Hi-tech manufacturing - an opportunity in waiting

The Elephant has started to run'’, 'India is Shining', 'What's the India angle?', and other such expressions are becoming increasingly common parlances. The new India is zooming ahead with robust growth and is amongst the fastest growing economies of the world. Growth optimism is no longer a scarce commodity in the Indian market, as was the case a couple of years ago. This bonhomie coupled with confidence is visible in practically all the sectors of the economy including IT and ITES, real estate, retail, telecom, and manufacturing. While we may be still small from the global output perspective, we are fast reaching there.

As the growth story unfolds in India, I must bring attention to one segment which continues to lag behind. While there is some bit of investment and related activities happening, given the enormous potential of this industry, India has a long way to go to catch up with other countries. The industry: Electronics.

Before going into the detailed analysis of this particular industry in India and why it is not at par with the other booming industrial sectors, let us have a quick at the terra firma of the electronics industry worldwide.

Analysts estimate that the electronics industry is much ahead and above other major sectors. Estimates peg the global electronics industry at twice the size of industries like oil, petrol, and minerals; chemical and plastics; food, beverages and tobacco. During the period 1980-2006, global electronics industry achieved a CAGR of 7.5 percent, compared to global GDP growth at 3 percent. Interestingly, the share of electronics industry worldwide in the world GDP increased to 4.3 percent in 2006 from 1.5 percent in 1978. Analysts put the global electronics hardware production in 2005-06 at $1,300 billion with China leading the production graph with a share of 18 percent followed by Germany (14.5 percent) and South Korea

(8.7 percent). Compare this with India which had a negligible share of 0.9 percent of global GDP production. Also it is no surprise that this industry contributes significantly to the respective country's GDP with China at 13.1 percent, Germany at 8.8 percent, and South Korea at 15.8 percent. The electronic industry accounts for 1.7 percent of India's GDP. What makes these statistics look bad for India is that we have all the right skill sets to ensure that electronic production can become one of the significant contributors to the economy, yet.

It is equally important to note that the lack of a strong electronic manufacturing in the country might also have a detrimental effect on our balance of payment. India is largely an importer country with a deficit of $12.4 billion ($1.6 billion exports against $14 billion imports in the year 2004). On the other hand, countries like China ($180 billion export against $148 billion import), Taiwan ($42 billion exports against $34 billion import), and Japan ($124 billion export against $73 billion import) are enjoying a sizeable surplus. These countries have used the electronic manufacturing prowess to uplift the living standards as well as to raise the intellectual property levels. It is most visible in the case of South Korea which is now considered at par with Japan in advanced electronics production capabilities. Also, China is catching up fast with electronics industry majors with its own brand of trans-nationals like Lenovo and Haier.

The major chunk of electronics industry production goes to computer and communication services with computer getting the largest share of 33 percent followed by communications with 28 percent market share. Sectors like industry (16 percent), consumer items (10 percent), government and military (8 percent), and automotive (6 percent) accounted for the rest of the $1300 billion production in 2006.

So what has led to the development we see in some of our Asian counterparts while we are still struggling behind? If we look at the industrial policies of some of these successful players (Malaysia, Singapore, Taiwan and South Korea.), we find that a clear, very proactive, and friendly set of policies ensure the growth of the hi-tech industry in these countries.

However in India, so far adequate impetus has not been given to this high growth industry. The total production in 2005-06 was $12.7 billion, just 1 percent of the global production and characterized by huge trade deficit of over $12 billion. Given the growth of the Indian economy, the gap is only going to widen, if domestic manufacturing does not take off soon.

According to ISA-Frost & Sullivan Report 2006, the projected growth in electronics hardware industry in India is around 30 percent over the next few years, while the current rate is 18 percent. The industry is projected to reach a level of $320 billion with a growth rate much higher than the national average of 12 percent. Of course, like all projections, these also look very good on paper. Will these projections become a reality soon or progress at the pace of a tortoise? While the ground work has already begun and India has already received investments (or investment proposals) worth over $500 million from companies like Nokia, LG, Samsung, Flextronics and Jabil Circuits, we still have a long way to go.

I feel, this is just the beginning. With an estimated 12 percent share of national GDP and employment potential of 21 million in the next few years, it could be a win-win situation both for the industry and for the employable population. Now it's up to the government to respond to this goldmine opportunity, to partner with industry, to make it a part of the 'developed India' of tomorrow.

The author is Chairman and Managing Director Moser Baer. He can be reached at deepak.puri@moserbaer.net