The electronic equipment industry in India

Foreword
India has been one of the worlds fastest growing economies during the last few years. However, India has still not recovered from the effects of the former inwardoriented policies it followed until the 1990s. Economic reforms started taking place in the beginning of the 1990s when India started opening up gradually. The question is whether India can implement the required policy changes effectively and develop a conducive business climate for industry to grow, and thus be able to sustain the strong rate of growth it has achieved over the past few years. During this time there has been increasing confidence in the manufacturing sector in India and its long term potential as a manufacturing hub. Importance of the engineering industry is supreme in this regard and it also plays a crucial role in the economic growth of the country. To understand the driving forces of India better, it is essential to develop an understanding of prevailing fundamentals in the engineering industry. In this report we provide an overview of the engineering industry in India with relevant facts regarding the structure and size, growth rates, main challenges, trends in international trade, research and development initiatives, as well as an indication of future outlook of the main segments in the engineering industry. It is a series of seven different reports that includes an overview of the engineering industry, the automotive industry, the machinery and equipment industry, the electrical machinery industry, the automotive components industry, the electronic equipment industry and the fabricated metal products industry. This series of seven different reports has been commissioned by Teknikfretagen, the Association of Swedish Engineering Industries, to provide a detailed overview of the Indian engineering industry covering various aspects of the main segments. It is hoped that the reports will help identify areas of business interest for Swedish engineering companies and give the reader increased knowledge of the present industrial development in India. The reports have been authored by Mr. Rahul Sanyal. He is an economist from New Delhi in India, and has been appointed by Teknikfretagen to prepare these seven reports. Stockholm, September 2008 Anders Rune Chief Economist

Table of contents

Overview of the electronic equipment industry in India..................................................... 5 A snapshot of the Indian electronic equipment industry..................................................... 5 Evolution of the Indian electronic equipment industry....................................................... 6 Large manufacturers of electronic equipment in India........................................................ 7 Contribution of the electronic equipment industry to the economy. .................................. 9 Growth of the electronic equipment industry..................................................................... 10 Pattern of development. ........................................................................................................ 15 Large untapped potential is driving growth........................................................................ 17 Size and structure of the electronic equipment industry................................................. 17 Consumer electronics........................................................................................................... 18 Computers............................................................................................................................. 20 Communication and broadcasting...................................................................................... 21 Electronic components......................................................................................................... 23 Industrial electronics. ............................................................................................................ 24 Strategic electronics.............................................................................................................. 25 International trade scenario. ................................................................................................. 26 Exports................................................................................................................................... 26 Imports.................................................................................................................................. 28 Research and development................................................................................................... 29 Future outlook.......................................................................................................................... 30 References................................................................................................................................ 33

The Indian electronic equipment industry is one of the fastest growing segments of the Indian industry, but it is still very much in a developmental stage. The electronic equipment industry is completely delicensed with the exception of aerospace and defence electronics. With liberalization of foreign investment and trade policies, this industry is attracting considerable interest from multinational manufacturers, not only as a vast market but also as a potential production base for other markets.

The electronic equipment industry in India

Overview of the electronic equipment industry in India
India has a relatively small electronic equipment industry. In contrast to many newly industrialized countries, the Indian electronic equipment industry derives most of its revenues from the domestic market. Historically, the Indian electronic equipment industry has grown under protection from foreign competition through high duties. Liberalization of the industry has benefited the consumers but weakened the local manufacturing industry as it is unable to compete with the foreign manufacturing companies.

A snapshot of the Indian electronic equipment industry

The Indian electronic equipment industry constituted less than 1 per cent of the global electronic equipment industry in 20062007, which is miniscule in comparison to the contribution of other Asian countries such as China, South Korea and Taiwan to the electronic equipment industry. Currently, approximately 50 per cent of the demand for electronic equipment is being fulfilled by imports. However, it is believed that India has a large untapped potential for exports growth.1 Production of electronic equipment is gradually shifting to Low Cost Countries (LCCs) like India that also serve as large markets for multinational manufacturers. Demand in the Indian market is growing rapidly and investments are flowing in to increase manufacturing capacity. Technological advancement in recent years has also increased with the boom in the Information Technology (IT) industry in India, thereby improving the international competitiveness of the industry and helping India develop into a hub for manufacturing electronic equipment.2 Development

1) This information has been obtained from The Hindu Business Line (9th November 2006) and ELCINA Electronic Industries Association of India (2006) 2) ELCINA Electronic Industries Association of India (2006) has been referred

in the electronic equipment industry in recent years has also had a profound effect on other industries and sectors that use electronic equipment, by enabling them to change their cost structures and increase productivity.3

Evolution of the Indian electronic equipment industry

The electronic equipment industry in India came into existence in true earnest only in the 1960s, with an orientation towards defence and space technologies, which of course was strongly controlled by the Government of India (GOI). Then there followed developments in consumer electronics mainly in transistor radios, black & white television sets and other audio equipment over the next two decades. The landscape of the electronic equipment industry changed significantly only in the 1980s. In fact the period between 1982 and 1990 is considered the golden period for electronic equipment. The GOI allowed import of colour television sets only from 1982 onwards due to the Asian Games being held in India at the time. In the late 1980s, India also began to see introduction of computers and telephones. Major fiscal reforms took place in the year 19911992, but the positive impact of the same was diluted to some extent, due to the Gulf War. However, afterwards during the mid and late 1990s, when the Indian electronic equipment industry started booming, the electronic equipment industry resumed its high priority, albeit to a limited extent. Beginning in the late 1990s and into the 21st century, India signed a pact with the World Trade Organisation (WTO) for reducing customs duty on electronic equipment to zero. After this agreement, the Indian electronic equipment industry became vulnerable to international competition and could not keep up. As a result, several manufacturing units turned sick and had to be closed down.4 Other Asian economies with similar characteristics as India have become significant players in the world through success in this industry and have also succeeded in creating large scale employment directly and indirectly. Given the right impetus, the electronic equipment industry can also add significant economic value in India. With global trends in the electronic equipment industry being optimistic, India is now poised to evolve into a major electronic equipment manufacturing hub.

