Indian IT manufacturing takes
off By Indrajit Basu
Over the past decade, even as India
emerged as a dominant force in the global
software-services and back-office outsourcing
world, high-tech-hardware manufacturing has
remained a classic case of the chicken-and-the-egg
syndrome.
The debate over whether the
country should wait for its market to grow to a
size big enough to justify a manufacturing base,
or instead kick-start manufacturing to secure a
foothold in the global hardware arena, raged with
little consensus.
But it now appears India
has made a decision after all: it cannot remain
content with software anymore, and in the wake of some
recent
high-profile announcements of global high-tech
biggies committing billions of US dollars to
hardware-related investments in the country,
despite false alarms in the past, it now seems
that the time for Indian IT (information
technology) manufacturing has finally arrived.
"With the spread of information technology
and IT-enabled services, the time is ripe to make
India a preferred destination for the manufacture
of semiconductors and other high-technology IT
products," said the country's finance minister in
his yearly budget announced on February 28, and
"to achieve this goal the Ministry of Information
Technology will announce a policy shortly".
Along with that announcement, the minister
doled out a slew of sops for the hardware industry
that included a reimposition of a 12% local levy
(removed last year) on fully built computers -
which in essence makes imported computers more
expensive - while allowing local hardware makers
to get tax credit for their inputs to lower the
final price.
The budget also removed
import duties and local duties on input
components. According to the hardware industry
lobby, the Manufacturing Association of
Information Technology (MAIT), the latter step
will make "locally made hardware more competitive
and also encourage manufacturing of other high-end
products".
"For the first time ever, the
[Indian] budget has given a focused attention [to]
IT-hardware manufacturing," said Vinnie Mehta,
executive director of MAIT.
"Even until a
few years back, replete with infrastructural
deficiencies like inadequate water [and power
supplies], and poor roads, Indian could have
hardly hoped [to become] a destination for
high-tech manufacturing. But now as India
witnesses an explosive consumption of electronic
goods and equipment, this market has become too
big to ignore."
Going by the recent spate
of announcements from some of the biggest names in
IT, India's hardware sector is certainly no longer
being ignored.
For instance, last October,
Cisco Systems in "an enormous strategic investment
in India" outlined the company's US$1.15 billion
investments plans the next three years. That was
topped by an announcement about a month later by
SEMINDIA, a consortium of non-resident Indian
investors, for a $3 billion advanced fabrication
facility to be set up in partnership with chip
maker Advanced Micro Devices.
Just a few
days later, Intel chairman Craig Barrett announced
his company's first major India investment plan,
exceeding $1 billion over the next five years.
And, not to be left behind, Microsoft
chairman Bill Gates announced the software giant's
first $1.7 billion dollar mega-investment plans in
a four-day India visit that ended on December 9.
Although most of that investment has meant
spending on research and development and expanding
Microsoft's reach in the country, "the company's
[mission in India is to take] the computer to
every home and to every desk while continuing with
innovation to bring better and more exciting
products [to] local consumers", Gates said.
The main driver behind these announcements
was the country's burgeoning domestic market.
"India is developing as one of the largest [world]
markets for electronic equipment," said Rajendra
Khare, chairman of the India Semiconductor
Association (ISA), a semiconductor industry group.
In a study released early last month, the
ISA reported that the consumption of electronic
equipment in the country would rise to $363
billion by 2015 from $28.2 billion in 2005,
representing a compound annual growth rate of
about 30%.
The report also said India's
rapidly expanding gross domestic product (GDP)
over the next several decades would boost
electronics demand in the public and private
sectors.
"The Indian electronics-equipment
production [sector] grew at a ... rate of 25% in
2005 and is expected to reach a growth rate of 50%
in 2010 and 34% in 2015," the report said. "Indian
electronics-equipment manufacturing is expected to
grow at 5.5 times the ... rate of global
electronics-equipment production [from] 2010 [to]
2015."
According to the hardware industry,
although the world thinks India's software
outsourcing and business process outsourcing are
money-spinners in terms of foreign-exchange
earnings, these sectors in fact cause a net drain
on foreign-exchange reserves because of the need
to import hardware. An estimate released recently
by the industry lobby said the software sector
will require computer hardware worth $77 billion
by 2010, which is less than the industry's
estimated projected exports of $60 billion for the
same period. A major part of the requirement is
expected to be met through imports if hardware
manufacturing doesn't pick up in India.
The industry added that if India does not
ramp up its hardware sector, just "a tiny portion
of the demand would be met from local production".
Mehta of MAIT has said: "Look at the country's
potential as a hardware user; its expected growth
rate is higher than China's. Perhaps India is a
bigger hardware story."
Demand is not the
only driver. "India today has also developed a
significant ecosystem for high-tech manufacturing
that includes chip-design houses,
application-development companies and other
supporting activities like chip design and design
automation," said Mehta. For instance, "chips are
increasingly loaded with embedded software, and
India has [a] $17 billion software industry to
give [it] an edge" in that activity.
However, there is another side to the
story. The federal budget's sops to local hardware
firms seem to have rubbed multinational hardware
makers the wrong way. Even as local hardware
companies have hailed the budget proposals -
"[The] budget has corrected an anomaly," said
Mehta - overseas corporates such as
Hewlett-Packard, Lenovo and Acer have said India
is becoming protectionist and going against the
spirit of globalization. The new tax structure
makes Indian brands cheaper but makes a fully
imported computer, for example, about $100 more
expensive.
The local software industry,
too, is peeved. Its lobby NASSCOM says it will
urge the government to withdraw the 12% hardware
excise duty. "At a time when the trend is towards
a lowering of PC [personal computer] prices, [the
12% duty] is a retrograde step," Kiran Karnik,
president of NASSCOM, is reported to have said.
"The move to impose a duty is detrimental to IT
penetration in India. We will urge the government
to take it back."
Still, the local
industry argues that the measures have brought
Indian hardware makers up to par with the Chinese
manufacturers in terms of government support.
"Hardware manufacturing is going to be the story
now," said Mehta.
Indrajit Basu
is a Kolkata-based equity analyst turned
journalist with more than 12 years of experience
in business/finance and technology journalism.
Besides writing for Asia Times Online, he writes
for US-based publications, as well as IT
companies.
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