Electronic components base in India. A distant dream… but can be a reality

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Indian electronics hardware manufacturing has witnessed a number of electronics and telecommunication stalwarts like Nokia, LG, Samsung, Motorola amongst others, establish their manufacturing bases in India, but having a full-fledged electronic components base in the country is still a faraway dream.Although electronic components manufacturing in India started in the 1960s, the steep demand in the   domestic market has kept indigenous manufacturers far behind in the global rat race. Moreover, with technologies becoming more enhanced and sophisticated, local  manufacturers were unable to match the proficiency level of their foreign counterparts. “Every manufacturer desires to have a local component manufacturing hub as it takes care of a lot of logistical concerns.India is not only witnessing the lack of component manufacturing, even in the semiconductor industry, there have been several announcements of investments being made by big MNCs but nothing concrete has materialised from those yet,” states T Vasu, director, Tandon Group.

By Atanu Kumar Das

For electronics hardware manufacturing to have a significant impact on the Indian economy, a strong components manufacturing base is essential. Countries that have realised the importance of a sturdy components manufacturing base and have encouraged its growth are reaping the benefits—at the cost of those that lack this vital segment. Ex-amples of such economies are Taiwan, Korea, Malaysia, Thailand, with China in the lead.

Multiple Setbacks

The granting of zero customs duty on the import of electronic equipment and components, with the implementation of the ITA-1 under the World Trade Organisation (WTO), has caused local component manufacturing to suffer a further setback. The markets are flooded with cheap imports, which effectively act as deterrents for  potential investments. There are no formal regulations on the import of components, with the result that sub-standard products and inferior substitutes are penetrating the country, totally unhindered.

“Components that are phased out or do not sell in advanced countries, find their way into India. For  example, while all exports of electronics components and products have to be RoHS-compliant, non-compliant products manufactured in various countries find a ready and favourable market in India,” reveals Rajoo Goel, secretary general, ELCINA. “The government needs to acknowledge the depth of this problem and take adequate steps to nip it in the bud,” he adds.

Furthermore, there is an astounding absence of laws required to regulate hazardous substances and quality standards such as EMC and safety. Many advanced countries are dumping components in India as the former are legally prohibited from using them in their own countries.

The challenge
So what is it that we need to do today to ensure that component manufacturing becomes a reality in India and multina­tional companies, who have set up their bases in India, do not have to source components from southeast Asian countries like Taiwan, Malaysia and Hong Kong? The challenge is intimidat­ing, but if both the government and the industry work in tandem to formulate investor-friendly policies, India can be a major force in the global electronics manufacturing arena.

Electronics associations like EL­CINA have been very proactive in voicing their concerns regarding the component manufacturing industry in India. According to Rajoo Goel, sec­retary general, ELCINA, “The present situation is quite adverse and the incentive to invest in a high value-ad­dition industry, requiring a high capital output ratio, is missing. Unlike other activities in the manufacturing value chain, component manufacturing is capital-intensive and skill-intensive and typically has a long gestation pe­riod. Due to high value-addition, inves­tors need to have a long-term perspec­tive and deep pockets, an assurance of supportive policy dispensation, low input costs and efficient infrastructure (power, water, etc), as well as skilled manpower.”

Showing concern about the grim situation, Sachin Saxena, director, Chennai factory, Nokia India, suggests, “Chief areas that need immediate atten­tion include an emphasis on building a complete supply chain. The local manu­facturing sector needs to be nurtured and augmented with product design capability and more local suppliers. Finally, an end-product manufacturing base requires an efficient infrastructure and tax regime—both of which need to be addressed through a comprehensive and transparent policy framework.”

“Value-addition is the key for any country to become a major player in an industry. The highest value-addition in the electronics value chain occurs at the raw material and components segments stage as components are the ‘building blocks’ for electronics manufacturing,” comments Goel.
Clearly, India faces severe competi­tion from southeast Asian countries when it comes to hardware manufac­turing. These countries realise that the best way to invite business is to provide end-to-end solutions to manufactur­ers. Most manufacturers tend to prefer a country that not only has reliable infrastructure, but also allows them to source components locally.

