ELECTRONICS HARDWARE

HARD FACTS FOR BEING AN IT SUPERPOWER
Financial Express, 20 August, 2004

The Government Needs To Nurture The Indian Hardware Manufacturing Industry As Well

A look at the 25 most-traded scrips on the National Stock Exchange shows that there has been a significant change in the composition in recent years. Five years ago the list was dominated by the new economy, and punters were busy chasing software and pharmaceutical companies. Today, the old economy has made a strong comeback. Automobile, cement, textiles and infrastructure companies now outnumber the new economy counters. The list now looks more balanced and mirrors India's wide-ranging emerging capabilities in a number of sectors.

Yet there is one segment that is conspicuous by its absence. There is not one company in the most-traded scrips list that can boast of core competence in electronics, particularly the IT and telecom hardware segments. This is a pity considering that these are among the fastest growing segments of the economy, and there are hardware needs that are increasingly being met by imports. Now that India has demonstrated its technological and managerial expertise in a number of manufacturing segments, it cannot be anybody's case that we do not have the skills and the capability to shine in this sector.

In automobiles for example, the latest trends in outsourcing of both auto components and finished products lend support to the assessment that India is better positioned to become a global low-cost manufacturing hub than China. With our engineering and electronics skills being harnessed by MNCs for outsourcing a range of manufactured products, there is no reason why in hardware for IT, communications, entertainment and media and power electronics etc we cannot become a global low-cost manufacturing hub. If we can make satellites and the equipment for launching them, we can surely do well in hardware.
If we look at the trajectory in other manufacturing segments such as automobiles, a rapidly growing domestic market has provided the critical mass for our industry to develop and become globally competitive. Fortunately, rapid growth in domestic demand for hardware products is now close to providing that critical mass. We are now the fifth largest telecom network in the world and the second fastest growing telecom market in the world next only to China. We are now adding over 20 million mobile phones each year. In 2004-5, Indian consumers would buy around four million personal computers. In 2003, the demand for all kinds of electronic hardware was around Rs 100,000 crore or around $21 billion and local manufacture could meet less than a third of it.

Some forecasts show that by 2010, this home demand could quadruple to cross $85 billion. If we continue the way we are, nearly $65 billion of this would be met by imports. If we see this as a potential growth area and get our act together, a huge opportunity awaits us. And domestic demand is just half the story. There is a huge and rapidly growing global market that Indian manufacturers can look at.

China, South Korea, Taiwan and Malaysia have successfully exploited the global opportunity and the size of the hardware industry in these four countries alone is over $500 billion and commands a huge share of the nearly $1,400 billion global market. With both domestic and global demand as robust drivers, India has the option of building a $100 billion plus hardware industry over the next decade. The Indian story in hardware can be as exciting as it is in software. Millions of new jobs can be created across the skill spectrum and the industry can be a powerful force for GDP growth and poverty reduction.
If we have failed in this area, it is not for want of entrepreneurial effort. In recent years, over a dozen private and public sector companies have entered this sector only to close down. Indeed, this list includes MNCs such as Panasonic, LG, Fujitsu, Motorola and Sony. In the nineties, HP seriously considered setting up its Asia manufacturing hub in India. But due diligence made it chose China over India. Over 300 component manufacturers in this segment have closed down in the nineties. Even now, over half the indigenous capacity in telecom equipment is lying unutilised.

The reason why the electronics hardware turf is littered with corpses lies in sustained failure of policy to understand the needs of this industry. An inverted customs duty structure with duties on finished products lower than those on inputs and components has consistently discouraged local manufacture and value addition and encouraged imports. This is also the reason why India, unlike Taiwan, Malaysia and China, has failed to be part of the global supply chain in hardware.

Complications in the local indirect tax structure and high rates of excise and sales taxes have only added to the industry's woes. The latest budgetary move to eliminate excise duties on computers while retaining it on components and inputs betrayed a lack of understanding on the value chain in the industry. Had the necessary correctives not been taken, the outcome would have been a disaster.

The step-motherly treatment meted out to this industry is also evident from the fact that while pharma and auto companies are encouraged to do R&D through a 150% write-off on expenditure, no such facility has ever been extended to hardware. Again, while labour laws have been amended for software and BPO, no such initiative has been thought of for hardware. Similarly, while efforts have been made to develop textile or auto component clusters, such support for hardware has been lukewarm at best.

This list can go on. There is enough wisdom around as industry associations and committees appointed by the government have made recommendations to nurture hardware manufacturing. One hopes that some visionary would start implementing them. Till then, India's claim to being an IT superpower would lack credibility.

Author : Mr Vivek Bharati, Advisior, FICCI