3) Reference has been made to Ministry of Information and Communication Technology (2008a) 4) This information has been obtained from ELCINA Electronic Industries Association of India (30th March 2008)

Large manufacturers of electronic equipment in India

Several multinationals with operations in India are firming up their plans to make India a manufacturing hub for their global operations. Backed by large investments, the companies are increasingly getting attracted to the advantages India offers in terms of availability of skilled manpower and significant cost reduction in logistics and raw materials. The continued growth in the domestic market has enabled a number of companies in achieving economies of scale in production. The industry produces a wide range of electronic equipment and can be broadly divided into the following industry segments: Consumer electronics; Industrial electronics; Communication and broadcasting equipment; Computers; Strategic electronics and Electronic components Most of the large manufacturers are present in two segments i.e. consumer electronics and communication and broadcasting. The consumer electronics segment is the largest segment in the industry in size and the largest number of manufacturers in the industry is present in this segment. Foreign manufacturers such as Sony, LG Electronics, Nokia and Samsung have established large manufacturing facilities and now enjoy a significant share in the growing market for products like television sets, mobile phones, DVD players and audio equipment etc. Growth in the industry has also attracted contract manufacturers like Solectron Centrum, Flextronics, Jabil Circuit and Elcoteq Network that are making large investments in India. The Indian market has substantial scope for penetration of electronic equipment. The communication and broadcasting equipment segment is one of the largest segments in the industry and is also expected to attract a large number of manufacturers in the segment. Strategic electronics does not form a significant part of the industry in terms of turnover. However, this segment is expected to develop in both technical and industrial terms. Since the opening up of this segment to private players, a number of large manufacturers from the private sector are entering this segment. India is a net importer of electronic equipment. However there is significant untapped potential in the industry and both domestic and foreign manufacturers are not

only producing for the domestic market but they are also using their facilities in India to manufacture for exporting to other countries. The table below mentions some of the largest manufacturers in the electronic equipment industry across different segments.

LARGE MANUFACTURERS WITHIN THE INDIAN ELECTRONIC EQUIPMENT INDUSTRY Company descriptions and products manufactured by them have been mentioned. The list is not exhaustive and is only indicative of some of the domestic and foreign manufacturers in the industry. Manufacturer Philips India Sony India LG Electronics Samsung India Videocon Company description Sectors/ Products

Has operations in India since 1930 and has a large Televisions, home theatre market presence. It is an industry leader and is well systems, recorders, portable, known in the consumer & lifestyle product segments mobile phones etc Started operations in 1994 and it is one of Indias foremost brands. It is considered a benchmark for superior quality, advanced technology and service Was established in 1997, is a market leader and enjoys a premium brand positioning. It is known for having the most eco-friendly manufacturing plants Computers, cameras, audio & video equipment, television sets and in-car entertainment Washing machines, mobile phones, television sets, audio equipment & air-conditioners

Started operations in 1995. India is the hub for Mobile phones, camcorders, Samsung in Sri Lanka, Nepal, Maldives, Bangladesh television sets, audio & video and for exports to Commonwealth, SAARC countries equipment, home appliances Is an Indian company that started operations in 1987. It is a household name and now has collaborations with world leaders like Electrolux Television sets, DVD players, microwave ovens, washing machines, refrigerators etc

MIRC Electronics A company of Indian origin that was established in Television sets, audio & video 1981. Sells its products under the name of Onida. It equipment, washing machines has a substantial share in the television sets market and microwave ovens Nokia Flextronics IBM The first mobile call in India was made from a Nokia Has 3 main operations mobile phone in 1995. Nokia has played a pioneering mobile phones, multimedia role in the growth of cellular technology in India and enterprise solutions It is one of the foremost in the electronic equipment Equipment manufacturing and contract manufacturing business in India. Alcatel and device manufacturing for wireNokia are some of its biggest existing customers less mobile devices IBM started in India in 1951, left in 1978 and re-entered in 1992. It is a pioneer in the notebook market and is highly reputed. It is also known for conducting extensive R&D in its facilities in India Personal computers, laptops, computer accessories, storage systems etc

Source: Industry research and analysis.

Contribution of the electronic equipment industry to the economy

The Indian electronic equipment industry has seen relatively stable annual growth rates in recent years at approximately 15 per cent. The consumer electronics segment has consistently remained the largest contributor to turnover in the industry. In the year 20062007, the share of the consumer electronics segment in industry turnover was more than 30 per cent.5 The contribution of the electronic equipment industry to the GDP of the economy was approximately 1.90 per cent in the year 20062007.6 This is in sharp contrast to other Asian countries like South Korea, Taiwan, and China that contributed 15.1 per cent, 15.5 per cent and 9.6 per cent to their respective GDPs in 20062007.7 There is concern about the drivers for inducing growth in this industry. Countries like Taiwan, Korea, Malaysia and of late China, have recorded much higher growth in the electronic equipment industry and are exporting worldwide. Presently these 4 countries account for 20 per cent of the global electronic equipment production. This is also enabling these countries to create wealth, improve efficiency, generate additional employment and develop better communication infrastructure.8 India, in comparison has not been able to take much needed steps to be able to enjoy the same upward trend like these countries. As mentioned earlier, this is largely because India has still not recovered from the effects of the inward-oriented policies that were followed from 1947 to 1991. When India agreed with the WTO to remove duty protection, several domestic manufacturing units closed down as they were inefficient and were not able to match the new foreign competition. In the 1990s, the size of the domestic market was also much smaller than it is today. But now India has the potential to develop and manufacture electronic equipment for the global market and gain in global share besides meeting the countrys future requirement in the areas of information, communication and entertainment.

