Subir Roy: Growing a Samsung or two

Govt must dangle access to the Indian market and ask MNCs to set up manufacturing here

The electronics industry in India offers an enormous opportunity. This is for three reasons. It is a laggard, so has lots to make up; India’s domestic market is and will be burgeoning, offering scope to tell the rest of the world “you can come in provided…”; and it has the most valuable asset that enables the highest value addition — intellectual capabilities and skills.

Against this, it has well-known handicaps: poor infrastructure; misconceived policies; and, what is not often realised, a wrong attitude on the part of the industry too. The industry, which first lived under import controls, has in the last two decades cried over tariff anomalies, high financial costs, and lack of government financial support. The best deal that it got out of the government so far, the national semi-conductor policy, is yet to take off as not a single government incentive payout has taken place under it till now.

But it is not as if there are no green shoots. Take Nokia manufacturing cellphones for India and elsewhere out of India, take Sriperumbudur in Tamil Nadu which is now a successful electronics manufacturing cluster, and take home-grown electronics manufacturing firms like Moserbaer and Tejas Networks.

The conventional way of looking at the whole scenario has been to pose the questions: How can the success in services, symbolised by Infosys and Bharti Telecom, be replicated in manufacturing; how can we get a few semiconductor fabs to get going in manufacturing. This highlights the big mistake so far, looking at the two worlds of services and manufacturing separately.

The future lies in looking at the total value chain — from conception to design to manufacture to marketing to sales to branding — and seeing how the maximum value can be captured. The Holy Grail is not semiconductor fabs like Taiwan’s but Apple. The electronics manufacturing services company that actually makes the products for Apple probably has a bill of materials of $90 and sells the item to Apple for $100, which the consumer eventually buys for $240-280.

There is a niche Indian company too successfully operating in a similar manner. Tejas Networks makes and sells boxes (optical network equipment with its name on it) which all telecom networks need. It thinks them up, designs them, gets a contract manufacturer to make them, then sells them in India under its own brand name and unlabelled to global network OEMs (original equipment manufacturers). It can’t say who they are but you get a clue when it says “we’ve had a bad year because one of our OEMs, a global biggie, collapsed” (you know it must be Nortel) and goes on and on about Cisco being the most respected globally in the field.

This is not all. While Tejas sells its stuff, both branded and unbranded, Ittiam Systems does the entire design for both software and hardware, called reference design in electronics parlance, for state-of-the-art products in wireless, multimedia and video for good names in East Asia and the US, for them to tweak a little and put their labels on and sell. Sasken develops mobile applications and Wipro has, of course, long had the world’s largest product design services.

Where does India go from here? An industry leader outlines the stages in the country’s technological journey. First was the period of reverse engineering till the early 80s. We copied others’ machines and made do. Then came the Rajiv Gandhi era of technology imports, lock, stock and barrel, within tariff walls, which was a bonanza for those who got the technology import licences. Then came the long journey of developing design and capabilities, roughly coinciding with the rise of software and currently maturing into a strong capability in semiconductor and engineering design.

It will be obvious that India has most of the elements of the value chain except two. It does not have manufacturing, the semiconductor fabs or contract manufacturing services, and it does not have firms that see the market and conceptualise what it wants, then get somebody to do the reference design, then tweak it to the final product and, most importantly, create a brand and a buzz to sweep the world. It does not have a Sony which gave the world the Walkman and, of course, it does not have an Apple which has successfully created the iPod and iPhone.

What must the government do? It has to dangle the access to the Indian market — the second most-important growth centre in the world economy looking into the future — and ask MNCs to set up manufacturing here, the way Nokia was asked to do. And the government has to reserve a part of its procurement to Indian manufactures, supplied by MNCs in India if need be.

The need to manufacture in India will create jobs (electronics assembly is very labour-intensive) and also, over time, direct minds to develop products for India. That will take care of the low-value, high-employment end. The other end, high value, is already an Indian advantage through capabilities like semiconductor design. So, the game plan has to be to develop a manufacturing ecosystem here; doesn’t matter who owns it. Then the industry will grow a Samsung or two on its own.

subir.roy@bsmail.in