Made in India

Can the nation excel in hardware as well as software?

By Barbara Jorgensen -- Electronic Business, 4/1/2005

Is India the next stop in the electronics manufacturing supply chain? Not in the near term, industry watchers say.

Although the words India and outsourcing have been linked for a while, they're largely used in conjunction with the terms software and services—not hardware and manufacturing. "India is not going to replace China" as an electronics manufacturing hot spot, says Jack Calderon, EMS group practice leader for investment banking firm Lincoln Partners. "I don't see that changing in a major way."

Why not? A lot of it has to do with the difference between "hard" assets—chips, boards and other physical inventory—and "soft" assets—intellectual property and design savvy. Electronics manufacturing requires the physical movement of hard goods from place to place, and India's roads are in terrible shape, visitors say. Many are unpaved. This may seem like a small matter, but Calderon says such issues have to be considered in a manufacturing equation. "I think a lot of U.S.-based companies forget how vast these areas are," he says. "India and China are huge." (India is twice the size of Alaska, and China is three times the size of India.) The inefficient transport of goods only adds to manufacturing costs. Although China faces many of the same challenges (see "Reality Bites," March 2005), the electronics industry has risen to them. High-technology companies in China tend to cluster around industrial parks, so component suppliers are next to, or down the road from, their manufacturing customers.

Rahul Suri, senior vice president for business development at EMS company Celestica, says the Indian government is beginning to address transportation issues: It's investing billions in local currency in a network of roads that will link the major cities in India. "India intends to build a transportation backbone, and this bodes well for the supply chain infrastructure," Suri says.

Still, India does not have the kind of component supply base that exists in Southeast Asia. Hong Kong, Singapore and Taiwan have emerged as world leaders in the manufacture of semiconductors and other devices, such as resistors and capacitors, and their proximity to China eases many supply chain issues. "You have a very large local supply base in China or nearby in Singapore and Hong Kong," says Kevin Sachs, Solectron's vice president of account operations management: "For India, you are going to have to bring components in from much farther away."

iSuppli analyst Adam Pick says India is making some headway in developing its own chip industry. Pick cites a November 2004 news report that said a company called India Semiconductor Manufacturing Co. was breaking ground for India's first 8-inch-wafer plant in February 2005. Production is slated for July 2006. (Other fabs in the country, according to news reports, use older technologies and suboptimal production scales.) India is also courting foreign chip makers: In 2004 Intel announced that it was considering building a semiconductor fab in India.

Even India's crown jewel—a large population of highly educated, English-speaking workers—is not a big draw for electronics manufacturers. Solectron's Sachs, who previously worked as an industry consultant, says companies "sometimes" see an advantage to an English-speaking workforce. Many U.S.-based companies have outsourced service and support functions—such as manning computer help desks—to the region. But EMS companies are more likely to choose sites based on other considerations—such as how badly their customers want them there. In the end, he says, OEMs will decide the value of an English-speaking population. Also, says Suri, wages in India are going up, so labor rates don't always compare favorably with China's.

Still, EMS companies are keeping a close eye on the region. The country's consumption of electronics goods—estimated at $12 billion a few years ago—is anticipated to grow. The population of India is more than 1 billion, and according to iSuppli, the nation is projected to have a gross domestic product (GDP) growth rate of 6 percent in 2005. (By comparison, China's is close to 8 percent and the United States' around 4 percent.) "As a country, India is developing very rapidly," says Celestica's Suri. "There is a growing middle class with a large amount of personal wealth. Demand for things such as PCs and cell phones translates into a market with a lot of promise."

The foremost reason to locate manufacturing in India "is to help our customers access the growth of that local market," Suri adds. Many companies still prefer to manufacture products close to or inside targeted end markets. Advanced Micro Devices (AMD), for example, intends to sell its Personal Internet Communicator (PIC), a low-cost consumer device that will provide basic Internet functions such as e-mail, downloads and Web browsing, in India. Solectron, which will manufacture the device, hasn't ruled out India as a manufacturing site. Solectron own 51 percent of Solectron Centum a microelectronics business in Bangalore. Although the site's manufacturing capacity is dedicated largely to microelectronics, it does have printed circuit board assembly capabilities. Moreover, it has a toehold in the Indian market. "If the AMD product does take off in India, it may make sense to manufacture it there," says Sachs.

Elcoteq, which specializes in manufacturing telecommunications equipment, is tapping into India's demand for mobile communications. The company will open a handset manufacturing plant in Bangalore sometime this year. It also intends to tap into the country's design talent, saying its proven capabilities in software and hardware design can readily be harnessed to support the telecommunications industry. India had more than 30 million cell phone subscribers in 2003, according to iSuppli.

Ultimately, though, OEMs and ODMs will drive any significant EMS expansion into India. iSuppli notes that OEMs such as Microsoft and Nokia are already there. And most large EMS companies say they are keeping their options wide open. "We have had customers asking us what our plans are there," says Celestica's Suri, "and we tend to pay very close attention to what our customers say."

And there are indications that India's potential customer base may be expanding. "From the investment banking standpoint," says Lincoln Partner's Calderon, "we are getting calls from a lot of companies that are interested in expanding into India."