Running The Wrong Programme

If we go by what the industry association, Manufacturers Association of Information Technology (Mait) has to say, it would be so. The $243 billion global IT business is booming, and big companies are scouting for low cost manufacturing sites. Indian industry has an advantage of cheap and skilled labour and must aim for a slice of this $41 billion sub-contract market. For proof of the business potential, companies are quick to point to Taiwan as a case study its IT industry is expected to outsource business to the extent of $5 billion this year.

Mait is convinced that India can replace Taiwan on the world IT map, if the government takes up the cause of promoting this industry more actively. Apart from the usual set of demands of lower excise duty, higher depreciation rates, low cost financing options, it has been urging the government to be involved with the industry more closely. Joint industry-government task forces to market these companies internationally, special incentives to encourage innovative R&D, organise training programmes for small companies to upgrade their skills are some of the suggestions. By no means, this is a novel suggestion. In fact, the industry is merely trying to implement the Taiwanese model, where the government actively promoted a few entrepreneurs, provided them with easy finance, infrastructure facilities, got ancilliary units to set up their factories close to the manufacturers.

 

But there are flaws in such an argument: For one, we are not Taiwan. Our competency and skills need not (and are not) be comparable. More importantly, there is another approach that of foreign direct investment (FDI) led growth, successfully tested out by the auto components industry in India which perhaps, could be repeated, for the IT industry.

A poor track-record

For years, local companies have been operating in protected markets. There were times when import duties on computer components were nearly 50 per cent, with the result that PC makers had no choice but to buy from them. Of course, the fact that the computer companies too were operating in a protected environment meant that few were really complaining.

The components business attracted entrepreneurs in droves because investments required were low of the order of Rs 5-6 crore. Compare this with the Rs 15-18 crore investment required to set up one SMT assembly line. Typically, a computer components maker would have a shed with people sitting in long rows piecing together components manually. Production runs were short, error rates high (as much as 20 per cent.) With a typical size of operation, 3,000-4,000 pieces a month, there were no economies of scale.

Today, there are more than 100 such companies in this business. Even the bigger players like Vintron and Microtech have turnovers of Rs 10-15 crore, a fair indication of the scope of their operations.

In defence of the small players, it can be argued that there was not enough demand for IT products locally. So the size of businesses remained small, which in turn made investments in superior manufacturing technologies prohibitively expensive.

The counter argument could well be that if demand at home was not robust enough, why didn't these companies tap other markets? Worldwide, the industry has been growing at a robust rate of 11 per cent for the last three years. And our much touted advantage of lower wage costs and abundant engineering skills was a clincher even then.

The reality is that nearly 90 per cent of the Rs 900-odd crore exports in IT hardware this year will be accounted by just two companies, Tandon and Altos India. Barring these two companies, there is no world-class, world-size manufacturing set-up in the country. Most other companies have made little or no effort to capture the export markets.

The wrong skills

The industry representatives also point to our vast pool of engineering talent as the other reason why we should excel in contract manufacturing. Every year, our engineering colleges churn out thousands of engineers. (Considering that most of them are proficient in English, this can be a useful advantage over non-English speaking countries.) But do we really have the right skills for this job?

A Mait study asserts that Indian engineers are skilled in mechatronics mechanical and electronic engineering which can be leveraged to get business for power supply units, monitors and keyboards from around the world.

It is argued that with a large manufacturing base in automobiles, appliances, televisions etc, our manufacturers have developed skills in processing of sheet metal and plastics, electronic and mechanical design, digital circuit design etc.

But in this gung-ho optimism what is, perhaps, overlooked is that in IT a different set of parameters operate. To be globally competitive, the need is to have high-volume production runs offering the best yields and quality. Manufacturing technologies change rapidly. So the advantage lies not so much in knowing a particular process well but in the ability to learn and adapt quickly. On a global scale, how many companies can truly claim to be running high-volume, low-cost operations?

Need outside help

The industry's record sheet so far shows that few companies have made any attempt to upgrade manufacturing quality to world standards. There is very little reason to believe that this will change now. So possibly, as many industry leaders who wish to remain anonymous point out, a solution to the problem lies elsewhere.

The auto component industry in India could be a role model. Before Suzuki set up its car manufacturing in India, the Indian component makers were churning out poor quality products. Today, these companies are global players. Sundaram Fasteners takes care of almost the entire requirements of General Motors for radiator caps. Sigma Industries, one of the largest exporters, supplies rubber and rubber-to-metal tubes to big auto retail chains like Federal Mogul and Dana Corporation.

And Suzuki is largely credited for this transformation. Importing components was not cost effective, so it had to buy from within the country. But to ensure good quality, Suzuki had to upgrade its vendors. The company got its suppliers in Japan like Nippon Denso to come to India, and transfer technology and skills to the Indian vendors.

In the IT industry too, a similar model could work. The focus of the government should be to encourage FDI; get global IT corporations like Intel and IBM to set up manufacturing operations in the country.

The government's role should be restricted to providing the right environment for manufacturing to flourish. Do away with fragmentation and duplication of manufacturing capacities by allowing a single factory to produce both for exports and domestic market. (Today, this is not possible.) Allow speedy clearances of consignment at the ports. Prices drop rather rapidly in this industry. In a fortnight, the delayed consignment value could drop by as much as 10 per cent.

Of course, the duty structure should also favour local manufacturing. For the multinationals, the Indian market is an attractive bait by the year 2001, India is expected to sell three million PC owners against 3,50,000 units today. This is more than the growth these companies can expect to notch in the already saturated markets in the West. The role of the government should be that of an enabling agency, not of a super-corporation trying to win business in the international market.

The role of the

government should be that of an enabling agency, not of a super-corporation trying to win business in the international market''