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April - 2010 - issue > In My Opinion
Indian Electronics Products - A $100 Billion Opportunity
Sanjay Nayak
Tuesday, March 30, 2010
Indian companies have gained significant success over the last 20 years in the global IT and ITeS industry. However, we still don’t have innovation-driven, globally successful, high-tech product companies from India; despite the fact that people of Indian origin have contributed immensely in building many successful global high-tech product companies and no one doubts the technological and entrepreneurial caliber of Indians.

According to a recent report by Ernst & Young, the Indian domestic demand for electronics products is expected to reach $125 billion by 2014, up from the current level of $45 billion annually. The primary demand drivers are sectors like telecom, defence, IT and e-governance, automotive, consumer electronics, and energy. At these demand levels, unless India creates its own electronics product industry, the imports of such products will create the single largest trade deficit item, which would even be larger than petroleum products. On the other hand, if this unique opportunity is utilized, it can create a large industry catering to domestic consumption, which will help achieve self reliance in strategic sectors like telecom and defence, while leading to large exports.

Most leading countries in the world have nurtured their domestic electronic industry that has not only met their domestic and strategic needs, but also created successful businesses that export several billion dollars worth of products around the world. For instance, electronic products form an insignificant part of our GDP, whereas they contribute to over 22 percent of GDP of Israel and over 15 percent for Korea and Taiwan. Also, as a global player, U.S. has over 40 percent share of global electronic products markets and China has 15 percent, whereas the share of India is close to nil.

Today India has the two most important ingredients that can enable us build global product companies ? a huge domestic market and a large pool of highly talented technical and managerial workforce. In addition, we also have venture capitalists who have the financial resources to provide the necessary funding for capable product startups. Given these ingredients, what is missing and why don’t we have the likes of Cisco, Apple, Nokia, or Huawei from India?

For building an Indian product industry, it is important to focus on activities that contribute to highest amount of value-addition and also lie in the sweet-spot of our core strengths. The majority of value-addition in electronic products comes from R&D, IPR creation, hardware, software, and product design, and then marketing, branding, and sales activities. Fortunately, R&D and IPR creation is a knowledge and people-driven activity, in which India has a global edge that we must leverage, and which requires relatively less capital investments. Due to sophisticated Electronic Design Automation (EDA) tools and emergence of high capacity programmable devices, even hardware design has become similar to software development, an area in which India has established global leadership. The actual manufacturing that requires huge investments in basic infrastructure and logistics can be outsourced to global Electronic Manufacturing Services (EMS) companies that have economies of scale. Once we have Indian product companies, it will have a pull-through effect to create a vibrant eco-system of EMS, semiconductor, and component industries in India.

So far the low-cost of Indian technical workforce has been used as a cost-arbitrage for building a profitable IT services industry. Indian product companies can use this cost advantage to do a lot more R&D and innovation for the same investments. This ‘innovation leverage’ is a sustainable competitive advantage for Indian companies against their peers in the U.S., Europe, and Japan, who are facing severe competitive pressure from the Chinese companies, and are being forced to cut-back on R&D due to reduced profitability. In fact, this also creates an opportunity for Indian companies to partner and become ‘product developers’ for global companies who can continue to leverage their existing brands and sales channels to provide market access to Indian products globally.

For hardware products, unlike software, a volume-base is required to become cost competitive, without which it is impossible for companies to compete successfully against global players who are much larger and have a large volume and cost advantage. This is where the Indian government must step in and use the large domestic market to provide ‘market-pull’ for Indian companies that develop world-class telecom products. The government must mandate that a certain percentage of the Indian domestic demand is reserved for Indian product companies that meet global technical and quality standards. This volume-base will enable Indian companies reduce their production costs and become globally competitive. In addition, they will build credibility with customers in India who can be used as references, when Indian companies start selling internationally. There are several large government projects (on broadband, rural connectivity, education, as well as e-governance) that are on the anvil and can be used as incubators for stimulating the development of Indian products. The fact that the Chinese government has successfully leveraged their domestic demand to support the creation of global product companies from China, is well documented.

While the domestic market will provide the initial success for Indian products, it is crucial that they turn this success into a global one. This will require a sustained investment to build the brand for Indian electronic products in the international markets. Since this activity requires deep pockets, a government intervention is required, especially to promote ‘made-in-India’ electronics products globally. In addition, the government should make electronics product exports a thrust area for bi-lateral trade. The Chinese government has effectively used bi-lateral trade promotion for their telecom equipment exports, while the U.S. and Israel have been using this successfully for defence products. An added advantage for Indian product companies in the telecom sector is the fact that many Indian telecom operators are now becoming global players, especially after their overseas acquisitions, and can become effective vehicles for globalization of Indian products and brands.

Electronics being a high-tech sector with rapid changes in technology, it requires sustained investment and a focused policy support to develop world-class capabilities. While venture funding is available in India, most of the funding is going to the middle and late stage companies. Lack of adequate early-stage funding is still an issue for product companies, especially since many first time Indian entrepreneurs are unlikely to have adequate financial resource of their own to sustain and fund their companies, even during the proof-of-concept stage. While the VC and angel funding mechanism falls into place, the government should immediately step in to provide R&D funding to create Indian products and IPR, especially since India’s investment in R&D, at less than one percent of GDP, is amongst the lowest in the developed and emerging countries. There are lessons to be learned from the success of early-stage funding of R&D in other countries. In particular, the funding model used in Israel by the Office of Chief Scientist (OCS) has played a very vital role in Israel’s emergence as a global leader in electronics and security products.

India has been a great success story in the IT services industry and we now have a great opportunity to create our own electronics product industry, which will help us move up the value chain and create global technology brands. We are now at a threshold of a decisive phase in our growth where, if the government and entrepreneurs take concrete steps we can create a $100 billion electronics product industry from India in the next 10 years.

The author is Sanjay Nayak, Co-founder and CEO of Tejas Networks.
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