INDIA 2.0: SECOND IN A SERIES

Cell phones blaze a trail to Internet

By John Boudreau

Mercury News

SRIPERUMBUDUR, India - Every two minutes or so, a new cell phone rolls off the assembly line at the 1-year-old Nokia plant.

Hundreds of workers in lab coats, running conveyor belts around the clock, turn out millions of mobile phones for the Indian and Southeast Asian markets. Just down the highway from Nokia, electronics manufacturer Flextronics has completed the first phase of an industrial park. Motorola, Foxconn, Samsung and Dell (which will be making desktop computers and, eventually, other products) are all rushing to set up their own operations in a sizzling South Asia market.

Think India's tech sector is just about software? Think again. A new tech boom is under way -- one that could transform India into a hardware center with its own semiconductor industry.

``The best way to describe this is the way you Americans say, `You ain't seen nothing yet,' '' said T.V. Ramachandran, director general of the Cellular Operators Association of India.

The potential is mammoth.

Already India has more than 100 chip-design houses, and the electronics hardware market could grow from $28 billion in 2005 to $363 billion by 2015, according to government and industry estimates.

Driving that growth will be cell phones, which are more prevalent than PCs in India. That in turn is creating an ecosystem of opportunities: electronics assembly lines, component parts companies, applications for new-generation gadgets and chips. The government is trying to jump-start a semiconductor industry, and might provide subsidies and take an equity stake in a $3 billion Hyderabad chip factory with start-up SemIndia, which has a partnership with Advanced Micro Devices. It is another example of the rapid changes sweeping over this nation of 1.1 billion people. The country's software and services industry -- expected to reach more than $36 billion this year -- has disrupted the global tech market. Now government and industry leaders hope to have an equal impact with electronics manufacturing.

``We are living in a wonderful, fortunate time,'' said Vinnie Mehta, executive director of the Manufacturers' Association for Information Technology. ``Things are falling into place.''

Young population

Seventy-five percent of India's population is younger than 35, observed Poornima Shenoy, president of the 2-year-old India Semiconductor Association. ``In the year 2020, the average Indian age will be 27. India is going to have the youngest population in the world. And what will these people need? They are going to need entertainment, animation, gaming, cell phones, consumer electronics.''

Industry and government leaders hope to turn the growing consumer appetite into a job-creating economic engine for the nation.

The early signs are promising. Within a year, 90 percent of the cell phones used in India will be made in India, according to Communications Minister Dayanidhi Maran, who in the past two years has courted $30 billion in foreign investment. About 40 percent of India is now covered with cellular service, with government and industry leaders aggressively planning infrastructure expansions -- cell phone towers -- to quickly expand that coverage.

Cheap labor, and savings in logistics and tariffs, make India an attractive place to set up shop, particularly for vendors of low-margin tech products. ``If you had to pinpoint one place in the world where you'd want to be if you were a technology company, India would be it,'' said Ryan Reith, IDC analyst who researches worldwide mobile phone use. ``And everything around India is growing.''

A mobile phone user chats it up at the airport in Mumbai, India.

Still, while the desire for shiny new gadgets is increasing, India is nonetheless a poor country, Reith observed. ``I'm a little wary about how quickly this will take off,'' he said. Furthermore, he questions whether a nation accustomed to cheap phone rates would pay for content on those devices.

``I know the path they are looking to take,'' Reith added. ``I think it will eventually take off, but I just don't see a fast adoption rate.''

In India, a transformation is taking place daily. Newly built malls are packed with cell-phone-toting young people. In Sriperumbudur, located near Chennai, state-of-the-art cell phone and PC factories are rising out of rice paddies and farm fields.

In Sunguvar Chattiram off a highway route to Cehnnai, trenches are dug for fiber-optic cables. Manufacturing plants are bringing advances to villages.

Just outside the gates of the new Flextronics industrial park in Sriperumbudur is a rut-filled dirt road leading to a village of huts made from wood and tin, where women carrying baskets on their heads pass a line of workers digging trenches for new fiber-optic lines. ``Two worlds are coming together,'' observed Bob Kondamoori, a Silicon Valley entrepreneur and venture capitalist who is a SemIndia board member and investor.

