While the future holds a lot of promise for the electronics industry in India, there still exist multiple challenges that hinder growth, such as inadequate infrastructure, tax structure, supply chain, logistics, inflexible labour laws, a limited R&D focus, lack of funding, limited focus to value addition, and export constraints. As supply does not keep pace with demand, it results in ever increasing imports from China and Taiwan. Local manufacturers cannot match the competitive prices of imported finished goods due to the challenges faced in India.
By Srabani Sen
Saturday, February 12, 2011: However, the government has, at last, woken up to the issue of promoting electronics manufacturing within the country. It has set up a dedicated fund with an initial investment of Rs 50 billion to boost electronics manufacturing. The fund will not only boost innovation and R&D activities but will also address the issues of Indian intellectual property rights (IPR). “The fund will enhance the R&D capabilities of the electronics industry and help in the commercialisation of new products thereof. This initiative has been taken up to put a stop to the huge foreign exchange outgo on importing electronic goods,” says N Ravi Shanker, joint secretary, Department of Information and Technology (DIT).
India’s electronics hardware production increased from Rs 844 billion in 2007-08 to Rs 946 billion in 2008-09, representing 12 per cent growth. According to an estimate, the demand for electronics hardware in the country has been projected to increase from US$ 5 billion in 2009 to US$ 125 billion by 2014 and to US$ 400 billion by 2020.
Having covered the manufacturing challenges and solutions pertaining to issues like licences, taxation, government policies and infrastructure, let us now look at issues like funds and investments, skilled labour and R&D.
FUNDS & INVESTMENTS
Easy access to funds and investments is a major challenge faced by the manufacturers, particularly the small and medium enterprises (SMEs). According to Subhash Goyal, managing director, Digital Circuits Pvt Ltd, banks and state financial corporations are the major sources of funds for industries. The Small Industries Development Bank of India (SIDBI) also provides funds for small industries at a relatively competitive rate of interest. Unfortunately, venture capital is not as popular in India as in developed countries. Indian entrepreneurs, therefore, have to mostly depend on banks and state financial corporations for their requirements.
“The procedure to get funding is very complex and it takes a long time to complete the formalities. One major requirement is the collateral required for any loan. An enterprise has to offer some security in the form of tangible assets to avail a loan from these institutions—a requirement which many entrepreneurs find difficult to meet,” says Subhash Goyal. “The cost of funding is also very high in India as the interest rate is high. This is to the tune of 12-13 per cent as compared to 3-7 per cent in most other countries,” he adds.
Airing the same views, Mukesh Gupta, managing director, Smile Electronics, says, “EMS being a highly capital intensive industry suffer from lack of upgradation due to very high rate of interest.”
Says Goyal, “The government should create a special corpus to fund SMEs at a special rate of interest. This fund should be available to them without any collateral and with minimum formalities. In addition, banks and other financial institutions should be asked to keep a fixed quota for preferential disbursal to SMEs at concessional rates of interest. We hope that more private equity and venture capital will be available to SMEs in the future.”
Mukesh Gupta suggests that The government should provide subsidies to balance out the interest costs for term loans that are used for upgrading facilities at SMEs—to enable them to be competitive in their costing process.
A task force report early this year had recommended that the government ought to create a fund to provide grants to SMEs. Other suggestions were that it should disburse funds in the form of loans; once desired time lines and targets were achieved, it could be converted into a grant. The task force also said that a separate fund could be created to provide an interest-linked subsidy to promote value added manufacturing and create products for India.
It also suggested that the recipients of government funds should be made accountable for efficient and timely utilisation of the funds. The government has also been asked to consider initiating a multi-slab investment programme, linked to manufacturing value addition, through a special purpose vehicle (SPV) for the electronics industry.
The task force has also recommended that the government should encourage incubating Indian start-ups by setting up a focused venture fund of around US$ 50 million to provide seed and startup capital for new ventures to undertake R&D and product development. It has also recommended setting up an autonomous body, similar to the Telecom Finance Corporation, to assist Indian players in setting up manufacturing facilities and to provide guidance.
India is known worldwide for its low cost skilled labour. But with the rapid growth of industries in the country over the last 10 years, demand for skilled labour has increased leading to a scarcity. “Not enough industry-ready trained personnel are available,” points out Madhusudan Mudgal, senior manager, business development, Flextronics India.
Says Subhash Goyal, “The current requirement is for specialised skills as jobs are becoming more and more specialised.”
