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Is contract manufacturing the next big opportunity?
Never before has hardware, the poor cousin of
the Indian software industry, got a bigger opportunity to redeem
itself. Contract manufacturing, estimated to be a $149 billion opportunity,
is attracting a host of MNCs to set up base in India. Srikanth R
P has the details on this emerging trend
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| Machinery used in making computer products
can also be used for making a variety of products, right from
mobile phones and PDAs to TVs to other electronic products,
says K R Naik |
Ask businesses outside India about an area
within the IT sector that this country is strong in. Ten times out
of ten, you would get the same answer—software services. Now gather
the courage to ask—what about hardware? Chances are rather slim
that you will get a positive impression of India’s hardware manufacturing
prowess.
While hardware industry captains have been
crying hoarse for reductions in duties for years now, the way forward
could lie in tapping opportunities that are still relatively untapped.
One hot opportunity that is knocking hard at India Inc.’s door is
contract manufacturing (CM). The global contract manufacturing business
is estimated to be close to $149 billion and is expected to grow
to $500 billion by the end of the decade—clearly a huge market for
Indian players to address.
And while China is still a hot favourite,
India Inc. still holds a good chance of attracting global contract
manufacturers because more and more global contract manufacturers
are looking at spreading their risks over more than one geographical
area. Currently, the top five companies in the global contract manufacturing
market—Solectron, Flextronics, SCI, Celestica and Jabil—account
for more than a third of the global market.
But what’s an unknown fact and an encouraging
sign for India is that three of the top five global contract manufacturing
firms, namely Jabil, Flextronics and Solectron, are here already.
The others are also expected to set up bases here soon. The strategy
of the global firms is to not only spread their risks but also take
advantage of lower labour costs and India’s expertise in design.
And just as India achieved success in the software services industry,
analysts believe that India could script a similar tale in this
space too.
What’s contract manufacturing?
Contract manufacturing is work sub-contracted
to a manufacturer by a company that owns the product design and
IPR. In some cases, the manufacturer takes the responsibility of
marketing the products using the vendor’s brand and provides after-sales
support.
Indian hardware manufacturers dive in
Looking at this emerging trend, some smart
Indian hardware product companies like D-Link, TVS Electronics and
WeP Peripherals have started offering CM services. This not only
helps the hardware product company de-risk its business model but
also means full utilisation of its production facilities. And being
product companies, these companies understand the client’s business
more than any other contract manufacturer.
Take the example of printing giant TVS Electronics,
which recently launched India’s first indigenously developed printer
for the retail market. While the Indian retail market is huge, there’s
still a long way to go before TVS Electronics gets the volumes it
is looking for. This is where TVS Electronics’ contract manufacturing
business provides the company stability and an assured flow of revenues.
The company has invested in state-of-the-art manufacturing capabilities
and product design capabilities that give it the ability to participate
in the design, development and manufacturing of new products for
other vendors. TVS Electronics has also established design competencies
in the areas of power supply units, dot matrix printer mechanisms
and dot matrix heads. The strategy has paid off handsomely as the
company’s contract manufacturing business grew 33 percent over the
previous quarter. The importance of the contract manufacturing business
is reflected in the fact that even though growth in the domestic
PC and peripherals market was negative, the company managed to put
up a good performance (an 18 percent growth rate) thanks to its
contract manufacturing business.
Another successful company is D-Link, one
of the very few hardware companies in India that does local manufacturing.
Other than traditional networking products from its Taiwanese parent
D-Link (network interface cards, hubs, switches and modems) D-Link
India’s strategy to enter into tie-ups with global brands to market
and manufacture their products has paid off. For instance, the recent
decision of the company to manufacture and market motherboards in
collaboration with Taiwan-based Gigabyte Technology has given it
a significant market share in the Indian motherboard market. Company
officials claim that D-Link India has close to a 15 percent market
share in the motherboard market with a manufacturing capacity of
20,000 units per month. Besides giving D-Link India a key advantage
in terms of technology, it also means full utilisation of D-Link’s
manufacturing facilities in Goa.
Says K R Naik, managing director of D-Link
India, "D-Link is an integrated IT company. While we are always
open for manufacturing on a contract basis, our main focus is to
manufacture products designed by us. D-Link has not consciously
focused on contract manufacturing." The nature of the manufacturing
machinery (SMT lines) used for manufacturing networking products
is universal. For example, the same machines can be used for manufacturing
a variety of products, right from mobile phones and PDAs to TVs
and other electronic products. One is not restricted to the computer
industry. According to Naik, D-Link has used this advantage with
telling effect.
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| Gopal Srinivasan |
While revenues from contract manufacturing
business constitute a small portion of business at D-Link, it is
definitely useful for the company as it provides extra usage of
the capital equipment in which the company has made investments.
