Watch total costs if sourcing in India
The benefits of cheap labor in India can be offset by higher total costs caused by poor infrastructure and the lack of a supply base.
By James Carbone -- Purchasing, 1/17/2008 2:00:00 AM
The Indian electronics industry is thriving as more OEMs and their electronics manufacturing services providers set up operations to take advantage of a highly educated, low-cost labor force and to gain access to a huge market for cell phones, computers and consumer electronics equipment.
But purchasers involved in outsourcing decisions need to take a hard look at India before recommending it as a low-cost manufacturing location. While labor rates are low, they are often offset by higher costs of logistics because of poor infrastructure and a limited supply base, resulting in the need to import many materials.
Buyers should not be unduly influenced by the fact that other large OEMs have set up operations in India and that India gets written about in many newspapers and trade publications, according to Charlie Barnhart, senior consultant for Technology Forecasters in Alameda, Calif. Often there is a "me too" thinking in deciding to move manufacturing to India because the list of companies in India reads like a who's who of the electronics industry. Motorola, HP, Cisco, Flextronics, Jabil Circuit and Celestica are some of the major electronics companies there.
But just because major companies are in India, doesn't mean all electronics companies should manufacture in India. Barnhart says before deciding to build in India, OEMs need to understand what their needs are, what they want to accomplish, what their expectations are and the level of resources they want to commit.
Smart workers
India offers clear advantages for some large OEMs. "The labor force in India is better than in China," says Barnhart. "The work force has more education and I think India culturally has a longer tradition of commerce, more of a free market kind of mentality than China."
He says China has a kind of a pseudo free market and adds "the Indian government is pro-business, which rolls down through their culture."
 As more OEMs and electronics manufacturing services providers move to India, the electronics market will take off. |
 More communications equipment and cell phones will be manufactured in India, primarily for the domestic market. |
In addition, EMS providers have built "world-class" facilities in India that have the same capabilities of facilities they have in other regions of the world. "The HPs and Ciscos of the world that go to India find that the tier-one EMS suppliers provide a mirror-image factory operation to what they are used to seeing anywhere else in the world," says Barnhart.
However, there are disadvantages to India. One is logistics. "The logistics problems in India are the same, if not worse, as China faced a dozen years ago," says Barnhart.
He says the issue is the lack of a proper infrastructure. "It takes an inordinate amount of time to get materials and supplies in and out of India just because of the roads and general chaos in their transportation system," he says.
Barnhart adds the electrical grid is "abysmal and unreliable. They havel problems with water and trash collection. Those are real issues in India," says Barnhart.
Limited supply
The other key issue is the supply base. "Buying in India is tough," says John Boucher, chief procurement officer at EMS provider Celestica, based in Toronto. Celestica builds telecommunications office equipment and automotive systems at its facility in Hyderabad.
He says Celestica buys build-to-print items, like printed wiring boards, cable assemblies and enclosures from suppliers in India. "These are heavier items where there is a benefit in sourcing locally," he says. "I have full-time folks in India trying to find suppliers of the right grade steel and aluminum to make sure we have high quality, and PCB suppliers that have the right capabilities. It is a challenge and we are developing our own approved vendor list in India" he says.
For electronic components, Celestica often uses electronics distributors because there is very little semiconductor production and limited passive component production.
"On semiconductors, the distribution channel has done a decent job getting into India," he says. "The Avnets and the Arrows of the world can help you a long way."
Barnhart says the supply base is not as mature as China's. "The supply base is not there and there is not the level of foreign investment right now or the level of commitment by the government to develop supply-base capabilities," he says. Even if there was the commitment, the existing infrastructure probably couldn't support a supply base right now, according to Barnhart.
He says any company thinking of manufacturing in India has to take those logistics, infrastructure and supply base issues into account and realize dealing with those problems will impact total cost of ownership and offset many of the labor savings that India offers.
"So it is not cheap for companies to go to India," says Barnhart. "A lot of value assumptions made by OEMs seem to evaporate over the execution phase of their outsourcing program." In other words, they end up spending a lot of money supporting their outsourcing strategy.
In fact, OEMs often spend more "in support of an Indian outsourcing strategy than they did on the Indian supplier for value added services."
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