Broadband Reforms for Local Manufacturing + Coverage

Published as "Broadband reforms for local manufacturing".

Broadband in India needs reforms for local manufacturing and for infrastructure expansion and utilisation.

Shyam Ponappa 

  |   June 1, 2017

India’s markets are at the heart of what attracts investment and economic activity, with mobile phones and broadband services comprising a significant share. In exploring their magnitude and supply chains, an obvious need emerges for policies and incentives for local manufacturing of components and handsets to boost domestic supply and create employment. Another avenue for deriving local benefits is extending the coverage of digital platforms, expanding the market through policies and incentives facilitating broadband infrastructure. Policy support can help both to extend networks using fixed and wireless technologies, as well as to increase capacity utilisation.

Reforms affecting both supply and demand are needed to fully and equitably provide ubiquitous coverage and exploit digital platforms for public welfare. Such reforms would mitigate the lower revenue potential of rural populations. Enabling steps could include allowing active sharing of spectrum and networks, providing more unlicensed spectrum, financial incentives such as tax credits and spectrum charge rebates for rural infrastructure, and standardised right-of-way charges.  

India’s Mobile Handset Market

“A billion smartphones will be sold in India in [the] next five years.”

This estimate is from a report by IIM-Bangalore and CounterPoint Researchers.1 The report notes that India became the second-largest global smartphone market in terms of number of users in early 2016, and still has enormous growth potential even as demand for smartphones elsewhere is waning. In the next five years, almost a billion smartphones and half a billion feature phones will require components worth $80 billion (Rs 5.2 lakh crore). These will have to be imported if they are not produced locally. The report estimates that in 2016, about 50 local units assembled over 180 million mobile phones valued at $9 billion (about Rs 59,000 crore), about 70 per cent of the $13 billion sold. However, the local value addition was only $650 million (Rs 4,225 crore, or 7.2 per cent). This underscores an urgent need for policy changes, considering that emerging manufacturers in these sectors such as  Brazil and Vietnam have value added of nearly 20 per cent and over 30 per cent, respectively, while champions such as South Korea and Taiwan add above 50 per cent, and China has 70 per cent local value added. 

In early 2016, India’s domestic smartphones had a 40 per cent market share, but by the quarter ending March 2017, Chinese brands dominated, with a share of over 51 per cent, while local brands dropped to under 14 per cent.2

According to the IIM-B/CounterPoint Researchers report, Indian manufacturers import most of their components, and there are few incentives for R&D or to attract component suppliers to form local ecosystems. Further, the existing incentives will become ineffective once the goods and services tax (GST) is introduced, because they will all be subsumed under GST. Accordingly, the Broadband India Forum in association with EY have suggested (a) refunding the GST to manufacturers for handsets and (b) extending this policy to components could provide an appropriate manufacturing incentive.3 This needs to be done without delay.4

The report also proposes a phased approach to maximise local value added, aiming for 30 per cent by 2020, and more thereafter. Early phases suggested are moving from assembling chargers and other such accessories to high-value components such as printed circuit boards, cameras and display units. The researchers suggest that chargers, batteries and cameras can in fact be manufactured locally, contributing to components valued at an estimated $15 billion by 2020. If these proposals are adopted and executed, it will reduce imports and create jobs, deriving local benefits from India’s market opportunities. Moreover, it will help create an R&D capability in India for this sector, which can over time become a supplier to global markets.

The prerequisite for these improvements is policy reforms on matters such as duties on components (including the refund of GST) and incentives for suppliers to set up in India. The report also suggests that policies need to be framed for effectively funding institutions and corporations for research to build intellectual property and skilled professionals. 

Extending Digital Infrastructure & Utilisation

There is a parallel need for policies supporting the extension and coverage of digital platforms, of the sort achieved in migrating from up-front auction fees to revenue sharing with the New Telecom Policy in 1999 (NTP-99). These require convergent action within the government and its multifarious departments and agencies, or in some cases by coordination and resolution among stakeholders, i.e., in addition to the agencies of government, the judiciary, the operators and vendors of equipment, the press and media, and the public. 

There are some issues that relate to the Telecom Regulatory Authority of India’s (Trai) recommendations over the years that need decisions on implementation. An example is access to broadband services through cable networks. The government’s position on additional charges as a share of revenues conflicts with cable operators’ unwillingness to pay additional charges, and perhaps the cost of the devices for conversion. The effect of this deadlock is that the entire set of cable network users have to use another means for broadband connectivity. As this policy change will affect the competitive dynamics of wireless service providers, it is a candidate for coordinated, participative resolution. Some Trai recommendations may benefit from review, such as open access (like Wi-Fi) on 60 GHz.

Other examples are: 

• Enabling additional bands of unused spectrum such as 60 GHz and 70/80 GHz for wireless gigabit links, and 
• Enabling the sharing of entire networks, including the radio access network (and therefore spectrum) among operators.

The promise of digital platforms is immense, and both these streams of reforms need to be taken up and completed for India’s digital platforms and markets to deliver on their considerable potential.

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Shyam (no space) Ponappa at gmail dot com

1. “Mobile Phone Manufacturing: A Practical Phased Approach,” by Pathak, Chatterjee and Shah: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874689 

2. http://www.idc.com/getdoc.jsp?containerId=prAP42557317 

3. http://www.communicationstoday.co.in/index.php/daily-news/6710-broadband-india-forum-with-ey-releases-the-research-paper-on-incentivizing-domestic-handset-manfacturing-under-gst

Added after publication - June 6, 2017

4. For a detailed exposition of the GST question and why raising customs duties on imported equipment/components is not feasible because of the terms of the Information Technology Agreement 1997 under the WTO, see: https://www.linkedin.com/pulse/incentivising-manufacturing-mobile-phones-india-parag-kar  

A Pathfinding Approach for Digital India

It's not only the installation of the OFC, but of ensuring quality and reliability.