“In the EMS business, we need to adopt the latest technology in manufacturing and hence skilled labour for this is a must. But availability of skill sets is one of the major challenges we are facing today. This has become more difficult as electronics manufacturing is still in its nascent stage of growth. The talent pool is also concentrated in a few metros, and attracting such talent to other cities and small towns is a difficult task. High attrition rate due to the small pool of talent available for both manufacturers and machine sellers is another reason for the shortage of skilled hands,” explains Sharath Bhat, senior VP, Kaynes Technology India Pvt Ltd. He further adds that the talent pool is not adequately trained or multi-skilled in various aspects of this process intensive industry.
“India, no doubt, has low cost labour, but there is a scarcity of skilled labour. If the employee has the requisite education, he lacks domain expertise, and if he has domain experience, he lacks the requisite education that would help him go up the corporate ladder. The EMS industry needs to spend a fairly good amount of resources making people employable. Moreover, retention is another major problem. HR policies for the EMS industry have to change dynamically,” says Kalpana Naagaraj, director, EMS operations, Micron EMS.
“The government has to come forward and enhance its spending on technical education and increase the number of ITIs, polytechnics and engineering institutions. In addition, there should be increased collaboration between these institutions and industry so that the students get better practical knowledge. Industry should place more emphasis on developing the skill sets of their employees by adopting measures like on the job training, job rotation and sponsoring staff to participate in seminars and technical workshops. Large industries should have their own training centres to train employees to meet the requirements of specialised skills of the industry. Infosys Training Centre in Mysore is one outstanding example of the efforts by the industry towards addressing this problem,” says Subhash Goyal.
Says Jagdeesha MP, VP, operations, SRV Telecom, “The government should invest in education and skill development to create a sustainable pool of high calibre talent. Individual companies should also provide higher level training to their recruits and focus on specialisation.”
“We also require more vocational institutes for electronics manufacturing and a more industry oriented curriculum in engineering courses. Greater industry-academia interaction is the need of the hour,” adds Madhusudan Mudgal.
Suggests Sharath Bhat, “ITI/diploma/engineering colleges should expose and train more and more students in handling sophisticated equipment like SMT machines. Or EMS companies should themselves take up the responsibility. This will ensure that more and more students are available for EMS companies. Multitasking and setting high benchmarks in processes and manufacturing technology should be undertaken by EMS companies. Moreover, a certain amount of ground work by companies can ensure the retaining of skilled employees.”
Kalpana Naagaraj feels that by investing in a robust internal training system and formulating a good retention policy, this issue can be resolved to a large extent.
Innovation is a key requirement for success. India has the potential to emerge as a leading hub of innovation in low cost technology and process reinvention. But to achieve this, India needs to be strong in R&D activities. The current spending on R&D in India amounts to 0.85 per cent of GDP, lower than in China (1.44 per cent) and Russia (1.77 per cent). A comparison of the number of researchers per million people across countries shows that India is lagging behind. The number of patents granted in India per million people is also lower than that in other emerging economies such as China, Brazil and Russia.
However, with India having a vast pool of highly qualified and skilled engineers, it has attracted many multinational companies to set up their R&D centres in the country. “But unfortunately, the Indian electronics industry is not doing much to develop its own R&D. Indian industry needs to increase its emphasis on R&D and has to allocate more funds for this activity. It is only with strong R&D that India will be able to come out with innovative products and capture the global market,” explains Subhash Goyal.
According to Subhash Goyal, the Indian electronics industry has come to realise that R&D is what drives any industry and without strong R&D, industry cannot survive for long. Many original equipment manufacturers (OEMs) are graduating to original design manufacturers (ODMs). The government is also offering tax exemptions on the expenses incurred on R&D activities. “The scheme can be made more liberal and simple to operate so that more industries can take advantage of it. There should be a closer association between educational institutions, defence R&D organisations (DRDOs), national R&D houses and industry, so that industry can make the best use of the technology developed by these institutions.
According to the task force, the government should focus on enhancing and enforcing IPR laws to match the best in the world. India already has strong IPR laws, but it needs stronger enforcement to encourage companies to commercialise the technologies and processes developed inhouse. Further, the government should catalyse investment in R&D to match the best in the world. It further suggests that the government, in consultation with industry and government bodies, should put in place a mechanism to ensure rapid commercialisation of (non-strategic) technologies developed in government labs. This mechanism should ensure that companies, specifically SMEs, which are developing similar/complementary technology, are identified and collaborative work is facilitated.
There is a huge requirement for measurement, standardisation, testing and quality centres across the country. This infrastructure requires substantial capital investment, which is difficult for SMEs in particular, and sometimes even the large companies, to bear. (to be continued)
In the December issue of Electronics Bazaar, we will cover yet more challenges and their solutions.
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine