Can we manufacture? Yes, but the ‘ifs’ and ‘buts’ need to be ironed out. Here are a few interesting anecdotes that explain why world class hardware manufacturing continues to elude India.

A leading peripheral vendor decided to export 14-inch monitors out of India. After shipping a consignment out of Chennai, the company wanted to claim the duty drawback for exports and approached the customer concerned and excise authority in Chennai. Unfortunately, the company was told that since the products did not come from its zone it could not give the duty drawback and the company would have to claim it from its originating destination. So the company approached the authority concerned and was informed that the amount can be claimed only from the point from where it was exported. Where does the company go, whom does it approach?

THE PLUSES COULD MULTIPLY: Its time we take up the challenge and leverage on the enabling factors, especially domestic market potential, to realize India’s true manufacturing potential

In September 2000, a global player with a couple of hundred million US greenbacks was scouting for locations to set up its fabrication plant. Given the low local demand and poor logistical support, the company would have taken a big decision and only if the Indian government could show that they mean serious business. The company approached the Indian government and it appeared to be smooth sailing as the otherwise indolent government bureaucracy showed an unheard of eagerness to meet the US investor. On the scheduled date and time, the gentleman from the American company was informed that the meeting was cancelled as the secretary concerned had rushed off to prepare the background papers for the Prime Minister impending US visit. It was but natural that the company decided never to invest in India at least for the next five years.

Another instance of the government’s ‘affection’ for the hardware sector. Out of the recommendations made by the much-touted National Task Force on Information Technology and Software Development, the government approved all 108 recommendations related to software and associated services. As against this, all 84 suggestions made to strengthen the hardware sector have been deferred until further notice.

Comments a hardware industry veteran, "The software segment was lucky as the authorities did not understand the dynamics of the business and the sector had a free run until it was too late to fetter it." He recalls an incident that occurred over a decade ago—While talking to a politician about software, an income tax officer is reported to have said, "Software kuch samaj mein nahi aata hai. Kya yeh Tata hawala ka paisa ho nahi la rahay India mein?" (I don’t understand this software business. I hope the Tata’s are not bringing in hawala money in India via the software business).

Thanks to the non-physical state of products and services, it took some time for the authorities to understand how the transactions occurred in software firms. But by that time software had become the darling of the Indian politician and there was no chaining it. To repeat the late Dewang Metha’s famous quote, "IT and beauty could do India proud because both did not have ministries governing them."

Unfortunately for hardware, the ministry has existed for long and given the physical nature of the commodities, a whole lot of mundane issues continue to fetter the growth of the hardware sector even now.

Great potential, but…
How can one explain why a strategically located low cost manufacturing destination is yet to figure on the global hardware manufacturing map? Contrast India’s situation with countries like Singapore, Taiwan and now China, countries that are running their economies on the IT manufacturing business. Given India’s geographical location, it could be the best country to cater to the European, Middle Eastern and African markets. And if things were right, it could be an ideal location to cater to the Asian rim countries as well. Apart from the strategic location, India’s large technical workforce has little competition across the globe and is best suited for the hardware manufacturing segment. The cost of labor too continues to be cheaper compared to other countries in the fray. And yet, hardware manufacturing refuses to take off.

Comments iFlex Technologies CEO (India operations) Deepak Ghaisas, "I do not believe any hardware manufacturing happens in India. Most of it is SKD/CKD assembly - a screw driver technology. Except the Param from CDAC, I have not come across any hardware manufacturing with its original R&D done in India."

So manufacturing still remains a pipe dream in India while small but nimble countries like Taiwan and Singapore continue to surge ahead.

Why strong manufacturing?
This certainly is no time to do a cost benefit analysis of building a stronger hardware manufacturing sector, as the benefits far far outstrip the costs involved. First, let’s look at the politician’s blue eyed boy – software and its 2008 target of $80 billion. Can India meet this target without a domestic hardware manufacturing base? Yes. But India’s cumulative hardware import bill could be to the tune of $120 billion. Comments Rajinder Singh, V-P (operations), HCL Infosystems "Instead of increasing employment opportunities in India, the demand created by the software sector will give employment opportunities to people in other countries like China. So we are actually helping build another nation at our cost."

Apart from the obvious saving in foreign exchange, building a strong manufacturing base will also have a cascading effect on Indian companies in other industries like plastic, steel, engineering and also good old software services with huge demand for software for local needs.

And more important, a strong domestic hardware manufacturing base can make the ‘IT for the masses’ dream come true. For this to happen, a few wish lists need to be fulfilled. If we can build huge economies of scale and duty structures are rationalized, PCs and other comparable computing devices could fall to reasonable price points. This in turn, would spur the demand for local language software.

Today, it’s the chicken and egg story. After the PC penetration increases, we can think about the availability of local language software or alternatively, we wait for local language software to be made available before we talk about PC penetration shooting up. A dilemma no doubt. The answer could lie in the course taken by the TV industry. The prices of TV sets dropping to reasonable levels and increasing penetration saw a huge growth in regional channels. PC penetration could do it too, only if…

Did we forget to mention that hardware manufacturing could meet one of the fundamental themes of any political party manifesto—employment. As per MAIT estimates, every Rs 10 million sale in the hardware industry has an employment generation potential of over 10 workers plus another five to six in the engineering industry as well.

Of course, if we can successfully manage to develop the hardware manufacturing segment in the years to come, we can reduce the trade deficit through hardware exports. A small example—China exports about $20 billion worth of hardware annually.

The Chinese threat
No one talks about Taiwan or Singapore yet, but there are persisting references made to China. Comments AS Srinivas, manager computing product research, IDC India, "The issue does not have much to do with the hardware segment, or else we would have long been talking about Taiwan and Singapore." The core issue is that China can hurt India’s dominance in the software segment. The debate over China is justified no doubt, but unfortunately, it shows how India has virtually dismissed the dream of becoming a hardware giant.

HOME IS THE FUTURE: While IT hardware constitutes the largest demand constituent in the foreseeable future, it is the home segment that’s growing fastest, with over 10% of electronics hardware sales heading in that direction

But there are a few lessons to be learnt from China’s persistence in pursuing the software dream. India could possibly replicate it in the hardware segment. Having decided to focus on software, China has been courting software companies across the globe. Early this year, when Chinese premier Zhu Rongji visited India, Bangalore was part of the agenda. In his address to IT leaders, Zhu instantly approved Infosys’ proposal to launch operations in Shanghai.

Comments Satish Kaura, chairman and MD, Samtel Color, "Given the superior infrastructure, the speed of getting things done and the cost of capital in China, India is obviously at a disadvantage." Can we take on the Chinese dragon in the hardware manufacturing segment? The answer is ‘yes’, but…

Government holds the key
There are a few success stories in the Indian hardware segment like Moser Baer and the Tandon group. Ask Moser Baer CEO Deepak Puri how his company tackled bureaucracy and infrastructure problems, he simply says "I opted for export processing zones. While there are problems here too, they are less pronounced in these zones." Weeding out those problems will take a long time.

So the first step towards transforming the hardware dream into reality is gaining the government’s acceptance. It is time we realized that we cannot focus on all industries but identify a few industries where we can build truly world class companies.

This would obviously require strong political will but without the same, nothing much can be accomplished.

The next on the wish list is the creation of a conducive environment.This would entail creating the infrastructure, rationalization of duties and reducing multiple government agencies. Recently Dell Computers chief Michael Dell stated that his company is not interested in manufacturing in India, as the duty structure is very high. While the government cannot favor a particular industry, duty structures for hardware ought to be frozen according to global benchmarks rather than comparing them with other domestic segments. EPZs (export promotion zones) or SEZs (software export zones) should be established on a war footing.

However, given the government’s poor track record on being proactive, the industry remains skeptical of any export initiatives. Comments Balu Doraisamy, MD, Compaq India on the proposed SEZ initiative and whether it can rekindle hardware manufacturing, "It cannot. The SEZ locations announced are far removed from domestic markets. Besides, the continuing restrictions on domestic market access, the time it will take to get any SEZ operational in India and the uncertainty surrounding any government initiatives are key deterrents."

Though the IT task force recommends ministries and other government departments to spend a minimum of 3% of their annual budget on IT, the initiative is yet to take off. As against this, the Chinese government consumed about $5 billion worth of hardware in 2000 itself.

In India, the government should consider identifying a nodal agency with the task of IT implementation. While a centralized agency would ensure that the IT funds allocated to the various departments and ministries are fully utilized during the year, it will bring in a lot of standardization in the various government departments. The government also needs to look at reducing the cost of various IT equipment. For example, to bring down the cost of the PC, the government can negotiate for a ‘India specific price’ for critical components like CPUs, operating systems and storage devices.

While the government can do a lot to increase domestic demand, it does not have much scope to alter the dynamics of the international markets. Yet, if we really want India to be a global player, branding is crucial. Today, India has a credibility issue. Many of the much touted projects have ended up as non-starters. Enron refuses to be washed away from the investors’ mind. It is time for India to take some lessons in marketing.

Comments Singh, "Private investors are turning to countries that offer them the best deal and anything less than that benchmark will deter their investments." Given the global situation, all countries are wooing international investors, so why should they come to India? Gone are the days when we could say that India is a huge market and companies would come in.

Comments MAIT director Vinnie Mehta, "Branding is essential. Look at China. So far 80 odd Chinese delegations have come to India trying to learn about how India has made it big in software." Globally, this does create the image that China is interested in software and can bend backwards to get software companies to China.

Comments Doraisamy on India’s failure to attract foreign direct investment in hardware manufacturing, "The absence of key facilities like port infrastructure seriously increase the turnaround time for consignments. There is the high cost and low quality of infrastructure. "

Last, but not the end of the list is the active industry, government and academia participation. Taiwan’s Hsinchu technology park could not have been a success without industry participation. While we boast of IITs as model institutes churning out the brightest people and recognized across the globe, how many times have we boasted of great products coming out their  research labs? But there are positive signs like IBM setting up a Research Lab at IIT Delhi.

Can we do it?
That’s the $62-billion question. As per the recent report by MAIT and Ernst & Young, India has a hardware opportunity of over $62 billion by 2010. However, the bigger question remains. Can the government do it? Just when we had given up all hopes about privatization, the government has sold off few of its holdings and seems determined to continue the process with the same zeal. If this continues, India is strongly positioned to make it big in hardware manufacturing. Says Kaura, "India should focus on niche areas and concentrate on design and development. High volumes need not necessarily be the basis of competition." If this does not happen, we will simply continue to talk about the potential of this segment. "We had a potential of $62 billion, only if…"

Yograj Varma in New Delhi

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