Shyam Ponappa   |   February 1, 2017

Most people believe an optical fibre cable (OFC) connection is necessary for broadband. While largely true, this is often financially viable only in urban agglomerations. What is less known is that trading companies use wireless links between New York and Chicago for high-speed electronic trades [1]. For people outside urban clusters, wireless is a less expensive alternative to fibre. They get only a few megabits per second, but realistically, ubiquitous broadband at 2 Mbps would be great.

Three factors are driving internet access and usage in India. An overriding factor is the growth of wireless devices and traffic as a global phenomenon. Cisco estimated in June 2016 that in 2015, wired access comprised 52 per cent of IP traffic, but would reduce to one-third by 2020, while wireless access would increase to two-thirds. This trend is reinforced by another factor: Innovation that lowers costs and improves performance in mobile wireless (Chart 1).

Chart 1: Mobile Innovation Lowers Costs and Improves Performance

Sources: Cisco Visual Networking Index; International Telecommunication Union; IE Market Research; Motorola, Deutsche Bank; Qualcomm

Note: Data speed indicated the maximum downlink speed, not average observed speeds. The average observed speeds depend on many factors, including infra, subscriber density and device harware and software

The third factor is the combination of the geographic spread of our population, the concentration of broadband penetration (Chart 2), and the limited coverage of OFC networks. While major cities and their connecting links are covered by OFC, less populated and less commercially attractive areas between them are not.  In hilly terrain, there is considerable difficulty in laying OFC, which extends far beyond cost.  In urban areas, cost can be a deterrent because we lack reasonable, uniform charges for rights-of-way. Such procedures and practices are difficult to institute and enforce, but are essential for robust, viable OFC networks.

Chart 2: Broadband Penetration

Source:  http://www.thehindu.com/sci-tech/technology/internet/The-India-wide-web/article14588938.ece

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It's not only the installation of the OFC, but of ensuring quality and reliability. OFC networks in India apparently suffer from 12 to 14 cuts per km per month, whereas the international benchmark is 0.7 cuts per km km per month. Apart from more frequent repairs, the capital expenditure in India is nearly three times as high as in Australia or the US. [2]
 

Estimates for installing OFC using standard procedures vary from about Rs 1 lakh to Rs 4 lakh per km. However, there have been attempts at getting costs down by radical changes in approach. For example, Andhra Pradesh considered an OFC installation of 22,500 km estimated at Rs 4,700 crore. By stringing fibre overhead along electric cables, however, the estimate was cut to Rs 333 crore, reducing costs from Rs 21 lakh to under Rs 1.5 lakh per km. It remains to be seen how this network will perform in terms of quality and reliability. Also, wireless technology is needed to extend connectivity from the fibre to villages, and cellular network costs rise with less bandwidth. For instance, one estimate is that excluding spectrum costs, a network using 5 MHz costs nearly 70 percent more than using 20 MHz.
 

For all these reasons, we need concerted action to redesign our approach to broadband, covering the fundamentals of infrastructure, spectrum and market design.  The exponential growth in mobile services has reached a plateau, and is complicated by the taint of the 2G spectrum scams. This has resulted in a mindset combining witch-hunting and paranoia in the press, the public, government departments, and the judiciary. This is not conducive for the coordinated, collective strategy and action that is required to extricate ourselves. Several proven wireless technologies are not permitted in India, although the Telecom Regulatory Authority of India has recommended their use. Methods to increase connectivity like those listed below are urgently needed, with requisite environmental safeguards such as the use of renewable energy.
 

• 60 GHz (V band) wireless gigabit for short-haul; 

• 70 and 80 GHz (E band) for multi-gigabit backhaul up to 5 km;

• TV White Space for the middle mile from the fibre to users in villages up to 8-10 km away in a single hop;

Additional steps, e.g.: 

• Increasing unlicensed spectrum in the 5.8 GHz band from 50 MHz to 80 MHz to enable 866 Mbps per channel, or more for gigabit capacity;

• Enabling secondary sharing of spectrum bands such as TV White Space, which has the possibility of existing Indian IPR establishing domestic manufacturing and dominating this niche;

It is evident that despite intense efforts by the people involved, our existing approach is simply not getting us to where we need to be. This has been repeated by government and private sector representatives many times. There’s no substitute for developing a sound approach, collectively and participatively, with professional facilitation, cutting across government, industry (operators and equipment providers), users, and the judiciary, to devise whatever solutions will deliver better results.  We have to move away from adversarial deadlock.  

A good way to begin is by accepting facts, and considering the evidence before dismissing points of view. For licensing, we know that government collections from revenue sharing far exceed the auction fees foregone (“Breakthroughs Needed for Digital India”). We have the experience of building other infrastructure such as roads and airports on revenue-sharing principles.  We have to take a similar systematic, phased approach to designing and implementing broadband networks. Policies on infrastructure resource use including spectrum need to be rationalised, and the sector organised through participative path-finding and problem solving.  We have to build national champions in manufacturing to keep costs affordable, for instance, using TV White Space. India could set the standard with its IPR and products where OFC is infeasible or unviable for connectivity to villages and rural clusters. Both the administrative and political leadership need to do this, working with all stakeholders, and not treating any of them as adversaries, or cronies.
 

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                                                                                 Shyam (no space) Ponappa at gmail dot com

1. ‘Information Transmission between Financial Markets in Chicago and New York’,  Gregory Laughlin, Anthony Aguirre, and Joseph Grundfest, Cornell University Library, arXiv.org

2. Conference presentation, Sterlite, http://www.trai.gov.in/sites/default/files/Sterlite-Badri.pdf