The Make in India Waistline— Every inch counts!

How fit is the Indian hardware story after hitting the Make in India gym? Are we moving towards muscles like high-value addition, miniaturisation, own IP, and strong upstream research—especially in components?

The couch was comfortable. Or too deep to get out of. Either way, the Indian hardware industry kept gathering flab, and losing competitiveness while its counterparts, and its own sibling—the Indian software industry, kept turning lean and strong.

Now that it has decided to get up and follow a strict new diet-and-exercise plan, there are signs of high-definition abs in some areas. But some organs still struggle with cholesterol, which accumulated over many decades, and it would take the industry a lot of effort, and rigor, to get fit and sharp in every way.

What would that mean? Let’s start with a BMI chart first. And then let’s see what new habits, super-foods and training can help to build those biceps and run fast as a stallion. Maybe turn into a Liew Thon Lin that attracts metal—naturally, effortlessly.

An X-Ray into the good, and the fat

Potbellies cannot be flattened in one day. The journey of turning lean and fit is a long one. But standing on the weight machine, time and again, gives a good view of what’s working and what’s not.

So let’s take a peek into where the scales swing for Indian IT and electronic hardware players.

The Indian semiconductor market was valued at $27 billion in 2021 and is expected to hit $64 billion in 2026, according to a report by the Indian Electronics and Semiconductors Association (IESA). But only nine percent of India’s semiconductor requirements were sourced locally last year, the report reminds.

As to electronics manufacturing in India, this space has grown at a fast pace (a CAGR of around 23 percent) during the last five years, with domestic production of electronics hardware touching $76 billion in 2019-20 (as per InvestIndia estimates). India can reach $300 billion worth of electronics manufacturing and exports by 2025-26—four times that of the current figure of $67 billion. But to do that we need to focus on specific product segments of high potential and scale—as indicated in the Vision Document 2.0, by the Ministry of Electronics and Information Technology (MeitY). Also, domestic electronics manufacturing could generate an economic value of $100 billion to $130 billion by 2025.

In the future, if some other country is able to give similar market access or incentives as we do, then it will be difficult for India to hold this position. Design Linked Incentives should be our priority focus area now.

But at the same time, we cannot turn our eyes away from the fact that India imports a major portion of electronics—note that as much as 70-80 percent of components and 50-60 percent of products get imported (as per some media reports). As to the manufacturing side, while growth is happening, a lot of it is still in the bracket of low-value addition work. At the last count, except for the $10 billion worth of components, the rest of the manufacturing output of over $50 billion was characterised by less than 20 percent value addition. When we think of our self-reliance on manufacturing electronic components, we cannot forget that we still need certain chemicals and semiconductors which are not being produced in India. Plus, the cost of high-end testing labs is another factor that is crucial for testing the quality of these components.

Design talent is India’s strength when we look at our skill-sets and we should tap it—reasons Rajeev Khushu, recently Chairman, and now Advisor, IESA. “We should think beyond just manufacturing and aim for both design and manufacturing. Yes, a lot of work in India is still low-value addition. Think of 12-14 percent except for products like energy meters where value addition is up to 60 percent. This is because we lack design control and the power to pick and lay down components as per our choice. Even on smartphones, we don’t have our own brands. The days of Onida and BPL sound nostalgic. But the industry is planning to change that with specific interventions. We need to catch up to this race.”

We should think beyond just manufacturing and aim for both design and manufacturing. Yes, a lot of work in India is still low-value addition. Think of 12-14 percent except for products like energy meters where value addition is up to 60 percent.

— Rajeev Khushu, Chairman, Advisor, IESA

That should be the priority, especially if most of the design does not happen in India, as Khushu affirms. “In the future, if some other country is able to give similar market access or incentives as we do, then it will be difficult for India to hold this position. Design Linked Incentives should be our priority focus area now.”

