India has made its mark in software exports, but few Indian companies have ventured into the hardware product arena. Though the hardware industry does not enjoy the level of hype that goes with the Indian software sector, there are companies that are doing an extremely good job. Most hardware companies have been successful in carving a niche in the domestic market, but a few have made their mark in the global market. Even in the software sector, India has been able to do well in the services arena, but when it comes to software product development, it still has a long way to go. MAIT (Manufacturers’ Association of Information Technology) is working hard on popularizing hardware product development in the country and instilling interest among Indian entrepreneurs to take the hardware product path. Much remains to be done, as Indian hardware companies face a long and winding road in the hardware sector.
Current Scenario
First of all, let us throw a cursory look at the current hardware business scenario. According to the MAIT–Industry Performance Review for the first half of the financial year 2006-07, the total PC sales between April and September 2006, with desktop computers and notebooks taken together, were 2.96 million (29.6 lakh) units, registering a growth of 19 per cent over the same period last fiscal. The buoyant mood in IT consumption was led by a significant growth in notebook sales, which grew by 180 per cent, while consumption of desktops grew by 8 per cent. PC sales are projected to cross 6.5 million units in fiscal 2006-07, given the strong macroeconomic conditions and buoyant buying sentiment in the market, led by demand from various industry verticals.
The second quarter (Q2) ending September 2006 witnessed PC sales exceeding 1.75 million units, registering a growth rate of 46 per cent over the previous quarter and 19 per cent year-on-year. Desktop sales crossed 1.5 million units with 48-per cent sequential growth, while notebook sales totalled 0.25 million units with 38-per cent sequential growth.
Demand was highest from the telecom, banking and financial service sectors, education, retail and BPO/IT-enabled Services, and rose also on account of some major e-governance initiatives of the Union and State Governments. The southward trend in pricing continued during the year due to technology reasons. Further, significant consumption in the small and medium enterprises contributed to the industry growth and consumption in the home market remained buoyant.
Commenting on the need for a strong domestic IT market to strengthen India’s hardware manufacturing industry, Vinnie Mehta, Executive Director, MAIT, says, “Domestic demand is likely to gain tremendous momentum in 2007, which has been declared the ‘Year of Broadband’. We welcome the slew of encouraging policy measures announced by the Government to promote development of content in the local languages. MAIT is geared up to facilitate more effective engagement by the industry across verticals. It works to ensure that the growth in the market translates into manufacturing opportunities and, as such, welcomes the clearance of the Fab. policy. We expect the details of the policy to be announced without much delay. The industry is also eagerly awaiting the long overdue policy for the manufacture of IT and electronics products. The above two policies could play a critical role not only in boosting highly capital-intensive activities like the manufacture of semiconductors, LCDs, storage devices and so on, but also in expanding the consumption of IT goods and services in the country.”
Budget Expectations of Hardware Business Bodies
MAIT being the apex body of the Indian hardware business, it has come out with a set of demands with the government.
Stressing the need for a stable policy regime, Mukul Singhal, MAIT President, summed up the expectations of MAIT in these words: “MAIT members have unanimously emphasized in our recommendations for the forthcoming Union Budget that status quo be maintained on tax structures for IT products, including the continuance of a reduced excise duty of 12 per cent on PCs. Since 2004, the PC industry has witnessed changes in the excise duty structure. However, it is only in the last one year that an excise regime was introduced to establish a level-playing field between local manufacturing and imports. It is imperative that this continues. In the same spirit, all IT products should attract the same rate of VAT across the country and the confusion over applicable VAT rates, which has arisen from the changes in Harmonised System of Nomenclature (HSN) from January 1, 2007, must be cleared. Accordingly, the VAT rate on IT products must be restored to the earlier 4-per cent level immediately. Further, the levy of central sales tax (CST), which with its cascading impact, is a major deterrent to local manufacturing, must be removed immediately.”
