For a while, India has been the preferred offshoring destination for software and services and China the manufacturing king. This neat division is beginning to blur now. Leading telcos like Nokia, Motorola, LG, Samsung and Ericsson have set up manufacturing plants in the last couple of years. Many of them have attracted their component suppliers to set up facilities here. Seven out of the top 10 worldwide electronics manufacturing services (EMS) players including Foxconn, Flextronics and Jabil Circuits have set up their manufacturing facilities. PC bigwigs like HP, Lenovo, Dell, Acer, HCL, Wipro and Zenith already have their assembly lines here. Take Nokia facility in Chennai, for instance. It showcases Indian IT and electronic hardware manufacturing prowess. Nokia?s factory in Chennai is among the largest, employing 40,000 people and houses close to 10 component vendors for mobile handsets in the same park.
Nokia exports about 70% of its production, according to industry estimates. The factory has a total production base of 5 lakh cellphones per day. Story at other telecom bigwigs like Motorola, LG, Samsung and Ericsson is not very different.
EMS vendors are expected to take the spotlight in the manufacturing story. Their share of total mobile phone production in India will grow to nearly 40% by 2011, according to Gartner estimates. Last year, the research company had predicted that the global handset vendors in India will outsource their production to EMS vendors to reduce time to market and achieve faster penetration for their own branded handsets.
?The reason for successful development of a very vibrant handset manufacturing units is the large scale demand for mobile handsets in India. We consume about 8-9 million mobile phones a month and that has attracted all the major handset manufacturing players in India,? says MAIT executive director, Vinnie Mehta. He has a point. A large market has forced manufacturers to ask their component suppliers to set up their units in the country. But this story is not limited to only mobile industry. It may be happening in other telecom segments.
Already, the total value of telecom goods manufactured in India is Rs 20,000 crore and is estimated to be Rs 25,000 crore by 2009, according to NK Goyal, chairman emeritus, Telecom Equipment Manufacturers Association (TEMA). ?One of the reasons for this kind of growth in the telecom component manufacturing segment is the market size, liberal reforms with respect to foreign direct invesment and the rationalisation of duty structure in the import of telecom components,? says Goyal.
PC industry has not yet seen the economies of the mobile handsets. The manufacturing process has primarily been an assembly line affair. The PC component manufacturing also does not have a wide base as seen with mobile handsets.
Though leading players like HP, Dell, Lenovo and Acer, have their assembly units here just like the large domestic brands like HCL, Wipro and Zenith, manufacturing processes do not seem to be growing deeper.
One of the reasons is the much smaller PC market base (7.5 million annually) that has detracted the domestic as well as foreign players to set up component manufacturing units. Most PC vendors scout for component manufacturers in other countries. ?Countries such as China, Vietnam, Czech Republic, Malaysia and Latin America are rapidly strengthening their manufacturing ecosystem. India contributes less than 1% of global production, while China outnumbers us almost 100 times. The ecosystem surrounding the PC manufacturing does not really exist in the country as most of the component manufacturers do not have their manufacturing in India. Most of the components are designed and manufactured outside India,? agrees Shailendra Beniwal, director (sales), Personal Systems Group, HP India. HP currently manufactures all its PCs in India.
For Ajai Chowdhry, the chairman and chief executive officer of HCL Infosystems, one of the key drivers is to achieve economy of scales and bring down cost. ?For countries such as India, this is a chicken and egg situation. The first thing is to build the size of the PC market, which will open doors for the entire ecosystem. Over a period of time, with the right policy and logistics environment, the ecosystem will build, but there are no short cuts. It is no coincidence that the mobile phone manufacturing ecosystem began to develop, once a critical scale emerged.?
?I believe the challenge for the domestic manufacturers is to go to the next step of setting up of component shops. This is essential if we want to compete with the large global brands who can achieve economies of scale because their operations target global market,? says Kaustuv Roy who heads Chirag Computers, a local brand.
Manufacturing operations are not limited to PCs like HP in Uttarakhand and Dell in Chennai. Assembly lines have been set up for peripherals too. HP and Samsung, for instance, have set up their printer units. HP has a manufacturing base of 1.5 lakh inkjet and laser printers per year. ?The global companies are setting up their assembly units here as the consumption in Indian market is growing and a small portion of it is being supplied to other Saarc countries too,? says Shiladitya Sarkar, who looks after the peripheral research group at IDC.
It is not manufacturing but assembling of components, which come in CKD (complete knock down) form, he points out. For Sarkar if India wants to have a printer manufacturing base, few things have to be planned. ?We need more SEZs which will cater to the IT manufacturing needs. Instead, we have few states like Uttarakhand offering tax sops. The SEZs should come up across the country where the domestic and foreign manufacturers will participate in the manufacturing process.?
There is considerable interest from Taiwanese companies in the Indian market. Taiwanese have invested heavily in mainland China but Taiwanese laws are changing. For one, VAT is being made harmonious between foreign investors and domestic manufacturers to 14% from 3% for foreign investors recently. Labour laws now don?t allow hire and fire and minimum wages have been defined. With this, China has now become expensive, so companies are moving to Vietnam.
?But Vietnam has problems?there is no local market and labour is in short supply with inflation at 25% plus. There are rampant labour strikes,? says Mehta. He says it is just the right time for Indian companies and the government to woo the Taiwanese and others.
Though China has been a preferred destination for manufacturing for long, India is beginning to acquire confidence now. Both tech and telecom manufacturing space in India have all the signs of emerging as a key growth driver. Ajai Chowdhry, elaborates on experiences of a global electronics manufacturer. According to him, the comparison showed that India beats China in labour cost, labour productivity, delivery cost and manufacturing defects. But China is ahead in inbound freight cost and response time.
Beating China might seem an ambitious proposition, but you can no more write off India?s manufacturing potential.