India is uniquely positioned since it has emerged as the centre of the biggest telecom revolution. Hence, there is an immediate need to give the industry the much needed impetus. In the long run, this would bring in technology, generate employment and develop an end-to-end value base.

Woes and Worries
The challenges faced by the Indian electronic component manufacturers and as­semblers

  • Inverted duties due to ITA-1 & FTAs (eg, CPTs & set-top boxes) and dual use inputs such as plastics, copper, aluminium, etc.
  • No fiscal incentive or import tax differential to support local manufacturing.
  • Domestic taxes and levies impose fiscal disabilities.
  • Cascading impact of CST on components detrimental to finished products manu­facturing.
  • High cost of finance and power add to disabilities—overwhelming impact under zero duty regime.
  • Disabilities—fiscal and physical—discourage capital-intensive, high value-add investments. The higher the value-addition, the higher the disability faced by the manufacturer. High risk and absence of level-playing field daunt investments in the manufacturing of components/parts, which require high and long-term investments and need a supportive fiscal and infrastructural environment.
  • Economics of scale is a crucial factor for a thriving component industry. India has sacrificed its market to global suppliers, specially to low-cost Asian countries by not regulating quality and environmental issues. This has resulted in a barrage of imports—largely sub-standard and unregulated, encouraging trading and acting as a disincentive for local manufacturing.

Govt’s inadequate role
The Indian government, although aware of this fact, has not built an adequate policy framework outlining the benefits of establishing a component manufacturing base in the country. “The government should understand that it needs to be proactive in order to comprehend the issues of the component industry and then come up with a solution which will make component manufacturing viable in India,” adds T Vasu.

In today’s global business environment, value-added manufacturing needs a supportive fiscal environment and efficient infrastructure. On the fiscal front, the government must ensure that there are no cascading taxes or inverted duties due to custom duties, on imported inputs. Central sales tax (CST) is a major disadvantage for local manufacturing as it adds to cost and is not viable. Two other costs for which the industry needs support are high finance and energy costs. Indian manufacturers have a considerable disadvantage with respect to these two and the higher the value-addition, the higher their impact.

Sustainable solution

It is really very difficult to sustain a component manufacturing business inIndia. Take Continental Devices Pvt Ltd (CDIL) for instance. It has a full-fledged component manufacturing unit in India, encompassing all manufactural processes— from fabrication checking stage to the finished product stage—but it still imports 90 per cent of its components from outside and sells them under its own brand name. It is only conducting the testing and branding activities in India.

“The truth of the matter is that since countries like China have bulk manufacturing bases, they can produce components at a much cheaper rate than India and, therefore, most Indian players are importing due to the 20 per cent difference in cost,” informs R K Asthana, manager, J M Enterprises. ELCINA has been recommending the creation of hardware manufacturing parks and clusters for housing the entire value chain for a particular product group such as energy-efficient lighting or accessories for cellphones.

Such clusters are housed in exclusive zones that cover the entire manufacturing value chain, from components to the final assembly and can facilitate a low-cost competitive environment for manufacturing. “Governments are the largest buyers and can use this power to leverage the growth of a strong components manufacturing base.

Electronic equipment should also comprise a certain minimum percentage of indigenously manufactured components.   The defence sector has opened vast opportunities for Indian manufacturers due to the offset policy on defence procurements,” remarks Goel.

“Infrastructural development must keep pace with industrial development. Road connectivity and cargo handling capabilities must be enhanced to cater to booming export needs. Water and power supply must also be bettered in an endeavour to support local manufacturing,” asserts Saxena.

Sector potential
Most manufacturers have realised the advantage having a global footprint holds in competing effectively in the electronics manufacturing space. India is uniquely positioned in this respect since it has emerged as the centre of the biggest telecom revolution. Hence, there is an immediate need to give the industry the much needed impetus. In the long run, this would bring in technology, generate employment and develop an end-to-end value base.

While a lot has been done by the government, yet, it needs to sport a more holistic and competitive approach in order to attract more investments
in the field of electronics hardware manufacturing. “This is the opportune moment for the government to create favourable policies and attract largescale investments in these areas, considering all the major telecom original equipment manufacturers (OEMs) like Nokia have already established manufacturing operations in the country.

Electronics Bazaar, South Asia’s No. 1 electronics B2B sourcing magazine