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India enters the networking market

PC manufacturing went overseas years ago. Now networking gear is getting more of an Asian flair.

BANGALORE, India--Following in the footsteps of China's Huawei Technologies and ZTL, a couple of Indian companies are trying to get a foothold in the global market for networking gear.

Though most of its sales to date have been in its home country, Tejas Networks, which is based here and specializes in Ethernet-over-Sonet boxes, has started to sell equipment in North America. Rather than sell the gear under its own name, Tejas serves as an original equipment manufacturer, or OEM, for multinationals, which put their own brand name on the products.

"OEM is going to become a way of life for them. It is the only solution," said Sanjay Nayak, CEO of Tejas. "They have less money to spend on R&D."

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What's new:
Following in the footsteps of China's Huawei Technologies and ZTL, a couple of Indian companies are trying to get a foothold in the global market for networking gear.

Bottom line:
Huawei has already shown that upstarts can break into the market--it regularly takes on Cisco. Still, one of the biggest challenges will be getting over the credibility hump. Product companies in India remain somewhat rare. When Tejas started, most potential customers assumed it was repackaging technology from a Western vendor.

Roundup: In India, seeking avenues for growth

Tejas, which has received $29 million in venture capital funding from Intel Capital and Battery Ventures, among others, will hit a run rate of $100 million in revenue within 18 months, Nayak predicted. So far, Tejas' equipment has been installed in the networks of 20 Indian carriers and five overseas carriers.

"If you use a cell phone in Mumbai, there's an 80 percent chance it went through us," Nayak said. "We have the opportunity to become a half-billion dollar company in the next five years."

Meanwhile, Telsima is coming out with a broadband switch for wired and/or WiMax traffic. The company expects to hit a price point that will come to roughly $150 per user, less than the $350 per user cost a similar product from a North American manufacturer might run, even if the North Americans used some overseas labor, said M.T. Karunakaran, CEO of Telsima.

"If we can hit $150, it will trigger WiMax. Carriers will look at it to connect towns and villages," Karunakaran said. "The primary focus is India, but we would like to build a global company. We are talking to a reseller in Japan."

Besides the usual factor--lower development costs--the push into networking comes because of the conditions of the Indian telecommunications market. On one hand, it's incredibly small. There are only 100 million phones, cellular and wired, in the entire country. That works out to about nine phones per 100 residents, said M.K. Shankaralinge Gowda, secretary of the Department of Information Technology for the State of Kanartaka. Residential broadband means a 128-kilobit-per-second line.

At the same time, India, like China, is one of the fastest-growing markets in the world, with about 2 million cell phones jumping onto networks every month. "We want to have 250 million in two years," Gowda said.

Manufacturers are also tweaking their products for broader acceptance. Motorola, for instance, recently released a $40 phone, according to Gowda. Monthly cell service averages run about $4 to $7. Home broadband costs $10 a month.

"Make your prices competitive and get the profit through volume," Gowda said.

To meet this demand, telecommunications carriers will have to install a lot of switches and routers. But because it's India, the equipment will have to be cheap. Even though North American companies have moved research and development operations to India and China, Nayak says Tejas can still undercut them. The company also has a comparatively small sales and marketing staff. Flextronics, which opened a contract manufacturing center in 2000, assembles the systems.

China's Huawei has already shown that upstarts can break into the market. Three years ago, it was relatively unknown. Now the company competes with Cisco Systems in almost every geographic market. (Cisco settled a patent and copyright infringement suit against Huawei last year.)

Being local, of course, helps. A watershed moment for Tejas (which means "shine" in Hindi and has nothing to do with the Lone Star state) came when it won a large contract with Indian Railways. The railway, the largest in the world, is scrapping its diesel trains for electric ones. Inside the power lines, it's installing fiber-optic cable, which it plans to lease to regional carriers.

Tejas worked with officials at the Telecom Engineering Center, which sets the technical specifications for government projects, to expand their regulations so the company could bid on the project against established competitors.

"We really got under their skin," Nayak recalled.

Still, one of the biggest challenges is getting over the credibility hump. Product companies in India remain somewhat rare. When Tejas started, most potential customers assumed it was repackaging technology from a Western vendor.

Vinod Dham, founder of NewPath Ventures, a venture capital firm specializing in India that has invested in Telsima, recalls going to a sales presentation with the company.

"They said, 'We are very interested.' I told them, 'Thank you very much. Now let's tell the truth. You aren't going to buy from an Indian company. You know you won't,'" Dham said. "But they said, 'Yes we are, because if something goes wrong, we know who to call."