Electronics ecosystem: Can industry overcome barriers?

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By Sandhya Malhotra

Over the last few years, India Inc. has been demanding better infrastructure, power, logistics and supply chain management in the country. These, no doubt, are critical for the growth of a conducive electronics ecosystem in India. However, experts believe that all other major components of the electronics ecosystem like PCB manufacturing, electronics manufacturing services, protyping services, product distribution, testing and quality services, after sales support and availability of electronics as well as non-electronics products, are present in India. But when we look at the current scenario, we find that the country continues to depend heavily on imports to meet domestic demand.

As Neelam Kumar, executive director, Aplab Ltd, puts it, “Global excitement over emerging markets like India continues unabated. India’s traditional strength in creating intellectual property (for example, embedded design) is well known. But looking at the current scenario, we need to re-access that are we really poised for a rapid growth or is it a long-winding road ahead?”

According to the department of information technology, Government of India, there is an average increase of around Rs 8,000 crore in annual production of electronics hardware. But the figure hides some important facts—the local manufacturing is growing slowly, while imports from countries in the Far East are rapidly increasing and are expected to reach $350 billion by 2015.

With domestic demand sizing up and the growth in exports to some key markets looking up, the electronics ecosystem needs to be revamped to foster cooperation and increased innovation. “The ecosystem analogy helps electronics companies understand the need for interaction, tap new opportunities and achieve rapid and sustainable growth,” says Kumar.

In terms of opportunities, the electronics industry can significantly boost India’s GDP, generate employment, modernise processes, thereby contribute to the country’s inclusive growth. According to an industry estimation, domestic manufacturing companies can expand their production to $100 billion by 2014 and $400 billion by 2020, thereby making 20 per cent contribution in the GDP.

Therefore, it is essential to have in place the right policies and regulatory environment to create a full-fledged electronics manufacturing ecosystem in India. In the long run, this can bring in technological innovations, generate employment and develop an end-to- end value base.

What India lacks

India’s capability in developing electronic products at competitive prices for segments like telecom, industrial electronics and computers is well recognised. But in the global market, India’s presence is negligible. So, it is important to probe why are we failing to get there?

According to Kumar, we lack a strong industrial technology base to make India the global hub of electronics manufacturing. “There is an urgent need to upgrade the industrial technology base. We also have to collectively influence the government to change the current taxation regime,” says Kumar.

When we compare our taxation system to other Asian countries, we find that too many indirect taxes are being imposed in India. Besides cascading taxes like CST and inverted duties, custom duties are non-existent in many countries. Government policies, infrastructure, training and research and development are excellent in these countries. For example, China’s phenomenal success is based on its cluster approach; hundreds (or even thousands) of factories producing the same type of merchandise across the east coast are clustered together. Although, Indian electronics associations have been demanding such clusters to be set up to encourage component manufacturing, the idea still needs to be executed in full swing.

Sustainable ecosystem

So, what is being done to ensure that the ecosystem is sustainable to help the industry grow? “All major global equipment manufacturers are present in India. With major EMS and product manufacturers like Nokia setting up their shops in the country, the future of electronics industry looks bright. Presence of a fair amount of skilled manpower and focus on SMEs are some positive signs for the growth of a sustainable ecosystem,” comments N Chandramohan, country head-SMT, Juki India.

Chandramohan points out that India has already started taking steps towards becoming a low cost manufacturing hub. Manufacturing clusters at Rajkot (for diesel engine manufacturing) and Coimbatore (for submersible pumps) can be cited as two examples in this direction. “It is essential to take these steps forward and set up world class infrastructure. Further, the government may identify more locations to set up such clusters,” he adds.

Despite the Indian electronics ecosystem lacking the government support and local manufacturing, there are companies like Amara Raja, which has ventured into EMS business with world class facility and fully integrated and automated components manufacturing plant in Chittoor district. “A world class manufacturing ecosystem has also been developed in Sriperumbudur. Besides, there are several international EMS manufacturers like Flextronics and original equipment manufacturers (OEMs) like Nokia, Motorola and Samsung, who have set up their base in India. We are also gearing up to augment the ecosystem,” says Indeevar, general manager-sales and marketing, Amara Raja Elelctronics.

How to overcome barriers

While the future of the industry seems promising, there exist multiple challenges like inadequate infrastructure, tax structure, supply chain and logistics, inflexible labour laws, limited R&D focus, funding, limited focus on value addition and exports that can block its progress.

Despite all these problems, laws conducive for the industry’s growth are not being implemented effectively. Markets are flooded with cheap imports that act as deterrents for potential investments. There are no formal regulations on the import of components, as a result, substandard products and inferior substitutes are making their way to the market. Further, laws regulating hazardous substances and quality standards like electromagnetic compatibility (EMC) and safety also need to be put in place. Central sales tax is another major barrier for local manufacturing as it adds to the cost of products.

Chandramohan feels that India can be a manufacturing hub, provided the industry becomes more competitive, the government regulates imports and local manufacturing is encouraged to meet the domestic demand. Agrees Indeevar, “Presently, we are importing 95 per cent of the electronics components, thus, investment in R&D has gone down.

Value added manufacturing plays an important role in today’s global business ecosystems. But it faces major obstacles like inadequate fiscal environment and infrastructure in India. “On the fiscal front, the government must ensure that there are no cascading taxes or inverted duties on imported inputs,” says Chandramohan .

It is also imperative to identify unique domestic needs, both manufacturing and design, to create products that can be exported to developing economies with needs and demographies akin to India.

Both the industry and government need to look at developing a sustainable ecosystem with a sense of urgency, as it can transform the economy (in the same way software has achieved in some IT hubs) and make India a technology powerhouse in the global market. India cannot afford to miss the immense opportunity offered by the electronics industry and lose ground to other competitive economies.

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