The Bridge to India (under construction)
There is no question that the electronics industry in India is growing. Revenue from electronics manufacturing in India will grow from about $10.4 billion in 2006 to $22.3 billion in 2010. A number of name-brand electronics companies, including Motorola, Dell, and Flextronics are manufacturing in India or have plans to.
By James Carbone -- Purchasing, 4/19/2007 2:00:00 AM
Reports that India would become the next China may have been greatly exaggerated.
There is no question that the electronics industry in India is growing. Revenue from electronics manufacturing there will grow from about $10.4 billion in 2006 to $22.3 billion in 2010, according to market researcher iSuppli. However, the growth rate is being slowed down by government red tape, a lack of infrastructure and scarce supply of components made in India to support electronics manufacturing.
Several name-brand electronics companies, including Hewlett-Packard, Motorola, Dell and Flextronics, are manufacturing in India or have plans to, but most component suppliers are cautious about investing in India. Buyers will have to import most parts.
"The supply base is relatively weak, especially for electronics," says Mike Fawkes, senior vice president of operations for Palo Alto, Calif.-based Hewlett-Packard's imaging and printing group. "Obviously we would rather have local sources, but they don't exist in many cases," he says.
HP builds computers in Bangalore and is constructing a computer-manufacturing facility in Pantnagar. In addition, one of its electronics manufacturing services (EMS) providers is building a facility to manufacture HP printers.
 Fawkes: “The supply base in India is relatively weak, especially for electronics.” |
Importing components is not a good long-term strategy because of the costs, logistics and general inefficiencies. But Fawkes and others believe that the supply base in India will develop as more OEMs and EMS providers expand into India.
Buyers can expect passives and connector production to grow in India. Some companies, like Tyco, FCI and Molex, are already producing passives and connectors.
But semiconductor production is another story.
Who's got chips?
"In India there is production of capacitors, resistors and other basic passive components, but you don't have any real semiconductor production," says Jagdish Rebello, director and principle analyst for researcher iSuppli, based in El Segundo, Calif. "There are a couple of old updated fabs in India that are basically run by the government," he says.
He says while there is little chip production, there are "four or five initiatives by expatriates in India who are looking to set up semiconductor manufacturing fabs there. The most famous is Semindia, which has broken ground for a fab in Hyderabad."
That fab won't produce any chips right away. Rather, it will be used for chip packaging and testing. Chip production is several years away.
Rebello says that development of fabs "has been locked down in bureaucratic red tape. Things are definitely not moving as fast as the industry would like," he says. "I am Indian and as a person having lived there, I can tell you there is a tremendous amount of bureaucratic red tape that goes on in India."
The government is trying to reduce the amount of red tape by setting up economic zones in certain parts of the country such as Chennai, Cochin and Kandla, among others, and giving tax breaks to companies that build there. But there are other obstacles besides red tape, such as the lack of highways, ports and reliable electricity. There are not many other incentives coming out from the government for manufacturers to set up shop in India in terms of land or water, which is needed for manufacturing, says Suresh Kamath, general manager for sales for Avnet Electronics Marketing-Asia.
But, says iSuppli's Rebello, "when you have a democratic country with a billion people pulling in different directions, having a power plant to produce electricity for factories when a lot of people don't have power can be very difficult to do."
 Revenue in the overall electronics industry will more than double by 2010 to $22 billion. |
Chips design takes off
One thing that may help chip production in India is the fact that chip design there has already taken off.
A study by researcher In-Stat found that the integrated circuit design market in India will grow about 20% per year from $869 million in 2005 to $2.45 billion by 2010.
Despite the obstacles, most analysts and electronics industry executives believe the electronics industry will grow in India and be driven by manufacturing by OEMs and EMS providers.
"When you have companies like Motorola and Nokia and Sony Ericsson announcing they are going to do production in India, you have a lot of EMS vendors setting up shop in Chennai and Bangalore to support these manufacturers," says Rebello.
Indian EMS revenue will grow from about $1.1 billion in 2006 to $2 billion in 2009, according to iSuppli. Much of that growth to date has been from cell phone handsets, consumer electronics equipment and white goods. In the future, handsets and telecom infrastructure equipment, automotive systems and medical equipment will be built. Most of what is produced will be for the domestic Indian market.
Nothing new
While the EMS industry in India is growing, it is not new to the country, according to Matt Chanoff, chief economist for EMS industry researcher Technology Forecasters in Alameda, Calif. "There is a fairly long standing set of various small Indian companies that do board assembly, but none of them are very large," he says. "They don't have the resources to scale up so they are in the process of being bypassed, being acquired or just going out of business" as large EMS providers such as Elcoteq, Flextronics, Jabil, Celestica and Solectron move in.
