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.

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.

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 (San Jose, CA) whose firm specialises in advising companies who outsource their electronic manufacturing requirements and; those companies interested in establishing electronics outsourcing divisions, "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.

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 reductin 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", says Zetter.

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.