Guest Column: Elcina: Good Times Ahead

The electronics industry in India was born in the mid 60s

with an orientation toward space and defense technologies. This initiative was

driven and controlled by the government with the activities almost entirely

restricted within the government and public sector enterprises. This was

followed by developments in consumer electronics mainly with transistor radios,

black and white TVs, calculators and miscellaneous audio products; color TVs

followed thereafter. In 1982, a significant year in the history of television in

India, the government allowed thousands of color TV sets to be imported into the

country to coincide with the broadcast of the Asian Games in New Delhi.

Hard Times



The year 1985 saw the advent of computers and telephone exchanges,
which were succeeded by digital exchanges in 1988. The period between 1984 and

1990 was the golden period for electronics during which the industry witnessed

continuous and rapid growth. From 1991 onward, there was an economic crisis

triggered by the Gulf War, followed by political and economic uncertainties

within the country. Pressure on the electronics industry remained during the

subsequent years as the policy of liberalization and globalization was rolled

out in the early 90s. Growth and developments have continued with digitalization

in all sectors, and more recently with the trend toward convergence of

technologies. However, it is a known fact that Indian companies have found the

going tough with lowering of tariff barriers in an increasingly globalized

environment.

After the software boom in the mid 90s, India's focus shifted

away from hardware, which took a backseat, as it was the 'difficult' option for

entrepreneurs. Consequently, it was treated with indifference by the government

as well as investors. The steep fall in custom tariffs made the hardware sector

suddenly vulnerable to international competition. In 1997, the ITA agreement was

signed at the WTO where India committed itself to total elimination of all

customs duties on IT hardware by 2002. This process was delayed to 2005 under

pressures from the industry. In subsequent years, a number of companies turned

sick and had to shut shop. Only a few exceptions have been able to make a mark

and establish themselves as globally competitive players.

Current Scenario



The last few years have seen a change in the fortunes of the
electronics industry due to a brisk pace of growth in the market. Electronics

output is currently worth about $13 bn against a market of $25 bn. Presently,

the largest segment is consumer electronics which is fast losing its primacy to

telecom. Today, the market for cell phones alone exceeds $4 bn per annum!

Even with a brisk rate of growth, the electronics industry in

India constitutes less than one percent of the global electronics industry

miniscule by international standards. Much smaller countries like Malaysia,

Singapore, and Thailand boast larger electronics industries. By comparison,

demand for electronics hardware in India is growing rapidly and is estimated to

be the highest in the world. The growth rate today is even higher than China,

though it has a much larger industry. In this situation, if domestic production,

which is barely 50% of demand, does not accelerate, India's import bill for

electronics may soon exceed our oil imports.

The output of the electronics hardware industry in India is

worth $12.7 bn at present.

The Growth Drivers



The growing Indian market for electronics products is over $25 bn,
and is growing at about 30% per annum! At this rate, it is projected to exceed

$320 bn by 2015.

The growth in demand for telecom products has been the most

impressive, and today India is adding 5-6 mn mobile phone users every month!

With telecom penetration at around 18%, this growth is expected to continue

through the next decade. Penetration levels in other high growth products such

as computer/IT products, auto electronics, medical, Internet, and networking,

and even consumer electronics are equally low and growth in demand is projected

to stay brisk for the next 8-10 years. With the market and the Indian economy

growing at an impressive 7-8% per annum, the projection of a $150 bn plus market

is quite realistic and offers an excellent opportunity to electronics players

worldwide.

One way of accelerating growth, which has been successfully

used by many Asian economies such as China, Malaysia, Thailand, and Singapore,

is through relocation of manufacturing plants from developed countries where

operating costs have become prohibitive. There has been a flood of such

relocations over the last 15-20 years, which has yielded huge dividends to Asian

economies by increasing their share in world electronics production by leaps and

bounds. In fact, more than 60% output now comes from Asia.

Most of these relocations or expansion of manufacturing

facilities have taken place from Europe and the US, which in turn have benefited

by taking advantage of these low cost production bases, which are also potential

markets for them.

EMS: The Preferred One



Comparisons between India and China are inevitable, and the sad truth
is that China manufactures electronics hardware worth more than $200 bn compared

to India's $13 bn. Electronics Manufacturing Services (EMS) have been a major

contributor to China's growth and India too can look forward to a significant

share of the EMS pie coming to locally based global as well as Indian

manufacturers.

Brand owners are outsourcing their manufacturing needs due to

the significant advantages it offers such as the onus of flexibility in

production is transferred to the EMS provider, coping with shortened product

life cycles by reducing time to market, efficient use of capital enhancing RoI

and reducing manufacturing costs and so on.

The recent acceleration in EMS activity in India is due to

rapid growth in all segments of the market for electronics hardware products.

This growth is a result of a number of drivers, which have emerged globally as

well as in India:

• Increased use of electronics in all spheres of life to make
  
  products and services intelligent and efficient.

• Strong and growing domestic demand for mobile phones,
  
  personal computers, consumer, medical, strategic, and automotive electronics.

• Increasing demand for telecom infrastructure equipment, teledensity to increase from the present 100 per 1000 in 2005 to 220 by 2007.

• Highly talented workforce, especially for design and
  
  engineering services with good communication skills.

• Rising labor costs in western countries and now also in
  
  Asia.

• Presence of global EMS majors in India and their plans for
  
  increased investments in India to diversify risks and access the Indian market.

• More outsourcing of manufacturing by both Indian and global
  
  OEMs.

These advantages, combined with a buoyant economy, a large

and aspiring middle class of 350 mn and spread of telecom services to rural

areas has expedited growth in EMS. Within the next five years penetration of

telephone users (both landline and mobile) is projected to increase from 100 to

500 per thousand while for PC's it will increase from 10 to 30 plus per

thousand. As market penetration levels are low for all electronics products in

India, this growth is expected to continue for the next 10 years and beyond.

The challenges and pitfalls faced by the industry are still

largely related to the business environment, infrastructure, and policies. These

challenges have been long overcome by competing nations of much smaller size,

such as Taiwan, Thailand, Malaysia, and, of course, our large neighbor, China.

They are extremely competitive and have the benefit of an extremely efficient

eco-system.

India needs to create a similar eco-system with low indirect

taxes, incentives for investments and R&D, and focus on high value added

activities such manufacture of components, parts and materials that are the

building blocks of a successful industry. A large share of the growth taking

place currently is limited to assembly and low value added activities. There is

an acute shortage of locally manufactured electronics components, which can

become a serious handicap in the years to come. Much greater support and active

participation of the government is required, especially as a facilitator for

entrepreneurs. Emerging concerns in areas such as environmental management,

electromagnetic compatibility and interference, test and R&D facilities need to

be addressed and infrastructure created to support growth of industry. India is

lacking severely in these aspects, and we are unable to meet international

standards for export competitiveness.

The focus has to be on realizing the significance of

electronics, not only because it could become a heavy drain on our foreign

exchange resources, but also because it is an essential facilitator for all

other sectors, a source of employment and revenue, and vital for our country for

maintaining our technological edge and safeguarding future strategic concerns.

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