India's ambitious plans to jumpstart hardware industry

Experts say efforts to foment a high-technology revolution might come to naught once again

The government of India, home to many of the world’s leading software outsourcing companies, wants to replicate that success by creating a homegrown industry for computer hardware.

But software requires little infrastructure; building electronics is a far more demanding business. Chip makers need vast quantities of clean water and reliable electricity.
Computer and tablet assemblers depend on economies of scale and easy access to inexpensive parts, which China has spent many years building up.

So the Indian government is trying a carrot-and-stick approach. In October, it began mandating that at least half of all laptops, computers, tablets and dot-matrix printers procured by government agencies must come from domestic sources—a difficult goal to meet, considering that India produces very few of those products.

At the same time, it is dangling as much as 150 billion rupees, or about $2.75 billion, in incentives in front of chip makers to entice them to build the first semiconductor manufacturing plant in India, a key step in creating a domestic hardware industry.

But like so much of Indian economic policy, it is doubtful that either initiative will have the effect the government is intending. “Nobody disputes India’s need to build up manufacturing,” said Gaurav Verma, who heads the New York office of the US-India Business Council, a private sector group. “Not doing so would be fiscally irresponsible.” But Verma said Indian efforts to force international companies to manufacture in the country were futile. “The government needs to not mandate this, but create an ecosystem,” he said.

The domestic purchasing mandate, known as the ‘preferred market access’ policy, seeks to address a real problem. Imports of electronics are growing so fast that by 2020, they are projected to eclipse oil as the largest import expense for India. The current Indian import bill for semiconductors alone is $6.6 billion a year, and demand is growing about 20 per cent a year, according to the Indian Department of Electronics and Information Technology, which devised the purchasing mandate. For all electronics, Indian imports are projected to grow to $400 billion by 2020 from about $70 billion in 2012.

“The problem we are facing is that the demand is growing so much that it is reaching nonsustainable levels,” said Dr Ajay Kumar, joint secretary of the department.

Dot-matrix printers, outdated in most of the world, are among the few electronic products that India manufactures. About 400,000 dot-matrix printers were sold in India in the year ended March 31, an increase of 2 per cent from the year before, according to the Manufacturers’ Association for Information Technology, a computer industry trade group in India.

The government, which accounts for about 40 per cent of the country’s electronicspurchases, hopes to use its purchasing power to jump-start manufacturing of other computer goods. However, the government has adopted a broad definition of what it considers locally made, because so few electronics are manufactured in India. If at least 30 per cent of a computer’s components are made in India, then it will qualify.The policy also allows prospective suppliers to show ‘value addition’ instead of actually manufacturing the goods in India, Kumar said.

For example, India does not manufacture hard drives, but it assembles and tests them. Under the policy, a hard drive that is assembled in India would be considered to have been made in the country. Computer makers contacted for this article declined to discuss how the new policy would affect their sales.

High-technology

The big fish the government would like to land is a factory to produce microprocessors for computers. A computer processor typically accounts for 25 per cent to 35 per cent of the total cost of a desktop or laptop computer. India hopes that such a plant, which could cost as much as $5 billion to build, would help encourage a  bigger high-technology manufacturing industry, Kumar said.

According to Indian news reports, two consortiums have been in talks with the government to construct microprocessor foundries.

The first is led by the Jaypee Group, one of the largest construction companies in India, which built the Formula One track in Uttar Pradesh. It has joined up with International Business Machines, a major chip maker, which will provide the technology for the plant.

The second bid is from Hindustan Semiconductor Manufacturing, which despite its name is an American company that does not yet manufacture any chips. It is working on the bid with ST Microelectronics, a chip maker based in Geneva.

Ron Somers, president of the US India Business Council, said he doubted that India could provide a new chip making facility with the infrastructure it needed to even keep the lights on.

‘‘India has an installed electricity generation of 12,000 megawatts,’’ he said. The chip makers ‘‘need 16,000 more of additional capacity.’’ “Tell me where we’re going to have a major chip fab that’s going to spring up overnight like a blossoming flower,” he said.

There have been several attempts to set up chip plants in the past. The most recent attempt was in 2008 by SemIndia, an American company run by Indian-American entrepreneurs. It ended acrimoniously, when a dispute arose over the terms of the agreement between the company and the state of Andhra Pradesh, where the plant was to be situated.

Some experts warn that India's efforts to foment a high-technology revolution might come to naught once again, unless it reduced some of the barriers to doing business in the country.

In the case of some electronics, the import duty on a finished product is less costly than duties on the component parts, said P V G Menon, the president of the Indian Electronics & Semiconductor Manufacturing Association, an industry group. Costs are also higher because of a lack of reliable power and the extra time it takes to move goods on the country’s roads.

Attracted by the new ‘Buy India’ requirements, Dell, the largest PC retailer in India, considered setting up manufacturing facilities in India. Dell, which is based in Texas, assembles computers in India, but does not manufacture any components.

“They flew in their suppliers from China and Taiwan to see if they could set up facilities. They said no,” said an industry executive, who requested anonymity since he was not authorized to speak on behalf of Dell. “The market is too small, and logistically it is a nightmare.” Dell declined to comment.

India has a model for success, said Verma of the business council: its automobile industry. In the 1980s, India opened its automotive industry to foreign companies, and in 1982, Suzuki Motor bought a majority stake in Maruti Udhyog. The joint venture produced the Maruti 800, India’s first affordable car.

However, the real watershed moment came in 1991, when India dropped its local-manufacturing requirements. The industry exploded, and there are now about 40 million cars on Indian roads.

“India now has the sixth-largest auto industry in the world because of the ecosystem the government created,” Verma said.