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30,2012

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Vol XXX No 12 I June 30, 2012 The Business of Infotech

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The Indian IT hardware manufacturing industry has the potential to play a big role in India’s growth story...

with a little help from the government

Make in India

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Cover Story

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 hard-ware 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,

SHWETA [email protected]

(With inputs from Inder Kumar)

The Indian IT hardware manufacturing industry has the potential to play a big role in the India growth story. But the government needs to provide the required policy impetus and address the immediate crises gripping the industry

Make in India

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high-er 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 manufac-turing destinations primarily due to the better infrastructure and policy environment they offer. While China has always been a frontrunner, Ma-laysia 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 op-portunity to Vietnam mainly due to inadequate infrastructure and lack of domestic demand.

“It is all because the ecosystem is miss-ing in In-dia,” points out Dr K Jaya-ku-mar, chair-man and MD,

Central Electronics, “The tariffs and duties don’t favor manufacturers. Even the financing options avail-able here are not supportive for new technocrats. Banks just don’t encourage entrepreneurs.”

Despite all the challenges, indus-try experts say that hardware manu-facturing today presents a huge op-portunity that India cannot afford to miss out. The industry figures also seem to be ringing the bell!

Don’t Miss the OpportunityAccording to the estimates of Min-istry of IT & Communications, the demand for IT hardware & electron-ics 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 ecosys-tems in the country by opening up education systems and design capa-bilities,” asserts Dr Jayakumar.

The domestic hardware market comprising desktops, laptops, serv-ers, 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

Policy MattersWhen it comes to policy focus, the IT Ministry seems to be moving in the right direction, but how many of these directives actually translate into action is the big question. A task force set up to suggest measures to stimulate the growth of IT-ITeS and electronics hardware manufacturing industry in the country recommended the following initiatives:

n To set up a National Electronics Mission (NEM)n To set up Semiconductor Wafer Fabsn To introduce modified special incentive package scheme by

providing capital grant and setting up of electronics manufacturing clusters

n To set up a dedicated ‘electronic development fund’ for promotion of innovation, R&D, Indian Intellectual Property (IP) and development of Indian microprocessor

n To provide preferential access to ‘Indian electronics products/manufactured-in-India electronics products’ for all government procurements and procurement by government licensees, PSUs, etc

CIO’s Take

—Yashpal Soni CIO, Everest Industries

— Arun Kumar country IT head, GlobalLogic India

‘Indian companies need to prove their credibility, dependability’With Indian products one is not too sure of the quality or the service they will provide in the long term. This mindset comes in the way of adoption. The credibility of Indian products is yet to be proved. For example, if we take the case of Aakash tablets, we have seen that the first version was not up to the mark.

On the other hand, most of the foreign companies offer good packages. We have companies like Dell which says that even if something goes wrong with the product in 5 years, it will replace the laptop. That is the kind of assurance you need.

Indian products need to improve their positioning. They need to keep their prices low and offer some value addition. Government support is also needed to help them grow.

‘It is time to build Indian brands’As far as hardware manufacturing is

concerned, there is hardly any Indian brand that emerges in our mind. Even if there

are, they stand nowhere closer to world-class quality. Reliability, good service, and

world-class quality are top priorities for us. Nobody would like to own products

that hamper business continuity.So, it is a time to build brands in

the manufacturing domain and develop capabilities to service customers better

than the international counterparts. I think it is an opportunity for the manufacturing

industry to give us some home-grown products.

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production, is widening the demand-supply gap. While this is seen as a challenge, it also unveils a plethora of opportunities for hardware manu-facturers, 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-re-

lated options. Despite the economic reforms of the 1990s, India has his-torically viewed foreign investment with suspicion. India’s growth in manufacturing continues to be ham-pered 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. “The government has to first start by procuring indigenous technology, so they should first lead by example, so as to create a momentum for Indian manufacturers,” he adds.

Create the EcosystemWhile the country has already proven its strengths in software and services, it is now time to focus on the manufacturing opportu-nity. 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 initi-ative 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 Srini-vasan, secretary, ELCINA (Electronic Industries Association of India), the new Draft National Policy on electron-ics 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.

“A bigger tsunami has hit the Indian IT hardware industry in the form of rupee devaluation”

—Dr Alok Bharadwaj president, MAIT and senior VP, Canon

“There is a fundamental flaw in the vision of

indigenizing electronic manufacturing in India.

There is a complete avoidance of investment

and risk appetite”

—Tanmoy Chakrabarty, vice president and head, TCS Government Solutions

What Can be Done to Stimulate Growth?The following steps can be taken to boost hardware manufacturing in India:

n Demand Stimulus: Increase the affordability of IT hardware to push consumption in the domestic market

n Conducive Policy: Provide a conducive policy framework to encourage local manufacturing

n Schemes & Incentives: In order to provide an extra push, the government must devise innovative schemes and incentives to motivate entrepreneurs

n Investment in R&D: The government must invest in research & development to keep up with the global trends; private players can also be encouraged to invest in this area

n Capacity Building: Unless the decisions to manufacture in India are supported with efforts at building capacity, they will not achieve the desired results

n IT Education: Efforts at promoting IT education in different states will also drive the domestic demand for IT products

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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 ImpetusIf the Indian hardware manufacturer has to find a place in the global land-scape, 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 manufac-turing haven’t been adequately sup-ported 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 de-mand-supply gap that is preventing

large-scale adoption of the product.Experts reiterate that any decision

to promote local hardware manufac-turing 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 manu-facturing 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? n

Driving R&D in Electronic HardwareWith a view to create a self-sustaining ecosystem in electronic hardware, the government has taken some initiatives to promote design-led manufacturing and bring research and development to the center stage.

n CAREL: In a bid to promote indigenous product development, the government has established a core advisory group for R&D in the Electronics Hardware Sector (CAREL). The group aims to synergize the efforts of academia and the industry to drive R&D. Its key objectives include: Identification of key focus areas, creation of a conducive environment for R&D, and also facilitation in terms of technical and legal aspects. The advisory group has currently undertaken 6 products to work on—tablets, smartphones, smartmeters, set-top boxes, Micro ATMs, and smartcards. Four sub-committees have been formed for planning, creation of technology roadmaps, components, incubation centers, and IPR.

n SIPS: Announced in the year 2007, the Special Incentive Package Scheme (SIPS) aims to encourage investments for setting up semiconductor fabrication and other micro and nano technology manufacturing industries. The government offers a package of incentives for investment in semi-conductor manufacturing (Fab units) and ecosystem units. Steps have also been taken recently to further relax the norms to increase participation under this scheme.

“If Nokia can make handsets here, then we can too, provided a good ecosystem is in place—fast clearance at customs can be one”

—Kiran Karnik, former president, Nasscom

“Indian products need to improve their positioning.

They need to keep their prices low and offer some

value addition”

—Yashpal Soni, CIO, Everest Industries