The Hindu Business Line : Carving out a niche in global arena

CLOSE on the heels of the success of the Indian ITES and textile sectors, which have made a big impression in the international markets, the domestic electronics industry could be the next to carve out a niche for itself in the global arena.

On the lines of the textiles sector, the Indian electronics industry has the potential to tap the vast export opportunities, while also capitalising on the electronics manufacturing services and offshoring possibilities from international clients.

The evolving opportunities also present the possibility for the industry to specialise in high-value, capital intensive areas such as Microsystems and Nanotechnology (MEMS) and automotive electronics.

The other traditional manufacturing sectors such as semi-conductors and Electronic Manufacturing Services (EMS) also augur hope for the sector.

The success of the power equipment manufacturing sector or EMS as it is usually referred to, though, hinges mainly on how well the industry manages to capitalise on the opportunities thrown up in light of the fact that global transnational corporations are all striving to cut cost to gain efficiency by outsourcing assignments and entire process to cheaper destinations in the developing world.

China has already made a head start in the field, with India still much lower down in the pecking order for MNCs.

The industry potential: According to industry estimates, the Indian electronics sector is projected to be about $60 billion by 2010. Two-thirds of this amount, $40 billion, is expected to be for domestic demand and the remaining $20 billion from exports.

Half of the export revenues is predicted to come from products and assemblies and the remaining half is expected to be equally divided between design and component exports.

Worldwide revenues in 2003 for EMS, or contract manufacturers, amounted to roughly $90 billion. A recent study by Ernst & Young estimates India's potential EMS capabilities could enable it to capture one per cent of the North American EMS market, two per cent of Western Europe, four per cent of Asia and five per cent of the rest of the world.

As India's EMS market evolves, it is attracting MNCs interested in having their products manufactured in India by Indian EMS providers as well as those MNCs interested in establishing transnational joint ventures with more established Indian EMS providers.

The difficulty for many Indian electronics contract manufacturers could lie in their inability to properly manage a majority of their contract manufacturing value-add services against higher industry standards exhibited by many North American, European and other Asia-based contract manufacturing counterparts and, most importantly, demanded by multinationals.

As an industry, there is also lack of a cohesive effort to market India's overall contract manufacturing capabilities to the electronics marketplace worldwide. Then there are also the problems of inflexible labour laws, customs duty on capital goods, limited local suppliers, high interest rates and poor infrastructure.

Key players: BHEL, ABB, Siemens, Controls & Switchgear are the biggies currently operating in the segment. The export portfolio includes products such as power stations, turnkey contracts for power plants and outdoor air insulated substations among others. The countries exported to include US, New Zealand and others.

BHEL, ranking among the major power plant equipment suppliers in the world, is one of the largest exporters of engineering products and services from India. Over the years, BHEL has established its references in around 60 countries of the world, ranging from the US in the West to New Zealand in the Far East.

BHEL's export range covers individual products to complete power stations, turnkey contracts for power plants, specialised after-market services such as Residual Life Assessment (RLA) studies and retrofitting, refurbishing and overhauling, and supplies to manufacturers and contractors.

ABB India too had been winning significant export orders from West Asia, valued at around Rs 135 crore. One major success includes a turnkey order for four new 220/66/20kV outdoor air insulated substations, which will play an important role in developing the power infrastructure and substantially improving power supply to the towns it serves. The scope of the project includes design, procurement, manufacturing and supply of equipment for all the substations.

ABB's multi-product equipment supply includes power transformers, instrument transformers, outdoor circuit breakers, medium voltage switchgear and control and relay panels from its manufacturing facilities at Vadodara, Nashik and Bangalore.

A consortium of Siemens Ltd, India and Siemens AG, Germany has recently signed two contracts amounting to Rs 2,600 crore for the development of the power transmission network in Qatar. First contract worth Rs 1,570 crore is to expand the power supply system and the second contract worth Rs 1,030 crore is to deliver most of the electrical power supply system for the `Westbay' Infrastructure project.

The project awarded to Siemens contributes to 70 per cent of the finalised requirement and include setting up of 19 substations with products such as modern Siemens gas insulated switchgears, transformers and protection controls system.

Manufacturing hub for exports: While ABB, Siemens are already present in the Indian markets, other players such as Emerson are looking at the country as a manufacturing hub.

Emerson, a power solutions company, had launched a new marketing plan for its products in the South Asian markets of Sri Lanka, Bangladesh, Nepal and Bhutan. The company would be using its Indian operations as a manufacturing hub for marketing its products in the South Asian region.

NOVAR Plc, a conglomerate with an interest in building solutions such as electrical accessories and fire alarms, had planned to make its Indian subsidiary, MK Electric, into a global manufacturing hub for electrical products.

Similarly, SOCOMEC Group of France too plans to make India its global outsourcing hub for switchgears, energy meters and energy management systems. It is poised to invest Rs 150 crore on capacity expansion over the next three years in its joint venture HPL Socomec Private Ltd, which specialises in the manufacture of electrical protection equipment.

Constraints: The Electronics and Computer Software Export Promotion Council (ESC) commissioned the Indian Electronics Hardware Exports Study under the aegis of the Department of Commerce, to find out India's status in electronics exports.

The study revealed that India's lack of success in exporting electronics to the global market is deeply rooted in a variety of reasons which range from market dynamics to inadequacy of support policy initiatives, low level of technology, poor basic infrastructure, long business cycles, lack of large scale manufacturing. Competitive product pricing featured on the top of the list.

The way forward: Despite the constraints, EMS is developing in India. Indian industry associations and government agencies such as the Manufacturers' Association for Information Technology (MAIT), the Indian Electrical & Electronics Manufacturers Association (IEEMA) and Ministry of Information Technology (MIT) are taking steps to invite both foreign and domestic investments in the electronics sector.

While the need for the Government and the electronics manufacturers to work in tandem still exists, some initiatives have been undertaken such as identification of a vision and strategic growth plan, reducing operational costs of manufacturing units and improving business attractiveness, promoting single manufacturing clusters, developing mass production capacities, global partnerships for rapid technology acquisitions, and strategic exploitation of niche markets such as optoelectronics, laser diodes, LCD monitors, nanotechnology, automotive electronics, passive components, and DVD technology.

The industry, on its part, has provided the Government with a wish list that includes abolishing the Central sales tax on all electronics hardware manufactured in India, a uniform 4 per cent VAT on the entire hardware value chain, and income tax exemption for five years for the industry.

If India remains focused; the Government creates and supports suitable industry initiatives with significant spending increases and appropriate excise, customs duty and other tax structures; and the country aligns itself with the right strategic partners and effectively markets its EMS capabilities globally, it surely has the potential to create a mark for itself.