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India Builds, but Will Electronics Makers Come?

In the same methodical way it went after the software and IT consulting market, India is systematically plodding through the next phase of its economic development cycle, this time with an eye to establishing itself as a major center for electronics manufacturing services.

The long-term goal is to position itself as an alternate destination to China, which has cornered the outsourced manufacturing market over the last decade. Additionally, India sees the growth of a local electronics design and manufacturing sector as a part of its strategies for protecting national and military resources from foreign governments and hackers. A further goal would be to provide job opportunities for millions of Indian artisans and graduates of the country's numerous engineering and information technology schools.

Don't doubt the government's resolve or the determination of India's entrepreneurial class to make a dent in China's domination of outsourced manufacturing. Government officials openly discuss the nation's numerous shortcomings, including poor infrastructure (roads, electricity, water, telecommunications), China's already formidable headstart, and the lukewarm reception from the international electronics community despite major overtures from India.

These are major hurdles for any nation, not to mention one struggling to cope with other significant national problems, including ugly political disagreements with neighboring Pakistan and China. Still, India is plugging ahead and, starting in 2012, plans to spend about $1 trillion over five years upgrading its infrastructure to bring these to developed world standards, according to Shri Anand Sharma, India's commerce and industry minister.

In a speech June 24 to the US India Business Council in Washington, Shri Sharma said India will continue to engage with global business leaders, which, he asserted, could realize significant profits while helping India solve its infrastructure problems.

India is not only reaching out to US businesses; companies, individuals, and governments throughout the world are being courted. Members of the Association of Southeast Asian Nations (ASEAN) are especially seen by India as viable export markets for Indian products. To grease the wheel, India has set up a $1 billion aid fund to help poor countries, the first sign the nation — despite extreme poverty in many of its own regions — also wants to be seen as an emerging power.

The stakes are high for India. With a predominantly young — and still growing — population of about 1.2 billion, India needs to maintain solid growth over the next years to keep its citizens employed. Its economy, while expanding, is still in transition to a market system, and its per capita income remains amongst the lowest in the world. Like many developing nations, India has thousands of rich people living side by side with thousands of poverty-ridden communities. Transforming the technological economy would require the government to move beyond software businesses to include traditional hardware manufacturing.

So, India wants semiconductor fabs as well as assembly plants. (Click here for information on the government's offer to chip investors.) It has set up a huge technology park to further accelerate the transfer of manufacturing facilities to the country; and in April it released a detailed plan for the local production of telecommunication equipment. In addition to incentives for local production, the government promises penalties on imports of electronics to the country. These include:

  • The total incidence of excise duty and VAT on domestic manufactured products to be limited to 12%.
  • CST
  • [Central State Tax] of 2% on domestic manufactured product to be removed or an equivalent tax/Duty to be imposed on imported products.

  • For mobile handset industry, a comparative tax disadvantage to be removed for domestically manufactured products by reducing VAT and placing tax/Duty equivalent 2% on imports.
  • Exemption to be given to the manufacturers of domestic manufactured products, in the Handset manufacturing industry…
  • A 10-year Income Tax holiday for manufacturers of domestically manufactured telecom products with annual turnover less than Rs. 1000 crore
  • [10 billion rupees]. Exemption would be also from the Minimum Alternative Tax obligation.

Will all these be enough for India to displace China in the electronics manufacturing market? No. But it will gain the country a toehold — and who knows where that might lead?

This subject will be discussed on EBN in a joint live chat I am hosting at noon EDT today with Marc Herman. Click here to join the discussion.

17 comments on “India Builds, but Will Electronics Makers Come?

  1. xoroy
    August 19, 2011

    There are many obstacles definitely. But look at these below two.

    1. Land : yes getting a location chosen and doing acquisition of land  for setting up a plant is going to be tougher and tougher everyday. Take the example of Posco. It has already been 6 years since MOU with local government but yet any concrete to be set up.

    2, Quality / skilled manpower : not to be surprised,if i mention this as a problem for India. Most of the young engineers are now in IT industry. Number of quality manpower for core industries is in shortage. Add to it number of engineers or grads doing higher study (or Phd ) apart from managerial education.

  2. Anna Young
    August 19, 2011

    Bolaji, I like what you said and thus agree that “the stakes are high for India” – the manpower and the resources are in abundance 

    Let's not lightly dismiss the move undertaken by its government to develop the nation's infrastructure.I think the $1 trillion development plans is a right move.

    Watchout, long term strategy will pay off. May not immediately create a dent in China's economy but it will be a good competition for China.

     

     

     

     

     

  3. _hm
    August 19, 2011

    It may be very difficult task. It is not the government but motivation of private industry which makes things happen. I do not see much involvement from private industry as return is not as high as in other industrial sector.