5) Reference has been made to Ministry of Communications and Information Technology (2008b) 6) This has been compiled based on deductive analysis. The turnover and share of the software industry (also a part of the electronic equipment industry in India) in GDP was obtained from Ministry of Communications and Information Technology. Henceforth, the turnover of the electronic equipment industry was used to obtain the contribution of the electronic equipment industry to GDP . Refer Ministry of Communications and Information Technology (2008b) 7) Reference has been made to The Hindu Business Line (11th February 2008) 8) Reference has been made to Ministry of Communications and Information Technology (2008a)

Growth of the electronic equipment industry

It is widely believed that growth of the electronic equipment industry in India has not been consistent with the market potential. Distinct growth rates in the industry have started only since 2000 beginning with the Information Technology (IT) boom. The computers segment recorded the highest growth rate in the industry growing by more than 88 per cent between the year 20032004 and 20062007, followed by the communication and broadcasting segment which grew by approximately 77.5 per cent during the same period. However these fast growing segments grew over a small base. The largest segment by size, the consumer electronics segment has also demonstrated steady growth rates of approximately 10 per cent during this period.9 With rising income levels, the demand for consumer electronics is set to expand enormously. According to the Global Competitiveness Report, India is ranked 62 out of 131 countries in terms of technological readiness. According to the report, Indias rankings in terms of computers, telephones, mobile connectivity among other things are very low. However, with rising incomes and increasing urbanization, demand for electronic equipment across segments is set to increase. This will positively impact demand for electronic equipment across segments.10 The figure shown herewith depicts the Compounded Annual Growth Rate (CAGR) of different segments in the electronic equipment industry between 2000 and 2007.

GROWTH OF SEGMENTS WITHIN THE ELECTRONIC EQUIPMENT INDUSTRY The figure below depicts CAGR of segments within the electronic equipment industry from the year 2000 till 2007.11 18 20 15 11 5 Consumer electronics Industrial electronics Computers 8

Communication Strategic and broadcasting electronics

Electronic components

Segment
Source: Indian Brand Equity Foundation 9) Reference has been made to Ministry of Communications and Information Technology (2008b) 10) Reference has been made to World Economic Forum (2008) 11) Reference has been made to Indian Brand Equity Foundation (2007)

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Identification of the electronic equipment industry as one of the focus areas The Ministry of Commerce and Industry in India has emphasised the importance of electronic equipment manufacturing as one of the focus areas for the manufacturing sector and indicated that the Government of India (GOI) is prepared to take fiscal measures and provide incentives for growth and development of the electronic equipment industry. The main objectives highlighted are to: Make the industry globally competitive; Reduce the excessive dependence on imports as is the case currently; Attract more Foreign Direct Investment (FDI) in the industry; Reduce the cost of production; Increase volumes to be able to realize economies of scale; Take measures to generate an increase in demand; Compensate for disabilities until basic infrastructural constraints are removed; Move towards lower indirect taxation levels in the next 35 years. For example, Chinas indirect taxation levels are considerably lower than those in India.12 Despite the late start and modest position that India has currently, it is time for India to capitalize on the advantages it has in the manufacturing sector. In addition to the low cost of labour, these advantages include highly-developed engineering capabilities, presence of high-quality suppliers and relevant technology partners with established relationships that are mutually beneficial and sustainable. On the other hand, industry sources believe that though the suppliers are of good quality, the network of suppliers is clearly inadequate to be able to service the large scale expansion and demand in the industry. Many feel that the process followed in the development of the automotive components industry needs to be replicated in the electronic equipment industry to be able to achieve growth targets. Increase in incomes and affordability About 25 per cent of the Indian population lives below the poverty line, but a large and growing middle class of 350 million has disposable income for consumer electronic equipment. It is strongly expected that the consumer durables market will have strong growth in the coming years as the profile of the Indian consumer is changing.13 There are a large number of nuclear families (changing from the joint family system prevalent in India), higher disposable income levels and easier access to credit with the growth of the banking and credit sector. Replacement cycles have
12) Reference has been made to Ministry of Communications and Information Technology (2008a) 13) This information has been obtained from ELCINA Electronic Industries Association of India (2nd July 2008)

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also increased along with a rise in the aspiration levels of the growing number of young working professionals. So, where the higher strata is going in for premium items such as LCD televisions and four-door refrigerators, the middle and lower classes, with rising levels of aspiration and incomes, are going for multiple ownership of durables and electronic items like washing machines, television sets and refrigerators. Low penetration levels A key factor in growth is the low density of electronics in India. By global standards Indias computer and telecom penetration are quite low. The figure below shows the penetration levels of computers, telephones and television sets in India. Increase in demand for telecom products has been outstanding with India adding approximately 8 million phone users each month.14 However, India ranked 114 out of 131 countries as per the Global Competitiveness Report, in terms of mobile telephone subscribers.15 These figures demonstrate the large untapped potential that exists in the industry in India.

PENETRATION LEVELS IN ELECTRONIC EQUIPMENT The figure displays penetration level for the year 2005 and the expected level in 2010 214 175 2010 expected 2005

130 100 70

14 Television sets
Source: Investment Commission of India16 14) This figure has been obtained from the book The Elephant and the Dragon. See Meredith R (2007) 15) Reference has been made to World Economic Forum (2008) 16) Reference has been made to Investment Commission of India (2006)

Telephones

Personal computers

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The increasing growth is not only dependent on urban demand but also on semiurban and rural demand. Rural India accounts for nearly 70 per cent of the total number of households but the penetration of refrigerators is less than two per cent and that of washing machines is just 0.5 per cent. This offers huge scope for tapping the potential in the industry. Mr Sunil Mehta, Joint Vice-President, Videocon Industries, adds, Penetration of consumer durables is still very low and this market is the one that almost all players are targeting.17 Increase in investments Large scale investments have started pouring into India. Samsung India has lined up a USD 500 million investment for a new LCD manufacturing unit in the Sriperumbudur Special Economic Zone (SEZ) near Chennai. Air-conditioning and refrigeration major Carrier Corporation said it would invest Rs 2 000 million in India during the next three years to build a new global Research & Development (R&D) centre, develop industry-leading products and technology for local markets and significantly enhance the companys manufacturing operations here. Airconditioning major Fedders Lloyd Corporation Ltd and Victor Company of Japan (JVC) would be jointly investing USD 30 million to create space for JVC products in the Indian consumer electronics market as well. Other international players such as Siemens, Texas Instruments, Matsushita, LG, Alcatel, Samsung, Sharp and Lenovo have already setup their manufacturing operations in India.18 Government buying from domestic production to spur demand Government buying is known to be one of the most significant catalysts to trigger domestic consumption. To enable manufacturers to increase production volumes, the Government of India (GOI) has decided that procurement of electronic equipment for the GOI should only consist of locally manufactured products against imported goods. The GOI is one of the largest administrations in the world and thus this decision makes a significant difference to scale of demand and thus is perceived to be a big demand driver.19

