Is there anything that India can emulate from the Chinese model? The main characteristic of the Chinese model is its tradition of centrally-planned R&D initiatives and the national mobilization of human and material resources to support their implementation. The PRC government plays a major role in technology commercialization drive. China’s conglomerates are continuously directed from the government and party side on development of strategic industries. China also follows an incentive based policy of promoting national firms to establish high technology production facilities, encouraging technology transfers, technology infringes and reverse engineering to move quickly in the technology ladder that again contributes to its national wealth and military strength. Most of the leaders in the Chinese political system are highly qualified with technical knowledge in many strategic fields. Also many scientists and engineers from the material, missile, space and other strategic programmes are now moving into and occupying important positions in the political and decision making system of China. Finally, it is also worth noting that large state-owned enterprises are themselves active players in shaping the government’s policy as many of the top managers of these companies are active party members and serve in different party committees. This is true with telecom equipment companies including Huawei and ZTE.

Since telecom equipment industry is a strategic sector, India should focus and build strong capabilities and should aim to become self-reliant in this sector. However, to achieve this goal, the government must bring in proactive and favourable policies to nurture and encourage local telecom equipment industry. Specific policies such as giving preferential market access to Indian products particularly for all government-funded telecom projects such as Rural Broadband, Utilities, National Knowledge network, promote R&D and innovation in telecom products, providing incentives such as R&D funds and grants. Government should formulate a comprehensive policy to promote local industry providing infrastructural assistance and fiscal incentives.

 

About the author

Nabeel A Mancheri is Assistant Professor, International Strategic and Security Studies Programme, National Institute of Advanced Studies, IISc Campus, Bangalore. Mancheri can be contacted at nabeelmnc@gmail.com




[1] Owen Fletcher (2010), “ZTE Pushes Mobile Phones,” The Wall Street Journal, September 22, 2010

[2] Bloomberg Businessweek (2005) “A Global Telecom Titan Called...ZTE?” March 7, 2005.

http://www.businessweek.com/magazine/content/05_10/b392307.htm

[3] U.S. House of Representatives (2012), “Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE” October 8,

http://intelligence.house.gov/sites/intelligence.house.gov/files/HuaweiZ...(FINAL).pdf

[4] Reuters (2013), “EU Cites Chinese Telecoms Huawei and ZTE for Trade Violations” Published May 18,NewYorkTimes, http://www.nytimes.com/reuters/2013/05/18/arts/18reuters-trade-eu.html?s...

[5] Nayak S (2012), “Telecom Equipment Exports from China” in Gopal S and Mancheri N (ed), Rise of China: Indian perspectives, Lancer Publishers, New Delhi P-187

[6] Ibid, page 188

[7] Ibid, page 182

[8] Philip J T (2013) “NSC points to Huawei, ZTE's links with Chinese military project PLA-863” The EconomicTimes,May15,http://articles.economictimes.indiatimes.com/2013-05 15/news/39282046_1_huawei-and-ztetelecom-equipment-nsc

[9] Dasgupta S (2013) “From defence to loans, China eyes slew of deals during Li Keqiang's visit” Times of India  May 19, http://articles.timesofindia.indiatimes.com/2013-05 19/india/39369665_1_business-delegationtelecom-equipment-zte

 

Author: 
Nabeel A Mancheri,
Affiliation: 
Assistant Professor, International Strategic and Security Studies, National Institute of Advance Studies, IISc Campus, Banglore