Between the Bytes

Cracking the manufacturing conundrum

Val Souza

Ken Kao had never visited India until last November. Yet his Taiwanese company, which specialises in networking gear and consumer connectivity, has had a 36 percent stake in an Indian joint venture for the last 10 years. The chairman and CEO of D-Link Corporation was gracious enough to state that he has never really needed to travel to India, as operations at D-Link India have always been super-smooth and everything has worked out just fine. But from a different perspective, Kao’s presence at the 10th anniversary celebrations of D-Link India in Goa last quarter was strong proof of the Indian partner’s increasing strategic importance to its global parent, and subtle acknowledgement of the growing market in India not only for networking products but also for mobile access and wireless gear.

The relationship between D-Link and its partner in India is a unique one—elsewhere in the world, D-Link is sole owner of its overseas business units in 24 countries (mostly sales and marketing offices). D-Link products are now designed and manufactured only in China, the US, Taiwan and India. In fact, D-Link’s Indian operations, in addition to sales and marketing, span all areas from product design and development to manufacturing and software R&D.

A visit to D-Link’s world-class manufacturing facilities in Goa—equipped with sophisticated Surface Mount Technology (SMT) lines—makes one wonder why other Taiwanese companies haven’t followed in D-Link’s footsteps and tied up with Indian partners for an alternative manufacturing destination. Surely it’s not entirely prudent business practice for Taiwan to put all its manufacturing eggs into a single Chinese basket, as has been the recent trend.

Why has D-Link been so successful in India? Ken Kao has a simple answer: “You have to find the right partner.” A tribute really to the efforts and perseverance of D-Link India’s chairman and managing director, K R Naik, who often speaks of how he had to battle all odds and hack his way through suffocating red-tape and bizarre regulatory obstacles in order to get things going on the manufacturing front. That it was all worth it is reflected in Kao’s telling comment: “The process and quality here is exactly the same as in Taiwan; it’s amazing because while India is famous for its software industry, there aren’t too many manufacturers here.”

Not too many manufacturers here indeed. Sure, there have been other successes, including TVS Electronics, WeP Peripherals, Moser-Baer and such like, but one has to search hard for examples. Building on the D-Link precedent, it would be wise for the Indian government to formally work at attracting a larger quantum of foreign direct investment (FDI) in IT manufacturing from Taiwan. It is a well-known fact that a large proportion of the FDI (over 60 percent) that contributed to China’s dramatic hardware manufacturing success came from Taiwanese companies.

It’s not at all unrealistic to propose that Taiwan, whose hardware industry has a turnover of around $110 billion, would benefit from considering India as a secondary manufacturing destination, while at the same time leveraging India’s embedded software expertise and design skills. Electronic Manufacturing

Services (EMS), also known as contract manufacturing, is a huge business opportunity, currently estimated at around $160 billion globally and expected to increase to almost $250 billion by 2008. Contract manufacturing leaders like Solectron, Flextronics and Jabil Circuit already have a presence in India, albeit tiny. A conducive regulatory environment needs to be provided for these and similar companies, giving them sufficient incentive to expand.

The trigger for this expansion could well be the commencement of the new WTO zero-duty regime in a couple of months. Components could then be imported without additional charges, while excise duties might be slapped onto imported finished goods. This could make manufacturing within the country more viable, and also desirable, since the domestic market has been showing signs of very healthy growth in recent times.

Industry body MAIT is quite confident that PC sales in India will hit the four million mark this fiscal (ending March 2005). A figure that’s no longer small beer, and in fact could be a threshold at which economies of scale come into play for manufacturers. And if the manufacturing successes of the Indian auto industry are any indicator, then we can expect that manufacturing will just as surely follow market demand in the IT industry as well.

Union Minister for Communications & IT Dayanidhi Maran recently stated that his ministry would do everything to ensure that the Indian hardware industry is not affected adversely by the imminent WTO and VAT regimes. He needs to go a step further and present a convincing and comprehensive case to the finance ministry for implementation of all of the industry’s recommendations in the forthcoming Union Budget. With prudent policy, the $62 billion revenues that a MAIT-Ernst & Young study projected for the Indian hardware industry by the end of this decade need not remain a dizzy pipe dream. And Ken Kao will have good reason to visit India again way before his Indian partnership turns 20.

Val Souza, Consulting Editor

valsouza@expresscomputeronline.com