17) Reference has been made to The Hindu Business Line (1st January 2008). Videocon Industries is one of the largest manufacturers of electronic equipment in India. 18) The information has been obtained from The Hindu Business Line (2nd January 2008) and The Hindu Business Line (29th November 2007) 19) Reference has been made to Ministry of Communications and Information Technology (2008a)

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Electronic manufacturing services Continuing cost pressures have led to the outsourcing of more and more elements of manufacturing design to Contract Equipment Manufacturers (CEMs). CEMs are companies that are hired by Original Equipment Manufacturers (OEMs) to produce products on contract basis where the OEMs own the designs and Intellectual Property Rights (IPR). The reasons why OEMs are outsourcing are the onus of flexibility in production is transferred to the CEM, manufacturing costs can be reduced and they can focus on product development. Some of the worlds largest CEMs, namely Flextronics, Jabil Circuit, Elcoteq Network and Solectron Centrum have presence in India. Some of the Indian CEMs are TVS Electronics, D-Link, Celetronix and Tata InfoTech.20 The Investment Commission of India estimates that out of the USD 500 billion global Electronics Manufacturing Services industry, India is in a position to tap USD 11 billion in contract manufacturing and USD 7 billion in design services by the year 2010.21 Housing boom India is going through a housing boom. With opening up of the banking sector there is easier access to credit, a rise in the income level and an increasing number of people purchasing houses. This also leads to increased purchases of electronic equipment. When people move into new houses, they buy electronic equipment; and with increasing incomes they tend to graduate to high-end products, which is a major reason for growth in the industry. Multiple increases in demand for consumer electronics during festivals India is a very religious country with several festivals. For many festivals the tradition is to buy new electronic equipment for the house among other things. The most important festival is Diwali during which time several people across classes buy electronic equipment. This time of the year witnesses the maximum number of sales in consumer electronics in a short span of time. For instance, only midway through the Diwali festival season, LG Electronics India recorded 51 per cent growth in terms of value and 34 per cent in terms of volume in 2007. At that rate more than 25 per cent of the sales for the company for the year were made in just one month.22

20) Reference has been made to Indian Brand Equity Foundation (2007) 21) Reference has been made to Investment Commission of India (2006) 22) Reference has been made to The Hindu Business Line (29th November 2007)

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Pattern of development
Senior industry experts believe that growth in the industry cannot be achieved in isolation but through clusters connected through vertical and horizontal linkages. To further enhance Indias electronic equipment exports to global markets, development of clusters for producing electronic equipment has begun to boost production and drive exports. These clusters are being designed to do away with bureaucratic hurdles, provide world class infrastructure in terms of flexible labour laws, uninterrupted supply of power, rail, road and sea linkages, telecom infrastructure, income tax benefits etc. This concept is working. For instance, two electronic equipment SEZs in the state of Tamilnadu in South India are completely sold out. Companies like Samsung, Nokia and Flextronics are manufacturing from the Sriperumbudur SEZ near Chennai, Tamilnadu (one of the two SEZs). Mr. Gulu Mirchandani, Chairman and Managing Director of MIRC Electronics, one of the largest electronic equipment manufacturers said that he is also looking at investing in the state.23 Eleven major clusters have been identified. These account for almost 95 per cent of electronics, software and services exports. The major clusters where manufacturers are present and where SEZs are being developed are in the states of Punjab in North India, Maharashtra in West India and Karnataka and Tamilnadu in South India. Some other large manufacturers are present in some other states, such as Ericsson that has a manufacturing facility in Jaipur in the state of Rajasthan located in North West India, Philips India is present in the state of West Bengal in East India and Sony India has a large manufacturing facility in the state of Haryana in North India.

23) The information has been obtained from The Hindu Business Line (28th July 2007)

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CLUSTERS WHERE MANUFACTURING IS TAKING PLACE AND SEZs ARE DEVELOPING The figure displays the states where large clusters are developing.

Sony India Alcatel Godrej Industries

Punjab

Maharashtra

Karnataka

Elcoteq Videocon Alcatel-Lucent Solectron Centrum

Jabil Circuit MIRC Electronics Celetronix D Link LG India

Tamilnadu

IBM Flextronics Nokia TVS Electronics Samsung

Source: Industry analysis and research. Company websites have been used to obtain details of manufacturing facilities in the states shown above

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Large untapped potential is driving growth

Indias electronic equipment industry presents great opportunities for growth. Consumer electronics, electronic components and computers are attractive segments as they offer both size and potential. Contract manufacturing is picking up at a fast pace and can also be used in a big way for increasing exports. Success in the Indian market would require attaining the appropriate technology at low cost, good understanding of local markets and product customisation to suit local needs. In terms of location, Tamilnadu is the most attractive state currently. A large number of manufacturers are already present in the state. It has the requisite linkages and better infrastructure overall compared to many other states. In fact it has already developed into a hub for the automotive industry also. Some of the other attractive states are Andhra Pradesh and Punjab.

Size and structure of the electronic equipment industry

Despite having a country of a large geographical area and a population in excess of 1.2 billion people, the size of the electronic equipment industry is quite small which contributed only 1.9 per cent to the GDP of the economy in the year 20062007.

TURNOVER OF SEGMENTS IN THE ELECTRONIC EQUIPMENT INDUSTRY The table below depicts figures between 20032004 and 20062007. Values are in Rs. Billion and growth rate is in percentage Segment/Year Consumer electronics Industrial electronics Computers Communication and broadcasting equipment Strategic electronics Electronic components Total annual turnover Industry growth rate 20032004 152.0 61.0 68.0 53.5 27.5 76.0 438.0 16.80 20042005 168.0 83.0 88.0 48.0 30.0 88.0 505.0 15.30 20052006 180.0 88.0 108.0 70.0 32.0 88.0 566.0 12.07 20062007 200.0 104.0 128.0 95.0 45.0 88.0 660.0 16.60

Source: Ministry of Communications and Information Technology

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The consumer electronics segment dominates the industry with a market share of over 30 per cent in the year 20062007. The next largest segment in terms of turnover in the industry is the computers segment with a share of 19.40 per cent in the industry. The figure herewith shows a graphic representation of the share of each segment in the electronic equipment industry.

