We take a look at how the Electronic System Design and Manufacturing (ESDM) industry can grow in this country and at some crucial initiatives that can make India an ESDM hub.
Like many other Indians, I too wish that ESDM happens in India. But, at the same time, as a professional, under the current scheme of things, I find little reason for investors to put their money in ESDM in India. Thus the question is how to build a vibrant ESDM sector in the current domestic scenario. In an attempt to answer this, I am putting my thoughts together to understand if ESDM is possible in India, and if so, how to go about making it happen. There are three phases in the evolution of the Indian ESDM scenario, which we need to understand: (1) Before the signing of the ITA (Information Technology Agreement); (2) The post ITA period up to the notification of the National Policy on Electronics (NPE); and (3) The period post notification of the NPE.
Before the liberalisation of the economy in 1991, most sectors of Indian industry were protected from foreign competition and there was little incentive for them to produce good quality products or to innovate. Policy protection was aimed at safeguarding local industry so that it could grow along with local competition and be able to compete with global companies. This could not happen.
After India signed the ITA in 1997 and its roll out, which was completed in 2004, it became more economical to import than to make in India. Complex multi-level taxation and delayed approvals made manufacturing a difficult proposition, more so for SMEs. It became difficult for Indian manufacturers to compete with the foreign goods and, slowly, the OEM as well as components industries nearly got wiped out.
For several decades before the full implementation of the ITA, there was a significant level of electronics manufacturing activity in India with players like Onida, BPL, Videocon, Western, JCT, ET&T, Uptron, Hotline, Blueline, Salora and many more firms that had large scale manufacturing activity on Indian soil. Traces of some of the units operating in niche areas may still be found as some entrepreneurs, driven by their passion for electronics, are still pursuing it.
As ITA unfolded, manufacturers in India became traders as they couldn’t compete on the cost and quality of the goods coming into India, which were a combination of the quality of the developed world and its productivity. Low quality products also came along, making India a dumping ground for recycled waste products.
ITA comprehensively transferred the factors favourable to manufacturing electronic products, outside India. It also helped in integrating global supply chains in other parts of the world, most of the time relying on the Indian engineering intellect but without Indians participating in IP ownership. Economies of scale and the SME support system also got augmented outside India. Within India, technical entrepreneurs struggled since they got little support from the complex mesh of the policy framework.
In the year 2009, a taskforce was set up, which made recommendations on how to promote the manufacture of electronic goods in India, following which the National Policy on Electronics (NPE) was notified in October 2012. This had provisions for the all-round development of the ESDM industry in India, particularly the Electronics Manufacturing Cluster Scheme and the Modified Special Incentive Package Scheme. There has been significant traction after the announcement of these policies but the challenges are many, particularly at the macro level, like, the lack of ecosystem and supply chains, inverted duty structure, low investor confidence, lack of infrastructure, tax issues, land acquisition problems and red tape, particularly at the local level of implementation, etc.
The oft mentioned advantages of trained manpower in design and huge domestic demand are practically of no use. Due to the lack of domestic semiconductor fabs and India being an ITA signatory, it is not possible to capitalise on any of these advantages.
Let’s admit the fact that international investors will not be excited unless there is a positive business case to invest in ESDM in India. As far as international investment in ESDM is considered, in our outreach effort, we should limit it to OEMs as, for non-OEM companies there is no point in manufacturing goods here and exporting them to its OEMs. We could target testing, repair and spares manufacturing companies.
Further, if there is ITA and there is over capacity globally, there is no reason for any company to make fresh investments unless it is altogether a new product line with a significantly different supply chain. Even then, at least the horizontal ecosystem will be in operation at existing locations/ supply chains.
I understand that it is for members of the local ecosystem to get together and form a critical mass, which will be able to attract foreign investors. At the same time, the market is to be made differentiated or restricted. But before we go further, we need to answer certain questions. Some of which are as follows:
a) Is the current investment climate perceived as positive for ESDM? Are factors of production, supply chain and demand (domestic household, public funded, public service companies, businesses and exports) positive?
b) ITA provides free market access. Installed global capacities for manufacturing of electronic goods are not fully utilised. Why will global companies invest in additional capacities?
c) In which vertical of ESDM are further global manufacturing capabilities required? What is their value chain? Who are the major/ anchor players in this vertical and what are their concerns?
d) Which ESDM vertical is poised to grow faster in India? And when, where and how is this expected to happen? Is it LEDs, solar, PCBs, EMS or something else? How will anchor companies participate?
e) How should India mobilise its MSMEs?
f) Which products are required for the aging world and where are their supply chains integrating?
g) Where will major investments come from for ESDM in India? Is it Germany, the rest of Europe, USA, Taiwan, Japan, Korea or China or will big Indian conglomerates or SMEs make up the critical mass?
h) Do prospective investors know about the NPE and the incentives it offers? Are they interested in these incentives? Do they find it lucrative enough?
i) How can India speed up the operationalisation of EMCs?
j) How will ESDM evolve in India? Which of the following should the government focus on?
