INDIA'S HARDWARE MANUFACTURING ECOSYSTEM

A GROWING ANCILLARY INDUSTRY Component makers like Mumbai-based Celetron are expanding to cater to the domestic market. THE ENTRY OF CONTRACT MANUFACTURERS Global contract electronics majors such as Flextronics, Solectron, and Jabil Circuit are here, and Indian companies like Wipro and TVS Electronics are either expanding contract manufacturing capacities or entering the business. STATE-LEVEL INTEREST Four Indian states have hardware manufacturing policies. And hardware parks are coming up across Karnataka, Tamil Nadu, Andhra Pradesh, Kerala, Uttaranchal, Himachal Pradesh, Goa, and Jammu. A BOOMING DOMESTIC PC MARKET Manufacturer's Association of Information Technology says 3 million PCs will be sold in 2003-04. That's 21 per cent higher than the 2002-03 figure. Estimate for 2005: 4.2 million PCs A BOOMING DOMESTIC MOBILE PHONE MARKET Cellular Operators Association of India puts the number of mobile subscribers in India at 28 million in December 2003. Estimate for 2005: 80 million POWER REFORMS In a significant development, the Indian government recently allowed a company to buy power directly from its vendor of choice, ordering the state electricity board concerned to pipe the power from producer to consumer. Hardware manufacturing, for the record, is power-intensive. EMERGING MANUFACTURING CLUSTERS Traditional hardware manufacturing capital Pondicherry, Silvassa, and Goa are seeing increased investments by existing and new hardware manufacturers THE AVAILABILITY OF VENTURE CAPITAL Sarath Naru's VentureEast is one fund looking for early-stage investment opportunities in hardware manufacturing. HARDWARE INNOVATION The organic light-emitting diode screen being developed by the Samtel Display Center in IIT Kanpur and a low-cost ATM being developed by a company founded by IIT Madras Professor Ashok Jhunjhunwala are just two examples of hardware innovation happening across India.

Sarish Verma wants to build PC monitors in India. No, the 38-year-old who has worked with HCL and American Express in India and the US isn't a crank, although there are enough of the we-have-invented-the-perpetual-motion-engine types around. Verma is earnest and is now busy persuading venture capitalists that there is a future for monitor manufacturing in India.

The man hasn't lost his head. The Indian hardware industry is on a roll, and hardware manufacturing, once written off as unviable, is making a comeback. Numbers provided by Manufacturer's Association of Information Technology show that some 3 million PCs will be sold in 2003-04. And Delhi-based information technology research firm Skoch Consulting expects the market to grow by 50 per cent in 2004. Sanguine execs are already looking at numbers of a far higher magnitude. "There are 170 million PCs sold every year and 20 million of these sell in China," says Ravi Pradhan, an IIT Madras alum who spent over two decades in IBM's PC division in the US, and who now heads the Indian operations of chipmaker Via Technology. "That is the kind of market we are looking at."

It isn't just PCs. Last year, India's mobile telephony companies added 17.5 million subscribers to an existing base of 11.1 million. Even assuming 10 per cent of existing customers change their handsets (read: phones), that's a whopping 18.6 million new phones sold. This year, the corresponding number is likely to be 36 million, volumes at which local manufacturing begins to look conspicuously attractive to phone-makers.

Personal computers and cellular handsets are at the bottom of the hardware hierarchy. Like most other class structures, however, this one is a pyramid, implying that the base contributes the most volume. The emergence of a large domestic market for TVs and mobile phones, then, fosters conditions conducive to domestic manufacture. Once that happens, products higher up in the hierarchy (they sell relatively lower volumes) can be easily manufactured.

Flextronics thinks it can replicate its China experience in India Ash Bharadwaj, Chief Operating Officer Flextronics

Circa, early 2004, India seems to be at this point of inflection. The icing on the cake is the imminent opportunity in set top boxes once the Conditional Access Service (CAS) regime in cable television kicks in-and kick in it will despite roadblocks. That's some 50 million set-top units that will be sold over the next five years. Then here are UPSEs, printers, telecom and networking equipment, digital cameras, medical equipment, even niche products like ATMs, leave alone hardware opportunities in white goods, consumer electronics, and automobiles. Gopal Srinivasan, the CEO of TVS Electronics, is understandably buoyant. "It isn't a question of opportunity here," he says. "It is a question of being able to execute; companies in this space should grow at least two to three times." The number he puts to the "hardware manufacturing opportunity" in India over the next three years: Rs 55,000 crore. That's manufacturing cost. Market researcher IDC, known for its conservative numbers, estimates that the corresponding market-value estimate (for PCs, servers, hand-held devices, traditional workstations, storage, peripherals, and data communication equipment) is Rs 75,000 crore. We'll say that again: Rs 75,000 crore or over $15 billion at today's exchange rate. For the record, India's software exports in 2003-04 are expected to be $12.2 billion.

