Dell's lessons in Indian manufacturing push

Dell's lessons in Indian manufacturing push

Dell's lessons in Indian manufacturing push

Dell’s manufacturing facility at Sriperumbudur, Tamil Nadu.

Computers leaving the assembly line go to millions of newly affluent Indians feeding an explosion in consumer demand. But the boxes of component parts on the floor say “Made in China”.

That fact alone says a lot about how far the country’s manufacturing sector has to go to match its world famous information technology and services prowess and sustain searing economic growth. India needs to crank up its industrial base to wean itself from service sector-led growth and tame a trade deficit which could more than double in three years, mainly because of billions of dollars worth of Chinese imports.

Shabby infrastructure, cumbersome bureaucracy, a meandering tax regime and a nascent local supplier base are holding back industrial growth and more foreign investment. “We are really taking baby steps in the IT manufacturing space,” Dell Executive Director M R Sundaresan said. “We have a huge opportunity to be able to build on this.”

“Electronics are still largely imported into the country,” he added. “We don’t have a component or parts manufacturing supply chain available in the country.”

While Dell is bullish about India’s prospects as a global growth driver, it is held back by issues ranging from a pesky permit system and the country’s fragmented taxation methods. One of the biggest challenges is an underdeveloped supplier base to make components, such as microprocessors, locally. The result is a “chicken and egg” dilemma for the country. Dell needs component makers to set up shop in India, but big players will only come when there are enough Dells to drive demand. This matters, because India can no longer rely on a mix of its IT and service sector clout, remittances from its citizens working overseas and capital flows to finance a huge import bill of one of the world's fastest growing economies.

Dell’s challenges are by no means unique, but reflect what firms grapple with as they seek to expand in one of the world’s hottest economies, from stifling labour laws to sudden government changes that catch companies off guard.

Dell prides itself on making desktops and laptops to order, delivering from the factory straight to a customer. But sending a finished item to certain Indian states requires the customer to obtain a permit from a local tax officer, which the delivery truck driver then has to produce at state checkpoints.

“It’s an impediment to the ease of doing business,” Sundaresan said. “The transport industry is highly immature, fragmented,” he said, adding, “The guy who comes and delivers it to your home, is not a company. He’s still a person who owns one truck.”

Dell’s annual revenue in India is closing on $2 billion. Its factory in Tamil Nadu, one of India’s most business friendly, caters to 90 per cent of local demand. But most of the components needed to assemble computers are sourced overseas.

The rise of Texas-based Dell Inc, the world’s second largest maker of personal computers, as a manufacturing heavyweight in India is a snapshot of how the country is striving to follow in China’s footsteps as an industrial giant. Dell started in India as a services provider, setting up shop in 1996 and opening up a series of call centres for customer support to anywhere from the US to Africa and riding a crest of a software and services boom that has tagged India as the back office to the world.

The tipping point for demand came in 2007. Strong double digit growth in computer sales in India had made the time ripe for Dell to set up a manufacturing hub to lower costs and slash delivery times to customers, helping it to expand in a bulging white collar market with economies of scale. It now employees nearly 25,000 people in the country, second only to the US.

Dell also prides itself on having been the country’s first major personal computer exporter out of its Indian factory, Dell’s third in the Asia-Pacific region, selling mainly to markets nearby in the Middle East. In time, greater expansion could follow. “If I get more and more of my ecosystem locally, there is no reason why I shouldn't be able to ship to western Europe as well as to the US,” Sundaresan said.

Asia’s third-largest economy is starting to shed its status as a manufacturing laggard with an influx of global big-hitters, to a sector once infamous for its red tape, countless licence requirements and pitiful output before liberalisation.

The town, Sriperumbudur, is about an hour's drive from Chennai. It is known for two things: it is where the technology-loving Prime Minister Rajiv Gandhi was assassinated by Tamil Tiger rebels in 1991, the same year India unleashed economic reforms which sowed the seeds of today's 8.5 percent boom. It has also since become a magnet for foreign giants such as Dell, Nokia and South Korea-based Hyundai Motor Co, as part of Tamil Nadu’s industrial belt also known as “India's Detroit”.

The government is pinning its hopes on the growth of the likes of Sriperumbudur to lift manufacturing to 25 per cent of GDP from about 16 per cent by 2025 to create jobs for tens of millions expected to join the workforce during that time.

The Tamil Nadu government won praise for attracting investors with tax incentives, easy access to land and an educated workforce. Proximity to sea ports and an airport are also key factors. Dell has reciprocated by hiring hundreds of factory workers from the state’s rural hinterland, giving them the chance to become more fluent in English, take correspondence courses with colleges and send money back home to their families. “I want to build my future here,” 21-year-old Manikandan, who takes apart dud computers at the factory, said.

However, no matter what incentives companies such as Dell get from states, national problems persist. Chennai’s sea port is the export-import point for many multinational firms who set up nearby. But the road to the port is strewn with trash, has shabby shops and slums with thatched roofs. Trucks have to wait in a queue which can be more than a mile long to unload their cargo. Reuters spoke to one truck driver near the end of this queue at quarter past five in the afternoon. He said he had been waiting there since ten in the morning.

Chennai port is not alone in this. Many of India’s roads and ports are clogged and underdeveloped. The average cost to move a container around within India is $945, more than double the $460 it costs in China. And it's not just infrastructure. Foreign investors and local firms alike have long pushed for Prime Minister Manmohan Singh's coalition to implement a Goods and Services Tax to simplify the country’s tax regime. “It’s not about giving freebies or anything,” Dell India President Ganesh Lakshminarayanan said. “It’s about having a stable tax regime which can signal to the component manufacturers, signal to companies like Dell, that the business environment is going to be stable.”

The government is trying to foster industrial growth, setting up manufacturing zones like China’s with the help of tax breaks, flexible labour laws and world class infrastructure to attract foreign players and foster export growth. But such initiatives have been a mixed bag. Getting land is tough, while ministries have clashed over how to implement such zones and how much the companies should be taxed, if at all. While Dell flourished to become India's top computer hardware seller, others may have a tougher time. Tamil Nadu's industrial rise, for example, may be becoming a double-edged sword with its infrastructure starting to rip at the seams. As well as clogged up ports, businesses complain of long blackouts.

“Manufacturing has suffered quite a lot in the past ten years,” said Shanker Gopalkrishnan, president of the Madras Consultancy Group, of Tamil Nadu industry. “If you don’t service these industries well, there is a danger of losing business to another country.” Whatever its problems, companies such as Dell remain bullish about India's prospects, even if it may not eclipse China. “India is the most exciting thing we get to talk about,” Lakshminarayanan said. “The whole point is acknowledging China's growth in the manufacturing sector and positioning India as the next best destination,” he added.

Get a round-up of the day's top stories in your inbox

Check out all newsletters

Get a round-up of the day's top stories in your inbox