But for the EMS business to grow further, a supply chain needs to develop. "The need for local supply of components is crucial given the high cost of transporting goods into India," says David Bradley, director of commodity management at Jabil Circuit in St. Petersburg, Fla.
Adds Harvinder Sembhi, vice president of supply chain strategy for Toronto-based Celestica, "the supply base is not as rich as perhaps you get in China or other parts of Asia."
Sembhi says there are some bare printed circuit board suppliers such as HiQ and ATS that can build up to 16-layer boards. There are also some suppliers for sheet metal and cabinets, transformers, wiring and resistors.
"Typically what we find when you get into the electronic components is that the market today is primarily served by distributors," says Sembhi.
Indeed, distributors report strong growth in India from OEMs and EMS providers. Distributors sell global brands in India, but they too say that for the electronics industry to grow in India there must be a robust local supply base.
Say no to status quo
"The status quo cannot continue," says Uma Pingali, managing director of Arrow India in Bangalore. "They need to develop a local component supply base. Otherwise the cost of bringing material into India, assembling equipment and shipping it out of India will work against what the contract manufacturing industry is trying to achieve: lower cost manufacturing," he says.
He adds that component suppliers want to see some volume of scale before they set up operations. That means the more OEMs and EMS providers open factories, the more likely suppliers will follow suit.
Most analysts believe India's electronics industry will continue to grow, but no one is placing bets that India will become an electronics manufacturing and supply powerhouse on a global scale the way China has.
"China had different advantages and India has some disadvantages," says Chanoff. "China had Hong Kong and great port facilities which India lacks."
Says Rebello of iSuppli, "India will be a powerhouse in design, but not manufacturing, at least in my lifetime."
Related stories:
Manufacturing moves to Chennai
 Bradley: “I think there is great potential to develop a world-class component supply base in India.” |
India's supply base has potential
Jabil Circuit is a leading electronics manufacturing services (EMS) provider that has a strong presence in India. The EMS provider has manufacturing sites in Mumbai, Pune and Chennai, where it manufactures set-top boxes, consumer electronics equipment and home appliances for OEM customers. It is also spending $70 million to construct a new facility in Chennai. Purchasing recently interviewed David Bradley, director of commodity management for Jabil about the challenges of sourcing in India.
Q: To what degree can you source components in India?
A: "A recent ELCINA report estimated electronic component manufacturing in India to be less than $2 billion on a yearly basis. From Jabil's perspective, although state-of-the-art electronic components are manufactured in India, the greater bulk of that $2 billion pales in comparison to that manufactured in other low-cost manufacturing countries in terms of technology, quality and the ability to meet the rigorous fluctuations in demand required in today's high-speed electronics industry. India still remains a significant importer of electronic materials and components, adding to total landed cost."
Q: In the next three years what are the prospects of further development of a component supply base?
A: "I think there is great potential to develop a world-class component supply base in India. The problem plaguing India's component supply base is not limited to the scarcity of resources but is also impacted by the high cost of transporting goods to India from distant supply base origins, the complexity of customs and indirect taxes, underdeveloped roads and expressways, insufficient inbound airfreight capacities and the shortage of available outbound ocean carriers. These have always weighed heavily against India.
However, the government is aware of the complexity of the problem and it is implementing aggressive solutions to rectify the deficiencies.
There is an existing export market for low-technology products and we foresee the industry rapidly developing into world-class manufacturers. Whether it will take three years, or five or more will depend on whether the supply chain is able to distinguish the opportunities and undertake the necessary risk for expansion."
Q: What needs to be done for the supply base in India to develop?
A: "For the Indian electronics manufacturing industry to enjoy even more long-term foreign direct investment as a cost-effective manufacturing center, it is critical to take a step back and assess areas of immediate improvement.
High technology components are currently manufactured in India but they focus primarily on niche markets. This needs to include mass production manufacturing. Taxes, customs and labor policies need to be reviewed regularly in discussion with players in the industry to ensure they remain relevant. All in all, prompt action needs to be taken to ensure that India continues to stay in a race with the other Asia-manufacturing heavyweights."
Q: To what degree are distributors doing business in India and what is their role?
A: "Distribution is present in India but in order to achieve the level of maturity and sophistication required to serve many international OEM component suppliers and end-product customers, top players need to study ways to further expand and increase their value-add to the supply chain. In addition, I anticipate a need for distribution to invest heavily in technical and application support services to meet the needs of a growing electronic design industry, particularly from a telecommunications and consumer electronics point of view."
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