Unlocking the Indian Telecom Industrys Potential

1
Unlocking the Indian Telecom Industrys Potential

The Shape of Things to Come
Alok Shende Director, ICT Practice
19 April 2006
2
Agenda
Making the Case
1
Challenges in Indian Telecom Service Providers
Space
2
Challenges in Indian Telecom Equipment
Manufacturers Space
3
Challenges in Indian Telecom Handset
Manufacturers Space
4
Recommendations
5
3
Making the Case
1
Challenges in Indian Telecom Service Providers
Space
2
Challenges in Indian Telecom Equipment
Manufacturers Space
3
Challenges in Indian Telecom Handset
Manufacturers Space
4
5
Recommendations
4
The Indian Telecommunications Industry at a Glance

• 125 million subscribers as of Dec 2005
• More than 4 million subscribers added per month
• The sector has grown at 35 p.a. in 2005
• Total current investments of the telecom industry
  are over INR 90,000 crores
• Total FDI till September 2005 was INR 41,800
  crores
• Network connecting close to 4500 towns cities
  and more than 65,000 villages
• A sector, which in less than 10 years, has
  increased Indian tele-density to 12

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While the tariffs have decreased, the subscriber
base has exploded
Source TRAI Study paper No 2/2005

• The per subscriber mE usage has increased from
  12-15 mE per subscriber in 1999 to 30 mE per
  subscriber in 2005

• The minutes of usage per month per subscriber has
  also increased from 114 minutes in 1999 to 367
  minutes in 2005

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But the biggest challenge is decreasing ARPU
? gt What Next
Source TRAI Performance Indicators

• Global average ARPU USD 21
• Indian Average ARPU USD 8

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The New Business Strategy From Services to
Business Ecosystem
Historic
Transition
Radio Paging
Legacy Telecom
Fixed Line
Mobile Wallets and Payment
Wireless
E/M Payment
Early Vertical Specific programs
Third-party consumer and early enterprise
Solutions
Future
Diversified Telecom
Applications
Telecom Service Focused Business
Fixed Line
Access and early applications
New Telecom Business Ecosystem
Wireless
Telecom Service Blended with Emerging Areas
like VAS Mobile Applications
Transform to be Telecom Ecosystem Enabler
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The New Telecom Ecosystem Feeder Model
Drive Indian Economy Towards the 10 Economy
Growth Target
Active Passive Infrastructure Providers
Wireless Service Provider
New Telecom Business Ecosystem
Application Content Providers
Fixed Line Service Provider
Telecom Transmission Equipment Manufacturers
Telecom Handset Manufacturers
Telecom Network Equipment Manufacturers
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What the New Ecosystem Will do ?

• If the new ecosystem is established to meet the
  target of 250 million subscribers, then the
• Increase in tele-density will increase the rate
  of growth of GDP
• A 1 increase in tele-density results in 3
  increase in rate of GDP growth rate
• Current 5 million jobs generated by this sector
  can increase to 12 million
• Proper facilitation to various sub-sectors in the
  ecosystem can increase revenues generated by the
  telecom industry for the government
• Mobile services industrys annual contribution of
  INR 32,000 crores can increase beyond INR 50,000
  crores
• The annual revenues for the government by mobile
  industry can increase from INR 15,000 crores to
  INR 65,000 crores

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Making the Case
1
Challenges in Indian Telecom Service Providers
Space
2
Challenges in Indian Telecom Equipment
Manufacturers Space
3
Challenges in Indian Telecom Handset
Manufacturers Space
4
5
Recommendations
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Levies Duties

• The Indian Telecom sector has one the highest
  levies and duties imposed on it
• The total regulatory charges are between 17 26
  exclusive of goods and service tax
• This high incidence of levies and duties means a
  low return on capital , thus adversely impacting
  availability of funds for network expansion
• The return on capital expenditure for mobile
  services is very low in India at 7.8
• Clubbing low tariffs, falling ARPUs and high
  levies and duties means lower funds with players
  to reinvest in a constantly funds demanding
  nature of business

Source TRAI
Backbone spectrum charges extra GST
Goods Service Tax
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Spectrum

• To enable a faster expansion of wireless
  telephony, adequate spectrum is a pre-requisite
• The growing telecom industry has witnessed a
  surge in spectrum usage from 12-15 mE per user in
  early 2000 to close to 30 mE per user in 2005.
  The net result is the congestion in networks.
  Since spectrum is not available, operators tend
  to reuse the same spectrum across multiple sites
  thereby causing interference and call drops.
• The increase in FDI limit will see the true
  benefits once the spectrum issues is resolved.
  The international Telco provider community is
  keenly watching the developments towards spectrum
  resolution and wants it to be sorted out before
  it can invest in this growing market.
• An increased FDI activity can help Indian Telecom
  industry to meet the 250 million target

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Connecting Rural India

• More than 70 of Indian population lives in the
  rural India but contribution from rural India to
  Indian Telecom industry stands at a mere 20.
• Rural tele-density stands at a mere 1.5
• Mobile and wireless services have not penetrated
  rural areas the way they should.
• USO concept is a good way to achieve faster
  growth and penetration in really remote areas. It
  is an effective way to meet governments
  obligation to provide service in rural areas.

