Manufacturing challenges in India: Some solutions Part-III

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India faces an acute crisis of raw materials and components for electronics manufacturing. This has been one of the major factors for the country lagging behind on the manufacturing front. Today, the country imports about 80 per cent of its raw materials and components for the electronics industry, pushing the cost of manufacturing to a higher level and ultimately raising the cost of the end products. Indian manufacturers, therefore, fail to compete with the cheap products that are coming from China and flooding the market.

By Srabani Sen

If the Indian raw material and component base becomes strong, equipment manufacturers will enjoy the benefits of easy availability of components at competitive prices. This will save them from the hassles of importing components, which involve delays, high freight costs, customs clearance expenses and payment of customs duty. By-passing all these hurdles will lead to reducing the cost of the end products, speeding up the time to market, and making Indian products competitive globally, in addition to saving precious foreign exchange for the nation.

AVAILABILITY OF RAW MATERIALS

CHALLENGES

According to Subhash Goyal, managing director, Digital Circuits Pvt Ltd, raw materials required for the electronics industry are of high precision and purity. Most of these are not available in India and have to be imported. Due to this factor, the components industry has not been able to grow and about 80 per cent of our component requirements are imported, making our products expensive.

Says Sharath Bhat, senior vice president, Kaynes Technology India Pvt Ltd, “Sourcing of components in India is difficult as about 60 per cent of the raw materials are imported for high end and medium range electronics products. This is a huge drain in terms of foreign exchange and has a direct impact on the overall cost of manufacturing. Apart from this, the recent global recession has hit component manufacturing hard. Manufacturers are still facing tremendous difficulties in scaling up despite economies gradually improving, worldwide. This has resulted in making components scarce in the global market, leading to an artificial scarcity that has pushed prices higher. As a consequence of all this, EMS companies are getting hit as customers are not willing to pay more.”

Speaking along the same lines, Kalpana Naagaraj, director, EMS operations, Micron EMS, says, “Raw material is the single biggest expense for any EMS company and most of it is to being imported. As a result, the components industry has not grown at all. Even today, to manufacture even a simple motherboard or to assemble a basic printed circuit board, most of the components have to be imported. We can only save on labour costs. Indian labour is superior to that of China and offers better quality at a lower cost.”

SOLUTIONS

According to a study by Ernst & Young, domestic demand for electronics products is expected to grow to US$ 125 billion by 2014 and US$ 400 billion by 2020. To take best advantage of this huge potential, India should develop a strong raw material and components base. The raw material and components industry is capital intensive, requiring high investments in semiconductor foundries, for instance, and cannot be developed without the proactive support of the government, feel those within the industry. “The government has to come forward with a specific policy to encourage investments in this sector. The government’s initiative in promoting the semiconductor industry has not been very successful. A more comprehensive package of incentives is required to attract investment in this sector so that the industry becomes viable and lucrative. In addition, the government should provide some incentives to the components industry to enable it to grow to global standards and become more competitive,” opines Subhash Goyal.

Says, Kalpana Naagaraj, “The government should give greater thrust towards local manufacturing of components. It could start an initiative to encourage only components manufacturing and create component hubs like we have for the automotive industry. For that to happen, raw materials should also be readily available in India. The 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.”

According to Mukesh Gupta, managing director, Smile Electronics, the freight costs are so high that it leads to uncertainty when receiving raw materials, and delays during the final dispatch to the customer.

The industry, therefore, feels that it is high time the country stops being dependent on imports for all its raw materials, components and electronics products, and starts making an effort to become self sufficient. And this is only possible, they feel, if the government comes out with a policy backed by investments, so that it is not just an eyewash.

SOURCING OF COMPONENTS

CHALLENGES

Electronics components form a very major part of the bill of materials (BoM) for any product. However, 80 per cent of the components are not manufactured locally, and hence, it becomes expensive for local manufacturers to import these components due to freight costs. The industry is of the view that a lot of components are imported because it is expensive to develop local partners for low volumes. So it seems that technical capability to manufacture these components in India does exist, but due to small volumes, manufacture is not viable.

Also, the lead times and a higher accumulation of inventory make local manufacturers less competent. India’s current semiconductor policy needs to be made more attractive so that investments in the semiconductor segment take place. This will make local manufacturing more competent.

Says Subhash Goyal, “Component manufacturing base in India is poor, as most of the raw materials, plant and machinery required for their production has to be imported. This makes the industry unviable. In India, only manufacturing low volume, highly labour intensive components is viable.”

N Jehangir, vice chairman and managing director, SFO Technologies, says, “India does not manufacture SMT and BGA electronic components in any worthwhile manner. Mostly, these components are imported from China, which is the main competitor for EMS operations in India. Chinese EMS companies have the advantage that they get components at lower costs and hardly have any logistic costs. This makes a huge difference in cost competitiveness.”

Although the scenario has marginally improved, and some components are being sourced locally, the volumes play a critical role in achieving economies of scale, so that components become affordable for local players. To compete with the prices of China, Indian industry needs to experience a huge boost in captive consumption.

SOME SOLUTIONS

The import policy for the electronics industry as a whole, needs a thorough review. To make the industry viable vis-a-vis imports, its input has to be duty free and finished goods need some protection. The process begins from raw materials, to components, to the sub-assembly, on to the complete equipment. The government policy has to take care of all the stages in such a way that there is no conflict of interest. To attract investments in the raw materials and components industry, the government should come out with a comprehensive package of incentives offering a capital subsidy, interest subsidy, power subsidy, land allotment, etc. Large industries can also encourage the components industry by patronising them and assuring them part of their business.

“There should be a detailed study of the kind of components being imported now, and then based on the priority, policies should be framed to encourage local manufacturing of those components in India. Investments in component manufacturing should be encouraged. There should be a certification programme to ensure high-quality Indian components. There should also be a subsidised cost of funds for component manufacturers. Component suppliers should be given incentives to set up operations in Indian hardware parks. Component manufacturing clusters should be created to reduce the cost of sourcing raw materials/components by enabling local manufacturing,” says Sukhvinder Kumar, general manager, India, Elcoteq Electronics India Pvt Ltd.

Kalpana Naagaraj is of the opinion that the government should provide facilities to entrepreneurs to encourage them to manufacture components.

“The government should encourage the electronics industries and FAB units to set up shop in India to enable components and raw materials to be available locally. Thus, freight cost, which forms a substantial portion of the bill of materials, can be reduced,” signs off Mukesh Gupta.

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

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