On Your Mark, Get Set...

Do you know that Samsung has set up a plant in Noida with a total targeted

manufacturing capacity of 4 million color monitors per year? This plant has an

initial capacity of 1 million units, to be hiked to the total capacity in

phases. The move comes even as the rest of the industry runs shy of

manufacturing, which remains crouched in the shadows behind its better-known

cousin, software. And that’s because despite repeated announcements by both

the government and private companies, not much is actually happening to boost

manufacturing in the country. DQ takes a closer look at what is happening on the

manufacturing front, and whether the authorities are taking steps to increase

the pace of growth

It’s obvious. Investors don’t want to touch the Indian IT

hardware manufacturing industry with a barge pole. When it comes to producing in

India, the great Indian USP comprising low-cost, high-skilled labor and

strategic location pitch doesn’t really sweep businesses off their feet. In a

country where manufacturing could have done wonders for its economy, frayed

government policies and the lack of political will keeps manufacturing related

investments away. The government is trying hard to globalize the Indian industry

without actually offering the industry an environment that is globally

competitive.

The country that is a software elephant is also a hardware

mouse. Why? In an industry that works on very tight margins (2-3%), it is either

high volumes in the domestic market or the incentive of smooth operations and

sound logistics for exports that would attract investors to manufacture in a

given economy. Sadly, India fails on both accounts.

Flash in the pan

But before you bring out those anti-depressants, here is the

upside. Domestic demand is projected to grow to four million PC units by 2003,

as per IDC India estimates. Perhaps this number is what attracted global

conglomerates like Samsung to invest in setting up peripheral manufacturing

plants in India. Samsung Electronics’ automated plant is its seventh in the

world and has been set up with an initial investment of $10 million. In its

first phase of operations till end 2001, the plant is estimated to have a

capacity of one million units and will cater solely to the domestic market.

What prompted this giant to set up the manufacturing plant in

India was the prospect of being among the first global players to have a strong

manufacturing presence in a potentially colossal and growing market. Vivek

Prakash, general manager, Samsung Electronics India admits that today it is

cheaper to import PC monitors than to manufacture them here. Although the

government tariff structure may not be sensitive to the needs of local

manufacturers, the fact remains that a monitor is the bulkiest and a very

fragile part of the PC. The costs involved in shipping PCs from Malaysia are

massive. "By manufacturing in India we are able to bring down the supply

chain costs," points out Prakash. But if there were tangible incentives for

hardware manufacturing in India, Samsung might have entered the market earlier

he admits. Prakash does not rule out exporting PCs bit there are no immediate

plans.

LG Electronics too has set up its PC monitor-assembling unit

in May 2001 involving an initial investment of $10 million. The unit has a

capacity of 3.5 lakh units per annum that can be upgraded to five lakh units per

annum. "The unit was set up in order to address the original equipment

manufacturers (OEM) segment, ensure better supply chain management, tight

inventory control, customization of products and in cost reduction," says

NS Bindra, general manager, sales and marketing–IT products, LG Electronics.

For LG too, the incentive is the sheer size of the growing market.

And how can we not mention the very profitable media

manufacturing company, Moser Baer? The company has witnessed unprecedented

growth in the past few years growing at about 100%. Moser Baer has seven state

of the art manufacturing units operating in Noida and the company has earmarked

an investment of about Rs 800 crore in the current year. There are plans for yet

another advanced manufacturing facility. Interestingly, Moser Baer exports more

than 90% of its products. As for the problems revolving around manufacturing in

India, Rakesh Govil, GM treasury, acknowledges that every country has its own

set of hassles. "You just need to identify them and develop solutions

accordingly," he says diplomatically.

The elephant sleeps

Though there are few other companies who have done wonders in

the field of manufacturing, they admit that the overall picture is grim.

"This is just a flash in the fry pan," says Vinnie Mehta, director,

MAIT adding, "There are major glitches in the system you just cannot

ignore. These range from extended turnaround time and inverted, unstable tariff

structure to bureaucratic and procedural delays and basic infrastructure

issues."

