Industry Perspectives

Manufacturing electronic products in India

K R Naik says that high duties and lack of government support have hampered the growth of IT manufacturing in India

Taiwan used to be the leader in manufacturing till a few years back, primarily because the industry there was given full support by the Government as well as investors, mainly for export business. Earlier the US- and Europe-based companies took advantage of cheap labor and the infrastructure created by the Taiwanese government. However in last decade or so their interests shifted towards China because the language remained the same and the costs were even lower with the advantage of similar infrastructure facilities created by the Chinese Government. Additionally the cost of living increased manifold in Taiwan over the past 25 years resulting in the cost of manufacturing shooting upward.

Early days: License Raj

India is a totally different scenario—the early days of License Raj had a high duty structure which was fortunately a bit lower for peripherals and components. This led some companies starting manufacturing in India in order to save on the customs duty. None of the peripherals were entirely manufactured here, only some parts such as the casings amounting to say about 25% were manufactured in India.

Earlier everyone used to wait for the yearly budget in order to plan their business. The budget day determined what they would import and how they could save some duty so that manufacturing became viable. No one ever thought about exporting. The high cost CPUs were brought into the market via the grey route at quite a low cost. Savings in custom duty was the only thing that made manufacturing possible in India.

The problem

Some 100% export units started in export zone. Basically they imported components at no duty and exported back the finished product but they were also allowed to sell some percentage of it in the open market along with some other export benefits. In spite of this rare were the cases wherein components were actually manufactured in India. Hence the components industry did not grow at all. Every year the government used to introduce a new policy, but the industry kept looking for loopholes to make money within the next one year.

In India, manufacturing in the early days was not true manufacturing with a long term business view, but in the last one decade things have changed. The demand for electronics goods has increased in India particularly for products such as mobile phones. Today, there is no difference in duty for the components and finished products.

The components industry sadly has not grown at all. Even today, to manufacture say even simple motherboards or for the assembly of basic printed circuit boards (PCBs), most of the components have to be imported. Today mobile phones are manufactured in large volumes because first and foremost they have set-up ancillaries, secondly the volumes are huge and lastly the labor cost is lower. In the case of computers, some motherboards are being manufactured in India by importing full CKD kits. Since there is no local design or R&D, therefore the saving exists only in the labor cost. Indian labor is definitely superior from China and offers better quality at lower cost. There are some local companies which have their own R&D units and they have developed products such as leased line modems, VoIP phones, base stations etc. Nevertheless, there are close to nil large EMS manufacturers mainly because components are mostly imported and no one is looking for the huge Export Potential.

If one has to decide whether to go in for basic manufacturing even for their own R&D developed products, it is at most times preferable to go outside as there are no advantages because most components need to be imported. Even if we get EMS done in China, for locally designed products it ends up being more worthwhile than manufacturing locally as there is no true advantage and component procurement is riddled with problems. In the case of Taiwan most companies have a base in China for manufacturing. In India also, if local companies design and develop products on their own, then it is worth manufacturing abroad.

Possible solutions

Tomorrow the IT manufacturing industry in India can only grow if there are some major benefits for locally manufactured products which could be in the form of custom duty relief or tax benefits or more thrust by government on the local manufacturing of goods.

If there is, say a 10-15% benefit for at least five years, then manufacturing will happen in India primarily because the cost of manufacturing is lower than in China. Despite the local demand increasing, India can help its export market grow. Obviously it is a chicken and egg story and only large scale local manufacturing can cause the components industry to come up in India. In current conditions, setting up a manufacturing base in India is difficult.

K R Naik is Executive Chairman at D-Link India