     

     

  4. jbond
    August 19, 2011

    I think most people are concerned about India's infrastructure and the possibility to sustain large developments. Based on information in your article and during the chat, we know that the Indian government is going to invest largely in updating and creating a better infrastructure. By also dealing with investors and U.S. companies, it appears India is on the right path. I guess the big question everybody wants to know is “If they build it, will they come?”

  5. Anand
    August 19, 2011

    Number of quality manpower for core industries is in shortage.

    @xoroy, I am not quite sure if this is such a big threat. Because of recession in US/Europe many qualifited NRI(Non-resident Indians) are coming back to India because Indian economy is booming.

  6. Anand
    August 19, 2011

    “It is not the government but motivation of private industry which makes things happen”

    @_hm, I agree with you that motivation of private industry is necessary but lets not forget government also plays major role. Because its government which has to provide right kind of infrastructure. We all know SemIndia had plan to setup fab in Hyderabad, but unfortunately the project was not completed. I feel government-private partnership is must to take forward such projects.

  7. _hm
    August 19, 2011

    Unfortunate part of Indian Government and Government in general is that they create very unpredictable results and always prolong the process. Infrastructure is big investement, but there are always alternate ways of doing thing differently. And private industry in India is very capable of it. If they have motivation, they do resolve most of the problem uniquely. The best part government in India can do is, do not interrrupt the development.

     

  8. Anand
    August 19, 2011

    The best part government in India can do is, do not interrrupt the development.

    @_hm I agree with you but again India is democracy. It cannot become dictator like China. We have seen how government in India struggled to get land from farmers. In china its easy for the government to get land from landowners but in India its big task. And sometimes this political compulsion is seen as interruption to development.

  9. hwong
    August 19, 2011

    Well if China is saying that they will go into “fabless” companies, then who else is going to do the manufacturing? Maybe India will be able to capture the market share for these plants

  10. Wale Bakare
    August 20, 2011

    @anandvy i corroborate your point. Governmnet is the policy and law maker as well as due processor. The main issue with democractic system of governemnt of a nation like Indian is high level corrupt practises among the government agents.

  11. Anand
    August 20, 2011

    “The main issue with democractic system of governemnt of a nation like Indian is high level corrupt practises among the government agents.”

    @Wale Bakare ,

      I agree with you corruption is bigger threat to India but it doesn't depend on if the nation has democracy or dictatorship. We have heard of so many corruption cases from China also. People are fed up of corruption in India and they are revolting against it. Hopefully India will be corruption free in coming years.

  12. Wale Bakare
    August 20, 2011

    @anandvy  you are right on that point but hardly can any system be perfected in this world. Of course, in both developed and developing nations, democracy or dictatorial corruption exits but can only be curtailed  and reduced to minimal level by disciplined people.

    In the developing nations –  Indian and others, policies arent well implemented and if they are, power intoxicants in government circumvent them. Why is China different? is it numerical advantage in her population that is making the difference clearer? why not indian?

     

    Wale

  13. prabhakar_deosthali
    August 20, 2011

    In my opinion, the success of the IT industry and its phenomenal rise in the last decade has to be atrributed to the visionaries like  Mr. Narayan Murthy of INFOSYS , F.C kohli of TCS , Mr. Aziz Premji of Wipro , all of them private entrepreneurs. The goverment red tape and corruption could not come in the way for these great industrialists .

    If similar thing has to happen in Electronics manufactruing front we need such honest and dedicated Indians and they only can build such an industry and take it to a massive scale such as what China has done.

    The best way to promote the electronics industry ,for the Indian Goverment is not to come in the way.

  14. Anand
    August 20, 2011

    Why is China different? is it numerical advantage in her population that is making the difference clearer? why not indian?

    @Wale, The main reason china is so successful today is because of its political will.One more reason which acts in favour of China is its dictatorship rule. Let me give you an example if Chinese government wants to acquire some land for a particular project its easy for the chinese government because government is supreme. In India if the government wants to acquire some land from say individuals/farmers it has to do it in democractic manner. If that individual refuses to handover his land then there is risk that the whole project might be in trouble.

  15. Houngbo_Hospice
    August 20, 2011

    Investment potential is surely high for India even though there may be some ricks involved. Many people think that India universities already produce graduates who are ready to work in semiconductor manufacturing facilities. However, the inadequacies of the Indian public educational system make it difficult for the country to “produce” a higher number of qualified employees. The few well-qualified graduates will certainly ask for higher wages, and this may erode some of the advantages provided by the incentives. 

  16. Eldredge
    August 22, 2011

    It will be interesting to see how the employee dynamic works in India's plans to encourage economic development.

  17. Ms. Daisy
    August 31, 2011

    @Prabhakar, you are right on the call to keep the electronic industry in private hands and not government. The red tape and corruption is the unwanted baggage that comes with government involvement.

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