Jim Handy, a veteran semiconductor analyst, from Objective Analysis throws some light on the capabilities that stand for high-value addition when we think of manufacturing Semicon and electronic components. “For chip makers product differentiation is a great path to profits, particularly when the product is popular. The downside is that it takes many years of expensive sales efforts to win designs for proprietary products. The companies that sell commodities (like DRAM and NAND flash) enter the market because they can take business from established suppliers quickly with a very small sales force. Margins tend to be much lower for commodities than for proprietary products.

Indeed, there is a big yawning gap on the side of IP and upstream research. We need a lot of serious work to be done here—if we are actually aiming for deep self-reliance. Just getting good on manufacturing scale or capital will be a hollow win if we still depend on others for the product designs, IP, patents, and R&D precursors that are needed before the factory action starts.

Margins tend to be much lower for commodities than for proprietary products.

— Jim Handy, Objective Analysis

Notably, the total number of patents in force in 2019, according to the World Intellectual Property Organization was about 14,978,300 and of these 68, 720 were international patents filed by China in 2020.

If you are investing or asking VCs to invest in your business, make sure that in the long term you envision to design your own chips rather than relying heavily on foreign technology which was a case in China and they are trying to change too.

— Muzammil Hassan, Group Manager, Grey B

Muzammil Hassan, Group Manager, Grey B, and a seasoned IP-area specialist, also points out some gaps in areas like own-IP, miniaturization, or upstream capabilities. “These have a very basic inclusive relation. When you do miniaturisation and start making small products taking a bigger product in mind, you should own IP. Owning IP ensures that you are recognised as a creator, the smaller inventions are owned by you and you are not only an assembler but rather an inventor who has the capability to innovate.

The same is the case for upstream processes, when you go to this minute level of manufacturing or fermentation, it is necessary to own an IP for the same. IP makes you different and it generated trust in the final product owner,” he advises.

“IP rights are important for small players, especially start-ups,” second Sanjay Gupta, Vice President, and India Managing Director, NXP Semiconductors. “This is to ensure that their product/service offerings are not misused, in addition to facilitating the idea of getting innovative technology to the marketplace and enhancing the competitiveness of technology-based firms. Technology that precisely minimizes the size of circuits is less expensive and complicated, particularly for new players.”

Gupta zooms in on how miniaturization is at the heart of any company’s quick development and is a boon for mobile telecommunications, multimedia, the internet, and a variety of other applications. “Miniaturization can squeeze more chips out of a single 300mm-wide silicon wafer. That’s not an easy change, though, given that much of the auto industry selects and validates components that are used for years.”

Handy iterates the importance of IP and upstream strengths. “When companies enter semiconductors or other electronics components, they enter a world in which IP is more carefully regulated than in older industries. This is mainly due to the high R&D cost to participate in semiconductors. Companies with high R&D budgets need to pay for this expense with higher profits, and if competitors use their inventions to compete against them then their profits will suffer. The typical way to deal with this is to build a patent portfolio that is similar in strength to the competitors’ so that IP negotiations start on a more even footing.

With regard to miniaturization, Handy feels that although leading-edge processes (like 10nm, 7nm, 5nm, & 3nm today) attract considerable attention, there is still significant demand for trailing-edge technologies (1µm, 0.5µm, 0.25µm, 180nm, 130nm, 90nm, 55nm, 45nm, 35nm, 25nm, 20nm, & 15nm). “It is less costly to enter these markets than try to get into leading-edge technologies, although margins are usually lower. If we think of the context of earlier stages in the supply chain, there are many opportunities in semiconductors for materials and tools. As a general rule, the materials are costly and lightweight, meaning that competition is global because freight charges are low when compared to the selling price. An indigenous company has no special advantage through its proximity to the customer.”

Indian IT and business services market is projected to reach $ 19.93 billion by 2025 and to achieve this, companies are focusing on security and security engineering as it is becoming important in dealing with the humongous exchange of data.

— Sanjay Gupta, Vice President, and India Managing Director, NXP Semiconductors

Building those muscles would help us to create endurance for the long race for sure. India has a big road ahead waiting for a lithe runner.

