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Vishwanath Kulkarni

India has been an attractive outsourcing destination for software services, product design, and R&D. Joining the list are the IT hardware and telecom sectors that have seen a rush of MNC investment in recent months. The race is on, and it's a run for money.

IT'S another wave in the making.

No, we aren't talking of killer tsunamis, thankfully. What is unfolding is a welcome development - the outsourcing boom extending to include more sectors.

Industry watchers say that outsourcing activity in the IT industry, confined hitherto to software services, product design, and research and development, is slowly getting extended to the IT hardware and telecom sectors. And there's every likelihood of a boom in this space in the near term.

Major multinational electronic manufacturing services (EMS) firms, or in other words contract manufacturers of IT, telecom hardware and consumer electronics, are seen firming up their plans for India. Spurring them on are a rapidly-growing huge domestic market and India emerging as a low-cost destination.

Recent announcements by handset majors such as Elcoteq Network Corporation and Nokia to set up manufacturing units, and the outsourcing deal announced by Flextronics, could just be the beginning for the country's fledgling electronics manufacturing industry.

Flextronics signed a deal with Distinctive Devices Inc's German subsidiary, Galaxis Sales GmbH, in October last year to manufacture over seven lakh set-top boxes (STBs) for cable, satellite and terrestrial platforms.

What has made the deal different is that the production of STBs for Galaxis will take place at Flextronics' facility in Bangalore.

The STBs manufactured by Flextronics in Bangalore are not meant for only the European market but for India too.

Exact estimates of the size of the industry in India are not available.Gopal Srinivasan of TVS Electronics feels the sector is poised to grow 3-5 times over the next six years. This is because manufacturers increasingly prefer to be closer to a growing customer base. Also, rising costs in the US and Europe are forcing companies in this space to transfer their manufacturing operations to Indian subsidiaries so they can retain customers. According to a white paper brought out by Elcoteq, contract manufacture of IT, telecom hardware and consumer electronics in India can catapult to an over $50-billion business, provided the Government pitches in to help create the right environment and policies. Key players operating in India in this space include Flextronics, Jabil and Solectron Centum. Electronic device manufacturers such as American Power Corporation, among others, have been here for some time, basically to tap the market, and now mobile handset manufacturers Elcoteq and Nokia plan manufacturing units here.

Advantage India

Manufacturing costs are still quite low in India. Industry estimates say savings range between 30 and 40 per cent and the country itself is a huge market that is still opening up — something no hardware manufacturer can ignore. Moreover, for hardware manufacturers, the integration of the software, design and the engineering capabilities that India has developed facilitates setting up a manufacturing unit in the country. Further, when vendors have manufacturing capability across different geographies, they are able to play the India card to retain clients who would walk away from a deal they feel is too expensive. "The EMS industry is still in infancy but there are indicators that it will grow aggressively over the coming years," says M.V. Appa Rao, managing director of Solectron Centum, a subsidiary of Solectron in India.

EMS companies are attracted to India by the size of the market, he says, adding that the companies would not focus on exports exclusively.

"However, once companies start manufacturing in India, exports is given," says Appa Rao, citing the example of his own firm.

C-Mac Centum started manufacturing initially for the domestic market and later turned to the export market. C-Mac Centum, which was taken over by Solectron, now derives about 50 per cent of its revenues from the export market.

According to Appa Rao, though poor infrastructure is still an issue for the growth of the hardware industry in general, it may not be a hurdle for the companies that plan to focus on the Indian market.

Industry observers feel the Government needs to put in place policies and incentives to enable India emerge a key player in the hardware manufacturing space.

Asked to comment on what the Government needs to do, Vinnie Mehta, Executive Director, Manufacturers' Association of Information Technology (MAIT), says that it needs to improve the impression that it is not quick enough in clearing investment proposals from industry biggies. "There is no great obstacle at the moment from the Government but single-window systems, where investors truly can get quick clearances without being made to run around, would go a long way in making life easier for them. After all, the back-end machinery is still the Government and it is important to quicken the pace there too. It is also time for State Governments to market themselves well."

Mehta adds, "Opportunities to sell in Asian and African markets are increasing." But the following is the most interesting aspect on the opportunity front. Mehta says, "The Taiwanese see India as a great derisking opportunity. China does not recognise Taiwan. Made in Taiwan labels are banned there. So, India offers a manufacturing and marketing haven."

Commenting on the trend of OEMs (original equipment manufacturers) moving away from manufacturing and leaving it to the EMS firms, Appa Rao says this could augur well for the nascent industry in India as more work is expected to move here.

OEMs, in a bid to cut down their operating costs and protect their margins, are outsourcing their manufacturing to EMS firms.

Companies in contract electronics manufacture will be able to make a product at lower cost compared to OEMs simply because they will be making the same product for several companies. This will enable them to rationalise cost and maximise savings. In turn, it makes more sense for OEMs to outsource their manufacturing and thus boost efficiency, says Gopal Srinivasan.

Henry Gilchrist, director for business development and marketing in Asia, Elcoteq, stresses that the Government should streamline implementation and remove investment barriers to achieve a compounded annual growth rate of 15 per cent during the Tenth Five-Year Plan. In the absence of policies to encourage domestic production, the country's telecom sector's requirement of equipment and handsets worth $30 billion is almost met by imports, he says. This has also given rise to the growth of a vast grey market in India.

Cellular services have registered a phenomenal growth of more than 100 per cent annually. It is estimated that every month, two million mobile handsets worth $130 million were being imported into India.

Revenues from the cellular industry are expected to reach $15.61 billion by 2008 and the infrastructure market for the same will be around $1.88 billion, estimates by Department of Telecommunications indicate.

The Indian telecommunications industry comprising services and equipment market is expected to increase to $24.29 billion by 2006, up from $13.71 billion in 2001.

The telecom hardware industry is currently estimated at $3.26 billion and the country imports over 75 per cent of the equipment. It has attracted interest from equipment vendors such as Alcatel, Ericsson, Lucent, Motorola, Nokia and Siemens.

The mobile subscriber base crossed 47 million by end-December 2004. Carl-Henric Svanberg, chief executive officer and president of Ericsson, sees the mobile subscriber base touching 100 million by 2006 and 200 million by 2008.

Component eco-system

Industry observers feel that the entry of contract manufacturing firms in India will spur the component industry. Initially, the multinationals may source their components from their regular suppliers and may bring them along with them, says Appa Rao. Elcoteq, says Gilchrist, will try to create an eco-system that should subsequently lead to manufacturing and sourcing of components locally.

Integration of software skills and BPO

Setting up operations in India could turn out to be a big advantage for contract manufacture firms as they could leverage the country's software and process engineering skill sets.

Going further, these firms could also tap into the country's growing business process outsourcing (BPO) sector to provide tech services and support.

Flextronics, which acquired the handset-manufacturing unit of Motorola in Bangalore, to gain a foothold in India, has lapped up quite a few software companies in the country over the last few months. This is being done to enhance its software development and design skill sets. It has acquired a majority stake in Hughes Software Systems, the Chennai-based Future Software, the Bangalore-based Deccanet Designs and a stake in E-muzed, which has a development centre in Bangalore. It is looking at tapping both the domestic and international market through its Indian operations.

"Aiming at both the markets simultaneously will create more volumes for us," says Veriah Ponniah, plant manager of Flextronics in Bangalore, which manufactures TV tuners, set-top boxes and energy meters, among others.

"Revenues from the Indian market are doubling every year," Veriah says, even while declining to spell out numbers.

vishwa@thehindu.co.in

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