Outsourcing: Make in India

The plummeting value of the rupee, supply line disruptions caused by the Japanese tsunami and Thai floods, and the constantly increasing price of components - the Indian IT hardware manufacturers are today grappling with several challenges that need immediate attention. "A bigger tsunami has hit the Indian IT hardware industry in the form of rupee devaluation. We are all in red for the last 3 months. Losses are accumulating, causing cash flow challenges, and blocking investments," explained Dr Alok Bharadwaj, president, MAIT and senior VP, Canon at a recent conference organized to bring up the critical issues facing the industry today.
The supply shortages and disruptions caused by the above factors have only added to existing woes of the hardware manufacturers. According to a FICCI report, the higher input costs for the Indian manufacturing sector is also a result of the cascading effect of indirect taxes on selling prices of commodities, higher cost of utilities like power, railway transport, water, higher cost of finance and high transactions costs. This puts the sector at a severe disadvantage as compared to its Asian counterparts.

The other Asian economies such as China, Vietnam, and Malaysia have emerged as attractive manufacturing destinations primarily due to the better infrastructure and policy environment they offer. While China has always been a frontrunner, Malaysia has also transformed into an industrialized market and Vietnam has become a hotspot for Electronic Manufacturing Services (EMS) and semiconductors and Original Device Manufacturing (ODM). Sometime ago when Intel was exploring India as a destination for setting up a fab unit, the country lost out the opportunity to Vietnam mainly due to inadequate infrastructure and lack of domestic demand.

"It is all because the ecosystem is missing in India," points out Dr K Jayakumar, chairman and MD, Central Electronics, "The tariffs and duties don't favor manufacturers. Even the financing options available here are not supportive for new technocrats. Banks just don't encourage entrepreneurs."

Despite all the challenges, industry experts say that hardware manufacturing today presents a huge opportunity that India cannot afford to miss out. The industry figures also seem to be ringing the bell!

 

Don't Miss the Opportunity

 

According to the estimates of Ministry of IT & Communications, the demand for IT hardware & electronics is expected to touch $400 bn by 2020 in India. If the government does not take immediate steps to boot the domestic production capacity, the country will have to depend on imports which will further add to the deteriorating fiscal deficit. Therefore it seems to be a 'do or die' situation. "It is high time that manufacturing capability is nurtured. It is a must. India has to push manufacturing, as was also laid down in the 12th plan. Steps must be taken to build ecosystems in the country by opening up education systems and design capabilities," asserts Dr Jayakumar.

The domestic hardware market comprising desktops, laptops, servers, printers, storage, networking peripherals is the largest segment within the domestic IT-BPO market, states the Nasscom Strategic Review 2012. This segment is expected to reach revenues of nearly $13 bn this year, as per the report. Although the segment is promising and has immense potential, the increasing demand-supply gap remains to be a cause of concern. A recent KPMG report on the 'Future of IT Hardware Industry in India' points to a huge gap between demand and supply. It says that the growing demand for hardware fuelled by modernization across verticals, clubbed with the slow rate of increase in domestic production, is widening the demand-supply gap. While this is seen as a challenge, it also unveils a plethora of opportunities for hardware manufacturers, who can gain significantly while bridging this chasm.

India has already missed several such opportunities in the past for setting up fabs, semiconductor plants, and other manufacturing-related options. Despite the economic reforms of the 1990s, India has historically viewed foreign investment with suspicion. India's growth in manufacturing continues to be hampered by its traditional bureaucracy. "There is a fundamental flaw in the vision of indigenizing electronic manufacturing in India. There is a complete avoidance of investment and risk appetite," says Tanmoy Chakrabarty, vice president and head, TCS Government Solutions.

Create the Ecosystem

While the country has already proven its strengths in software and services, it is now time to focus on the manufacturing opportunity. In spite of the infrastructural drawbacks, India has tremendous potential in terms of its large pool of educated engineers that must be leveraged. Apart from encouraging private investment in this area, the government also needs to take initiative in this direction. "If Nokia can make handsets here, then we can too, provided a good ecosystem is in place - fast clearance at customs can be one. Moreover, it is not just R&D it is the whole ecosystem that is not conducive to it. You have to get in new technology and you have to compete on costs," says Kiran Karnik, former president, Nasscom.

 

There is a need to provide a level playing field for Indian manufacturers so that the challenges are overcome to a large extent. According to K Srinivasan, secretary, ELCINA (Electronic Industries Association of India), the new Draft National Policy on electronics addresses many of these issues even while recognizing the threat posed by high dependence on imports.

Although the policy makers have been making efforts to pick up lessons from some of the more successful countries, problems related to planning and execution often come in the way of achieving the desired results. For instance, the Special Economic Zone (SEZ) scheme was created after studying the zones in China, but our SEZs are much smaller and often struggle to get uninterrupted power supply. Some states like Gujarat have put up dedicated feeders to supply power, but that is more of an exception. The cost of power, cost of land as well as the challenges of acquiring land are some of the other critical issues that need attention.

Provide Growth Impetus

If the Indian hardware manufacturer has to find a place in the global landscape, there is a need to develop a comprehensive strategy that not only addresses the infrastructural issues but also encompasses the other areas related to policies and procedures. So far most of the government initiatives taken to push indigenous manufacturing haven't been adequately supported by efforts to build the required capacity. Take for example the recent case of Aakash tablets. All efforts to push for manufacturing these devices in India have got mired in various controversies, resulting in a huge demand-supply gap that is preventing large-scale adoption of the product.

Experts reiterate that any decision to promote local hardware manufacturing will not reap results unless it is backed by infrastructure support. In order to establish the ecosystem, the government needs to provide tax-incentives, relax stringent policies, and launch innovative schemes to encourage more investment in this area. The government needs to work in partnership with the industry to provide the required impetus to the domestic IT manufacturing industry.

Indian IT hardware industry can probably take a cue from the success of the auto manufacturing sector, which has gradually stepped up capacity from component manufacturing to part-designing and now complete product engineering and manufacturing.

As the government makes efforts to drive the hardware manufacturing industry, it will have to simultaneously address the immediate challenges that emerge from economic issues such as rupee devaluation, inflation, and other recession-related problems. India has already demonstrated the potential to succeed on a global landscape in software & services. With Indian IT having reached a certain level of maturity, the timing seems almost right to push for growth in the area of hardware manufacturing. So are we ready to take on the Asian tigers with a 'Made in India' brand?