Consumer electronics major Samsung came up with its own suggestions to the government. In order to make the industry globally competitive, the overall taxation level needs to be brought down to the levels prevailing in other South-East Asian countries. Currently, against the 7-per cent tax levels prevalent in Thailand and 17 per cent in China, the tax levels in India are over 30 per cent.
The South Korean major wants the government to treat IT products at par with consumer electronics products and to levy 4-per cent VAT across the board on the entire hardware portfolio. At present, VAT for IT products is charged at the rate of 4 per cent, while consumer electronics products are charged at the rate of 12.5 per cent. It appreciated the reduction in Customs Duty on Multi-Function Printers by the government from 12.5 per cent to zero. It expresses its displeasure on non-uniform imposition of VAT by various states and demands a uniform 4-per cent VAT in all the states. On the issue of excise duties, it lauds the Government’s move to make the excise duty on monitors to be MRP based.
It recommends the excise duty on all consumer electronics products (including components, raw materials and capital goods) to be rationalized at 8 per cent. On the Customs Duty front, the company needs a correction of the inverted duty arising out of FTAs and wants Additional Customs Duty of 4 per cent to continue for all imports. This, in its view, will serve to give some protection to the domestic manufacturing sector against imports. On the Corporate Tax front also, the vendor wants the removal of the 5-per cent surcharge on the Corporate Tax.
In his Pre-Budget comments, HCL-Peripherals’ Executive Vice President, Pattabiraman, says, “4-per cent SAD (Special Additional Duty) levied on domestic manufacturers has created an imbalance between manufactures and direct importers of finished goods. Low value addition being done or not much margins being created from the production against the stiff competition of imported goods are leading to huge accumulation of MODVAT credit of 16.32 per cent CVD (Custom Value Duty) being paid while importing the components and inputs. This becomes unutilized and is a cash loss. If this is reduced to 8 per cent, the manufacturers can have a breathing for survival. Computing associated components like scanners, coin/currency collectors and validators, thermal printers, etc. come under different duty structure. This should be reviewed and should be made synchronized with the duty tariff of computing data products. Some inputs and raw materials to computing, still attract a merit duty of 36 per cent. Since these are all being used in the end-product of computing, this should be treated as computing/data processing and should be given the benefit of duty for fostering the growth of products like CAT 5e, CAT 6 cables and N/W Switches, etc.”
Problems plaguing the Industry
Although India has earned the reputation of bei
ng a hot software hub, it is yet to replicate the same on the hardware front. Let us analyze the reasons that can be accounted for this.
Stepmotherly Treatment
The Indian hardware industry has consistently suffered from stepmotherly treatment by the Government vis-a-vis its elite cousin – the software industry. Despite monumental efforts by MAIT, several promises by the concerned ministries, a precious little has been done on the ground to make India an attractive “manufacturing” destination for both domestic and overseas players.
Non-Rationalization of Import Tariffs
Non-rationalization of import tariffs by the Government has also made matters worse for the industry. MAIT has been claiming further rationalization of import tariffs for the hardware industry, and has presented a combined MAIT–Ernst & Young study titled “India: The Hardware Opportunity”’ to bolster its case with the Government.
Infrastructural Bottlenecks
The infrastructural bottlenecks (forget about the models used by Singapore, China, Taiwan, or Malaysia) faced by the sector have been crippling the sector. The Indian electronics hardware industry has the potential of reaching a target of $62 billion by 2010 (comprising $37 billion of products and assemblies for the domestic market and export revenues of $25 billion), but infrastructural problems will prove to be the greatest hurdle.
IT Task Force lying in limbo
The IT Task Force Report on Hardware (prepared by the Government of India) has been lying in limbo for years and the Indian electronics hardware industry has been losing its competitive edge and is in a deeper mess financially.
Hardware Industry is high Capital-Intensive
Unlike software, hardware is highly a capital-driven industry. India’s success in software can be largely attributed to this factor. Unless concrete steps are taken by the Government to attract huge foreign funds, hardware business would continue to lag behind.