SHARE OF EACH SEGMENT IN THE ELECTRONIC EQUIPMENT INDUSTRY The figure displays the share of each segment in turnover for the year 20062007. Share is in percentage. 30.30

19.40 15.75 14.40 6.82 13.33

Consumer electronics

Industrial electronics

Computers

Communication Strategic and broadcasting electronics

Electronic components

Segment
Source: Ministry of Communications and Information Technology

Consumer electronics
Consumer electronics is the largest segment in the industry with a turnover of Rs. 200 billion in the year 20062007. During the year 20072008, the consumer electronics segment produced worth an estimated Rs. 225 billion recording a growth of 12.5 per cent.24 Trends analysis by Federation of Indian Chambers of Commerce and Industry According to a survey on the electronic equipment industry in India, conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI),25 growth in this segment has been achieved despite an unfriendly customs duty structure and
24) Reference has been made to Ministry of Communications and Information Technology (2008b) 25) FICCI is considered one of the largest think tanks for the industry and has several engineering companies as its members

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high levels of excise duties. The survey also points out that the future of this sector is optimistic as technological advancements, falling prices due to increased competition, and declining import tariffs will help in growth of the segment.26 It is expected that the market for white goods will increase at a fast pace in future. Low penetration levels A senior official of Whirlpool India has pointed out that the categories that are growing very rapidly are the ones that are less penetrated. There is a clear trend of the technologically advanced high-end products growing at a significantly faster rate than the average. For instance, the fully automatic washing machines, frost-free refrigerators, split air-conditioners and microwaves have been growing at a very fast rate as the penetration levels are relatively low in these product segments.27 Scenario in some product categories The television set product segment is the largest contributor to the consumer electronics segments revenues. The high end products, particularly the Liquid Crystal Display (LCD) television sets segment has been registering growth of more than 100 per cent over the previous few years, albeit on a very small base. Production of LCD television sets is expected to reach 10 million units by 20102011. The DVD player market has also been increasing at an annual average rate of 20 per cent and production of these players is expected to cross 7 million units in 20082009. With the advent of the Direct To Home (DTH) and Conditional Access System (CAS) in many parts of India, the demand for Set Top Boxes (STBs) has been increasing at an exponential rate. Only 25 per cent of demand is met by domestic production.28 Advent of organized retail enabling growth of the sector India has also been going through a revolution in the retail market. Over the past few years, the Indian retail market has been getting organized. In India, the concept of large shopping malls and supermarkets was limited to the reach of a very small part of the population. Now with the opening up of several shopping malls in several cities across India, the reach of consumer electronics has increased. With increasing incomes and urbanization there is increased demand for consumer electronics in the country.

26) The information has been obtained from The Hindu Business Line (26th December 2007) 27) Reference has been made to The Hindu Business Line (29th November 2007) 28) Reference has been made to Ministry of Communications and Information Technology (2008b)

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Boom in the luxury car market driving growth of the industry With the growth of the luxury car market in the automotive industry there has been a parallel increase in demand for hi-tech gizmos. The car accessories market is evolving with an increasing number of sophisticated devices being fitted in them making cars not just vehicles but communication and entertainment zones. These gizmos include television sets, DVD-players, advanced audio players, entertainment consoles etc. The GPS systems are also new to the Indian car market and with an increasing number of luxury cars coming into the market; the demand for GPS systems is also going up significantly owing to the large domestic market.

Computers
The Personal Computers (PC) segment includes both desktop computers as well as notebook laptops. In the year 20062007, this segment had a turnover of Rs. 128 billion registering a growth rate of 18.5 per cent. It is estimated that the turnover of this segment will increase to Rs 164 billion in the year 20072008 registering a growth rate of 28.1 per cent. The growth of the segment was led by a significant surge in growth of notebook sales of 59 per cent, while sales of desktops grew by only 3 per cent in 20062007. PC sales are projected to increase substantially, given the strong macroeconomic conditions and positive buying sentiment in the market, and increased demand from various industries for both notebooks and desktop computers. High growth in PC sales can be attributed to increased consumption by industries such as Telecom, Banking & Financial Services, Manufacturing, Education, Retail and Business Process Outsourcing (BPO)/ IT Enabled Services (ITeS) as well as major e-governance initiatives taken by the Central and State Governments. Governments are significantly large in India. In fact India has one of the largest bureaucracies in the world. Another major driver of growth in this segment in the industry is the downward trend in prices. Each year the prices for computers fall, enabling a larger population to afford the gadgets, leading to robust growth through increased demand from the households sector. According to the Global Competitiveness Report, India ranked 105 out of 131 countries in terms of the personal computers market. An increasing number of Small and Medium Enterprises (SMEs) are also generating demand for computers. The major manufacturers in this segment include global majors like Lenovo, Dell, Hewlett Packard, Compaq, Apple, Acer, Toshiba, Sony etc.29

29) Reference has been made to Ministry of Communications and Information Technology (2008b)

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Communication and broadcasting

This segment is the fastest growing segment of the electronic equipment industry. Communication technology has been recognized nationally as a crucial driver for growth of the electronic equipment industry. Overall teledensity is low in India, but despite that, due to the large size of the domestic market, it is already one of the largest in the world in terms of number of telephone subscribers. India also enjoys the position of being one of the largest mobile phone markets. Many of the worlds renowned manufacturers are present in India and others are also setting up facilities in India to meet local demands and to serve foreign markets also. The table below shows that although this segment is developing fast, there is significant untapped potential for this segment to grow. The segment has the potential to match the size of the largest segment in the industry i.e. the consumer electronics segment.