India Shining. Hardware Shining

Actually, it's more like hardware basking in the reflected glory of India Shining. With the economy on an upswing, a resurgent India Inc-454 of the 797 companies whose financial results are in at the time this article goes to press show net profits for the first nine months of this year that are higher than their 2002-03 net profits-is certain to invest more in it, both software and hardware. Better still, much of these gains have come on the back of productivity gains that involve the extensive use of it and as more companies, especially small and medium enterprises, travel down this path, the domestic hardware market will grow, and grow, and grow.

That's evident in the financial results of HCL Infosystems, one of India's largest hardware companies. In the three months ending December 31, 2003, the company's hardware business grew 56 per cent as compared to the same period in 2002. "We can now invest in educating and developing the market," says a visibly upbeat Ajay Choudhury, CEO, HCL Infosystems. Wipro. Suresh Vaswani, the President of Wipro Infotech, a company focussed on the corporate segment, is just a shade less bullish: he expects a growth of 30 per cent.

Once the market hit a certain volume, it made sense to manufacture in India Sunil Sharma, Head, Kobian India

The second reason for the boom-in-making is price. Hardware manufacturers are close to hitting the sweet spot of the desktop segment-under Rs 15,000 according to some estimates, although Narendra Pani, the Vice President (Business Development) of TVS Electronics, insists that the market will really grow once the Rs 10,000 barrier is breached-and the laptop one (Rs 30,000). In part, these arise from increasing manufacturing efficiencies and a quest by companies to cut costs, and consequently, prices, to increase penetration. In part, they arise from the government's decision, in early 2004, to cut excise duty on hardware from 16 per cent to 8 per cent and remove the 4 per cent special additional duty. This reduction has rendered unorganised sector players-they do not pay duties-redundant. Today, HCL's entry-level desktop, Ezeebee, retails for 17,990; price warrior Zenith has an offering for 16,000.

The third reason for the hardware boom is activity in the retail and government segments of the market. A third of the 3 million PCs sold this year will find their way to homes. And e-government initiatives launched by several Indian states as well as the central government could further the cause of growth.

The Boom Riders

As demand grows, everyone is speaking about increasing output, even capacities. Acer, for instance, is expanding the capacity of its PC assembly line at Pondicherry and LG is threatening to do to the PC business what it did to the consumer electronics one with its more-for-less products. IBM has a manufacturing facility in Pondicherry with an estimated capacity of 50,000 units. The company didn't respond to BT's questions but it is evident that it is considering large-scale manufacturing in India. In 2003, while media-attention was focussed on the visits of the company's Chairman Sam Palmisano and President Steven Mills, another senior executive made a low-profile trip to India. This was IBM's head of manufacturing Nicholas M. Donofrio, who reportedly visited the Pondicherry plant as part of an exercise to evaluate the possibility of large-scale manufacturing in India.

The two have come together to produce low-cost ATMs for the Indian market Sarath Naru, Founder, Ventureeast (Left) and L. Kannan Founder, Vortex

However, according to Skoch Consulting's Sameer Kochar-he headed marketing at now-dead-but-once-glorious PC manufacturer PCL-organised sector players do not have the capacity to meet demand. The gap, he reasons, will be met by a clutch of aggressive price-players, local, and from countries like Taiwan and Singapore.

That phenomenon has already begun. Singapore-based Kobian (See A Laptop For Rs 30,000) has a manufacturing facility up and running at Silvassa. Other such companies like eSys, again from Singapore, UK's ACI, and local-laptop vendor Micro-D have some sort of presence. And most hardware execs believe it is only a matter of time before Chinese biggie Legend (2003 revenues: $2.6 billion) enters the market.

The hardware industry is as component-dependant at the automotive one. Sure enough, there's a boom on there too. Acer's component manufacturing company Wisitron has had a presence in India through Bangalore-based Xserve Technologies for over a year. "One of our charters is to look at the viability of manufacturing here," says Rahul Gupta, Country Head, Xserve, who has already outsourced the manufacturing of some components to Indian companies. And Celetron India (See The Billion-Dollar Hardware Company), an electronics manufacturing services company is expanding its capacity to cater to the domestic market.

