The rupee devaluation over last year has exacerbated problems for an industry that has no manufacturing capabilities but instead assembles imported components.
Sometimes, it takes an unexpected crisis to initiate the much-needed action. The recent rupee devaluation vis-à-vis the dollar — from Rs 45 per dollar in May 2011 to Rs 57 by June 2012 — has exposed the soft underbelly of the Indian hardware sector.
The industry has been bleeding as much as Rs 300 crore on a monthly basis, resulting in the recent request for urgent intervention by the government from the Manufacturing Association of Information Technology (MAIT), the industry body. “The condition is so severe that many domestic manufacturers’ production will come to a halt,” said Ajai Chowdhry, chairman, department of IT's taskforce and chairman, HCL.
The crisis was inevitable, its roots directly linked to the inability of the Indian hardware industry to curb its dependence on imports. The real need for Indian hardware, a semiconductor fabrication plant, doesn’t exist in a country with an industry worth Rs 70,000 crore, where 85 per cent of what goes into machines here comes from abroad in the form of components.
It’s only going to get worse. According to the ministry of IT & communications, the demand for IT hardware & electronics is stratospheric. It’s expected to touch $400 billion (Rs 22 lakh crore) by 2020 in India, but $320 billion (Rs 17 lakh crore) worth of IT hardware & electronics will be imported to cater to this need.(INDIA’S HARDWARE QUANDARY)
Naturally, any company that relies on imports gets hammerred when the currency depreciates. For Indian firms, the rupee losing 26.6 per cent of its value in just one year has been disastrous. Take the case of HCL Infosystems, one of the leading PC manufacturers in India. According to Gartner’s first quarter (January-March 2012) survey, HCL’s PC market share dropped to 5.8 per cent in the first quarter of 2012 from 7.1 per cent in Q1 of 2011, as it experienced a 13 per cent year-on-year decline from the first quarter of 2011.
“We have been severely impacted by the rupee devaluation. In standardised products like PC and laptops, the import component is high. Even for us, it is 60-80 per cent. Our challenge is that our factories do not have enough business to sustain themselves. The impact is that we are not accepting new orders,” said Chowdhry. Recently, the company hived off its hardware unit into an independent subsidiary as the company wanted to focus on the fast-growing services segment.
There has been another serious fallout from the rupee depreciation: government business, which accounts for almost 50 per cent of IT hardware expenditures in India. These are not just for day-to-day administrative operations but also for the various projects and programs run by it.
“Every order that the industry is completing for the government sector is going for losses,” says Chowdhry. “The government buys through tenders that are applied for at least six to eight months before the actual implementation. Though the rupee has depreciated, the vendor has to respect the price that they have quoted earlier, though he is procuring the hardware at the prevailing rates,” said Chowdhry.
Players like Zenith Computers have moved out of supplying the government altogether. "We have become selective about business, especially when catering to the government sector. Some of the contracts that are coming up ask for a five-year warranty, when the hardware product lifespan is not more than three to four years. It then becomes difficult to do business," said Raj Saraf, chairman and managing director.
Warped incentives
India’s sorry state in tech hardware is exemplified by the fact that there hasn’t been a single fabrication plant set up in the country as yet. Fingers point to the government’s inability to act on demands made by the industry for several years now, as well as a tax structure that is hurting companies.
Sabyasachi Patra, president of MAIT, adds that the current duty structure has not helped the industry either. “Today, importing products is cheaper than manufacturing. To give an instance, if you import a DVD writer, it is cheaper than manufacturing it in India, because DVD writers are exempt from customs duty whereas its parts attract duty. Solar cells and modules are exempt as it is covered under ITA-1 list. However, input items to these (like EVA, Tedlar, Toughened glass) attract 12.83 per cent, creating an inverted duty structure,” points out Patra.
K R Naik, executive chairman, Smartlink Network Systems, one of the few successes in the Indian hardware segment, says the industry is in a ‘chicken or egg’ situation. “Government could have helped by offering incentive to manufacturers, and then more product development & local manufacturing would have come up in India. Ten years ago, the customs duty difference in importing components & finished goods was as high as 50 per cent. Due to this difference of duty, a lot of assembling used to happen, along with some local value add. This used to result in locally assembled products cheaper by 25 to 35 per cent. But, over the years, this difference has decreased. So, today, importing and marketing has become easy,” said Naik.
In 2009, a task force was set-up to suggest measures to increase hardware manufacturing in India. The committee had recommended five measures. These included: Setting up of a semiconductor wafer fab; introducing a modified special incentive package scheme by providing capital grants and setting up electronics manufacturing clusters; setting up a dedicated Electronic Development Fund; providing preferential access to Indian electronics products for all government procurements; and to setting up a national electronics mission.
Of these, the government has approved the creation of clusters and preferential access to Indian electronics products for all government procurement. “To say the government has not done anything is wrong. The five measures recommended by the task force were unanimously accepted by the government. Having said that, one of the most significant moves would have been setting up of an Electronic Development Fund. The government did announce a grant of Rs 10,000 crore on PPP basis for the same. But the fund is yet to get any allocation,” said P V G Menon, president of the India Semiconductor Association.
Silver lining
Minister of Communications and Information Technology Kapil Sibal has indicated that by the end of 2012, the government will decide on the setting up of a fab plant. IT services and consulting firm Accenture has been given the mandate to review the investment proposals. So far, 33 companies had applied for the fab plant and 16 were shortlisted, of which five were consortiums.
Even if the government is successful is clearing the path for the semiconductor plant, it is too little, too late, say industry players. “A fab is a completely different game. It will take at least four years to become operational. But before that, there are several other issue to be addressed. The fab eco-system needs a huge land parcel. And, land acquisition in India is becoming difficult,” said Menon. More important, this will need a sizeable investment from the government.
In other words, the government needs to act fast if it has to both lessen the industry’s pain due to currency fluctuations, as well as slake the growing thirst for hardware in the country.