Take for example a recent strike at the Chennai seaport. The

strike that continued for 27 days did not allow ships to dock at the Chennai

port. "We went through a very turbulent time during those twenty-seven

days. There were no monitors in the country," says Prakash of Samsung,

which sells close to 80,000 monitors in a month.

Another rather peculiar but interesting ‘irritant’–air

consignments have to be stored for 24 hours before being shipped out, a process

called cooling off, something that was considered necessary because of the risk

of sabotage. Little do the authorities realize that other than the sabotage risk

that ‘cools off’, the prices of the obsolescence sensitive hardware products

cool off too. To add to this, clearing goods for exports from designated export

zones needs to be verified at least seven times! Little wonder that companies

are wary of investing in India. Reports suggest that no single major player has

expressed interest in the hardware facilities investment in the country and

nearly 17 joint-venture proposals in computer hardware have been ignored,

because no policies exist to shepherd them home.

"Investors have traditionally shied away from the Indian

IT manufacturing sector which stands at a meager $250 million," says Mehta

of MAIT. He feels that if India were to remain on the global IT map, we should

learn from China, which is the third-largest hardware supplier to the world.

"An economy that is just two-and-a-half-times that of India, exports six

times the IT goods and services that India sells overseas."

Good times ahead?

With a 5 million installed PC base and annual sales of over

one million PCs, the market for peripheral manufacturers is large and it makes

sense to manufacture in India. As Anil Gupta, CEO of India’s second largest

monitor maker Microtek puts it; "Manufacturing certainly facilitates better

logistics and distribution. This surely is one of the key factors for survival,

if not the only." Microtek has six manufacturing units for peripherals

including motherboards, monitors, UPS’ and keyboards with an investment of

over Rs 100 crore in plant machinery and working capital.

Manufacturing could emerge as a USP for the vendors. Prakash

of Samsung says that it makes business sense to have a production unit in India.

Given the scale of operations, the domestic market is large enough to absorb the

products and despite the tariff drawback, the supply chain advantage and cost

benefits that accrue from short inventory lead times are hard to ignore.

"Considering these factors, I would say that it’s profitable to

manufacture here as compared to importing from Malaysia," he points out.

When quizzed about government policies though, most

manufacturers preferred to dodge the issue. Gupta of Microtek was blunt and

forthright–"Government policies are anti-manufacturing," he

declares. "Manufacturing here is happening due to logistic reasons."

Yet, all’s not lost. Even to the ‘almost sadistic’ policies, there are

exceptions. Take Pondicherry, for instance. This tiny Union Territory has

attracted major IT players to set up manufacturing facilities. The minimal tax

benefits have brought heavy investments to Pondicherry.

Other state governments are seriously considering replicating

the manufacturing success story. States like Karnataka and Andhra Pradesh that

attracted software organizations in large numbers, now want hardware

manufacturers to establish their facilities there.

India may have lost out to its more populous neighbor in the

PC manufacturing race, but there is still some hope. If only the government

would play its cards right, we have everything going in our favor to become a

hub for peripheral manufacturing. But only if…

MEGHNA SHARMA in New Delhi

Namrata Rana Managing director, Futurescape Netcom

I find running my own company and calling the shots glamorous

Background

Namrata Rana completed her MBA from IIM, Ahmedabad. She took up a job at DSP

Merrill Lynch on the institutional sales desk where her role was to consult FIIs

on their Indian investment strategies. In 1995, Namrata joined Futurescape

Netcom as one of its founder members.

Job Profile

As the managing director of Futurescape Netcom, she is responsible for

strategizing, customizing and ensuring proper implementation of CRM solutions.

Her focus has been on organizations in areas like customer acquisition,

retention, care and loyalty. During the past six years, she has been involved in

executing projects for multinationals like General Motors, Motorola, SmithKline

Beecham, Reckitt Benkeiser and Siemens.

