IBM’s Manoj Chhura says that faster Customs processing in China is the reason why MNCs prefer to manufacture there

For the beleaguered Indian hardware industry, survival is often more important than growth. Yet, a recent MAIT-Ernst & Young study said that this very industry could zoom to revenues of $62 billion by 2010. Srikanth R P & Rajneesh De find out if this scenario is fact or fiction

IT hardware manufacturing in India is a classic case of the chicken and egg syndrome. Should we wait for the market to grow to high volumes that justify creating a manufacturing base in India, or should we just kick-start manufacturing so that prices then come down and thereby create volumes? The debate has raged on long enough and no consensus seems to be emerging. Rather, things took a turn for the worse with recent years witnessing a perceptible decline in manufacturing activity. Therefore, when a recent MAIT study, conducted jointly with Big Five firm Ernst & Young, concluded that the Indian hardware industry had the potential to reach a size of $62 billion by 2010, it not only raised many an eyebrow, but derisive laughter from sceptics.

Sample some salient conclusions of the study which paint a rosy future for India Hardware Inc: By 2010, the Indian hardware industry has the potential to grow to twelve times its existing market size, with the domestic market accounting for $37 billion and exports accounting for another $37 billion. The study has identified major export opportunities in the areas of innovative new devices, contract manufacturing and design services. The study says that component exports offers an opportunity worth $5 billion, while that of design and related services in embedded systems and wireless telecommunication services can bring in another $7 billion by 2010. Further, ambitious projections have been made in the area of contract manufacturing, which represents a $11 billion opportunity if India succeeds in capturing a share of only 2.2 percent of the global pie by 2010.

Though the rosy projections look good on paper, is this growth really possible? Sceptics deride the study as an attempt by the hardware industry to copy its software counterpart, which has been tom-tomming Nasscom and McKinsey’s projection of $87 billion in software revenues by 2008. MAIT officials are however quite upbeat. Says Vinay Deshpande, president of MAIT, “There are four key steps which we need to take to make India a manufacturing-friendly country. Firstly, market India as a hardware destination and build a brand akin to software. Making India manufacturing-friendly through improvements in infrastructure and logistics should follow this. We should also emphasise on design and innovation through the development of Indian solutions for Indian needs. All these initiatives need to be backed up by the government with adequate funds.”

The bright side

For a country whose economy is so heavily dependent on agriculture, a vibrant hardware industry has the potential to generate three million jobs, especially for Indians who come from economically underprivileged sections, who aren’t very highly educated. So, in the words of Deshpande, the hardware industry can be some sort of a panacea for India’s unemployment problem. Also, with the size of the contract manufacturing industry expected to be over $500 billion by the year 2010, Indian firms could grab a significant chunk of the pie in a manner pretty similar to India’s emergence as a key player in the global BPO stakes. And, with a potentially huge market in embedded systems emerging, Indian firms with the right mix of hardware and software can be big players here. For the record, of all the high-end processors produced in the world, only 6 percent are used in PCs and the remaining 94 percent are used in entertainment electronics, non-PC devices, communication products and embedded electronics.

The hardware revolution is also essential for the continued high growth of the software industry. As Vinnie Mehta, director of MAIT, puts it: “India can lose out on the software advantage it has already built up, and the future potential, if

it does not concentrate on the hardware front. For example, the estimated domestic hardware requirement by 2008 to meet the software target of $87 billion is $160 million.”

And now the problems

But before India Inc. can go into ballistic mode on the hardware front, there are lots of serious issues that need to be addressed. Issues like lack of local availability of input raw material, ever changing government policies, inconsistent sales tax structures in different states, high interest rates, customs duties on capital goods, poor infrastructure, inordinately long and variable transit times all add to uncertainty, delays and increased costs. Something that hardware manufacturers dread. Explains Manoj Churra, country manager-manufacturing, IBM India, “Everyone in India cribs about duty, but even China has a similar duty structure. The main reason why companies prefer to locate their manufacturing operations in China is because customs processing in China is much faster.” Here, even after a manufacturer’s raw material arrives at a port it might take another month or so before the goods reach his factory. In the fast changing world of technology, that’s virtually suicidal for companies into hardware manufacturing. Besides, labour laws in China are also very flexible.

In India, laments Raj Saraf, chairman and managing director of Zenith Computers, there are a lot of restrictions for the hardware industry. “The software industry has grown in leaps and bounds simply because there have been no restrictions. On the other hand, even if I do manufacture in an SEZ in India, I cannot sell my products in the domestic market. The government says everything should be exported. But it should realise that the industry will always flock to an area where there are least restrictions.” The government can also take a cue from the fact that if the industry is allowed to grow to three times the size it currently is today, it can earn more tax from its revenues.

The manufacturing industry in India also suffers from a lack of proper environmental standards. With environmental concerns mainly ignored or casually overlooked by Indian corporates, MNCs desist from setting up manufacturing bases here since there is no compliance with ISO 14000 standards, which deal with environmental issues.

On the design front too, there are lots of opportunities left to be explored. Design exports are a $7 billion opportunity in areas like embedded systems and wireless telecommunications. While Indian firms do some work on hardware design exports, many unfortunately show this as software exports to avoid tax. Fact is, some experts say a robust design sector could play a huge role in bringing down PC prices too a significant reason why PC penetration remains low in India. For example, on a CPU that costs $150, the material cost is not even $4. Adds Deshpande, “If we can get a design, like say a PII, made either by ourselves or if we can get the government to buy out a design and start manufacturing here, this would bring costs down substantially in PCs.”

The silver lining

The Indian hardware industry could learn a thing or two from the Taiwanese hardware industry, where companies started off as component assemblers some years ago. Today, the same firms are world leaders, and in fact outsource their manufacturing designs to other countries. A majority of Taiwanese firms are now original manufacturers of chipsets.

Another instance that could inspire companies to set up local manufacturing bases is the example of D-Link. D-Link is one of the very few hardware companies in India that does local manufacturing. Recently, the company tied up with Taiwan-based Gigabyte Technology to manufacture and market motherboards locally. D-Link will manufacture approximately 30,000 motherboards per month. Besides giving D-link a key advantage in terms of technology, it also means utilisation of D-Link’s manufacturing facilities. The cost savings per motherboard when manufactured here works out to be approximately $5. Hence, if volumes are huge, it does makes sense to outsource contract manufacturing to India.

And for sceptics who doubt the quality of Indian products, Ram Agarwal, managing director, Wipro ePeripherals has a ready answer, “Doubting Thomas’s who keep on questioning the quality of Indian products should know that Legend computers, the largest maker of PCs in China, buys network interface cards from India.”

Going forward, if the government and the hardware industry proactively decide to work together and solve issues rather than have one hand clamouring for duty concessions, and the other avoiding issues, the Indian hardware industry could definitely go the software way-as MAIT and Ernst & Young have said. The only question to ask is whether the government and the industry are up to it.

(With inputs from Stanley Glancy)