The Hardware Ecosystem

Electronics Manufacturing Services (EMS) is probably one reason for the continued profitability of most global hardware companies. These companies are contract manufacturers of sorts: they provide design, engineering, manufacturing, and logistics solutions to hardware companies. The rate of obsolescence in the hardware industry is close to supersonic and few companies have the resources to change their manufacturing lines and supply chain requirements at the same rate. Enter EMS companies such as Flextronics (See The 13.4-Billion Endorsement) that take care of everything.

Flextronics is in India, in Bangalore, where it assembles set-top boxes, mobile phones, TV tuner cards, and the innards for some equipment on offer from city-based optical networking company Tejas Networks. Solectron (Solectron Centum in India), another EMS major, has a factory, also in Bangalore, and has invested Rs 10 crore in contract manufacturing. Jabil Circuit manufactures printed circuit boards for Whirlpool and Philips. All three companies are busy acquiring customers and getting a taste of the Indian market. Indian companies have jumped into the fray too.

Via is convinced that low-cost high-performance machines will explode the Indian PC market Ravi Pradhan, Head, Via's Indian operations

TVS Electronics' Srinivasan wants to transform his company's manufacturing facility in Chennai into a contract manufacturing hub (he also wants to focus on catering to the hardware requirements of India's booming organised retail sector, but that's another story).

EMS companies are a critical part of the hardware manufacturing ecosystem. Apart from driving down costs and increasing speed to market, they provide local hardware hotshops (such as Tejas) with an opportunity to develop products and outsource manufacturing.

Noida-based iPolicy Networks, for instance, plans to start manufacturing its internet security boxes soon. "In four-to-five years, there will be more (such) products," says Ashok Jhunjhunwala, a professor at IIT Madras, who is the moving force behind an incubation engine called Tenet Group. "We ourselves will make a few announcements in the next two months."

Nor is venture capital an issue (See The Venture Capitalist And The Innovator). Midas is in the process of closing a new round of funding of $10 million. And two batches of Silicon Valley venture capitalists have visited India thus far in 2004; they are sure to have experienced the telecom boom and the optimism among local hardware makers. Ergo, they are likely to be more open to investments in Indian hardware start-ups.

Infrastructure, especially power, could play the spoilsport, but hardware executives are taking heart from a recent government decision to allow Indal to buy power from its vendor of choice for its Kochi-facility, with the state electricity board piping power from generator to customer. And Vinay Deshpande, the Vice Chairman of the Karnataka government's hardware committee and CEO of Encore Technologies, points to the hardware park coming up in Bangalore and others planned in Andhra Pradesh, Kerala, and Tamil Nadu as evidence that the government is doing its bit. There's empirical and anecdotal evidence to suggest that it is all coming together.

-additional reporting by Venkatesha Babu and Vandana Gombar

WILL INDIA BECOME A MANUFACTURING BASE FOR:

Chips Making silicon wafers is capital-intensive. India has an opportunity in testing finished chips, however PC Components Mother boards, memory cards, power packs, and cooling fans are already being made in India PCs PCs are already being assembled in India and manufacturing is poised to take off in a big way Cellular Phones Cellphone-boards can be made here. Displays are hi-tech and India will have to play catch-up Monitors Low-end ones are manufactured here but domestic demand for cutting-edge flat panels is low Switches and Routers They are already being made here. India possesses the competitive advantage to design and assemble them Servers India has an edge in high-end servers: design and labour inputs are far more critical than cost of components Laptops Laptops are already being manufactured here. And as volumes increase more and more will be made here

THE BILLION-DOLLAR HARDWARE COMPANY Mumbai-based Celetron could be it.

The EMS company is expanding capacity to meet local demand M.L. Tandon, Head, Celetron India There must be something about hardware manufacturing in India if hard-nosed investors, including New Enterprise Associates, ING Barings Asia and Westbridge Capital have invested $51 million in a California-based electronics manufacturing services (EMS) company whose business model revolves around manufacturing in South Asia, primarily India. The company is Celetron Inc, its Indian subsidiary is Celetron India, and its promoters are the Tandon family (remember Tandon computer?). The Indian arm already exports PC components like power supply, head stacks for disk drives, and memory cards, and boasts profit margins in the 12 per cent region (the company claims this is higher than that for any other EMS company). Encouraged by trends in the domestic market, Celetron plans to expand capacities to cater to demand in India and has acquired land in Pondicherry for a factory. In three years, the company hopes to touch revenues of $1 billion from the domestic market, and from exports. That's something.