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EXIM BANK: RESEARCH BRIEF

INDIAN ELECTRONICS INDUSTRY: PERSPECTIVES AND STRATEGIES
April 2011

EXPORT-IMPORT BANK OF INDIA

Visit us at www.eximbankindia.in

No. 61

Production Indian electronics hardware production increased from ` 50,500 crore in 2004-05 to ` 97,260 crore in 2008-09, with a cumulative annual growth rate of 17.3%. The production of electronics hardware in the country is estimated to have grown from ` 97,260 crore in 2008-09 to ` 109,940 crore in 2009-10, a growth of 13%. The slower rate of growth of production during 2009-10 is attributed to the global economic slowdown. Communication and broadcasting equipment took the largest share (29%) in Indias electronics production in the year 2009-10, followed by consumer electronics (27.4%), computers (13.1%), industrial electronics (12.4%), components (12.2%) and strategic electronics (6.3%). Exports and Imports During 2009-10, Indias electronics exports

were valued at US $ 5.48 billion, with a share of 3.1% in Indias total exports. During this period, electronic exports have witnessed negative growth of -19%, over the previous year. During April September 2010-11, the exports of electronic goods were US $ 3469.95 million, witnessing a growth of 10% over the corresponding period in the previous year. In the year 2009-10, the imports of electronic goods were valued at US $ 20.96 billion, a negative growth of (-) 9.2% over the previous year. During April-September 2010-11 the imports of electronic goods were valued at US $ 10.11 billion, a decline of -5.4% over the corresponding period in the previous year. Major export destinations for Indian electronic goods include USA (14.8%), Singapore (8.2%), UAE (8.2%), Germany (6.7%), Hong Kong (5.8%), and Netherlands (4.9%). In the case of imports too, Asian countries (74%) were the

largest import sources for India, in the year 2009-10, followed by European Union (13%), America (8%) and Middle East (2%). CHALLENGES AND STRATEGIES CHALLENGES Small Size / Scale of Operations The size and scale of operation of majority of electronic manufacturing units in India are small compared to global standards. This leads to non-operation of economies of scale in terms of cost disadvantage in production (low capacity translates into higher per unit cost), as well as catering limited ability to adhere to supply commitments. Non-operation of economies of scale offset the overall advantage of low-cost labour in manufacturing. The skewed tax structure in favour of small scale units had encouraged establishment of more small scale units in various locations across the country. Low Level of Component Base The Indian electronics components industry is restricted to passive components. Even here, relatively larger presence is only in few sectors. The low domestic volumes and import/ customs procedures and regulations do not encourage stock and trade of components. In the case of mechanical parts, suppliers do exist with technical capability. However, the industry has not positioned itself to cater to the needs of high-volume customers and would need substantial up-gradation of management skills. Challenges Associated with Supply Chain and Logistics Management While inadequate (roads, ports) and high cost of infrastructure (power) hinders the competitiveness of the Indian electronic industry in international market, the challenges of supply chain management and

Note: * Estimated Source: Exim Research, data derived from Annual Report, Department of Information Technology, Government of India ELCINA Electronics Industry Association of India

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Indian Electronics Industry: Perspectives and Strategies

share on R&D expenditure was 0.88% of GDP, China held a share of 1.44%. Israel was the country with the largest share in R&D expenditure with a share of 4.86%. The R&D intensity of electronic industry was 0.73% during 2009-10. Low Penetration of Distribution Network Due to the inadequate world-class infrastructure facilities in India, distribution of electronic goods across the country poses a great challenge. Not so well-developed distribution networks make the distribution challenging to penetrate the fastest growing rural areas, economically. In addition, regular power cuts and poor road linkages make systematic production, assembly and delivery a challenging proposition. India also has limited availability of proper storage and warehousing facilities in the rural parts of the country.