The mobile phone is becoming the society-changing force that the PC was in the United States. It's far more affordable than a computer and provides instant and constant communication links for millions of Indians, many of whom do not own desktops or even have land-line phones.

``The next Microsoft, Cisco or Google of the world is going to come out of countries like India,'' said Rajesh Jain, an entrepreneur and chief executive of Netcore Solutions, a Mumbai company creating mobile Internet applications, from entertainment to social networking. ``It will be built around mobile. That's what I think Silicon Valley companies need to understand: The next battleground is not about Web 2.0. It's about the mobile Internet. And that is happening here, not in the U.S.''

'Untouched opportunity'

Text messaging is now a cultural norm in India, as it is in many other parts of Asia. And it's cheap, costing users 2 cents a message. (Phone calls range from less than a penny to 2 cents a minute.) Television and billboard ads direct consumers to SMS addresses, or Short Message Service, something like a Web address for texters.

Eventually Jain and others see mobile phones becoming the preferred way Indians, and people in other developing countries, access the Internet. That will be increasingly true as, during the next 12 to 24 months, so-called third-generation networks that allow for high-speed mobile Internet access -- comparable to broadband -- are deployed across India, he said.

``This is the untouched opportunity,'' Jain said. ``You've got to get away from the PC-first mentality. How do you re-create the magic of the Internet for people who, for the most part, have not had access to a PC?''

Sales of computers in India are expected to hit 6 million this year, according to the Manufacturers Association of Information Technology. In just 2 1/2 years, the total number of subscribers to cell phone services soared from 48 million to 130 million in October. (In October alone, there were 6.6 million new mobile phone subscribers.) The government expects the number of total subscribers to grow to 500 million in four years. (In the United States as of June, about 220 million people were mobile phone subscribers, according to CTIA -- The Wireless Association.) There are about 45 million land lines in India.

``In the next five years in India, nobody is going to get a land line,'' said Sanjay Swamy, a former Silicon Valley executive who is now chief executive of mChek, a Bangalore start-up whose software allows people to use their cell phones as credit cards.

Perhaps the most aggressive business model to emerge out of this new land of opportunities are plans to create a semiconductor industry in India.

``Right now, every chip is brought into India,'' said Vinod Agarwal, chief executive of SemIndia, which is building a chip test and packaging plant in Hyderabad and hopes to eventually construct a fabrication plant with government support.

Although cell phones are spreading quickly throughout India, many pay phones like this one on a tree in Bangalore can still be seen.

``You look at a $300 billion market for electronics and the semiconductor part, it's going to be at least $40 billion,'' he said. ``That's what we are after. We are going to be hiring thousands of people in five years. I get hundreds and hundreds of résumés from around the world. People see India as the next opportunity.''

But, Shenoy and others concede, Agarwal's dream is just that, for now.

Unlike the software industry, which requires relatively little infrastructure, chip factories cannot exist without good roads to transport easily damaged equipment, and reliable water and power supplies. Recently, a delegation of Taiwanese semiconductor industry officials visited India and, noticing the generally poor conditions of the country's road system, repeatedly asked about the quality of infrastructure, Shenoy said.

Also needed are new government policies with tax incentives that reflect the expensive upfront costs needed to construct $3 billion chip factories, said S. Janakiraman, who heads up R&D for engineering research firm MindTree Consulting in Bangalore.

``If SemIndia succeeds, many more will follow,'' he said. ``If it fails, it will have an equal impact.''

Silicon Valley hopes

What is happening in India is reminiscent of Silicon Valley 40 years ago and the creation of companies such as Intel, said SemIndia's Agarwal, who founded semiconductor-testing company LogicVision in San Jose.

``Look where we are because of that,'' he said. ``The whole world has been changed. We are following in their footsteps. I think all of India is going to be changed -- and potentially the world.''