Currently, D-Link manufactures around 30,000 motherboards, 10,000-plus
switches and hubs, 40,000 modems and approximately 30,000 structured
cabling products at its facility. Naik claims that many companies
with similar product lines have started approaching D-Link due to
the company’s high-speed and high-precision manufacturing facilities.
Another Indian hardware product vendor on
the contract manufacturing front is WeP Peripherals. The company
has already executed a number of projects such as manufacturing
of dot-matrix printers for a Japanese company and electronic typewriters
for a German company. The strong focus on the contract manufacturing
business can be seen from the fact that over 50 percent of the company’s
resources are utilised for contract manufacturing in one location.
One more positive sign of India’s cost competitiveness and capabilities
in design can be judged from WeP Peripherals experience. Recently,
the company won a contract against competition from China thanks
to its design expertise. This could be the emergence of a new trend
that Indian IT Inc. should ideally capitalise.
Domestic market
While the potential for exports is definitely
huge, the domestic market too offers a huge opportunity for contract
manufacturing as more and more vendors introduce their IT products
in the Indian market. Says Mark Zetter, president of Venture Outsource
Group (a firm specialising in advising companies who outsource
their electronic manufacturing requirements), "India’s overall electronics
industry is expected to be close to $60 billion by 2010. Two-thirds
of this amount—$40 billion—is expected to come from domestic demand,
with 80 percent of products manufactured internally. Exports are
expected to be $20 billion." Zetter feels that as India’s electronic
manufacturing market evolves, it will attract MNCs in a huge way.
"These MNCs are not only interested in having their products manufactured
in India by Indian players but are also interested in establishing
transnational joint ventures with established Indian players."
For instance, take the case of memory major
Micron, which recently set up a direct presence and appointed Celetron
India as its sole national distributor. It is a win-win situation
for both the companies. Celetron is a known player in the electronic
manufacturing service space and undertakes contract manufacturing
in the areas of power supplies, headstacks, RFID tags and memory
modules. The firm has forged close relationships with many manufacturers.
This gives Micron a ready market to tap. On the other hand, Celetron
is responsible for manufacturing as per the design specifications
given by Micron. Additionally, Celetron will also provide customised
Micron chips to local manufacturers.
Click on image for larger pic |
Of tigers and dragons
Unlike the common perception, Indian hardware
product companies believe that the Indian tiger can compete with
the Chinese dragon. Says Naik, "We can compete with China on every
parameter—quality, cost, productivity, efficiency, as well as engineering
and technological capabilities. But unlike China, we have no component
industry base and till the time we have a strong component industry,
contract manufacturing cannot really take off in a big way. This
is purely a chicken-and-egg story." He explains that a few years
ago China started assembling products by importing components from
Taiwan, which is just a few hours away from China by sea. But today
China’s component industry has grown due to higher local requirements.
Naik is of the opinion that once the zero-duty regime is in place,
many organisations may stock components, which will then give rise
to a cluster of contract manufacturers since components will be
available readily.
Additionally, besides the usual reduction
in duties, India also needs to seriously look at improving its infrastructure
and turnaround time for goods coming in and going out through ports.
Says Zetter, "India does not have sufficient shipping traffic and
it is not situated on the prime shipping routes. Adding to this
are the all too familiar delays at Indian ports. Many ships must
wait three to five days for a berth in Indian ports. Turnaround
times at Indian ports have averaged 72 hours in many cases, compared
to 16 hours at Singapore and 20 hours at Bangkok.
A report by Meyrick & Associates (Auckland,
New Zealand) cites the traditional paradigm in the shipping sector
where ports used to serve ‘local’ trade and ships came to the cargo.
This sector is experiencing a paradigm shift and ports are now serving
non-local trade and cargo comes to the ships. India’s electronic
export volumes must become more robust if it is to offset its already
unfavourable geography relative to the major shipping routes. Looking
at road transportation, the average distance covered on roads by
truck in India is less than 250 km per day compared to 1,000 km
per day in the United States. The difference is partly due to the
high volume of vehicles on Indian highways, as well as various tax
regimes and frequent check posts on state borders, not to mention
inferior roads.
What the future holds
But despite all the obstacles, Indian hardware
product firms are positive on the road ahead. Says Vikram Chopra,
vice president, Marketing and Sales, at Celetron India, "Indian
firms have already proven their expertise in the automotive components
space. Now similar success can be emulated in the electronics space
too. And we can definitely compete with Chinese companies in areas
of cost and quality with an added competitive edge in design services."
If the Indian government manages to address the key issues faced
by this segment, more and more companies would consider manufacturing
or outsourcing their requirements to contract manufacturing firms
in India—that’s an opportunity for big bucks to come into India.
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