Source: Directorate General of Commercial Intelligence and Statistics (DGCIS)

logistics solutions, which are essential for timely delivery of electronic products, are also affecting the competitive landscape of Indian electronics industry. Adequate supply chain and logistics system will ensure timely delivery of electronic products and will provide a better competitive landscape of Indian electronics industry. Challenge of Shorter Product Life Cycle New technologies, changing standards and shorter product life cycles constantly challenge the manufacturers of electronic goods. The vendors have to match short product cycles through quick response to changing technologies, by producing equipments that will cater to the production of new generation products. All these call for a high level of open systems design, modularity and flexibility in hardware and software architecture. Low Level of Technology Absorption The low volume of production implies that any capital equipment with a given technology used by an Indian company is not optimally utilized; while its physical life lasts for a longer time, technologically they become obsolete in a short span of time, calling for modernization and upgradation. Yet, most of the Indian companies prefer not to go for new technology / capital equipments as they are costly proposition in view of sub-optimal utilization of capital equipments. Limited Facilities for Standards and Testing In electronic hardware segment, technology is changing rapidly. Most of the countries in the world have laid down standards for new products to ensure that low quality products are not dumped into the country. India has

limited standard and testing facilities in the country and also have limited number of wellequipped labs (such as Electronic Regional Test Laboratories, and Society for Applied Microwave Electronics Engineering and Research). Setting up of modern testing labs will help electronic product designers and manufacturers in achieving their compliance requirements as quickly and efficiently as possible. Grey Market Frequently this form of parallel import or grey market occurs when the price of an item is significantly higher in one country than another. This situation is commonly prevalent with consumer electronic items. According to industry estimates, the grey market for premium watches is almost 50% of the total sales, 30% of the gaming console market, and 25% in the digital camera market. Managing E-waste As the demand for electronic goods is increasing, so is the challenge of managing the E-waste. According to some estimates, Mumbai tops the list of cities with around 12,000 tonnes of E-wastes, followed by Delhi (around 10,000 tonnes), Bangalore, Chennai, Kolkata and Ahmedabad (around 4,000 tonnes each). Though the challenge of managing E-waste in India is at a nascent stage, this may turn out to be a serious challenge at a later stage. Low R&D Intensity Lesser spending on research and development by electronics industry has increased Indias dependence on electronics imports, which has been growing over the years. While Indias

Shortage of Skilled Labour India has shortage in skilled labour in the electronics industry. Not enough industryready trained personnel are available. The talent pool is also concentrated in a few metros, and attracting such talent to Tier II cities and small towns is a difficult task. High attrition rate due to the small pool of talent available is another challenge faced by the industry. Low Value Addition Indian electronic industry faces the challenge of low value addition. Usage of electronics is pervasive in many other sectors as well, like automobile, aviation, etc. As the domestic electronic industry is not having a strong manufacturing base, most equipments are imported with hardly any value addition being done in India. R&D plays a very important role for value addition in the country. However in India R&D intensity is very low. Complying with Environmental and Social Standards Most Indian electronics goods are considered as relatively inferior in global markets. Limited awareness about environmental and social standards and the cost involved in obtaining the globally recognized certifications are the major reasons for limited number of players adhering to such standards. STRATEGIES Rapid Customer Response To keep a step ahead of the competition, companies should maintain a customerfocused, forward-looking business strategy and keep abreast of new standards and new technology developments. The solutions should address the complete range of

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requirements for organizations that are focused on ensuring quality of service (QoS)-starting from research and development (R&D) organizations to manufacturing, engineering, operations, information technology, and sales and marketing fields. Adherence to Quality Enterprises can gain competitive advantage only through offering unique products and services. Efforts should be made to concentrate not only on research and development but also in the adaptation of already existing technology to build distinctive technical competence and develop superior products and services. Effective E-waste management According to a Report by Centre for Environmental Studies, the best option for dealing with E-wastes is to reduce the volume of E-waste. Stress should be laid on use of less toxic, easily recoverable and recyclable materials, which can be taken back for refurbishment, remanufacturing, disassembly and reuse. Ministry of Environment and Forests, Government of India has announced E-waste (Management and Handling) Rules 2010 for handling of E-waste by defining the responsibilities of stakeholders such as producers, dealers and recyclers among others. Establishing National Electronics Mission A high-level Task Force for the Information Technology (IT) industry has recommended constitution of National Electronic Mission, a nodal agency for the electronics industry under the Department of Information Technology, Government of India, with direct interface to the Prime Ministers Office (PMO). The main functions of the nodal agency would be to attract investments into India, promotion of Brand India, facilitating business in India, managing R&D fund, and manufacturing of value added products. Research & Development Lesser spending on research and development by electronics industry has increased Indias dependence on electronics imports, which have been growing over the years. While Indias share on R&D expenditure was 0.88% of GDP, China held a share of 1.44%, and Israel was the country with the largest share at 4.86%. R&D intensity of Indian electronic industry was 0.73% during 2009-10. Department of Information Technology, Government of India, has constituted a specialized group R&D in Electronics - to conduct sponsored R&D activities across India at various academic institutions of higher learning and R&D laboratories, in the areas assigned to it through