In a McKinsey Global Institute report, we can see that in the fiscal year 2020, manufacturing generated 17.4 percent of India’s GDP. Also, we can notice that in the past 13 years, India’s manufacturing-sector share of employment went up by just one percentage point (in contrast to a five-point increase for the services sector.) There are many areas of opportunity that, as per experts, India can tap here- export growth, import localization, domestic demand, and contract manufacturing.

So we need to remember that mere superficial weight loss will not help much unless inner stamina is bolstered—for a marathon.

McKinsey’s estimates show that even if some companies and sectors in India’s manufacturing industry have delivered strong Returns On Invested Capital (ROIC), there were still about 700 of the top 1,000 manufacturers that produced returns that were less than their cost of capital in 2018, thereby destroying value. Poor logistics, delays, fragmentation, and scalability are key issues.

That said, there is some hard-to-miss improvement in many muscles.

A happy inch-tape

Ask Paresh Vasani, CEO & MD, PCB Power Market & Circuit Systems India Ltd, and he would laud the Make-in-India Progress in a confident tone. “The progress is really remarkable despite concerns from some people around speed and direction. The government of India has done a tremendous job in policies, and incentives and in providing apt encouragement to Indian players and major global players to Make in India. This impetus for self-reliance is all the more relevant when we look at some geopolitical incidents and the Covid disruption of supply chains—we see that there is an emerging need for ensuring that electronic manufacturing is not limited to one country. It is a good time for India to capture this global opportunity by strengthening its manufacturing edge.”

There are some 11 value chains that could more than double their GDP contribution to $500 billion in seven years. We can also look at strengthening our muscles on import localization ($55 billion to $60 billion of additional GVA). McKinsey’s analysts augured that India’s manufacturers could challenge foreign competitors for market share in some strategic sectors, one of which was electronics.

There is a potential to reduce India’s spending on imports from 30 percent of all manufactured goods to 15 to 20 percent. Interestingly, leaders in India’s automotive industry generally believed that high import tariffs on finished vehicles allowed the industry to develop local product development, supplier, and manufacturing capabilities. That helped to strengthen exports of automotive components and finished vehicles to reach more than $25 billion even as these tariffs were progressively reduced.

In the opinion of Vasani, it is not just about reducing imports but about gaining self-dependence and creating a good ecosystem, and focusing on exporting from India. “We should remember that electronics are the second highest in terms of imports in India, after oil. Although the import data suggests that gems and jewelry is the second-highest imports but usually these imports are for job work and then exported back to their designated country and are not consumed in India. Our current electronics manufacturing is about $75 billion and India has a plan of manufacturing $300 billion by 2026. This will mean we need to develop a whole range of electronics components to meet this huge electronics manufacturing requirement. And this area is both a concern and an opportunity for

domestic players.”

Burn Those Calories

A lot, and we repeat, a lot remains to be done. There are still many muscles that need a hard-core workout. There are still many dead-weight areas that won’t wipe away fat so easily.

Vasani advises that we need to sustain momentum in infrastructure and policy areas. Especially in creating friendly policies for local manufacturers. “We need strong reforms in customs and logistics; perhaps, something like what GST did—for local players so that the industry has adequate entry barriers. A Chinese player can easily ship a component in 2-3 days to another country—and that’s an edge. We need to catch up on that level of speed in logistics. The government’s efforts would be very crucial in creating effective entry barriers to accelerate manufacturing in India. Apart from these suggestions, the government's impetus to Make in India—through its specific policies and work is really commendable and it is helping the industry. Now we need to see these policies and incentives being implemented on the ground in all their earnestness. I would recommend my fellow industrialists to also come forward and make full use of these friendly policies and invest more towards Make in India.”

We need strong reforms in Customs and Logistics.

