Soft on Hardware

Can we manufacture? Yes, but the ‘ifs’ and ‘buts’ need to be ironed

out. Here are a few interesting anecdotes that explain why world class hardware

manufacturing continues to elude India.

A leading peripheral vendor decided to export 14-inch monitors out of India.

After shipping a consignment out of Chennai, the company wanted to claim the

duty drawback for exports and approached the customer concerned and excise

authority in Chennai. Unfortunately, the company was told that since the

products did not come from its zone it could not give the duty drawback and the

company would have to claim it from its originating destination. So the company

approached the authority concerned and was informed that the amount can be

claimed only from the point from where it was exported. Where does the company

go, whom does it approach?

THE PLUSES COULD MULTIPLY: Its time we take up the challenge and leverage on the enabling factors, especially domestic market potential, to realize India’s true manufacturing potential

In September 2000, a global player with a couple of hundred million US

greenbacks was scouting for locations to set up its fabrication plant. Given the

low local demand and poor logistical support, the company would have taken a big

decision and only if the Indian government could show that they mean serious

business. The company approached the Indian government and it appeared to be

smooth sailing as the otherwise indolent government bureaucracy showed an

unheard of eagerness to meet the US investor. On the scheduled date and time,

the gentleman from the American company was informed that the meeting was

cancelled as the secretary concerned had rushed off to prepare the background

papers for the Prime Minister impending US visit. It was but natural that the

company decided never to invest in India at least for the next five years.

Another instance of the government’s ‘affection’ for the hardware

sector. Out of the recommendations made by the much-touted National Task Force

on Information Technology and Software Development, the government approved all

108 recommendations related to software and associated services. As against

this, all 84 suggestions made to strengthen the hardware sector have been

deferred until further notice.

Comments a hardware industry veteran, "The software segment was lucky as

the authorities did not understand the dynamics of the business and the sector

had a free run until it was too late to fetter it." He recalls an incident

that occurred over a decade ago–While talking to a politician about software,

an income tax officer is reported to have said, "Software kuch samaj mein

nahi aata hai. Kya yeh Tata hawala ka paisa ho nahi la rahay India mein?"

(I don’t understand this software business. I hope the Tata’s are not

bringing in hawala money in India via the software business).

Thanks to the non-physical state of products and services, it took some time

for the authorities to understand how the transactions occurred in software

firms. But by that time software had become the darling of the Indian politician

and there was no chaining it. To repeat the late Dewang Metha’s famous quote,

"IT and beauty could do India proud because both did not have ministries

governing them."

Unfortunately for hardware, the ministry has existed for long and given the

physical nature of the commodities, a whole lot of mundane issues continue to

fetter the growth of the hardware sector even now.

Great potential, but…



How can one explain why a strategically located low cost manufacturing

destination is yet to figure on the global hardware manufacturing map? Contrast

India’s situation with countries like Singapore, Taiwan and now China,

countries that are running their economies on the IT manufacturing business.

Given India’s geographical location, it could be the best country to cater to

the European, Middle Eastern and African markets. And if things were right, it

could be an ideal location to cater to the Asian rim countries as well. Apart

from the strategic location, India’s large technical workforce has little

competition across the globe and is best suited for the hardware manufacturing

segment. The cost of labor too continues to be cheaper compared to other

countries in the fray. And yet, hardware manufacturing refuses to take off.

Comments iFlex Technologies CEO (India operations) Deepak Ghaisas, "I do

not believe any hardware manufacturing happens in India. Most of it is SKD/CKD

assembly - a screw driver technology. Except the Param from CDAC, I have not

come across any hardware manufacturing with its original R&D done in

India."

So manufacturing still remains a pipe dream in India while small but nimble

countries like Taiwan and Singapore continue to surge ahead.

Why strong manufacturing?