Turning point

The turning point in her career came when she learned that two of her friends

had set up their own software ventures and were doing pretty well. The prospect

of being able to run one’s own enterprise and call the shots was quite

exciting and glamorous. "I also realized that that buying and selling

stocks was just not what I wanted to do. Also, I did not wanted to continue

executing orders," explains Rana. Soon she joined her friends in their

venture and Futurescape was born.

Best decision

Rana considers her decision to switch from being a stockbroker to an IT

entrepreneur as her best professional personal decision. In terms of changes in

the organization, she thinks her best decision was to redefine customer

relationship management for Futurescape. "From just a hardcore IT driven

solutions firm, we are now a technology-led, process driven solutions firm which

is also a very important development partner of CA," she feels.

Professional faux pas

‘‘I once delivered a project report to a client on a CD, only to find

fifteen days later that the CD was still with me. I had delivered only the empty

CD case to him,’’ she says, blushing.

As told to Shubhendu Parth

Perspective: Industry hot spots in the coming fortnight

Are happy days here again?

Get set for cheaper and faster PCs. Intel is expected to clip another 23% off

the prices of P4 processors late this month, after having snipped off 39% in

late August. And the ride to faster PCs is not being awaited by those that will

end up using them–PC vendors are also eagerly waiting for the price cuts,

hoping they will to act as a strong booster to the sagging PC industry’s

fortunes. A precursor to the same is the introduction by Indian vendors like HCL

Infosystems of P4 desktops in the sub-Rs 40,000 price range. Also, the narrowing

price differential between the P4 and the P3, with the former offering far

superior capabilities, should bring the much-needed excitement into the PC

market. Vendors are hoping price cuts will get companies to standardize their

systems to P4s by replacing aging PCs with the new powerful ones. Given the low

demand in the market, the P4 means a helluva lot.

Hindi-Chini, no bhai bhai

Infosys’ proposal to recruit Chinese software professionals and bringthem

to India for training, targeting redeployment later to the Far East market

stands nixed by the ministry of external affairs. While security concerns are

reason enough to turn down the proposal, India still has to walk a middle path,

given the growing Chinese market. By 2005, China is expected to become the

biggest software market in the whole of the APEC region, and the world’s

second-largest, trailing only the Big Daddy called the United States. Also,

given this heavy dependence, Indian companies need to look at the Asian market

more aggressively. Here, however, language could emerge as a critical weakness

for India. While the going has been good in the US, Indian companies have not

made much headway either in the European or the huge Japanese market thanks to

the cultural and language barriers. Companies are fast realizing that while the

Indian advantage of English-speak, low-cost labor has worked well in the United

States, it is yet to cut too much ice in the other parts of the world, notably

APAC region, and to a lesser extent, in Europe. And China can now exploit a

similar cliché in the Asian market–given its fast-growing domestic market,

easy access to regional markets, and the government’s focus on software

professionals, India may lose out big time in the long term. It is time the

government and industry remembered Buddha and his middle path approach to iron

out this issue fast.

Aren’t we having too many profit warnings?

The first warning comes in.

As the slowdown continues with no signs of a turnaround, the

Indian software companies with a major dependence on the US market are preparing

for the worst. Telecommunications software major Hughes Software Systems has

cuts its profit growth forecast from a previously projected 60% to under 25-35%.

In FY 2000-01, the US accounted for about 80% of Hughes Software’s total

exports, while Europe accounted for 16%. The balance came from Japan and Asia.

The ‘tighten-your-belt’ syndrome is definitely in and could see pink slips

being offered to employees. For instance, Hughes Software, like most of the

other companies in the software arena today, recently shed about 80 employees,

but it did something different–it also took in around 30 new employees. Are we

looking at a scenario where companies get rid of dead wood, akin to the US,

where 5-10% of employees are shunted out annually, slowdown or no slowdown?