— Paresh Vasani, CEO & MD, PCB Power Market &

Circuit Systems India Ltd

According to the IESA report, the government’s ‘Make in India’ and product-linked incentive (PLI) policies for semiconductors are expected to be a game-changer for the space, driving local sourcing further and local procurement will grow by over 17 percent by 2026. According to the report, some of the primary growth drivers include accelerated digitisation, dependence on complex electronic systems to process vast amounts of data, and the increasing use of technologies like Artificial Intelligence (AI). India has the potential to become a significant supplier to the global semiconductor manufacturing supply chain across the semiconductor equipment ecosystem, said the report. “There is a potential opportunity for India to serve up to $85 billion-$100 billion of the $550 billion-$600 billion annual global opportunities by 2030. It’s a big number—nearly 17 percent of the global market requirement and it complements the vision to reach $1 trillion in export value by 2030. The semiconductor industry-led exports could well be another important sector for the government in its vision to scale up exports and contribute to nearly 10 percent of the export outlook by 2030.

No Room for a Cheat-Day

The current global geopolitical situation, the hangover appetite from the lockdown phase, and a general surge in digital ingredients in every industry – all this hint at a lot of possibilities that Indian players can tap now.

For instance—Global semiconductor revenue can grow to $676 billion in 2022, and overall semiconductor component supply constraints are expected to gradually ease through 2022—as per Gartner. This means prices will stabilize with the improving inventory situation. But automotive applications will still experience component supply constraints—particularly in microcontrollers (MCUs), power management integrated circuits (PMICs), and voltage regulators—extending into 2023. There is also the possibility of chip shortage continuing as a concern for the supply chain of electronics equipment in 2022.

Interestingly Gupta points out that many automotive OEMs that want to improve their design capabilities are now collaborating with semiconductor companies, especially on the development of application-specific solutions for autonomous vehicles. “Semiconductor companies are focusing on an M&A strategy that would allow companies to branch into adjacent areas, open important markets, or add capabilities essential for future growth and for extending their technology leadership.”

“Across all product segments, semiconductor companies strive for innovation because faster, more powerful chips and leading-edge equipment help generate greater sales in all value chain segments. The companies with the most distinctive technologies and products are likely to become the global champions. The approval of the $10 billion incentive plan to attract semiconductor fabricators and display manufacturers will help India establish itself as a global electronics production hub,” as Gupta opines.

Looks like we can tone up many areas by doing both squats and burpees—with a well-planned calendar.

The highest risk is taken by the player who invests in the market development and R&D. This is the company to whom the IP belongs. Thus, small & new players have to focus on the demand side and carve out a niche space for themselves and grow from there. Jumping into the high-velocity mass consumption space is a bad idea.

— George Paul, CEO, MAIT

When new players are entering the Semicon space and really looking at the manufacturing processes, there will always be a need to innovate, Hassan argues. “Don’t just copy the ones already built. Let’s consider a small example of Qualcomm 5G baseband chips. It covers more than 70 percent of the market share, if some new player really wants to penetrate this market, it is important that one can innovate and own the IP for processes, 5G Chips, 5G processes, or at least one of these. Without IP a player would be exposing itself to a lot of long-term threats which may end up taking it down.”

“I understand that in India IP could still be an alien world or at least the IP litigation, per se. But not a long ago our foreign counterparts used to file more patents than Indians did. There will be a change and a change for good. So if you are investing or asking VCs to invest in your business, make sure that in the long term you envision designing your own chips rather than relying heavily on foreign technology which was the case in China and they are trying to change too,” Hassan recommends strongly.

Like Rajeev Chandrasekhar, Minister of State for Electronics & Information Technology and Skill Development & Entrepreneurship said at the Semicon India conference “Semicon start-ups are truly catalyzing India’s electronics & semiconductor ecosystem. May this tribe increase. I am confident that the next unicorn will be from here.”

It’s not impossible. Rocky is training hard. From someone who looks like a potato, to someone who runs like a horse—it would be the right time to say—“Every champion was once a contender who refused to give up.” Especially when Mickey is right behind him screaming – “You’re gonna eat lightnin’ and you’re gonna crap thunder!”

It’s time for that plank!

By Pratima H

pratimah@cybermedia.co.in