- EMS -> OEM -> Components -> Design IP
- PCB -> EMS -> Components -> OEM -> Design IP
- Components -> PCB -> OEM -> Design IP
- Incubator -> Product/ Design IP
k) Does electrical engineering have some role to play in the development of the electronics ecosystem? Is it possible to have ESDM without electrical manufacturing?
l) How do we resolve macro inhibitors like the inverted duty structure?
m) Which model is working in India’s favour, as of now? With companies like Samsung, LG, Nokia, NEC, Bosch, Panasonic, etc, which are already in India, what is their value addition? And now with Micromax, Maxx, Lava and others that claim to be making in India, is it 2 per cent value addition or 20 per cent?
Answers to these questions may help India in building the ESDM sector further, brick by brick. Central as well as some state governments also are very proactive in getting investments to their states. But to grow from this stage, we need to work on a number of finer points in order to impress investors.
Since the notification of NPE, sector development initiatives have come a long way. Most of the provisions are in place and the nuances have also now been well debated. Now is the time to consolidate and move ahead under the given scheme of things. Listed below are some of the measures that can be taken.
1. Understand the kind of products and components being made in India and the value addition happening here. This could be an eye opener, throwing up many surprises on internal capabilities in some of the areas. Assessments can be done in the following areas:
- Assess local manufacturing/value addition on an OEM sourcing/manufacturing map for each product with a database of contacts
- Map how OEMs manufacture, source or trade for each product/sub-assembly; and maintain a database of contacts
- Understand exports and promote them for volumes
- Understand imports and initiate substitution
- Profile research agencies to help provide customised industry information
- Assess the skills that are required and are available, and how these will be acquired henceforth
If we map these against the manufacturing process chain of each of the final products or assemblies, companies may be able to map vertical growth by sourcing or value addition.
2. The ecosystem and supply chain are two key components for attracting investments in a particular sector. Thus, the natural way is to understand the electronics manufacturing activity in the area till now, and find ways to use that capacity and capability to build over it to pursue organic growth. Say, for example, automobiles have about 35-40 per cent of electronics by value. And there is a good auto industry in Rajasthan, Tamil Nadu and other states. So, by mapping the kind of ecosystem and value chains that already exist, the possibilities can be mapped for attracting investment for organic growth.
3. When the above data is available, we can think of augmenting our strategies and putting in place non-tariff barriers. ITA calls for tariff barriers but does not stop us from mandating a 30 per cent local sourcing norm. Training, as allowed in defence offset, should be excluded.
4. The pain points of ESDM companies currently operating in India should be pinpointed and ways to ease them should be debated. Else, these will also be pain points of new companies exploring ESDM in India.
5. Support OEMs and connect vendors with big companies. Ask companies to have a vendor development charter.
6. Make states compete for the support infrastructure to be built. Not all states or EMCs can have units making all electronic products. Let’s identify a product which has more feasibility at an EMC, and build infrastructure and noise around that.
7. Inviting OEMs along with their vendors, like how Nokia was manufacturing in Chennai, is what we have been aiming for but with limited success. These efforts should be continued so that when we have some supportive system aggregated, other OEMs will start considering investing or entering India.
8. Create a ‘Made in India’ campaign based on the PPP model, in which ESDM products are listed on a 10 point scale; the campaign should focus on making Indians feel proud about making in India.
9. Create awareness on Chinese spyware being embedded in imported goods, particularly in telecom equipment, power equipment or even hardware procured by the military. None of the defence goods should have any Chinese component.
10. Bridge last mile connectivity, which is often government approval like STQC approval, classification of products, etc, for Indian manufacturers.
11. Have a periodic (fixed date) meeting of stakeholders’, say the 13th of every month, with a team following up on the consolidated list of action points.
12. We should also understand the impact of our outreach efforts till now and be aware about policy provisions. We could ask research and consulting agencies to inform us about how many of the global ESDM companies have got an entry strategy report done in the last three to four years.
1. Central government agencies may facilitate the emergence of electronic clusters like those in Taiwan or Japan. There may be Central government funded and PPP-managed EMCs with SMT line common facilities and space on rent (as in the STPI model), which are as efficient as the Delhi Metro. Entrepreneurs may come with raw material and labour into the EMC to start operations. This could be like a ‘plug-and-play’ space. Regional strengths and choices across India also contribute to investment decision making.
