NEW DELHI (Reuters) - India, already the world's fastest growing wireless services market, is set to become a handset manufacturing and export hub as giants such as Nokia and LG churn out millions of phones to tap voracious demand.
Global handset firms are knocking on the door of Asia's third-largest economy because of its established software industry, a booming domestic market and they want another manufacturing stronghold to offset the possible risk of operating plants in China.
"There is no question that everybody is planning for India to become a hub for (exporting) mobiles to the Middle East, neighboring countries and even Europe," said Rajiv Kochhar, chief executive at Mumbai-based Avista Advisory.
The consulting firm helped Elcoteq SE (ELQAV.HE: Quote, Profile, Research), Europe's largest contract electronics maker, to set up a unit in Bangalore, India's silicon valley.
It is also assisting several suppliers to Nokia (NOK1V.HE: Quote, Profile, Research), the world's largest handset maker, to set up plants in Bangalore, Pune and the southern port city of Chennai.
"Software design capabilities are a big factor in setting up a shop -- and India has them in abundance," Kochhar said.
More than 40 percent of the software that goes into Motorola Inc.'s (MOT.N: Quote, Profile, Research) iconic and ultra-thin RAZR handset is developed in its Indian R&D facility.
Nokia, which controls nearly half the $2.5 billion Indian handset market, and its suppliers are investing about $150 million in its Chennai unit, which makes a few million handsets a month and has already exported phones to south east Asian nations like Singapore, Indonesia and Thailand.
Jukka Lehtela, Nokia's director for Indian operations said the firm had earmarked 30 percent to 40 percent of its annual Indian production for export.
"The growing markets are here -- India, the Middle East and Africa. India is in the middle of these geographically and for us the transportation from India was easier and cheaper than from China or Europe," he said.
Two of Nokia's suppliers -- Aspocomp group (ACG1V.HE: Quote, Profile, Research) and Perlos Corp. (POS1V.HE: Quote, Profile, Research) -- are investing $70 million and $12 million respectively to set up a printed circuit board unit and a mechanics factory.
South Korean conglomerate LG Electronics Inc. (066570.KS: Quote, Profile, Research), for its part, operates a plant in the western city of Pune that will churn out 20 million GSM and CDMA handsets by 2010, roughly half of which are earmarked for export.
"We are already exporting in excess of 10,000 units a month and we can see it growing to 50,000 a month in less than a year," said H.S. Bhatia, product group head for GSM phones at LG.
"India is also emerging as a second base apart from China, to distribute risk. Handset firms, having already established their initial manufacturing bases in China, are now looking at other locations, for which India is the obvious choice due to its growing domestic base."
Fourth-ranked LG exports handsets made in India to Bangladesh, the Middle East, Nepal, Africa and Sri Lanka. LG's larger rival Samsung Electronics Co. Ltd. (005930.KS: Quote, Profile, Research) has also begun producing handsets in the country.
India's domestic market, forecast to grow to $5.8 billion by 2010, is expected to consume about 55 million handsets this year, up 71 percent from 2005. Between 4 million and 5 million new users are coming into the market each month, attracted to the world's cheapest local mobile call rates of as low as 2 U.S. cents a minute.
There is still room for growth as mobile ownership is just 9 percent in India where the population is more than a billion and networks, even though they are expanding rapidly, are still largely city centric.
Analysts expect India's user base to rise to 278 million by 2010 as the low call rates lure customers. At 93 million, now it exceeds the combined population of Germany and Belgium.
"The domestic market is going to be huge -- 80 percent of handsets will be consumed locally and the (remaining) 20 percent will get the advantage of economies of scale and lower cost of production," Bhatia said.
"The scale of production that India will attain in two years will give it a similar edge as China has in many other industries."