The Hindu Business Line : Chipping in, to counter China

Welcome to the second instalment of our chat with Norwest Venture Partner's Promod Haque. The well-known face of the venture capital world spoke about NVP's investments then (eWorld dated April 17, 2006). Here, he dwells on the opportunities for India across the knowledge sector, as well as areas he would like to invest in. Excerpts:

We understand that you would like to see India act as a counter to China's dominance in the semiconductor industry. Why do you feel so?

There are multi faceted issues. Over-concentration of any industry in one particular geography poses problems. Then there is too much leverage on the part of the manufacturers and not enough negotiating powers for users.

So, it will make sense to have a viable cost-effective second source. This requires a large pool of skilled labour — Engineers and Programmers.

The reason why foundries of the semiconductor industry are based in Taiwan and China is because of the cost factor. From both a skilled and semi skilled labour as well as cost advantage, India becomes a logical destination.

What has hampered India in the past, in this direction?

There was not a Brand India Inc in the global market about 10 years ago.

Also, there has been a lot of design getting done here in the recent past. We are now finding the development of very domain-specific skills around dealing with packaging houses, foundries, design layouts. These skills are developing in India now. Decisions are being made now in India on the designs that are being created, which was not the case 10 years ago. If you are a manufacturer of silicon chips, you may find a situation that the engineers — the guys who are designing — are sitting in India. Hence, one's sales force has to be placed in India for these companies. And this is a dramatic shift. The balance of power and eco system is changing. (Also), from a risk management point of view, it makes sense to diversify your assets geographically.

How would you view the semiconductor foundries coming up in India? We understand that the government supports most foundries in China and of these only two have recently become profitable.

One has to look carefully at the economics of all this. We do not want too many coming up. The setting up of new foundries has to happen with Government help, collaboration with other industry players, large manufacturers of equipment.

I am not a big supporter of Government involvement on an ongoing basis. One will invest in a country based on some commitments — both financial and order. They may move some of the product lines to India

As in the case of semiconductors, doesn't the concept of dual sourcing destinations apply to software too?

There is not much capital investment in software services. Also, India is a very small piece of the cake, even in the offshoring space. (So, if capital needs to flee, it easily can.)

What areas are hot for your portfolio companies?

The telecom sector is growing dramatically. We have added a number of customers in India in the last 2 years. Eastern Europe is an important market for us (as a user base).

Infrastructure there is way behind. There is a cell phone boom, broadband penetration happening there.. Same with South Asia, Vietnam, Africa.

But aren’t Indian companies way behind in the use of IT here?

Salaries in India are shooting up and very soon enterprises would want to become more efficient and differentiate themselves from others. Hence, there is going to be increased use of technology and as a result the penetration of technology is likely to go up. With this, the spending by Indian enterprises on technology will go up.

You had earlier said that the mobile and Internet space interests you:

Yes, there is a whole bunch of value added services, data services. In India and China, wireless subscribers are more than broadband subscribers. These users are very hungry for a lot of services. It is a very vibrant market.

Value added services space is huge. We are seeing a lot of growth in the consumer Internet space. We are looking at this space (mobility) closely and we will decide in the next two months on whether we want to make an investment on companies in this space for the Indian market.

We are seeing tremendous investments by IT services companies in real estate even though the biggest of these do not have customer visibility beyond a year or so. Any alarm signals you see in the sector?

We are seeing tremendous consumer consumption of technology. Technology is in the process of getting commoditised. It was the same with consumer electronics. As it got commoditised, it moved from US to Japan to Taiwan to China

The hardware industry too got commoditised and this industry slowly started getting outsourced and more work started coming offshore.

Now we are finding this trend in software. And work is moving massively away from US.

It is finding low cost centres such as India. The challenge India is likely to have over the next few years is that software will get commoditised too, even by Indian standards.

One will find that the programmer’s job, which was previously done out of India, could be done cheaper elsewhere. India has an advantage in that IPR laws are strong here and also the language barrier is not there.

As part of this, India Inc. will move up the value chain. The semi conductor industry too will have to move up the food chain. The whole eco system will have to advance, so that when the project that gets done here, we are not just doing stuff as per specifications given but are doing the whole system and C code might be a piece of it, which itself may not get done in Bangalore but may be in remote locations in India at a lower cost geography.

bharatk@thehindu.co.in

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