Is IT and electronics manufacturing a low hanging fruit?

Published: September 20, 2019 3:39:29 AM

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By Nitin Kunkolienker

The global electronics manufacturing sector is changing, fuelled by national aspirations and strong political leaderships. A combination of several aspects like geopolitical realignments, rising wages, shifts in domestic consumption patterns and changes in demographics is having an impact on global manufacturing hubs like China.

The ongoing trade war between the US and China is also contributing to the realignment, leading to opportunities for countries ready to provide an alternative.

India needs to seize the opportunity, and shift gears from an import-substitution play to an export-led manufacturing strategy to make up for lost time with electronics manufacturing. The state can capitalise on the current scenario to propel the manufacturing sector, and gain significant ground, provided we take the right steps, and fast.

China has snowballed over the last couple of decades to become a global manufacturing hub. It manufactures about 80% of the world’s electronics. However, with rapid growth, workforce costs have also grown along with input costs. For instance, labour cost is about 300% more expensive compared to India, and natural gas is 138% more expensive than that in India. On top of these, the trade war has led businesses to feel the heat, and rethink future strategies. The trade war is also the result of the underlying nature of the economies, which is different. India and the US, on the other hand, are two similar, vibrant democracies. Not to forget, India’s role as a critical regional ally for the US, both politically and diplomatically, to respond to Chinese supremacy in the region.

India’s inability to build scale because of an inward-looking strategy has resulted in it being unable to realise its potential. Components ecosystem and semiconductor manufacturing require scale, which will come only from an outward-looking strategy. This aspect of the sector’s growth has been neglected to the extent that there is no bulk production facility for semiconductors in the country. In China, the government has provided tax cuts to incentivise semiconductor manufacturing.

Brands that have to cater to a large consumer market are looking for alternatives, with a conducive environment for alternate manufacturing locations, to de-risk their business. An opportunity India must capitalise on to build on its manufacturing portfolio is taking lessons from China’s strategy. The government has rightly identified electronics and hardware manufacturing as a focus sector; electronics being the second largest net foreign exchange bill of India. The National Policy on Electronics (NPE) 2019 projects the demand for electronics in India is rising rapidly, and is expected to increase. The past few years have witnessed a sharp rise in the consumption of mobile phones, LCD/LED TVs, and LED products in the country.

To help reduce India’s foreign exchange outflow due to import of electronics, the only solution is to build an export-led manufacturing ecosystem. NPE 2019 is key to building manufacturing supremacy in the Electronics System Design and Manufacturing (ESDM) sector in India. The policy aims to encourage inland manufacturing and exports to achieve a turnover of $400 million by 2025. It is also expected to generate 10 million more jobs in the country by 2025.

But India is not alone in eyeing this shifting global play. Economies are competing to attract electronics majors to set up manufacturing plants, offering incentives and tax breaks to compensate for local disabilities, and the disruption that shifting of supply ecosystem will cause to a business. India has to be quick to act. Timely action and strategic steps, taken in consultation with the industry, will give Make In India its wings, and will also trigger home-grown innovation.

India is a highly cost-effective R&D destination, and also has a high-quality, young workforce, as evidenced by major international brands investing in R&D or design facilities in India. Despite a 9% increase in operating costs of R&D centres in India, they are still 25% cheaper than China. If capitalised well, this can lead to 10-15% growth in R&D in the country in the next couple of years.

Additionally, it is essential to develop domestic research and innovation capabilities by extending support to the local market. The government can consider offering incentives on royalty payments made by a company for Indian patents. Researching emerging sectors can also be incentivised, with the condition that IP registration happens in India. The idea is to encourage a culture of innovation within the industry, which can help India take the lead in the global market. Currently, the tax rebates for investing in R&D capabilities are decreasing, a scenario that needs to be reversed.

Defining standards is a crucial step in how technology is operated and evolves. India has the opportunity to take the lead when it comes to specific technology areas, like 5G, medical electronics and cybersecurity, which are rapidly maturing. We should, therefore, also use our geopolitical influence, and participate in establishing these standards; playing a critical role in this endeavour can be extremely strategic.

President, MAIT (Manufacturers’ Association of Information Technology)

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