TURNOVER AND GROWTH RATE OF COMMUNICATION AND BROADCASTING SEGMENT Data is for the years 20042005 till 20072008. Values are in Rs. Billion and the growth rate is in percentage Segment / Year Communication and broadcasting equipment Segment growth rate 20042005 48.0 - 20052006 70.0 45.83 20062007 95.0 35.70 20072008* 143.5 51.05

Source: Ministry of Communications and Information Technology *) These figures have been estimated by Ministry of Communications and Information Technology

The table below shows rankings compiled by the Global Competitiveness Report that show that India is very backward when it comes to technological readiness. Large scale development is required in the industry to provide the requisite infrastructure in the segment to enable it to grow, and to tap the potential of the large and burgeoning domestic market.30

30) Reference has been made to World Economic Forum (2008)

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RANKINGS OF INDIA IN THE GCR IN TERMS OF TECHNOLOGICAL READINESS The table below shows the rankings for the year 20072008 out of 131 countries Segment description Mobile telephone subscribers Number of internet users Broadband internet subscribers
Source: Global Competitiveness Report 20072008

Ranking 114 95 88

Telephone and broadband subscriber base scenario India had set a target to have 250 million telephone subscribers and 10 million broadband subscribers by the year 2007.31 The gross number of telephone subscribers reached 272.88 million as of December 2007 with mobile telephone subscribers being 233.63 million. In comparison, USA and China had 260.5 million and 550.5 million subscribers respectively for mobile phone services in 2006 as per a study released by the Telecom Regulatory Authority of India (TRAI).32 The overall tele-density reached the level of 23.89 per cent in December 2007, which is a considerable improvement from a tele-density of 17.16 per cent in December 2006. Now, India is one of the largest in the world in terms of gross telephone subscribers and second in Asia after China. At the end of December 2007, the number of broadband connections was 3.13 million. The short term target is 10 million by the end of 2010 and the long term target is to reach 20 million by the end of 2020.33 Fast paced growth of the mobile telephony market India is one of the leaders in the mobile handset market. With increasing penetration of the market, increase in incomes and connectivity, and conducive conditions for engineering and manufacture of handsets, this segment has been booming at the rate of 85 per cent per year as per a study conducted by TRAI. However, in comparison to China, India is still far behind. According to the study, the subscriber base of India in cellular lines in March 2006 was 93.04 million compared to 410 million in China.34
31) Reference has been made to ESC: Electronics and Computer Software, Export Promotion Council (30th March 2008) 32) Reference has been made to Embassy of India (April 2008). Reference has also been made to Ministry of Communications and Information Technology (2008a) 33) Reference has been made to ESC: Electronics and Computer Software, Export Promotion Council (30th March 2008) 34) Reference has been made to Telecom Regulatory Authority of India (2006)

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The largest manufacturers of mobile handsets from around the world are manufacturing in India. These include Nokia, Sony-Ericsson, Motorola, Alcatel-Lucent, Samsung, and LG. Several manufacturing facilities are expected to come up in the coming years, to meet local demands as well as make India a manufacturing hub for their international markets. Some of the achievements made by India and factors for growth in the segment are: India has the distinction of having the worlds lowest call rates i.e. 23 cents Record sales of 8 million phones a month Production of the worlds cheapest handset at USD 17.2 These factors are demonstrative of the fact that the mobile telephone market in India is booming and is set to achieve the ambitious targets set by the GOI. The rising demand for a wide range of telecom equipment has provided excellent opportunities to domestic and foreign investors in the manufacturing sector.35

Electronic components
The major categories of components that contribute majority of the share in production in the segment are writable Compact Disks (CDs), Colour Picture Tubes (CPTs), Printed Circuit Boards (PCBs), writable Digital Versatile Disk (DVDs), connectors, semiconductor devices, ferrites, and resistors. Growth and turnover in the segment The total production of electronic components during 20062007 was Rs. 88 billion remaining stagnant at that level since 20042005. However this is expected to change and the segment is expected to grow to Rs. 95 billion during 20072008 at a growth rate of 8 per cent. This is because the serviceable market for professional grade components such as PCBs, semiconductor devices, connectors, antennas, etc. is likely to go up due to the increase in indigenous manufacture of mobile phones, STBs, DVD players, etc.36 Surge in mobile handsets and CEMs widening the scope of the sector The worlds top five mobile handset makers Nokia, Motorola, Samsung, SonyEricsson and LG Electronics have their manufacturing facilities in India. Presence of global CEM majors like Flextronics, Jabil Circuit and Elcoteq Network is creating
35) Reference has been made to Ministry of Communications and Information Technology (2008a) 36) Reference has been made to Ministry of Communications and Information Technology (2008a)

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potential for a jump in hardware manufacturing in India. This will naturally have a trickle down effect as demand for components will increase as production increases. Innovations in the sector driving growth Developments in this segment have been driven by growth in the consumer electronics segment and more specifically the CPT segment. In view of introduction of flat panel colour televisions, the market for LCD panels has been rising fast. The electronic components segment is experiencing growth in the optic fibre segment also with technological advancements making these at par with international standards. Most of the top global semiconductor companies have set up their chip design centres in India. It is expected that chip manufacturing may start in India also in the near future. One of the manufacturers of Light Emitting Diodes (LEDs) has developed a series of high power LEDs. These LEDs were a long time demand of the Indian lighting market and are tailor made for use in solar lamps for home lighting and ideally positioned to meet the Remote Villages Electrification program. A low cost black and white television set with AM/FM radio has also been developed by a domestic company for the mass market and this can be fitted into vehicles. Such gadgets at affordable prices are alien to the Indian market and hence this cost competitive innovation is reasonable compared to international models.37

Industrial electronics
This segment of the electronic equipment industry plays a very important role. It caters to strategically and economically important industries like Steel, Power, Chemicals, Textiles and Transportation etc by providing them customized instrumentation. It is characterized by the production of state of the art industrial electronics equipment and systems, automation technologies and networking systems. Out of these industries, the most crucial for the industrial electronics segment is the Transportation industry and more specifically the Indian Railways. The Indian Railways is increasingly adopting the latest in power electronics equipment for their mainline electric/ diesel locomotives and sub-urban train systems. India has the second largest railway network in the world. Hence, this development is expected to lead to tremendous growth in the segment. This segment registered a turnover of Rs. 104 billion in the year 20062007 at a growth rate of 18.2 per cent. During the year 20072008, the production in this segment is estimated to be Rs. 119.5 billion registering a growth of 15.0 per cent.
37) The Institution of Electronics and Telecommunication Engineers (2007) has been referred

