Print

Comment

Email

Digg

Del.icio.us

Reddit

The electronics components production in India for growing communications and broadcast equipment has almost come to a standstill. Annual reports of the Department of Information Technology (DIT) for three financial years show that there has been no increase in the production of electronics components. From FY 2004 to 2007, the total production value of components has been static at Rs 8,800 crore, whereas the production of communications and broadcast equipment has shown regular growth.

Out of the total components produced in India only a very small portion can be used by manufacturers in the communications segment.

“The components production for the communications industry is very low in India, as it is a small part of the overall manufacturing in the country. Most components that manufacturers require in this segment are imported. Components available in India can be used for networking equipments and base stations. But none of the active components are produced in the country,” says Rajoo Goel, secretary general, ELCINA Electronics Industries Association of India.

Manufacturers' Plight
Communications and broadcast products require more active components as compared to passive ones. But only a couple of companies make active components in India, and are mainly discreet semiconductors and linear IC in limited quantity. This has made manufacturers in India highly dependent on imports.

“Very few initiatives have been taken to create manufacturing companies or product companies, as these initiatives pose a greater challenge than setting-up a service company. I am sure most of us agree that in the telecom equipment-manufacturing segment, more than 80% of the electronic components used for production are imported. That's because of the not-so-friendly policies that exist in our country,” says R Venkatesh, CEO, Ordyn Technologies.

Component manufacturing has a very important position, but in India this industry, as per the components makers, is getting differential treatment from its own government. Despite being identified among the top five vital industries by the National Manufacturing Competitiveness Council (NMCC), there seems to be no serious effort by the Ministry of Communications and Information Technology in this direction.

“The future of the electronics industry lies in the hands of component manufacturers. We conducted a study to find out the top five most important segments for job opportunity and national security and found out that the electronic components industry is one of them. To defend ourselves we need to produce a lot of modern electronics and communications equipments in the country. These equipments are vital for national security,” says V Krishnamurthy, chairman, NMCC.

The absence of a strong component production base in India has resulted in foreign companies benefiting from investments made in telecom manufacturing from India. Thus the picture has turned this way that though the Indian government has been successful in attracting investments by sacrificing its revenue in terms of tax holidays and other incentives to manufacturers, the benefit is being reaped by foreign companies, especially having their manufacturing base in countries like China, Thailand and Malaysia.

“Every time we go to buy a mobile phone, we give employment to a Chinese because almost 80% of components comes from there. There is good telecom manufacturing happening in India but the amount of value addition being done is very low. I am not very sure how long we are going to survive as an assembly industry,” says Vinod Sharma, managing director, Deki Electronics and co-chairman, ICTE Hardware Manufacturing Group, Confederation of Indian Industry.

Market Demands
GK Pillai, secretary, department of commerce, Government of India says that there is focus on manufacturing and in the coming years there will be huge demand for components in the Indian market.

“We at this time are providing infrastructure and attractive facilities to companies. In the coming days we will see many companies that will hive-off from big companies and start production here. It is bound to happen in all sectors. Once we are able to create demand in the country, the manufacturing of components is bound to grow,” says Pillai.

As predicted by an ISA Frost & Sullivan report, the consumption of electronics equipment in India will be $363 bn by 2015. According to the report, India has the potential to manufacture electronics equipments worth $155 bn by 2015. Most of this growth is expected to come from manufacturing of information and communication technology products, and office automation.

“The growth drivers for electronics manufacturing in India are telecom, IT, and office automation segments, which together will account for almost two-thirds of the semiconductor total available market by 2009. Telecom's share has been estimated to grow from 21% in 2006 to 41% by 2009,” says Poornima Shenoy, president, Indian Semiconductor Association.

According to ISA F&S Report Update 2007-08, the total market (TM) revenue for semiconductors in India during 2007 was estimated at $3.46 bn. The total available market (TAM) revenue was estimated at around 50% of the TM revenue which was at $1.74 bn in 2007. TM is estimated to double in revenue to $5.5 bn by 2009, while TAM revenue is projected to increase at a higher rate and grow by 2.5 times to $3.18 bn by 2009, thereby signifying an increasing manufacturing index for different electronics products.

“The mobile handsets markets touched 74 mn in 2006 with more than 19 mn handsets being manufactured in India itself. Mobile handsets manufacturing is set to grow, as manufacturers and electronic manufacturing services companies are expected to ramp up their production. Low cost handsets in GSM and CDMA are expected to generate higher volumes. BTS lines capacity is expected to touch 51 mn in 2009, riding on the increase in subscribers base. Due to this growth, TAM revenue for analog, ASIC and DSP semiconductors is going to grow,” adds Shenoy.

Further, emerging technologies like WiMax and VoIP are gaining acceptance in the Indian market. This is expected to generate high TAM revenues for ASIC, discrete, microprocessors and DSP till 2009.

In the absence of active components base, it remains under question whether Indian companies or India will be able to gain from growing domestic production of communication equipments.

“The present trend of components production shows that Indian companies will not be able to meet even half the requirement of the predicted size. While the other half of the requirement, which lies on the hi-tech components side, is vital for the country's growth and security,” says Krishnamurthy of NMCC.

Policy Processing
The past record of government shows that it has never been serious to develop components manufacturing base in India. On two occasions India has lost big investment opportunities in this field. Craig Barret, chairman, Intel announced setting up or semiconductor fabrication unit in Vietnam after bypassing India. This is pointing to the flawed decision-making that has continued since the time Intel's co-founder Robert Norton Noyce aka Bob Noyce's visit in the early 60s. Robert Noyce at that time was with Fairchild Semiconductor.

