No soft answers for hardware

The few weeks before the Budget are petition times.

All industry segments find ways and means of getting their "needs"
across to the finance minister–this was the most essential business imperative
a few years’ back. Those were the days when fortunes were made and lost on the
basis of a two-hour speech by the country’s finance minister. Thankfully, that
has changed to a large extent. Nevertheless, partly due to habit and partly
because of genuine problems, February still sees a large number of articles
appearing in the national press–presumably a tool for lobbying.

Information technology is not immune from this syndrome, and more than a few
‘petitions’ have been made. Most of them relate to hardware–their basic
thrust is that the hardware industry needs the government’s blessing hand over
its head. If India has to be an IT superpower, then we need a
globally-competitive hardware industry of our own. So reduce customs and excise
duties and make the market and the industry grow. There are other expectations
too, but that is the gist of it. There’s a problem with these arguments–that
too many problems are getting rolled into one.

Shyam Malhotra

The growth of the hardware industry is being equated with the growth of the
domestic hardware market. Why’s that? Did the software industry grow on the
back of a thriving domestic market? Can the domestic market not grow solely
through imports? Make import duties zero and let hardware be sold at
international prices. You also kill the grey market. And the customer gets the
full choice of products and latest technologies at the cheapest possible prices.
The government loses some revenue, but it’s not a huge amount.

If we look at the hardware industry, it is clear that electronics is an
industry of a few highly-sophisticated components. If we were to have a domestic
industry, what would it do? Manufacture chips? Manufacture storage devices? Or
make the cables? Assemble products? Or only make a few specialized components?

If you want to manufacture chips, you need sophisticated plants and billions
of R&D dollars. If you want to make storage devices, you need to make them
in thousands of numbers to justify the capital investment. If you make cables,
what you need is quality raw material, plus quality standards. And if you want
to assemble machines, you don’t need too much, but then, that’s not
manufacturing in any case.

It is also not an industry that we aspire for. Let us decide that we aspire
for–an internationally competitive electronics industry? This has three
characteristics. It works on economies of scale and, therefore, needs access to
huge markets. It works on very short product lifecycles and, therefore, needs
constant and large product development funding. It is brand-dominated and,
therefore, needs big marketing clout. If these conditions have to be met, the
Indian hardware industry has to address international markets and not just the
domestic space. It’s obvious that this type of growth can only happen if
international companies start sourcing their products from India. Domestic
companies have, in most cases, exited from the manufacturing business of
electronics and moved to services where they see a competitive advantage.

There are advantages to having a vibrant and booming electronics industry. To
make that happen, one needs to look beyond customs and excise duty obstacles.
The beyond-these-two list includes complex and changing policies, lack of local
raw material, high interest rates, high cost of capital, poor infrastructure,
atrocious processes for import and exports, labor laws, power... in short,
almost everything that any industry needs to thrive.

These are not new problems. They have been raised time and again, and some
are getting addressed. But there’s a clear need to grow the domestic market.
And the answers for that are not the same as growing the India-based electronics
industry. This India-based electronics industry is unlikely to grow in leaps and
bounds if it is seen as a domestic industry. It has to be seen and planned as a
global industry operating from India. This is a huge opportunity area by itself
and niche areas have to be selected to work on. MAIT has conducted a study on
this and identified some areas. That’s a great starting point, and we need to
get moving... or industry will remain lost in the zone between the desirable,
and the do-able.

Shyam Malhotra

The author is Editor-in-Chief of Cyber Media, the publishers of Dataquest.