Manufacturing in India  Slow, Steady and Dying

Consider this selling pitch–”We offer low-costhigh-skill labor, are strategically located and serve the African and Asianmarkets.” Any MNC looking for setting up a manufacturing base should jumpat this offer. But few have taken the bait when the country is India.

The PC hardware and components industry has found theinternational players disinterested in setting up their manufacturing bases inthe country. Most of the PC components are imported and assembled by nativevendors rather than being sourced within the country. Barring the Tandon groupthat manufactures and exports hard drive heads, no other company–local orinternational–has a reasonably high manufacturing base in the country.

Slow and steady loses

How India Loses due to High Turnaround Time

Let’s assume that company X wants to do value addition on processors and re-export the final product. It imports latest processors valued at $1,000. Also assume that the average life of a processor is about three years or roughly 1,000 days, with a daily depreciation of one dollar. The company takes about 20 days, on an optimistic note, to do the value addition and ship the final product out of India. By the time the product is shipped out, the processor has already lost $20 in value. Consider the same for the competition in Singapore or Philippines, which takes a maximum of three days, thus losing only three dollars in value. With a wafer-thin margin and $17 already lost to the competition, can the company X survive in a cutthroat international market? In other words, India ceases to be a feasible base for manufacturing or assembling.

Why India, despite having everything in its favor, has failedto grow into a natural choice for the PC hardware manufacturers, is not hard tounderstand. In a volume-driven business with wafer-thin margins, the highturnaround time has been detrimental to the success of the business. Exportswill have to become a key market, as domestic markets are yet to take off, inorder to achieve economies of scale, if manufacturing facilities of global scaleare to be set up.

India stands out poorly with a high turnaround time. CommentsVinnie Metha, director, MAIT, “In India it could be 16-30 days–significantlyhigher than three days in case of Singapore and one-two days inPhilippine.” Can manufacturers afford to wait for the undue and longprocedural delays at the customs or civil authorities’ ends, that India offersalong with its traditional pitch of low-cost and high-skilled labor? No doubt,the country has some native players in manufacturing, like Microtek in monitorsand keyboards and Vintron in motherboards and now in PCs, but we are still along way from being close to the likes of Taiwan. The same stands for valueadditions and re-exporting of the same to international markets.

Little hope

Have we missed the PC manufacturing opportunity? Says Vinnie,”Probably yes and with zero duties coming by 2003, I don’t see how we caninterest manufacturing activities with the current state of affairs.” Thegovernment has been phasing out the duties since the era of liberalization (seetable), and it’s expected that by 2003, the IT hardware industry will be thefirst to have zero-duty imports.

Currently, due to a duty of about 15% on finished goodsimports, local manufacturers/assemblers enjoy some protection. Whether they willbe able to sustain when this advantage goes off in a zero-duty regime (alongwith the continuous procedural delays), is anybody’s guess. Though companieslike Wipro, IBM, Compaq and Acer have beefed up their manufacturing andassembling activities, continuing to do so in the post-zero duty scenario ishard to imagine.

Duty Structures across the Years

 

95-96

96-97

97-98

98-99

99-00

00-01

Finished Goods

65

40

22

22

20

15

Parts and Components

35-40

25-35

12*

12

10-May

0-5

Source: MAIT
*All figures in %. The duty was 22% and subsequently changed to 12%, following an interim correction

The only hope for manufacturing activities to prosper can bea volume demand at the local market. If demand grows to reach four million PCunits by 2003, as projected by IDC, then companies’ supply chains will be ableto dictate assembling or manufacturing in the country. Agrees Aditya Pant, headof research, IDC India, “The current local demand does not justify settingup of international-scale manufacturing operations in the country.” To haveeconomies of scale, companies will have to look at exports, where the turnaroundtime is the decisive factor. Hence there is no serious need felt by companies toset up their manufacturing base in the country, given the continuinginfrastructure-related and procedural
delays.

India has not been aggressive in attracting internationalcapital for the hardware manufacturing business. Maybe it’s too late to thinkabout this, with zero duty in the pipeline, but perhaps we can try and become amanufacturing hub for the next generation of non-PC information devices. Yes,the turnaround time still needs to be reduced.

YOGRAJ VARMA
in New Delhi

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