Reliance Infocomm's network operations centre in Mumbai: can you spot the market?

A Success Story In The Making

» The Indian market for telecommunications equipment is the second largest in Asia (China is #1). » The Indian PC market is expected to overtake the Korean one by the end of this year, according to research firm IDC. » India and Korea are neck-to-neck in the race to be the second largest market for chipmaker Intel in Asia. "Well, some analysts say that India is already number two," laughs Amar Babu, Director (South Asia), Intel. "And consumption is the most important investment criteria for Intel." » Telecom equipment manufacturer Nortel expects its Indian business to equal its Chinese one in the next four to five years. » "We are riding a growth wave in India while China is plateauing," explains Rajan Mehta, the head of Nortel Networks India. » Sun Microsystems has declared that it expects India to contribute a billion dollars to its worldwide revenues within the next few years. » India has moved into the number three slot after the US and China in Cisco's ranking of its most important markets. » German software giant SAP counts India among its "success stories". That's not surprising given that last year was the best ever for SAP in India, which grew at 70 per cent. ''We expect to grow at 1.5 to two times the market rate," says Hans Peter Klaey, President (Asia Pacific), SAP. » In 2003, software major Oracle Corporation witnessed its highest growth (in the last five years) in India-"a particularly excellent year considering the growth has been on a much larger base," says Oracle India Chief Shekhar Dasgupta.

Early on the morning of may 17, Rangnath 'Rangu' Salgame, the head of Cisco's Indian and SAARC operations, then in California on business switched on a business channel to catch up with the day's news only to have the importance of India driven home to him, again (not that he was not aware of it in the first place). NYSE had just opened for business, and the scrips of the top five telecom vendors listed on it had nosedived. The spot analysis? The previous trading session on BSE, which had witnessed a carnage, courtesy fears over the new government's commitment to economic reform. India was such an important market for these companies, the reasoning went, that anything that happened there (especially something that could, say, just engender the writing of a new telecom policy) was bound to have a bearing on their fortunes. And why not? The Indian telecom market has emerged as the fifth largest, possibly the fastest growing and among the most deregulated in the world.

Salgame's experience is reason enough to take a long hard look at goings on in the technology markets in India. It doesn't take long to arrive at the conclusion: technology companies, the lot of them from hardware vendors to software majors to it services hothouses to purveyors of telecom equipment have been growing at rates that they have never encountered before in India, and rates that they haven't seen in a long time in any other market in the region, even anywhere in the world (see And it is Perhaps the Fastest Growing in the Region).

While the other side of the technology story, namely the discovery of India's talent base and product development capabilities has been hogging the headlines, a much larger story has been quietly unfolding in the wings.

Gunning For A Share Of The India Pie

"Its funny how companies in India are constantly talking about how to tap the overseas market while every single company overseas is talking about how to get a larger share of the Indian market," laughs Patrick McGoldrick, CEO & MD, Tata Technologies, which specialises in the auto sector and has practically every major auto company on its client roster. Companies eyeing India are obviously keeping a close watch on the eye-popping growth rates registered by some very large technology multinationals for whom growth generally creeps along in single digits in the developed markets (see Expectedly, Growth Stories Abound).

Telecom infrastructure player Alcatel has seen a 100 per cent growth between 2002 and 2003 and has touched revenues of Rs 1,000 crore according to industry estimates. IBM for its part has seen a 111 per cent year-on-year growth in its storage business and a 56 per cent growth in its server business. Home-grown technology product company i-flex is doubling its domestic business every year. And Sun Microsystems has managed a similar feat between 2002 (revenues of Rs 440 crore) and 2004 (Rs 800 crore).

It's not just the major MNCs that are capitalising on the India story. Take the case of small companies such as Airespace, Veraz Networks or Virtela Communications, all US-based product companies operating in the telecom space and all funded by Norwest Ventures. Addressing a media briefing in Mumbai during a visit to India organised by ace venture capitalist Promod Haque (see Promod Haque: VC #1, Business Today, April 25, 2004), all the companies unequivocally declared India as the "most important market" for them. "The overall addressable market for enterprise class wireless LAN (local area network) products is in the tens of millions (in US dollars) over the next year and should rise to hundreds of millions within the next several years," says Steve Martin, Airespace's country manager in India.

Cisco's Salgame spells out a more tangible measure of market expansion. "In developed markets, a Fortune 500 company would spend 8 per cent of sales on it; Indian companies currently spend about half a per cent; even if this expands to 1.5 to 2 per cent in the next few years, that's a huge expansion." Then, there is, as Salgame points out the GDP effect: if gross domestic produce grows, so does the amount companies spend on it.

MNC CEOs: HEADED FOR INDIA
No, he didn't come here, although his President will later this month. Still, he touched base with his live video-conferenced speech in 2003 Larry Ellison CEO/Oracle	He has been to India twice in the past four years. On his latest visit he met with the CEOs of all Indian telecom firms. P.S.: The Bharti deal followed Jorma Olilla Chairman & CEO/Nokia
Curiously, McNealy's first visit to India came after his company sold a reported $100 million of equipment to Reliance Infocomm. QED Scott McNealy Chairman/Sun Microsystems	India was one of the first companies Svanberg visited after taking over as of Ericsson. Why? Just look at the outsourcing deal his company signed with Bharti Carl Henric Svanberg President & CEO/Ericsson
Gates has always been bullish on India. And on his last visit in 2002, he did enough to ensure that corporates opted for his company's offering over Linux Bill Gates Chairman/Microsoft

Companies like Bharti Tele-Ventures are already nearing First World benchmarks in terms of it-spends: It already spends 4-5 per cent of its gross revenues on it. "Our business is marketing," says Jayant Khosla, the head of the company's mobile telephony operations in Mumbai. "Everything else can be outsourced." That could explain some mega technology outsourcing deals the company has announced in recent times: a $400-million network management one with Ericsson, a similar $275-million one with Nokia, and a 10-year $750-million it outsourcing one with IBM.

