Creating A Manufacturing 'Magnet Ecosystem' In India
Stepping back in time a little, learning lessons from history, and remembering the past will certainly help us avoid jumping to not-so-well-informed conclusions
Photo Credit : Reuters
It's been more than 500 days since the government announced the 'Make in India' initiative with the aim of creating 100 million jobs in the next 7 years. The policy also holds a grand vision of taking the manufacturing sector's contribution to GDP from the existing 16 per cent to 25 per cent. There are also plans to turbocharge the production of electronic components, which underlies the very existence of handset industry, and turn this into a $400 billion marketplace in the next 3-4 years - serving both domestic and global markets. This flurry of numbers around Make in India begs a fundamental question: What should a mobile manufacturer be doing here and where in the value chain to jumpstart manufacturing industry as a whole, so it can contribute to this magnificent vision?
It is not uncommon to feel a little distracted when the conversation starts moving around assembly operations. Stepping back in time a little, learning lessons from history, and remembering the past will certainly help us avoid jumping to not-so-well-informed conclusions. American vocalist Maynard James Keenan once said, "I think people in general have neglected to learn about history."
The first mass-produced laptops appeared in the US in the early '80s. Soon afterwards, the Japanese with their tremendous capacity for miniaturization - something they carried forward from the experience in electronics - put skin into the laptop game. Even otherwise, American laptop makers were sourcing so many of their components from Japan. By the end of that decade, Japanese players had begun developing and marketing miniature laptops (or notebooks as we know them). By the mid-'90s, as Taiwanese companies entered the fray, offering notebook design and production services, the Japanese realized it made more economic sense for them to focus on chip and component production. Likewise, US companies moved upstream into high-end design, development of more friendly UIs, branding, and even "defining needs that consumers didn't know they had".
By the late '90s, flush with orders from Japanese and US companies, notebook production by Taiwan-based companies jumped phenomenally. Meanwhile, the Taiwanese had also mastered product design. Since 2001, the mantle of notebook production has fallen on China in a major way. In the face of rising labor and land costs in their home country, many Taiwanese players have moved their manufacturing sites to China, while retaining design capabilities. In most of these cases, it was only a matter of time before the engineering art of designing notebooks was extended to small-form-factor devices like smart phones. And assembly operations represented the conduit by which these nations have migrated towards key upstream capabilities, and now India looks well-placed to perform this feat. Certainly, it is important to seize this favorable moment before it is gone.
Two leading actors in the global smartphone circuit - one, a maker of branded smartphones; the other, a contract manufacturer of multiple smart phone brands - cut their teeth in the mobile sector doing cost-sensitive, low-profit-margin manufacturing as well as assembly tasks for some of industry's big boys. And yet in a span of 9-11 years, on average, both had hauled themselves into a pole position, acquiring capabilities that run the gamut of manufacturing. Today they boast significant expertise in smart phone design and have established emotional connect with the consumer. What if smartphone players in India could make that leap of faith in a telescoped time frame of 4 years, leading up to 2019? That should probably be the collective endeavor by industry participants.
For a long time, many Indian players were importing feature phones from China and selling them at a margin. But industry participants soon realized that this model wasn't going to be profitable even in the not-too-long run. That starting them thinking about new ways to deal with the situation. Soon key industry players tied in with chip makers and incubated design and R&D groups in-house. This way, some of the domestic smartphone players, in association with policymakers, managed to lay the groundwork for the smart phone manufacturing ecosystem of the future. Moving assembly lines from China represents the next major inflexion point in the history of smartphone production in this country.
In terms of labor costs, China is 300 per cent costlier than India. Rising costs is hastening the flight of smartphone assembly processes out of China. At the same time, India, with a greater proportion of people in the working age group, is well-placed to take over as the world's assembly hub. India's growing manufacturing prowess and cost advantage is becoming clear to global manufacturers, including China, so much so that there is a certain keenness to move such activities to India. Importantly, India's human capital in India is proving more efficient than China's.
Assembly - the initial leg of any manufacturing journey - is among the first things a fast-growing economy like India, looking to pump more muscle into manufacturing, should be training its energies on. The key that will turn on the engine and power this cruise is the country's human capital. Starting out with assembling smartphones is about visiting the roots of mobile phone production, setting key learning in motion, and leveraging that knowledge to build out and move upstream in the smartphone ecosystem. In the next two years or so, handset assembling will peak even as the economy grows, skillsets get firmed up, and infrastructure improves. By then, tooling, surface mount technology, painting and other areas would also be integrated backwards.
Assembly capabilities are also critical because, in the next 3-5 years, these can serve as a "magnet industry" for other parts of the smartphone value chain. Smartphone assembly sector holds the promise of spawning a thriving marketplace around it, comprising suppliers of printed circuit boards, passive components, integrated circuits, and liquid crystal displays. These industries tend to line up around assembly processes much like iron filings around a magnetic field. It's not just Indian companies that are beating a retreat to their home country and laying assembly lines here. To satisfy many of its production needs, Chinese mobile players are also turning their gaze towards India. In mid-January, executives from more than 80 Chinese handset makers descended upon Delhi to scout manufacturing opportunities in association with Indian partners. Some of these are component suppliers and their movement will help the ecosystem here flourish. With assembly operations gaining traction in India, as a magnet industry, it will attract other player to shift here. And together this community of smartphone practice will put the country's competitive and skilled labor to good effect, thus helping grow the larger piece: India's manufacturing sector.
First-movers who have already invested in assemble-in-India facilities are feeling good about the results so far. Firstly, they are able to control the quality of handsets in a much better way; defect rates have been halved and that also means a richer experience for the user. Second of all is costing; cost is competitive in relation to China and this benefit can be passed on to the customer.
Assembly is one of the most labor-intensive processes in handset manufacture with the potential to create a job boom. As an example, India will have 700 million smartphone users by 2020, with students and young professionals forming the core market. If a significant number of these devices are made in India, one can imagine the magnitude of employment creation. These are just the domestic numbers. If India transforms into a handset factory (and it can very well!) with the scale to meet a significant chunk of the global appetite for smartphones, how much more would be the impact, GDP-wise?
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