2. Perhaps this is the time for PPP model PSUs in the electronics sector to be supported with public money. After some time, old government institutions may be merged into this new organisation with its own culture and managed by professionals, like the Delhi Metro was managed.
3. If the research finds a shortage of raw material, we should have a production and warehousing facility, possibly in a PPP model.
4. The role of SMEs is critical and should be cultivated in EMCs. Consolidation of SMEs in EMCs will support savings on operational costs and promote growth of the business. Thus anchor units will find it feasible to set up operations in that particular EMC.
5. Panel of technical advisors and individual experts should be made available to companies to draw on their collective experience.
6. Establishment of a network for IP registration and transfer of indigenously developed technology will help build the IP bank in India.
7. Collaboration forum for companies in India to collaborate and add value will also help.
C. Policy related strategies
1. The Ministry of Defence is pursuing various policies to attain self-sufficiency in the manufacture of defence products. Electronics again contributes to more than 10-40 per cent of the value in defence purchases. Foreign companies are forced to have Indian offset partners and transfer of technology is also a part of it. We may invite domestic and foreign companies in strategic electronics and make it conducive for them to work. Slowly, there may be cross fertilisation which will help build the ecosystem.
2. Government demand is to be essentially fulfilled through domestically manufactured items. Demand assessment in various government agencies can be done so that this is supported through PMA (preferential market access), without compromising on quality. This will help us to streamline PMA.
3. We may also use a reverse PMA policy. Bids for procurement of goods may be in two envelopes – first, technical and the second, the financial bid. We may then make the L1 (lowest of these offers) price as admissible to all who have qualified technically. Then, the next bid should be on the amount of domestic content/value addition (except overheads and training) being done in India. The highest value-addition/BoM can get the order.
4. There should be effective enforcement of producer liability of e-waste products on importers.
5. Ministry of Consumer Affairs may ask importing companies to submit data on consumer complaints and reparability, and link it with e-waste disposal liability.
6. Reparability should be strengthened through the product’s lifecycle.
7. Comprehensive engagement with stakeholders in customs and other government offices.
8. As we know that the cost of capital (CoC) in countries from which goods are imported is low as compared to India, just like the education cess along with sales and service tax, we could have a CoC tax on electronic goods and use this to provide an interest subsidy to companies manufacturing in India.
9. Regarding labour laws, let’s ask companies to propose the law (with their reasoning) and seek a referendum on a 10 point scale with inputs from employees too.
10. Resolution of the inverted duty structure.
11. Policies should have fewer implementation dependencies.
12. Like the USFDA approves all the factories from which the US imports drugs, India can also put in place a non-tariff barrier to look into compliances prior to allowing imports.
D. Product related strategies
1. We need to find products/horizontals where it is possible to quickly increase the value addition. Examples could be portable batteries, accessories for mobiles or Internet of Things devices, homeland security devices, etc. We could aim at comprehensive import substitution by building specific internal capabilities, through PSU or PPP mode.
2. Another strategy could be building supply chains, product by product. For example, an electronic toys cluster in India can be set up from where OEMs or brand owners can source parts, job work and assemblies.
3. Electronics manufacturing is very vast and diverse, with a common factor being design and EMS. It will be good to start with ITA2 products, which will help build capacities for ITA1 products also, after some time. These could be lighting products and smaller home appliances such as regulators and door openers.
4. After EMS, we should look at PCBs to enhance value addition and create an ancillary ecosystem around this product. If the PCB ecosystem is strengthened, there will be more demand for components as well and higher feasibility for OEMs to source locally.
5. We should have specific policy interventions around select products, and build infrastructure at locations suitable to those products.
6. MSIPS and EMC approvals should be streamlined to save time.
7. There may be inbuilt capabilities to ensure cyber safety. STQC and other labs should be equipped with such instruments.
8. A list of critical companies/technologies should be made and the value chain understood, so that those technologies can be specifically supported.
The road ahead
The ESDM industry in India has been mobilised by initiatives taken in the past two to three years, which will stimulate interest among a greater number of international players regarding policy and facilitation at the Central, state and local (EMC) levels. To serve them better, investors may be classified into different categories for us to understand the evolutionary path of each of the categories. Domestic players may be classified as manufacturers-non-OEMs, ex-manufacturer OEMs, traders, etc. The global investor community can be categorised as those who’ve already invested, those looking at India as their next destination, those who may look at India and those who have negatively evaluated India.
The best strategy to boost investor confidence will be to support companies which have already invested in manufacturing electronics in India. With this, the investors looking at India will get positive word of mouth feedback on investing in the domestic ESDM sector. To convince investors, all the components of their decision support system must be in place. As the infrastructure spending of the new government picks up, India will be importing more at this stage and we will be contributing more to the Chinese economy than ours. The opportunity is now, or never.