Meanwhile, other biggies with US dependence are Cognizant

Technologies with 84%, Satyam with 76%, Infosys with 74% and HCL Technologies

with 76%. Can we expect more warnings soon?

The war-cry keeps business down

Good things come in small packages, but bad news comes in big chunks.

First has been the extended slowdown, then the WTC tragedy. Now, it is the

American war-cry. The obvious hit to the Indian IT industry is the fall in

software exports. From 50%-plus growth rate in FY2000-01, the current growth is

being pared to less than 20% by Boston Consultancy Group and a more optimistic

30-35% by Nasscom. While the bigger players may be able to weather the storm,

the smaller ones may find the going tough, given the continued uncertainty. In

this shock wave, any flicker of good news? There was, at least till the WTC

tragedy. According to a new poll by CIO magazine and Deutsche Banc, the tech

slump hit bottom in May this year and the industry is now expected to see some

sort of a resurgence. The poll also predicted that IT budgets would grow by 7%

over the next 12 months, up from the July prediction of 6%, but down sharply

from 19% last November. Also, according to the poll, its the infrastructure

software category which should see the maximum activity, with CIO expecting this

segment to show an increase of 47% in spending during the next 12 months, up

from 37% in July. Storage systems also emerged as a most popular category of IT

spending, with 49% of the panelists expecting it to increase and only 17%

expecting it to be scaled back. Post-WTC disaster, this could be the key segment

where enterprises would be making sizeable investments. And what about

outsourcing, a key segment that the Indian IT industry is banking on? Bad news

once again. Outsourced IT services remained the weakest industry segment, with

only 27% of the panelists expecting increased spending here. However, the real

picture will emerge only in December, when CIOs plan out their budgets for Year

2002. Till then, keep them fingers crossed.

The war-cry keeps business down

Good things come in small packages, but bad news comes in big chunks.

First has been the extended slowdown, then the WTC tragedy. Now, it is the

American war-cry. The obvious hit to the Indian IT industry is the fall in

software exports. From 50%-plus growth rate in FY2000-01, the current growth is

being pared to less than 20% by Boston Consultancy Group and a more optimistic

30-35% by Nasscom. While the bigger players may be able to weather the storm,

the smaller ones may find the going tough, given the continued uncertainty. In

this shock wave, any flicker of good news? There was, at least till the WTC

tragedy. According to a new poll by CIO magazine and Deutsche Banc, the tech

slump hit bottom in May this year and the industry is now expected to see some

sort of a resurgence. The poll also predicted that IT budgets would grow by 7%

over the next 12 months, up from the July prediction of 6%, but down sharply

from 19% last November. Also, according to the poll, its the infrastructure

software category which should see the maximum activity, with CIO expecting this

segment to show an increase of 47% in spending during the next 12 months, up

from 37% in July. Storage systems also emerged as a most popular category of IT

spending, with 49% of the panelists expecting it to increase and only 17%

expecting it to be scaled back. Post-WTC disaster, this could be the key segment

where enterprises would be making sizeable investments. And what about

outsourcing, a key segment that the Indian IT industry is banking on? Bad news

once again. Outsourced IT services remained the weakest industry segment, with

only 27% of the panelists expecting increased spending here. However, the real

picture will emerge only in December, when CIOs plan out their budgets for Year

2002. Till then, keep them fingers crossed.

IT companies in aggressive mode

Traditional stock market wisdom says ‘buy when there is blood on the street’.

It seems that the Indian IT industry is taking this maxim seriously. Shiv Nadar’s

HCL Technologies has acquired 51% stake in Deutsche Bank’s software arm and

will buy out the balance over the next three years. The same is the case with

NIIT. Instead of the buy-back of shares, the company is planning to use its cash

reserves for acquisitions and expansion. According to its chief Rajendra S Pawar,

NIIT is "close to acquisitions". Most Indian IT companies are loaded

with huge reserves and the slowdown seems to be the right time to go on an

acquisition spree. Let’s see who’s next to come out with an acquisition announcement.