Indian Electronics Industry: Perspectives and Strategies

a variety of Plan programmes. Industry should also focus on more R&D related activities. Thrust to Semi-conductor Industry India has an edge in semiconductor design, embedded systems and has the potential of becoming an engineering design house for the world. As the semiconductor industry is going through the transition phase to newer technologies, embedded software forms a significant part in the design of todays Systemon-Chips, where India is already seen as a leader. India has to complement design and R&D expertise with local manufacturing, which would help in increasing the value addition . Global demand for semiconductors is growing, and therefore, if India can integrate its chip design services with fabrication facilities, it can result in growth of competitive manufacture of electronic products and thereby help achieve success in the domestic as well as global markets. Developing and Improving ICT Interface in India ICT enabled services are very important in all the major sectors of the economy such as manufacturing, education, healthcare, financial services and public services. Development of ICT infrastructure and connectivity are one of the main indicators that investors look for as an indication of technological development in a country. Enhanced ICT interface helps the manufacturing companies fit seamlessly into value chain of multi-national corporations easier. This would also enhance the demand for electronics products. Brand Building Initiatives Currently, in the global electronic industry, Indian products have limited level of competitive brand perception. Brand development is more important these days because customers have started becoming more conscious of the products they buy, and they are expecting products with good quality and standards. Hence, Indian electronic firms should increase their focus on brand development and management, as it will help to create desirability in international markets for products manufactured in India. Further, the firms may strengthen the Incredible India branding campaign and run it regularly through key international media. Developing Market Sustenance The Indian electronic firms should concentrate on taking care of the customers with sensitivity, speed and responsiveness by establishing effective channels of distribution and reaching out to them. Also, Indian electronic industry should concentrate more on providing new generation products that maybe in demand in future eg. Nanotechnology. Department of Information Technology, Government of India, has taken measures for promoting emerging areas of technology like RFID (Radio Frequency Identification), smart cards, ubiquitous computing, perception engineering, scientific computing, nanotechnology, digital preservation and M-Commerce initiative. Cluster Development The major advantages of a cluster are the availability of common opportunities, which help them in creating a conducive ground for the development of inter-firm cooperation to promote collective production, collective innovation and collective learning. Clustering of technology companies in an area is very beneficial to developing new industries in a country. Taiwans Hsinchu Science Park, spread over 600 hectares has clusters of most of the semiconductor component manufacturers, thus saving on time and cost for assembly. In such clusters, one can find trained people more easily and form inter-relationships between suppliers and vendors that make development of products faster, cheaper, and even lead to better innovations. India should also follow such models for the better development of the electronics industry. Improved Standards and Testing Facilities Most of the countries in the world have laid down standards for new products to ensure that low quality products are not dumped into the country. Also, in the growing electronic industry, there is a strong need to evolve/ adopt EMC (Electromagnetic Compliance) standards that are acceptable worldwide in order to avoid trade barriers. In India, EMC compliance certification scheme is followed to ensure standards to the products that are manufactured, exported and imported. Technology Development and Sourcing Indian electronics industry needs support from the Government including through financial, fiscal and infrastructural resources for strengthening manufacturing ability and R&D. Indian firms must focus on acquiring technology through mergers and acquisitions and acquire manufacturing plants of established companies from other countries. Countries like Taiwan have integrated their public and private sector to establish highly efficient electronics manufacturing environment. Hence, Indian electronic industry should also bridge the challenges of financial, technological and infrastructural resources through public and private partnerships.