This certainly is no time to do a cost benefit analysis of building a

stronger hardware manufacturing sector, as the benefits far far outstrip the

costs involved. First, let’s look at the politician’s blue eyed boy —

software and its 2008 target of $80 billion. Can India meet this target without

a domestic hardware manufacturing base? Yes. But India’s cumulative hardware

import bill could be to the tune of $120 billion. Comments Rajinder Singh, V-P

(operations), HCL Infosystems "Instead of increasing employment

opportunities in India, the demand created by the software sector will give

employment opportunities to people in other countries like China. So we are

actually helping build another nation at our cost."

Apart from the obvious saving in foreign exchange, building a strong

manufacturing base will also have a cascading effect on Indian companies in

other industries like plastic, steel, engineering and also good old software

services with huge demand for software for local needs.

And more important, a strong domestic hardware manufacturing base can make

the ‘IT for the masses’ dream come true. For this to happen, a few wish

lists need to be fulfilled. If we can build huge economies of scale and duty

structures are rationalized, PCs and other comparable computing devices could

fall to reasonable price points. This in turn, would spur the demand for local

language software.

Today, it’s the chicken and egg story. After the PC penetration increases,

we can think about the availability of local language software or alternatively,

we wait for local language software to be made available before we talk about PC

penetration shooting up. A dilemma no doubt. The answer could lie in the course

taken by the TV industry. The prices of TV sets dropping to reasonable levels

and increasing penetration saw a huge growth in regional channels. PC

penetration could do it too, only if…

Did we forget to mention that hardware manufacturing could meet one of the

fundamental themes of any political party manifesto–employment. As per MAIT

estimates, every Rs 10 million sale in the hardware industry has an employment

generation potential of over 10 workers plus another five to six in the

engineering industry as well.

Of course, if we can successfully manage to develop the hardware

manufacturing segment in the years to come, we can reduce the trade deficit

through hardware exports. A small example–China exports about $20 billion

worth of hardware annually.

The Chinese threat



No one talks about Taiwan or Singapore yet, but there are persisting

references made to China. Comments AS Srinivas, manager computing product

research, IDC India, "The issue does not have much to do with the hardware

segment, or else we would have long been talking about Taiwan and

Singapore." The core issue is that China can hurt India’s dominance in

the software segment. The debate over China is justified no doubt, but

unfortunately, it shows how India has virtually dismissed the dream of becoming

a hardware giant.

HOME IS THE FUTURE: While IT hardware constitutes the largest demand constituent in the foreseeable future, it is the home segment that’s growing fastest, with over 10% of electronics hardware sales heading in that direction

But there are a few lessons to be learnt from China’s persistence in

pursuing the software dream. India could possibly replicate it in the hardware

segment. Having decided to focus on software, China has been courting software

companies across the globe. Early this year, when Chinese premier Zhu Rongji

visited India, Bangalore was part of the agenda. In his address to IT leaders,

Zhu instantly approved Infosys’ proposal to launch operations in Shanghai.

Comments Satish Kaura, chairman and MD, Samtel Color, "Given the

superior infrastructure, the speed of getting things done and the cost of

capital in China, India is obviously at a disadvantage." Can we take on the

Chinese dragon in the hardware manufacturing segment? The answer is ‘yes’,

but…

Government holds the key



There are a few success stories in the Indian hardware segment like Moser

Baer and the Tandon group. Ask Moser Baer CEO Deepak Puri how his company

tackled bureaucracy and infrastructure problems, he simply says "I opted

for export processing zones. While there are problems here too, they are less

pronounced in these zones." Weeding out those problems will take a long

time.

So the first step towards transforming the hardware dream into reality is

gaining the government’s acceptance. It is time we realized that we cannot

focus on all industries but identify a few industries where we can build truly

world class companies.

This would obviously require strong political will but without the same,

nothing much can be accomplished.