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Some of the largest manufacturers in the segment include Bharat Heavy Electricals Limited (BHEL), Electronics Corporation of India, Rajasthan Electronics and Instruments Limited and Masibus Process Instruments.38

Strategic electronics
This segment is the smallest in the industry but is also one of the most important, because of the criticality of development in technology targeting two aspects, the technology being applicable to the strategic sector for defence purposes, and the emerging state of the art technology which is not available off the shelf and which is denied due to its strategically sensitive applications. Denial of this technology has not allowed civilian and defence applications from taking place. It is believed that due to its critical nature, the technology can generate returns much faster. Hence technology to cater to these critical applications needs to be developed and produced on a much larger scale. Various institutions are developing strategic systems and Public Sector Enterprises (PSEs) are the largest in this regard. Some of the focus areas in the sector include the following: Secure communication and networking Navigational aides (air/land/underwater) Surveillance systems (air/land/underwater) State of the art technology development for modern warfare systems Naval communication systems and satellite mapping systems Advanced robotics The segment has witnessed steady growth rates since 20032004. The turnover for the year 20062007 was Rs. 45 billion growing at the rate of 40.6 per cent. The turnover estimate for the year 20072008 is Rs. 61 billion. Some of the major manufacturers of this equipment are Bharat Electronics, Midas Communication Technologies, Fibcom India and Electronics Corporation of India among others.39

38) Reference has been made to Ministry of Communications and Information Technology (2008a) 39) Reference has been made to Ministry of Communications and Information Technology (2008a)

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International trade scenario

The largest segments in the industry where international trade takes place are electronic components and industrial electronics, where these segments account for 46.8 per cent and 24 per cent of the industry exports respectively. Most manufacturers in the consumer electronics segment are focusing on tapping the large domestic market but many have begun and others plan to use their manufacturing facilities in India to export electronic equipment to other markets.

Exports
Exports in the electronic equipment industry increased by nearly 30 per cent in the year 20062007. Despite a sudden drop in exports growth rate in 20042005, exports have been growing steadily since 20052006. Backed by big-ticket investments, the companies are increasingly getting attracted to the advantages the country offers in terms of availability of skilled manpower and significant cost-reduction in logistics and inputs. This enables the foreign companies to use their manufacturing facilities for exports purpose also. The domestic manufacturers have also come of age and export to the international market.40

VALUE OF EXPORTS IN SECTORS WITHIN THE ELECTRONIC EQUIPMENT INDUSTRY Values are in Rs. Billion and growth rate is in percentage Sector/Year Consumer electronics Industrial electronics Computers Communication and broadcasting equipment Electronic components Total exports Growth rate of exports 20032004 8.25 15.15 14.40 1.65 37.55 77.00 37.50 20042005 11.50 15.00 12.00 3.50 38.00 80.00 3.89 20052006 20.00 23.00 10.25 5.00 38.00 96.25 20.31 20062007 15.00 30.00 15.00 6.50 58.50 125.00 29.87

Source: Ministry of Communications and Information Technology

40) Reference has been made to Ministry of Communications and Information Technology (2008a)

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Increasing investments for setting up hubs for exporting Since products manufactured in India are reaching international standards in terms of quality, many companies have started focusing on exports in addition to tapping the large domestic market in India. The challenge is to supply competitively to global markets. Some instances of this phenomenon are described below. Haier, the Chinese durable goods manufacturing giant has acquired a facility in the state of Maharashtra in West India to manufacture refrigerators, colour television sets and washing machines. It is also upgrading the new facility with modern equipment to create an R&D facility for refrigerators. The major reasons cited by the Chief Operating Officer of Haier, Mr. Pranay Dhabhai, were the easy availability of inputs such as steel and fuel, and the logistic advantages India provides. The freight cost is almost 30 per cent less if one were to export from India rather than China, he said. Samsung is looking at its Sriperumbudur facility as a manufacturing hub for Samsungs global operations, said Mr Zutshi, Deputy Managing Director, Samsung India. Chinese durable goods major TCL too plans to set up a manufacturing facility in India, both for domestic and global operations. We are seeking regulatory approvals to set up a manufacturing unit somewhere in northern India, Mr Sudhanshu Bhandari, Marketing Head of TCL, said.41 Development of hubs-advantages and downstream benefits There are immense opportunities in the segment for manufacturers and the local population also. Manufacturers benefit because the advantages India provides in terms of cost of production, logistical support, improvement in quality standards, strong engineering capabilities, etc can help companies to explore other global markets as mentioned earlier. The socio-economic benefit (downstream benefit) is that a robust manufacturing base would have multiplier effects like generation of employment and generation of business to local SMEs, growth of the services and maintenance sectors etc. Thus in other words, development of hubs can serve important business and socio-economic objectives that can lead to overall growth of the economy.42

41) The Hindu Business Line (2nd January 2008) has been referred 42) Reference has been made to ESC: Electronics and Computer Software, Export Promotion Council (25th July 2005)

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Imports
India remains a major importer of electronic materials, components and finished equipment, where imports exceed exports amounting to USD 12 Billion in 20042005 according to the National Manufacturing Competitiveness Council (NMCC).43 The Associated Chambers of Commerce and Industry in India (ASSOCHAM) found out after conducting a study on imports in the electronic equipment industry, that the main reason for the tremendous volume of imports and hence large trade deficit in the industry is the current tax regime in the country that restricts growth in domestic manufacturing. According to ASSOCHAM, India has the potential to compete with other Asian economies where the contribution of the electronic equipment industry to the GDP can be much higher than 1.9 per cent in 20062007, and more in the double digits range like other countries in Asia such as South Korea, Taiwan and China. Thus changes must be effected in the duty structure to enable higher production of electronic equipment domestically. In its report ASSOCHAM mentioned that 21 million jobs (7 million jobs directly) can be created within the country in the next ten years if most of the demand is fulfilled through domestic production. To curb the excess imports the association has suggested that the GOI raise customs duty on imports i.e. protect the industry to enable domestic production to grow.44 This strategy though has not worked in the past and is the reason for the rather slow development of the electronic equipment industry. Hopefully, the GOI will implement policy changes that reduce protection, invite competition and make it easier for domestic and foreign companies to manufacture in India for the domestic and international markets.