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Infrastructure Sharing Clearing Issues

• Being a developing country, duplication of
  infrastructure is a colossal waste.
  Infrastructure sharing, as an option, should be
  considered more seriously
• The players face enormous delays in obtaining
  Right of Way from different agencies like NHAI,
  pollution board, municipal corporations etc thus
  hampering faster network roll outs
• Changing local rules and regulations across
  different states handicaps roll outs instead of
  expediting at this time

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Making the Case
1
Challenges in Indian Telecom Service Providers
Space
2
Challenges in Indian Telecom Equipment
Manufacturers Space
3
Challenges in Indian Telecom Handset
Manufacturers Space
4
5
Recommendations
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Challenges Faced by Indian Equipment
Manufacturers Industry

• The current demand supply mismatch
• The industry needs to add capacity in tunes of
  150 million lines to achieve the target of 250
  million subscribers by 2007
• major portion of these requirements would be
  catered to by importing the required telecom
  equipment
• Inverted duty structure currently hampering the
  industry
• The customs duty on the finished product is lower
  than the inputs used to manufacture it
• The telecom infrastructure equipment, majority of
  which is imported annually into the country at 5
  percent customs duty. Whereas, duties are levied
  (10 - 30 percent) on inputs that go into the
  manufacturing of this equipment, except ICs at
  zero percent, making domestic production costlier
  than the imported equipment

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Making the Case
1
Challenges in Indian Telecom Service Providers
Space
2
Challenges in Indian Telecom Equipment
Manufacturers Space
3
Challenges in Indian Telecom Handset
Manufacturers Space
4
Recommendations
5
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Challenges Faced by Indian Handset Industry

• The mobile handset manufacturers have till
  recently bypassed India completely despite the
  pace at which the handset sales have been growing
  for the past two - three years
• The handset market in 2005 was over 30 million
  units, till recently all handsets were imported
  into India
• No base of suppliers to source components
• Huge Gray Market Almost 60 percent
• The hike in VAT on cell phones from 4 to 12.5
  percent in the current budget will promote the
  gray market for handsets

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Making the Case
1
Challenges in Indian Telecom Service Providers
Space
2
Challenges in Indian Telecom Equipment
Manufacturers Space
3
Challenges in Indian Telecom Handset
Manufacturers Space
4
Recommendations
5
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Recommendations

• For infrastructure sectors, (e.g. power, roads
  etc.) 100 exemption is available for the full
  term of 10 years in succession and these 10 years
  can be opted from the block of 20 years. A
  similar 100 exemption for successive 10 years
  out of the 20 years should be allowed for Telecom
  sector, which is currently at 5 years. This will
  result in higher disposable capital to reinvest
  in business
• There should be no service tax on the IUC amount
  receivable from other operators. IUC is levied
  for allowing the call from the cellular service
  provider to be carried over to the other service
  provider.
• The cellular industry is presently paying a
  service tax of 10.2 on its gross revenues in
  addition to state governments demanding sales tax
  on elements like airtime, rentals etc. The
  industry thus faces double taxation with both
  sales tax as well as service tax being levied on
  it

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Recommendations

• The government should seriously identify all the
  unused spectrums and allocate them to the
  cellular industry. Also steps should be taken to
  enforce a more constructive and disciplined role
  of spectrum utilization among service providers
  and other wireless users in the spirit of mutual
  understanding and co-operation.
• The USO fund has yet to be utilized for practical
  implementation and state success stories. The
  fund needs to be utilized by players more
  effectively and government should ensure that the
  operators use this fund to enter into the rural
  India
• Infrastructure sharing should be mandated by the
  government, both for private operators as well as
  incumbent
• A single window clearance system should be put in
  place to expedite all clearance related issues
  and thus endure faster network roll-outs across
  India

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Recommendations

• The government should encourage the vendors to
  manufacture handsets in the country rather than
  just reducing the import duty
• This would enhance the telecom ecosystem further
  as related ancillary units would flourish
• Government should work on policies to make India
  regional manufacturing hub for mobile handsets

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Thank You

• www.frost.com

ashende_at_frost.com