“Bob actually came down to Delhi in the year 1963 or '64. He had discussions with the government in which he expressed his willingness to use India as a base for manufacturing low cost silicon semiconductor for export. They wanted to start with a small project, at $10 mn, and he thought the company could very quickly scale it up to $200 bn. But government officials laughed at this proposal and said it wasn't possible,” recalls Dr Gurpreet Singh, chairman of the board, Continental Devices India (CDIL) with whom Noyce stayed for three days during his visit to India.

However, government officials agreed to give permission to 6 lakh units instead of 1 crore per annum production capacity that Noyce wanted. Noyce then dropped his India investment plan and moved to Hong Kong where he set up a semiconductor plant. Five years later Noyce and Gordon Moore founded N-M Electronics which was soon renamed Intel.

Unfriendly Move
In the last one decade, the Government of India has taken few steps like partial free trade agreement with Thailand and implementation of ITA 1, which have proved fatal for Indian components manufacturing. Any such decision by the government is made after taking the industry into confidence, but in the case of the components industry, it did not happen.

“We were not informed when ITA 1 and framework for the FTA with Thailand were being signed. It has also come to light that other hardware associations were also not consulted,” says Goel of ELCINA.

As a result of the new trade policies, now many telecom goods and components can be imported at 0% duty. Hence it is cheap to import components for telecom products than to manufacture them in India. It had been acknowledged by industry players that because of this reason actual manufacturing in India is not happening.

“We have found that most telecom companies in India are not really manufacturing the equipment per se. They are importing assembled or complete set of modules. Therefore they don't need to buy components from us,” says Shishir Mehta, deputy general manager, marketing, CDIL.

Companies that are manufacturing in India include multi-national companies that have tie-ups for sourcing components globally. They source from their fixed qualified vendors.

However, this trend of relation between manufacturer and vendors has benefited India to some extent. Establishment of manufacturing plant by MNCs has also attracted their components supplying companies to set-up manufacturing facility in India

When Nokia invested in India, it attracted seven of its global component manufacturers including Salcomp, Aspocomp, Foxconn, Perlos, Laird, Jabil and Wintek to set up their units within the Nokia Telecom Park in Chennai.

Ignored by All
After years, the Indian government has finally announced the semiconductor policy to pave way for high-end active components manufacturing in India. Under this policy investments to the tune of Rs 98,000 crore have been approved but most of it is for solar cells. Investment plans announced by Reliance Industries under this policy for wafer fabrication plant is the only hope that can pave way for active components manufacturing in India for communication equipments. No foreign company has taken a chance to invest in such facility in India.

“There is not much toward active components or semiconductors manufacturing in India. Fab talks are story of the past,” says Ashok Chandak, director global sales, NXP Semiconductors.

Almost all leading players like NXP, ST Microelectronics, Renesas, Freescale, Qualcomm, Texas Instruments, Analog Devices and others have their presence in the Indian market.There are more than 225 chip designing companies present in India, but none are willing to manufacture chips here, as companies feel the Indian ecosystem is not viable for setting up semiconductor fabrication units.

The requirements of the Indian market can be met by production in other established fabrication plant of companies located in the Asia Pacific region. But this argument fails when we look at Singapore.

“One would get stunned to learn that a country like Singapore, which is smaller than Bangalore, houses seventeen electronic fabricators, while India, with such vast resources, doesn't even posses one fabricator. The reason is clear. Fabricators consume a lot of power, water, energy, etc, which needs to be addressed. Also, there should be all-round encouragement in terms of fiscal benefits,” says Venkatesh.

Need of the Hour
Earlier it was low level of manufacturing that checked demand of electronics components in India.

Indian components industry was hit hard after implementation of ITA 1 and the partial FTA with Thailand. The Indian tax system, high input cost and infrastructure issues eventually made them even more uncompetitive.

ELCINA pointed out that in a zero duty regime, there is no place for customs duty on inputs. ITA products and their inputs have been brought to zero duty. However, dual use materials like rubber parts, cables, copper, steel, plastics and others are subjected to peak rate of duty. ELCINA believes that zero duty is an unfavorable policy dispensation, especially in a country like India where value added manufacturing suffers high input costs (energy, finance, and cascading taxes). It further stated that inadequate infrastructure and complex procedures add to the cost.

“We are already competitive in terms of quality and ready to compete further. Our request to the government is only that it should provide us a level playing field as compared to foreign companies,” says Goel.

Nokia has urged that government should incentivize components manufacturing in India in order to attract continuous investment of component manufacturers

“With most of the major handset vendors having set-up units in India, the next logical step for the government should be to incentivize and attract component manufactures to set up units in India and encourage local manufacturers to achieve scale and quality. This will create a complete self sustaining telecom manufacturing eco system and greater employment opportunities within it,” says Sachin Saxena, director operations, Nokia India.

India also needs legislation like Restriction of Hazardous Substance (RoHS) directive to check inflow of components that contain hazardous chemicals and are banned in European countries, China, North America and others. The banned components under RoHS are being dumped in India at a throwaway price, thus making Indian components more incompetitive in terms of cost.

The government of India has formed the NMCC, which strongly advocates and supports components manufactures in India but promises needs to be transformed into action.

Prasoon Srivastava
prasoons@cybermedia.co.in