43) Reference has been made to National Manufacturing Competitiveness Council (2006) 44) Reference has been made to The Hindu Business Line (11th February 2006)

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Research and development

As is the case with the manufacturing sector in general, spend on R&D is limited in the electronic equipment industry also. However, this realization is driving initiatives that are being taken to promote R&D in the industry. R&D for each of the segments in the industry is being carried out in different groups. There are projects that cover a wide spectrum including electronic components, discrete semiconductor devices, microelectronics, photonic devices, sub-systems and technologies, equipment and systems development, nanotechnology, medical electronics, telemedicine and field demonstration in different sectors of the economy like Transport, Power, Steel and Textiles etc. According to the Ministry of Communications and Information Technology the following measures need to be taken: To promote strategically relevant R&D for developing high value added products and services through both sponsored programs. To set up world class R&D centres. The GOI has to take a lead role through long term investments as well as to encourage leading global companies to set up their R&D centres in India. To promote knowledge-based industries and also develop efficient production technologies for cost reduction. Continuous up-gradation of technologies and manufacturing process which is essential for industrys survival in the global manufacturing environment. To take initiatives for developing products and services for handicapped India is already turning into a major destination for Foreign Direct Investments (FDI) in the Information Communication Technology (ICT) sector. World leaders in ICT like Intel, Cisco, Microsoft, Motorola, Ericsson, Nokia, Siemens and LG etc have announced investment plans for R&D. Some examples are shown below: Air-conditioning and refrigeration major Carrier Corporation has said it would invest Rs 2 000 million in India during the next three years to build a new global R&D centre, develop industry-leading products and technology for local markets and significantly enhance the companys manufacturing operations here.

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 Haier, the Chinese durable goods manufacturing giant is upgrading its newly acquired manufacturing facility with modern equipment to create an R&D facility for refrigerators. The facility would enhance the overall capacity of Haier and would enable it to increase its customer reach in India as well as in the global market, including West Asia and Africa. Samsung also has R&D operations at its manufacturing facility in North India both for hardware (product customization) and software development.

Future outlook
The electronic equipment industry is one of the worlds fastest growing industries but India has not demonstrated spectacular growth in recent years. However, as can be seen from the turnover figures, an upward trend has started in the industry that is expected to be sustained over the coming years as demand conditions are only expected to get better, with the main challenge for the industry being its capability to be able to market its products in a competitive way in comparison to its Asian counterparts. Based on feedback and suggestions made during the Union Budget of India as well as by industry associations like ESC India, ASSOCHAM and FICCI, the GOI is seriously considering steps to address the taxation issues that are highlighted to be a major reason for Indias trade deficit in electronic equipment, slow growth and small contribution to the GDP. The global electronic equipment industry is driven by demand for products, which are durable, lighter, cheaper, and better than the ones they replace. To meet the growing market demands, the large global manufacturers in the industry are gradually shifting their base to Asia Pacific countries, which are the prominent sources of electronic components and are soon going to become primary destinations for consumer electronics. There is an estimation that within 20 years, two third of the electronics industry will be four times as big as today and half of it will move into Asia. Foreign collaborations and mergers are on a rise. A new wave of industrialization is throwing up several business opportunities for the electronic equipment industry. The future seems prosperous for the industry in terms of the expected surge in global demand and upsurge in investments. Positive trends such as over-capacity in developed markets, globalization, technology advances, regulation and environme-

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ntal consideration, market fragmentation and product proliferation will lead to the accelerated growth in the industry. The projected turnover of the industry should not be if the industry is approximately USD 62 billion or Rs. 1 500 billion in the year 20092010. This, it is believed, is only possible if there is substantial growth in exports, an increase in domestic consumption at a CAGR of 33 per cent over the next few years that is expected to be driven by increasing demand for consumer electronics and mobile handsets, and lesser dependence on imports. Another driver is the contract manufacturing business. The global market for contract manufacturing is expected to be USD 500 billion out of which the Indian share is expected to be USD 11 billion.45

45) Reference has been made to Investment Commission of India (2006)

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References

Council for Electronics Hardware Associations (2007), India: The Vibrant Electronics Industry, Council for Electronics Hardware Associations ELCINA Electronic Industries Association of India (2006), Electronics, Environmental Requirements and Eco-design: Overview of Developments in India, ELCINA Electronic Industries Association of India ELCINA Electronic Industries Association of India (30th March 2008), Indian Electronics Industry, www.elcina.com/industry.asp, ELCINA Electronic Industries Association of India ELCINA Electronic Industries Association of India (2nd July 2008), Indian Electronics Industry, http:// www.elcina.com/industry_EMS_Contract.asp, ELCINA Electronic Industries Association of India Embassy of India (April 2008), India Review, Embassy of India, Washington D.C. ESC: Electronics and Computer Software, Export Promotion Council (30th March 2008), http://www. escindia.com/htmlsite/AboutUs.aspx?Id=40, ESC: Export Promotion Council ESC: Electronics and Computer Software, Export Promotion Council (25th July 2005), ESC: Export Promotion Council Indian Brand Equity Foundation (2007), Electronics October 2007, Indian Brand Equity Foundation Investment Commission of India (2006), Opportunities in the worlds largest democracy, Investment Commission of India Meredith R (2007), The Elephant And The Dragon, W W Norton & Co Inc Ministry of Communications and Information Technology (2008a), Draft Paper on National Electronics/ IT Hardware Manufacturing Policy, Department of Information Technology Ministry of Communications and Information Technology (2008b), Annual Report (20072008), Department of Information Technology National Manufacturing Competitiveness Council (2006), The National Strategy for Manufacturing, National Manufacturing Competitiveness Council, New Delhi

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