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Brief on New Publications

Indian Electronics Industry: Perspectives and Strategies

Skill and Human Resource Development In order to achieve the plans of raising production, mastering the sophisticated technology, and for achieving market leadership, it is necessary to have adequate human resources with superiority in skills, knowledge and resources. It is necessary to develop skills in the human resources matching with the latest technological innovations. Steps should be taken to impart training in human resources that lead to skill development based on evolving consumer demand. Capturing the Rural Market Indias rural market provides a huge demand base, with more than 720 million consumers spread across 627,000 villages. Furthermore, their per-capita income has been rising at a consistent growth rate of more than 4 percent, which has resulted in increasing disposable incomes. Electronics companies operating in India have started developing plans to tap the rural market. With rural and suburban markets gaining importance, such innovative strategies would help electronic product companies to tap the potential offered by these markets. More Support to Telecom Equipment Sector Globally, Governments have created a supportive policy framework to encourage their telecom equipment manufacturing and R&D. China has been actively supporting its telecom industry and has been providing significant support in the form of incentives and lines of credit and thereby stimulating their exports. Israel, with just about 200,000 technology professionals, has been able to create R&D driven companies, exporting telecom equipments globally. Based on the public-private partnership model, quite a few Centres of Excellence (CoEs) have also been set up in India in the areas of telecom, wireless technology, bioinformatics, lasers and optoelectronic devices and nano-electronics. India should focus on improving and developing these Centres of Excellence, and thereby achieve product excellence. Promotion of Intelligent Manufacturing Significant engineering skills, with the combination of hardware, software and system integration skills, are required in the evolution stage of advanced technology products. India has a competitive advantage in this sector where a large proportion of value addition is through software and system integration. Establishing joint ventures with Chinese firms, which

have manufacturing strengths and substantial market share in third world countries, would help in increasing high tech exports, in the short term, to developing countries in Africa and the Middle East. Promoting Repair/Reconditioning/ Refurbishment of Electronic Goods According to the Strategy Paper on Doubling Exports in Next Three Years (2011-12 to 201314) prepared by the Ministry of Commerce and Industry, Government of India, the American market for repair/reconditioning/ refurbishing of electronic goods is estimated to be US $ 10 billion annually. India has a few large emerging companies which are beginning to provide these services but the combined turnover is of the order of only US $ 5 million. India should take refurbishing business as a big opportunity because Indian workers are recognized as having better diagnostic skills and would thus enjoy core competence in the area of repair and re-export. Simplification of customs procedures After the signing of the ITA-1, the electronic hardware sector was the first sector to open up with zero duty on most items, as also reduction in overall duty rates. However, the customs procedures have undergone with limited simplification. According to the Strategy Paper on Doubling Exports in Next Three Years (2011-12 to 2013-14) the customs procedures should move from a refund regime to a selfdeclaratory regime as is the case with excise duties. This will go a long way in reducing a major non-tariff barrier faced by the electronic goods exporting units. Effective supply chain and logistics system Adequate supply chain and logistics system will ensure timely delivery of electronic products, and will provide a better competitive landscape of Indian electronics industry. Firms and their supply chains need to closely integrate themselves into a network, carefully manage the complexity that ensues, align their business strategy with logistics and supply chain operations, and leverage information and communication technology with process improvement, and pioneer operational innovation for superior performance. Grey Market One of the ways of fighting grey market is to conduct awareness and educate customers against piracy and counterfeit products,

through interactive events, PR and advertising. Higher taxes are considered as reasons for the flourishing grey market in India. Measures should be taken to combat this issue. Also, legal protections, such as coding the products, should be adopted to reduce the challenge of grey market . CONCLuSION Many countries, especially in Europe and ASEAN, have identified electronic industry as one of the thrust areas for national growth and development. India is also a signatory to ITA, and India has also placed greater thrust on this industry for developmental growth. The market size of the electronic industry is projected to exceed US $ 150 billion by 2015. According to Ministry of Commerce and Industry, Government of India, the export performance of electronic goods is expected to be US $ 15 billion by 2013-14. In order to achieve this level of growth, India needs to concentrate and focus more on designing and manufacturing global products, and then reach out to the rural areas in the domestic market, and emerging export markets. Also, India should leverage its strengths in software to build high-complexity, but medium-volume products for the global market. Further, the Indian industry should focus on inventing mass-products that matter to rural and bottom of the pyramid segments. The demand for appliances and energy efficient consumer electronics is huge and can be explored by the Indian electronic industry. Increasing R&D intensity should be a joint approach of both Government and industry. With such strategies, Indian electronics industry would excel both in domestic and international markets.
The contents of the publication are based on information available with Export-Import Bank of India and on primary and desk research through published information of various agencies. Due care has been taken to ensure that the information provided in the publication is correct. However, Export-Import Bank of India accepts no responsibility for the authenticity, accuracy or completeness of such information

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