Other mega deals in the telecom space include BSNL's Rs 6,000-crore GSM contract (participants include Nortel, Nokia, and Alcatel) and Lucent's deal to run Reliance's CDMA network; the deal contributed Rs 1,100 crore to Lucent's revenues last year. On the average, says a multinational telecommunications equipment vendor, an order from Reliance or Bharti is worth $100 million (it could, he adds, even go up to $600 million). "Some 40-50 million wireless lines (read: capacity) are already being added and should be in place within the next six months," he confidently predicts.

Others share his optimism. "As the country tries to achieve the target of 15 per cent teledensity by 2010 as set out in the New Telecom Policy of 1999, it will need substantial investment in telecom equipment," says Ravi Sharma, MD & President (South Asia), Alcatel. "This makes it one of the most attractive markets in the world; cellular penetration in India is at around 2.7 per cent, and is likely to exceed 10 per cent by the year 2008."

Consumer broadband is another big wave that promises to fuel telecom spends over the next few years. "We expect up to Rs 40,000 crore to be spent across the country by various participants in the area of consumer broadband," says Sanjay Mashruwala, President, Reliance Infocomm, adding that the largest slice of Reliance's spend over the next few years will go into this. "And our total investment ranges right from the core network to data centres and servers, routers and switches, optical equipment to consumer premise equipment."

While telecom is the biggest driver of accelerating tech-spends, banking and finance is a close second. "Telecom accounts for about 40 per cent of our India business today while banking accounts for about 25 per cent," says K.P. Unnikrishnan, Director (Marketing), Sun Microsystems, India. "The rest comes from manufacturing while (the) government (segment) shows a great deal of potential."

For starters, it product companies like i-flex expect domestic banks to spend around Rs 2,000 crore over the next three to four years on basic it infrastructure, software, and services. Much of this will come from first time investors in automation. "If you look at automation for a bank with about 500 branches, that is an it spend of Rs 200-300 crore right away per bank and at least 10 PSU banks have automation plans right now," says Makarand Padalkar, Member (Executive Management Organisation), i-flex. Most public sector banks have been quick to realise that automation is the key to their survival. One of the biggest projects being executed by IBM Global Services currently is the automation of Syndicate Bank, which involves implementing a core banking solution across 300 branches.

Then there is the need to adopt Basel 2 norms on capital adequacy. This, in turn, necessitates the use of packaged software that can churn out the required information in real time. "We are seeing an 18-20 per cent growth in the banking sector," says Oracle India Chief Shekhar Dasgupta, adding that "the packaged software market, which currently stands at $420 million, is expected to touch $740 million by 2007, according to IDC."

Newer banks such as HDFC Bank and ICICI Bank have demonstrated that technology can be a key differentiator in the business and can help the cause of growth. "Our business model is one that leverages technology to deliver value adds," says Pravir Vohra, General Manager (Retail Technology Group), ICICI Bank. "Technology spends are embedded in the business plan for each business segment." The company, he says, has benchmarked itself with international banks (on tech spend) and discovered that it currently spends 15 per cent of what they do per customer. That's good news for technology vendors.

The auto and auto components business is also contributing its fair share to zooming it spends. "Customers want more variety in vehicles, the life cycle of vehicles is shorter, upgrades are happening across the board, and safety measures are increasing," says Tata Technologies' McGoldrick. "All of this means investment in it."

The other drivers of the boom are not surprisingly the IT and IT-enabled services companies whose business hinges entirely on technology. Retail is another potentially big market segment as is government. "We are addressing retail, healthcare and pharmaceuticals, apart from government and of course banking, telecom, and manufacturing," says Sun's Unnikrishnan. "Basically, every single industry has started to look up as a technology market."

The Indian Market As Pivot

Global tech research and consultancy firm Forrester points to some interesting trends to watch out for in the Indian tech landscape. The packaged software market is likely to witness a slugfest between global heavyweights. Navi Radjou, vp Research (Enterprise Apps) at Forrester, makes an interesting observation. "If Indian companies want to manage end to end processes, they will spurn traditional packaged applications in favour of new solutions-like transactional portals, Business Process Management tools that build upon web service technologies. This means that packaged application vendors like SAP and Oracle will be in for a big fight with the middleware/infrastructure vendors like IBM and Microsoft. SAP may end up finding more buyers for its "Netweaver" (process integration platform) in India than in the United States!"

That, though, is just another fragment of market dynamics. With contract manufacturers such as Flextronics (it recently acquired Hughes Software Systems, is scouting for a few more buys, and has already expressed its desire to set up manufacturing facilities in the country), Solectron, and Jabil Circuits already in India, a booming domestic market may well be the motivation technology companies require to start manufacturing locally. Even better, the booming domestic market could well engender a clutch of companies in the software products space (a la i-flex) or in hardware. Even Indian software services companies may be able to hedge their overseas play with a significant presence in the domestic market. It's beginning to happen.