Hardware’s Y2K moment
Nov 16 2012 , New Delhi
It won’t be easy.
Agreed, electronics hardware manufacture is a sunrise sector as claimed by Ajay Kumar, joint secretary in the department of electronics and information technology.
Agreed also that the government was never seen to be so keen to develop the electronics sector as now.
In quick succession it has unveiled a string of policies designed to attract investors to manufacture electronics.
There is now a national policy on electronics, essentially a vision document. Then there are schemes such as the electronics manufacturing cluster parks (EMCP), modified special incentives package (MSIP) and electronics system design and manufacturing (ESDM). Then there are state schemes, at least in some states. But that’s a start. All these policy initiatives at various levels form part of a whole that is supposed to give indigenous electronics manufacture a gigantic leg up
In Kumar’s words this is a “360-degree, comprehensive approach” which will make investment in electronics manufacture viable and attractive. The idea is to pull in investors and companies, within and outside India alike, and to make it attractive enough for both seasoned and first-time investors. (See interview on pg 12)
If this is supposed to give electronics its own Y2K moment, Ganesh Ramamoorthy, research director of Gartner India, won’t buy it. These policies are merely old wine in a new bottle. “It is not very different from a 2007 policy,” the semiconductor and electronics manufacturing policy, which proposed special economic zones and electronic hardware technology parks.
Ramamoorthy, though, agrees with the direction of the new policies but sees an absence of details that would have made the policies workable. “The details need to be worked out. Different equipment requires different ecosystems,” he insists.
Not ‘what’ but ‘how’ is what companies and investors look for. ‘What’ is driven by industry and market. But ‘how’ these policies will be implemented is what the government needs to clarify, he says.
Kumar gives Ramamoorthy’s comments a somewhat tentative nod. Yes, the national electronics policy is a vision document and a framework; yes, it needs to be backed up with detailed guidelines on various provisions.
Which has not been done yet.
According to Kumar, draft guidelines have been circulated and will be approved by the finance ministry.
When? “As soon as possible.”
Indian electronics and hardware do need a leg up, abjectly dependent as we are on imports. First, no one has a clear idea of the size of the industry (diverse estimates put it between $75 billion and $100 billion) yet projections are boldly made, one of which says the market will be worth $400 billion by 2020. This presupposes annual growth of 22 per cent.
In contrast, India’s domestic electronic hardware production will be a modest $42 billion in 2014, and thereafter grow only 16 per cent annually to reach $100 billion by 2020. That will leave a staggering production gap of $300 billion by 2020, all of which will have to be met with imports. (An info nugget: our current import bill is less than that.)
Another foreboding perspective is that we will be destined to forever bank on foreign suppliers of critical equipment in key areas like telecommunications, which is fraught with the possibility of crises of gargantuan proportions.
Biswaroop Bhattacharjee, group business director of market research firm IMRB who conducted a study of electronics goods for the Manufacturers Association of Information Technology (MAIT), is positive that the policies are required and will definitely have an impact.
He even sees a lot of potential in the policies to change the landscape. “Cluster parks, for instance, are required for sustainable development of the industry.”
To realise the electronics promise, private industry and some states have on the drawing board plans for electronics clusters. While Andhra Pradesh, Madhya Pradesh, Uttar Pradesh and Kerala have taken the lead and Kumar says other states are also in the game, drafting their own policies and incentives.
On its part, the private sector is doing its bit: the first electronic cluster is coming up close to Ananthpur in Andhra Pradesh. Called Vittal Innovation City (VIC), the cluster is being promoted by the Electronic Industries Association of India (Elcina), an industry lobby. It strategic location — just 100 km from the Bangalore airport — has drawn interest from individual members of the association.
It is one of many clusters Elcina is promoting. A second is proposed in the NCR region, a third in Rajasthan and a fourth in Uttar Pradesh. “Elcina is dealing with government agencies in these states to get land, power and other infrastructure allocated,” says Umesh Anandani, Elcina’s additional secretary.
Hopefully, these will someday see light of day and begin to produce to meet the spiralling demand for electronic products. The Indian market is always hungering for gadgets of all sorts. Even Diwali gifting, a big market for traditional ware and goods, now sees increasing volumes of electronics gifted. Included in the list are hot items tablets and smartphones.
With costs dropping all the time and incomes rising, the smartphone and the tablet is well within reach of most households. Take, for example, Aakash-2, a fully functional tablet that will be available to students in government schools for just Rs 1,163; it will be sold commercially too – at a mere Rs 3,500. The government school market should be a potential goldmine for Akash-2 makers. With education spreading, tablets have the promise of emerging a tool of empowerment and entertainment.
All that market could be ours if the electronics manufacture policy succeeds in attaining it objectives. The market for tablets alone, 950,000 units in 2011-12, is growing fast and will be 7.3 million by 2015-16, according to the MAIT study. The estimated annual growth is a staggering 40 per cent.
