I first visited Tejas Networks about a decade ago. At that time, it was just two years old, had its first product in the market, and was boldly seeking a position for itself as a high technology product company out of India. Tejas was an early experiment in putting together a team to address a market opportunity – Sycamore Networks founder and prominent investor Desh Deshpande was the catalyst who brought together Sanjay Nayak and Arnab Roy from Synopsys, and optical networks whiz Kumar Sivarajan from the Indian Institute of Science to address optical networking equipment opportunities in the growing telecom space.
Tejas is well known for its integration of Ethernet transmission with optical networks. This technological innovation allowed Indian service providers to use their networks originally created for voice to easily add on data services thus benefiting millions of customers. Tejas has become well know for designing future proof transmission equipment that allows its customers to upgrade their networks at low cost. Design reuse, smooth and concurrent development of hardware and software, and quick build cycles are some of the distinctive competencies of Tejas Networks that allow it to provide such a benefit.
How has Tejas fared in the last decade? The good news is that its thirst for innovation and product development remains strong. Its products have won every significant innovation award in India (CSIR, Nasscom, etc.), are sold under the brand names of both Tejas and some of the most demanding global telecom OEMs, and have played an important role in the backbone of India’s telecom infrastructure. Tejas continues to be a technology-intensive company with a little over half of its 750 strong workforce in engineering and R&D functions. The company has raised five rounds of capital (about $75 million) from leading global investors. Tejas was nearly listed a few years ago but a change in market conditions postponed their IPO. As a private company, Tejas is not obliged to disclose its financial performance, but market estimates place the company at a size of about $150m (about Rs. 750 crores).
The obvious question that pops up: Isn’t that quite small for the leading equipment manufacturer in one of the world’s biggest and fastest growing telecom markets?
The Changing Structure of the Telecom Equipment Market
If Tejas has not grown as quickly as its founders might have liked or expected it to, market structure can’t be blamed. On the contrary, the market structure today favours the growth of companies like Tejas.
Till the 1990s, the telecom equipment market was dominated by large players with close links to the monopoly service providers in their respective markets. Alcatel in France, Siemens in Germany and AT&T (later Lucent) in the United States could make large and lumpy investments in developing new equipment because they were assured of a domestic market. It is estimated that each major player invested a billion dollars in developing digital switches in the 1980s.
However, this cosy arrangement broke down in the late 1990s for a number of reasons. In most countries, provision of telecom services was deregulated leading to the weakening of the dominant monopoly players and the entry of new service providers. Changing technologies (e.g. digital mobile, 2G and 3G networks, growing importance of data) led to the need for service providers to secure fresh licences and make large investments in networks and technologies. Service providers obtained licences at large costs and struggled to recover their investments. In this scenario, service providers sought to buy the best equipment at the lowest cost and were no longer willing to work exclusively with their national equipment manufacturers. The convergence of technologies and increasing dominance of software over hardware in telecom equipment and systems design led to new players entering the equipment market, the most prominent of these being Chinese players like Huwaei and ZTE. These players were willing to sell equipment at much lower margins than the existing giants, and thus prevented the majors from making the large margins they were used to.
The existing equipment manufacturers have struggled to cope with these fundamental structural changes in the industry. Witness the slide of Nortel into bankruptcy and the mergers (Alcatel-Lucent and Nokia-Siemens) that are symptomatic of the lack of competitiveness of these companies.
Life has been more difficult for these players because of another shift – the big markets for telecom products are today in the large “emerging” countries like China and India. Service providers in India took advantage of the ferment in the equipment industry to drive down prices to previously unimaginable levels.
So, it looks like Tejas was born at the right time, and in the right place, at least from a market point of view. Why hasn’t it become a larger company?
The Manufacturing Ecosystem in India
In From Jugaad to Systematic Innovation: The Challenge for India (FJ2SI), I argued that innovation is influenced by the quality and quantity of inputs available to the innovation process, the innovation capacity of firms, and the incentive for innovation. While at a broad level the incentive for innovation has improved in the last two decades, I pointed out that India firms are still handicapped by the absence of the right inputs and their failure to build innovation capacity.
However, in the case of manufacturing, particularly high tech manufacturing of sophisticated electronics and telecom equipment, there continue to be serious disincentives to innovation, particularly in comparison to players from China. Chinese companies are believed to enjoy both direct and indirect subsidies that allow them to be very aggressive on the pricing front (evidence: anti-dumping cases have been successfully fought in India against Chinese telecom equipment manufacturers). China is the world’s manufacturing hub for electronics with a complete ecosystem of component manufacturers and assemblers. India completely lacks this ecosystem, doesn’t have a semiconductor fab (in spite of central and state level policy statements), and has a taxation and duty structure that works against manufacturing (at the WTO, we signed up for a zero duty structure for IT and electronics imports under agreement ITA 1 years ahead of any obligation to do so).
Should we just give up on high tech manufacturing and focus on services where we clearly have a competitive advantage? Or, is there still an opportunity to re-build manufacturing? And, is there a need to do so?
Recent Government Policy Initiatives
After years of virtual abdication to “market forces”, policy makers in India have recently veered to the view that manufacturing is too important to the economy and for job creation to be ignored any longer. The Planning Commission and the Department of Industrial Policy and Promotion have been grappling with questions related to what the government should do, and what it should not do.
India is now developing a multi-pronged strategy to enhance the competiveness of high technology manufactured products. The first prong is the use of Preferential Market Access norms (a WTO-compliant policy initiative) to reserve 30% of government-purchased products for firms attaining a minimum specified level of value addition in India. This provision is not related to ownership but to value addition – any firm, irrespective of ownership, will be eligible to sell to the government under this reserved access as long as it meets the local value addition requirements. The second prong is the creation of a sectoral innovation fund for electronics and telecom within the overall Rs. 5,000 crore innovation fund proposed to be set up by the government of India. The third prong is to encourage the creation of one or more semiconductor fabs in India. And, the fourth prong is creation of an export promotion fund or agency that can support export sales through innovative funding mechanisms. In addition, new national infrastructure projects like the National Optical Fibre Network will help the growth of a domestic electronics industry.
Implications for Tejas & other Innovative Electronics/Telecom Companies
In FJ2SI, I made a case for stronger government policies to support domestic innovation. Innovation funding, government procurement support, and large national projects are some of the initiatives I underlined as important. Many of the current government proposals are consistent with these recommendations.
There are, however, two dangers. One is that the government dilutes the preferential market access criteria to the extent that they become meaningless. The other is that the Preferential Market access becomes a form of protectionism that enters through the backdoor. The new government proposals need a high level of sophisticated supervision if they are to achieve their desired results.
If properly implemented, the new proposals should be good for companies like Tejas. They will create a more supportive playing field for companies that do genuine value addition in India. Such value addition will not come from manufacturing alone. The real value addition will come from design and R&D. Companies like Tejas that combine superior engineering engineering capabilities with a sensitivity to the market should be able to drive such value addition. It is estimated that for every $500 iPAD that Apple sells, its value addition is of the order of $150. Though creating Apples from India may be far-fetched at this stage, Apple provides a good long-term aspiration that we can strive for. And more companies like Tejas will be needed if we are to move in that direction.