The next on the wish list is the creation of a conducive environment.This

would entail creating the infrastructure, rationalization of duties and reducing

multiple government agencies. Recently Dell Computers chief Michael Dell stated

that his company is not interested in manufacturing in India, as the duty

structure is very high. While the government cannot favor a particular industry,

duty structures for hardware ought to be frozen according to global benchmarks

rather than comparing them with other domestic segments. EPZs (export promotion

zones) or SEZs (software export zones) should be established on a war footing.

However, given the government’s poor track record on being proactive, the

industry remains skeptical of any export initiatives. Comments Balu Doraisamy,

MD, Compaq India on the proposed SEZ initiative and whether it can rekindle

hardware manufacturing, "It cannot. The SEZ locations announced are far

removed from domestic markets. Besides, the continuing restrictions on domestic

market access, the time it will take to get any SEZ operational in India and the

uncertainty surrounding any government initiatives are key deterrents."

Though the IT task force recommends ministries and other government

departments to spend a minimum of 3% of their annual budget on IT, the

initiative is yet to take off. As against this, the Chinese government consumed

about $5 billion worth of hardware in 2000 itself.

In India, the government should consider identifying a nodal agency with the

task of IT implementation. While a centralized agency would ensure that the IT

funds allocated to the various departments and ministries are fully utilized

during the year, it will bring in a lot of standardization in the various

government departments. The government also needs to look at reducing the cost

of various IT equipment. For example, to bring down the cost of the PC, the

government can negotiate for a ‘India specific price’ for critical

components like CPUs, operating systems and storage devices.

While the government can do a lot to increase domestic demand, it does not

have much scope to alter the dynamics of the international markets. Yet, if we

really want India to be a global player, branding is crucial. Today, India has a

credibility issue. Many of the much touted projects have ended up as

non-starters. Enron refuses to be washed away from the investors’ mind. It is

time for India to take some lessons in marketing.

Comments Singh, "Private investors are turning to countries that offer

them the best deal and anything less than that benchmark will deter their

investments." Given the global situation, all countries are wooing

international investors, so why should they come to India? Gone are the days

when we could say that India is a huge market and companies would come in.

Comments MAIT director Vinnie Mehta, "Branding is essential. Look at

China. So far 80 odd Chinese delegations have come to India trying to learn

about how India has made it big in software." Globally, this does create

the image that China is interested in software and can bend backwards to get

software companies to China.

Comments Doraisamy on India’s failure to attract foreign direct investment

in hardware manufacturing, "The absence of key facilities like port

infrastructure seriously increase the turnaround time for consignments. There is

the high cost and low quality of infrastructure. "

Last, but not the end of the list is the active industry, government and

academia participation. Taiwan’s Hsinchu technology park could not have been a

success without industry participation. While we boast of IITs as model

institutes churning out the brightest people and recognized across the globe,

how many times have we boasted of great products coming out their  research

labs? But there are positive signs like IBM setting up a Research Lab at IIT

Delhi.

Can we do it?



That’s the $62-billion question. As per the recent report by MAIT and

Ernst & Young, India has a hardware opportunity of over $62 billion by 2010.

However, the bigger question remains. Can the government do it? Just when we had

given up all hopes about privatization, the government has sold off few of its

holdings and seems determined to continue the process with the same zeal. If

this continues, India is strongly positioned to make it big in hardware

manufacturing. Says Kaura, "India should focus on niche areas and

concentrate on design and development. High volumes need not necessarily be the

basis of competition." If this does not happen, we will simply continue to

talk about the potential of this segment. "We had a potential of $62

billion, only if…"

Yograj Varma in New Delhi

Taiwan: The Powerhouse of Manufacturing

The Taiwan story is a stark reminder of how a successful government and

private sector cooperation can create a global force to reckon with. Even today,

barring Acer, very few global brands have come out of Taiwan, yet it controls

key industry segments like memory and IC.

Way back in the 1950s, the government decided to move out of agricultural

exports to import substitution products. The government encouraged the SME

sector with incentives to operate in market niches and manufacture light

industrial goods. In the 60s, the government introduced a number of export

processing zones with zero duties on all incoming and outgoing manufactured

goods.