All said and done, because of the imperative need to develop the hardware industry to complement the success achieved in the software industry, the MAIT-E&Y report should be taken seriously.
Solutions in Sight
Assuming the Government accedes to the demands of the industry, the commercial viability and challenges in undertaking various hardware projects to be taken up in future may hinge upon the following issues:
Specify Areas of Growth
While the MAIT-E&Y report talked about the areas of opportunity across the entire electronic hardware landscape, it does not make out a persuasive case of electronic hardware segments in which the Indian players will have a competitive advantage vis-a-vis Asian and other overseas peers. This is important because India is late in joining the hardware revolution and unless the limited financial, infrastructure and manpower resources are deployed in the right areas, even this opportunity may turn out to be a mirage. For instance, deploying resources in semiconductor manufacture at a time when China is going on an investment overdrive in semiconductor complexes to emerge as a global chip player may turn out to be counterproductive to the interests of Indian manufacturers. A judicious choice of electronic hardware components/finished products to invest in will remain one of the biggest challenges facing the hardware industry.
Huge Capital Investment
According to the MAIT-E&Y report, considering the mix of opportunities in captive manufacturing, contract manufacturing as well as design, the investment requirements for capital equipment to realize the potential opportunities are in the range of $9 billion. Since the investments required to set up manufacturing operations of viable economies of scale are beyond the reach of most domestic companies, foreign direct investments (FDI) may be imperative.
If the industry has to attract FDI to meet a good chunk of this capital requirement, then the “India development” advantage will have to be packaged and sold much more prudently and aggressively. It is significant to address this issue carefully because of two key challenges. The first challenge is to get the global manufacturers to create an ideal climate to invest and set up “global-scale” facilities in India for design and manufacture of hardware components and finished products.
Secondly, using the software “offshore outsourcing” model may be counterproductive as hardware, unlike software, is a highly capital-intensive exercise. If the software model is encouraged too aggressively, it is likely that more and more investments will flow towards software than hardware, given the varying risk-reward equation between hardware and software.
Economies of Scale
As outlined in the MAIT-E&Y report, the global component manufacturing capacities (say, in Taiwan or Malaysia) are 20 times larger than those in India. Considering over a decade-long headstart which these countries have enjoyed in some of the hardware areas, India has to be extremely careful in the choice of global components/finished products it chooses to invest in. Unless “economies of scale” drive investments in this
“volume-driven game”, it is likely that the industry itself may not flourish for long. More so, as wafer-thin margins are an accepted fact in this industry and are unlikely to drive investments in this area.
Contract Manufacturing
Even though the focus on cutting costs and increasing operating efficiencies retains its primacy in the corporate strategy, the original equipment manufacturers (OEMs) are also aiming to shrink the number of contract manufacturers they are willing to work with. Basically, it is for two reasons: One, to derive considerable cost savings in working with contract manufacturers which can use “size” to offer scale advantages and share benefits with OEMs. Two, in an increasing complex operating environment, these OEMs are looking for varying competencies, skill sets and domain expertise (ranging, say, from manufacturing, supply chain or logistics) under one roof. Clearly, “size matters” is the key mantra emerging from the consolidation, which is taking place across the entire outsourcing landscape. The big challenge for Indian hardware players will be to set up global-scale capacities in contract manufacturing to help India compete with the Taiwanese or Chinese majors in this arena.
A Final Word
In a nutshell, this presents probably the last opportunity for the hardware industry to make its presence felt. The best that the Government can do under the circumstances is to accede to the demands of the industry players on the import tariff front and create a conducive climate on the infrastructure and regulatory front by removing the bottlenecks that have impeded the growth of the industry. And then step out and let the private players slug it out.
Hardware Business in India: A Pre-Budget Overview : By -Vinnie Mehta Executive, Director, MAIT
