Manufacturing in India: picking up the pace despite the speed bumps

India is receiving increased attention - and investment dollars - from global electronics manufacturers eager to capitalize on the country's economic growth and inexpensive talent pool. But while the opportunities are significant, a new research report just released by Technology Forecasters Inc. (TFI) finds many technology companies remain wary of the country's ability to support major manufacturing operations.

GDP annual growth in the world's largest democracy has been hovering in the 7-9% range for the past three years and economists forecast a similar pace in 2007 and beyond, which places India among the strongest economies in the world. The implication is that as disposable income of India's sizeable middle class increases, spending on electronics will increase. And as the commercial and industrial sectors expand, demand for capital equipment and IT infrastructure will rise. With India's import duties relatively high, there is a compelling argument to be made for locating manufacturing in country.

Based on a Web survey of over 400 electronics industry managers, TFI projects that the number of electronics companies selling product in India will rise by 24% in the next two years. The number of companies manufacturing in India is likely to rise by 63% during the same period. Most companies are attracted to India by the potential for serving the local market, not as an export hub, which differs from the typical manufacturing strategy in China.

Of the 400-plus companies surveyed, 17% are currently outsourcing manufacturing to India, and another 21% are planning to outsource in India in the next two years. System test, board assembly, final box build, and repair/refurbish functions are most commonly outsourced, according to survey respondents. The most frequently mentioned outsourcing markets are in the consumer and communications sectors, followed by computing and industrial.
 
Why communications? In large part because of India's commitment to building its communications infrastructure to support the growth in consumer and business demand. On the consumer front, its all about the run-away demand for cell phones and the high import duties are driving the increase in local manufacturing.

The question for OEMs and EMS providers alike is: Just how big is India's consumer electronics market? That depends on your assumptions about the size of the middle class. For most electronics goods, significant purchasing doesn't occur until households income reaches approximately $4,500 per year income level. The number of Indian households earning $4,500 a year or more today is about 18 million, or slightly less than 100 million people.  Over the next five years, that figure is expected to double, with dramatic consequences for the consumption of electronic goods, including cell phones, televisions and refrigerators.

 
TFI asked the Web survey respondents to rate each of the following eight areas to determine the key drivers behind their investment plans in India. These factors were:

-- Access to the local market. With a rapidly growing middle class, now numbering over 300 million, and a sustained GDP growth rate that is among the highest in the world, India presents substantial incremental demand for all types of electronics products.  Distance from more established manufacturing centers, tariffs, and infrastructure bottlenecks all lead companies to consider addressing the domestic Indian market with India-based production.

-- Lower labor rates.  While development in most Asian production centers has led to wage inflation, Indian wages tend to be lower, and are rising more slowly, than in many competing areas.

-- Diversification away from China.  Over the past decade China has eclipsed other destinations for international electronics investment.  However, some companies are adding manufacturing in India in order to manage currency, political, and other risks associated with single country manufacturing,

-- Benefit from Software Expertise. India is the key international destination for new software development investment. Some companies with existing software investment or those that want to take advantage of software opportunities, see the benefit of investing in related hardware manufacturing in the same region.

-- Benefit from other technical expertise.  India has developed other areas of manufacturing expertise, in sheet metal manufacturing for example, and in technical support.

-- English language or other cultural conditions.  English language proficiency has led many back office and call center operations serving English language markets to locate in India. TFI wanted to judge the importance of this factor for hardware manufacturers.

-- Personal or business ties. Expatriate Indian engineers and entrepreneurs have been particularly active in the United States in a variety of IT industries.  TFI wanted to judge the importance of this factor in considering India as a manufacturing destination.

-- Customer requests. For many companies the decision to locate manufacturing in a particular region is driven by customer interest. This is a particularly powerful driver for EMS companies.

For the 400-plus Web survey respondents, labor costs were the most important reason cited for selecting India as a manufacturing site; customer requests were the least important. Labor costs are indeed a major advantage for India, especially when compared to the rapidly rising labor costs and pockets of labor shortages in China. Indian labor costs are about half China's and wage inflation is expected to remain modest in the next year or two, according to TFI research.

To complement the Web survey, TFI conducted 16 in-depth phone interviews with 11 OEMs and 5 EMS providers, all with manufacturing operations in India. For these experienced companies, the reasons for choosing India differed somewhat from the Web survey respondents. For instance, access to the local market and local management skills were the top criteria for setting up shop in India. Labor costs, in contrast, were relatively low on their list.

This small but experienced group of executives also shared their concerns and challenges about manufacturing and about future investments in India. Their concerns include the relatively low skill level of the local labor pool, the lack of an adequate local component supply base and poor infrastructure. Concerns about infrastructure are pervasive, and include ground, air and sea transport.
 
For more details on the challenges faced by international OEMs and EMS providers in India, along with specific company recommendations, please contact Bruce Rayner, TFI's vice president of consulting and research at brayner@techforecasters.com

CHARTS

Interest in India - Web survey of 404 electronics industry managers

 
 
Source: Technology Forecasters Inc.

Current and Future Outsourcing Trends - Web survey, n=155

 
 
Source: Technology Forecasters Inc.