However, by the early 1970s, the government shifted its focus to promoting

capital and technology intensive industries. The next decade saw a renewed focus

by the government on seeding and developing high tech industries. One of these

was the creation of the Hsinchu Science park as a key support infrastructure

with a clear charter - apart from concessions and incentives, firms located in

the park were expected to sustain a higher level of R&D expenditure and

considerable tax concessions were linked to the introduction of new

technologies. While most of the Asian countries lost out on their competitive

advantage after the 1986 Plaza Accord where all the Asian countries had to

revalue their currencies, Taiwan bounced back with new technology sub-sectors

like memory chips, CD-ROMs and flat panel displays).

In 1981, technology intensive industries accounted for just 20% of total

industrial output but by 2000, they accounted for over 40%. In 1999, exports of

electronic goods including computer, telecom and peripherals amounted to a

whopping $50 billion.

Among the host of initiatives in Taiwan, a few factors/entities which can be

singled out for the radical changes in Taiwan are the Industrial Technology

Research Institute and the Hsinchu Park. As the top research institute, it helps

Taiwanese entrepreneurs by bringing in the latest technology suitable to

Taiwanese industries and helps in transferring technology to them. Also, it has

been the charter of the ITRI to scan the global technology horizon and

disseminate the technology to numerous SMEs. This helps in sharing the R&D

cost and to reduce risk. This has been one of the key factors in the growth of

Taiwan as the global technology hub. The role of the government has been in the

rapid adoption of new technologies and products developed elsewhere and their

rapid diffusion to as many firms as possible.

Also with the Hsinchu park, Taiwan had developed a great model to bring in

high tech companies. Companies setting up shop in the park were offered low

interest government loans, R&D funds, tax incentives, access to government

labs and test facilities located in the park. With the first park in place and

successful, the Hsinchu park was followed by others parks like Tainan and

Chung-Shan Institue of Science and Technology.

Clustering to Conquer: The Singapore Story 

Here’s something to ponder on. In 1960, it was a struggling third world

economy with a per capita income of $1300. By 2002, the per capita income had

grown 25 times to touch $32,900. In India while we are still sparring over the

Swadeshi—Videshi syndrome, the Videshi’s clearly kicked off the whole

process in Singapore. The country saw a change in strategy in 1990 with its ‘Manufacturing

2000’ strategy vision.

The focus was on three key industrial segments— engineering,

electronics/semiconductors and chemicals/petrochemicals. All policies and

initiatives since then have been on promoting and strengthening these clusters.

Specialized infrastructure such as the ‘wafer fabrication parks’ for

semiconductors firms, has been created to make Singapore an attractive global

destination for these clusters. Mind you, the focus from day one has been on

value addition and not just final assembly jobs.

The Economic Development Board (EDB) identifies the key value adding steps

that exist and more importantly points out the gaps in the value chain that can

be remedied by attracting local talent or getting international firms to invest

in the Singapore cluster. Take the case of the semiconductor cluster. The EWB

sought to have companies in the full value chain process of semiconductor

production from IC design to fabrication to test and assembly and support and

ancillary services. While even today, there is no branded semiconductor product

produced by a Singaporean local company, yet semiconductors remains one of the

key industries in Singapore.

Unlike Taiwan with a model of sharing R&D cost and reducing risk,

Singapore’s Institute of Microelectronics (IME) established in 1991 and funded

by the government, works with the highly focussed consortia till the

pre-competitive stage. The idea of creating a complete value chain makes it a

favored location for the high technology semiconductor industry with most global

companies like AMD, Hitachi, SGS Thomson, Sony and Toshiba present in the

country. Importantly, all the clusters are backed financially and with

technology by the public policy initiative by the government. For example, as

the decision was made to focus on the electronic/semiconductor cluster, IME was

established and government invested in capital intensive infrastructure like the

wafer fab parks to bring the global semiconductors players to Singapore.