The same study also looks at the boom in smartphones. In 2011 almost 10 million smartphones were shipped to India, which was close to 6 per cent of all mobile phones shipped that year.
Clearly Indian industry has so far failed to capitalise on the opportunities, which have been seized by overseas manufacturers, primarily in China. “The tablet and smartphone market is dominated by vendors and not manufacturers. The scale of manufacture in China will hard to replicate,” rues Bhattacharjee.
Scale is what Kumar too knows well Indian manufacturers need: “Our strengths lie in large-scale human resources. We are still at least 1.5 times cheaper than east China in manpower costs.”
The first ones to attempt scale are not Indian companies but the likes of Ericsson, Nokia and Nokia-Siemens Networks. They came in riding the already heady telecom wave and set up factories in India. They make a variety of telecom equipment ranging from phones to telecom towers for the domestic and export markets.
Home-grown companies like Kavveri Telecom and Point-Red Wireless are trying. And acquisition of factories abroad is not counted out.
It is not that electronics manufacturing in India is impossible. The success of the telecom revolution brought in its wake a number of multinationals like Ericsson, Nokia-Siemens Networks and Nokia who have set up shop and are manufacturing telecom equipment ranging from phones to telecom towers for the domestic and export market as well.
Nokia was one of the first to set up a manufacturing facility in India in 2006. Set up near Chennai, it is the company’s largest manufacturing facility and is used to produce Asha smartphones and feature phones.
Prakash Katama, director of Nokia India’s Chennai operations admits that the decision to invest in India was ahead of the curve. He credits “immense support from department of Industries, Tamil Nadu for single window clearance and overall government support” for the success of the facility, and is an example of how government support can go a long way to support nascent industry.
Apart from government support, he listed market size and growth potential that swung the decision to invest in India. Nokia has invested close to $285 million in the 90,000 sq ft facility and manufactures 23 devices, up from an initial six in 2006.
Starting from a small base, the company now exports products to over 100 markets across the globe. The Chennai plant has allowed Nokia to gain operational efficiencies and reduce time to market. “It has helped us to expand our market base and come closer to our customers in the region,” Katama said.
He cites an example of how Nokia’s facility in India combined a deep understanding of the market with quick turnaround time provided by the manufacturing facility. “In June 2011, we rolled out Nokia’s first two dual-SIM devices from the facility. Within a few months we had a comprehensive portfolio in the market that helped us come from behind and lead in this segment of the industry,” says Katama.
Home-grown companies like Kavveri Telecom are also getting in on the act in a big way, acquiring manufacturing capabilities overseas and folding them up into their India operations.
For every Nokia or Kavveri Telecom that manufacture in India, there are many, which won’t put a dollar to set up factories here. What stops them is integration of the electronics market on a global scale. The information technology agreement (ITA) under the aegis of the World Trade Organisation is a tariff cutting mechanism which obliges signatory nations not to levy import duties on listed items. The list has a number of electronic goods too on it.
Thus, these listed goods can be manufactured anywhere in the world and shipped anywhere else without attracting import duties at the destination. No doubt this unifies the global market, but at the same time it renders Indian manufacturers incapable of competing with say Chinese companies.
Kumar believes that signing the ITA has not brought intended benefits to the industry in India. The government is clear that it won’t sign ITA-2 if these clauses in the first remain. ITA-1 includes items many of which India manufactures but for lack of scale cannot supply the global market.
Ramamoorthy rejects the argument. He thinks it unfair to say that ITA has been the spoilsport. “It is important to identify where we can be profitable despite signing the ITA. The focus needs to be on markets that can be exploited,” he says.
For now, the government is trying to carve out a niche market for domestic manufacturers using its own procurement policies. This area is outside the purview of ITA. Known as preferential market access norms, any Indian manufacturer of electronic goods is given preference in government contracts.
Large as it is, the size of government procurement, Kumar admits, is just a fraction of the total market. “A very rough estimate should put it at $1-2 billion a year, which is only 1-2 per cent of the $100 billion overall market.
The preferential market access that India allows have not gone down well with other countries; they see in it a threat to their companies’ prospects in this country. Congress in the US has joined the issue by calling it “concerning.” But Kumar defends it saying that it is WTO-compliant. Resistance came mainly from countries that were trying to re-establish themselves in the global supply chain.
For example, the US, which too is trying to revive manufacturing with policies very similar to ours. “There is a lot to learn from each other,” Kumar offers. So why blame India?
Close to 28 million direct and indirect jobs will be generated by 2020 if Indian electronics industry becomes a $400 billion industry. The stakes are undoubtedly high. The government may have come out with policies to encourage domestic manufacture, the way they are implementation is still an open question. As Ramamoorthy says, a good second step will be issuing detailed guidelines.
“India’s strength lies in chip design and embedded software and large-scale human resources. The market is very large and just waiting to be tapped,” says Kumar.