ithardware_03july2010.pdf

I

CONTENT

Particulars Page No.

EXECUTIVE SUMMARY

i-vi

Chapter I Introduction 1.1. Background 1 1.2. Objective of the Study 1 1.3. Methodology 1-2 1.4.

1.5. Organization of the Report Limitations & Constraints

2 2-3

Chapter II IT Hardware & Electronics Sector: An Overview

2.1. World Electronics Market 4-6 2.2. An overview of Indian Electronics and IT Hardware

Industry

6-7

2.2.1. Segment-wise Growth in Indian Electronics and IT Hardware

8-11

2.2.2. Geographical Distribution of Electronics and IT Hardware Industry

11-12

Chapter III Productivity Growth in IT Hardware & Electronics Sector

3.1. Global Scenario 13-14 3.2. Electronics and IT Hardware Industry: Organized

Factory Sector

14-18

3.3. Partial and Total Factor Productivity Growth All India

19-20

Chapter IV Competitiveness Analysis of IT Hardware & Electronics

Sector

4.1. Benchmarking IT Industry competitiveness 21-22 4.2. India in Trade Competitiveness Map of IT Hardware

& Electronics 22-23

4.2.1. IT Hardware and Consumer Electronics 23

II

4.2.2. Electronic Component Market 24 4.3.. India Vs China 24-26 4.4. Competitiveness Factor Identification 27-28 4.4.1. Factor Analysis 28-30 4.4.2. Financial Performance of Electronics and IT

Hardware Industry 30-31

4.4.3 Cost Vs Profit Analysis 31-33 4.4.4. Domestic Market Analysis 33-34 4.4.5. Export Market Trend 34-37 4.4.6. Related and Supporting Industries 37 4.4.7. Main players and Market trends 37-41 4.4.8. Role of Government 41-43 4.4.9. Recent Policy Initiatives 43-46 Chapter V Field Survey Findings: IT Hardware & Electronics

5.1. Introduction 47

5.2. General Profile of Respondents 47-49

5.3. Productivity and Competitiveness 49-51

5.4. Employment Trend 51

5.5. Market Trend 51-54

5.6. Analysis of Export and Import 54-55

5.7. Impact of Import on Price of Finished Products 55

5.8. Analysis of Cost of Production 55-56

5.9. Factors Affecting Productivity and Competitiveness 56-58

5.10. Measures taken by Firms to enhance Productivity & Competitiveness

59

5.11. Expectation of IT Hardware and Electronics firms from Government

60

Chapter VI Issues of Concern for IT Hardware & Electronics Sector 61-64

III

Chapter VII

Recommendations

7.1. Competitive Strategy for IT Hardware and Electronics Firms

65-67

7.2. Policy Guidelines for Skill Development and Training of Manpower

67

7.3. Infrastructure Development 67

7.4. Import of Raw Material & Machinery 67-68

7.5. R & D and Technology Upgradation 68

7.6. Implementation of Quality Standards/ Certification 68-69

7.7. FDI in Electronics and IT Hardware Sector 69

7.8. Policy for Disposal e-waste 69

7.9. Fiscal Incentives 69

REFERENCES 70

Annexure Annexure - 1 : Survey Questionnaire 71-79

Annexure - 2 : List of Units Contacted for the Study 80-82

Annexure - 3 : Methodology Adopted for Partial and Total Factor Productivity Estimations

83-85

Annexure -4 : NIC codes 86

V

LIST OF TABLES

Table No. Particulars

Page No

2.1 Ranking and share (%) in Electronics Production 4 2.2 Ranking and Percentage share in Electronics Components

Production 5

2.3 Electronics Production Scenario in India 7 2.4 Segment-wise Production Growth in Indian Electronics and IT

Hardware 8

2.5 Top 10 States in Electronics and IT hardware Production 11 2.6 Sector wise Electronics in Top 10 States (2002) 12

3.1 Labour Productivity in World IT Market during 2006 13

3.2 Registered Manufacturing of Electronics and IT Hardware Industry (All India)

15

3.3 Key Characteristics of Electronics and IT Hardware Industry 16

3.4 CAGR in Registered Manufacturing of Electronics and IT Hardware Industry (All India)

18

3.5 Productivity and Productivity growth rates 19

3.6 Index of Labour and Capital Productivity Growth Rates 20 4.1 IT industry competitiveness in Asia-Pacific Region 21 4.2 Decomposition of Indias share in World IT & Consumer

Electronics Market 23

4.3 Decomposition of the change in Indias share in the World Electronic Components Market

24

4.4 Development of ICT in India vis--vis China 25 4.5 Market and Production Rankings in the world : India Vs China 26

4.6 Indias Competitiveness Strengths and Weaknesses 27

4.7 Raw Material Import US Purchase 28

4.8 FDI inflows in Electrical Equipment 29 4.9 Financial Performance of Electronics Sector 31 4.10 Cost vs Profit Analysis of Electronics Sector 32

VI

4.11 Market Size of each segment of the Electronics and IT Hardware Sector

33

4.12 Domestic Demand (Consumption) of Electronics and IT Hardware

34

4.13 Export Scenario of Indian Electronics and IT Hardware Industry 35 4.14 Segment-wise Growth in Export of Electronics and IT Hardware

(1991 to 2007) 36

4.15 Exports as a proportion of Sales in Electronics and IT Hardware Industry

37

4.16 Share (%) and Market Trend of top players in Computers & its Peripherals

38

4.17 Share (%) and Market Trend of top players in Electronics Market 39 4.18 Electronics Policy in India (1966- 2008) 42 4.19 Recent Policy Initiatives 43 5.1 State wise distribution of respondents from IT Hardware &

Electronics Firms 47

5.2 Profile of IT Hardware and Electronics Firms/ Units Surveyed 48 5.3 Research and Development (number of manufacturing units) 49 5.4 Productivity & Competitiveness in the IT Hardware &

Electronics Firms 50

5.5 Employment Trend in the IT Hardware & Electronics Firms 51 5.6 Market Trend of IT Hardware and Electronics (Last Five Years) 52 5.7 Market share (number of manufacturing firms) 53 5.8 Domestic market share 54 5.9 Extent of Trade of Raw material and finished Products 54 5.10 Factors Hindering Trade of IT hardware and Electronics 55 5.11 Impact of Import on Price of Finished Products during last Five

Years 55

5.12 Change in Components share in the Total Cost of Production 56 5.13 Analysis of Cost Components in IT Hardware and Electronics

Firms 56

5.14 Factors Affecting Productivity & Competitiveness of IT Hardware and Electronics firms

57

5.15 Measures taken by Firms/Units to Enhance Productivity 59 5.16 Measures taken by Firms/Units to Enhance Competitiveness 59 5.17 Expectation of IT hardware and electronics firms from

Government 60

Productivity & Competitiveness of Indian Manufacturing IT Hardware & Electronics Sector

National Productivity Council, New Delhi i

EXECUTIVE SUMMARY Electronics and IT Hardware Industry is the largest and fastest growing manufacturing Industry in the world. The current recession notwithstanding, the Indian IT hardware & Electronics Industry has grown at approximately 7% per annum compared to global GDP growth of 3-3.5%. The electronic industry in India constitutes just less than 1% of the global electronic industry. However, the demand in the Indian market is growing rapidly though it remains a major importer of electronic materials, components and finished equipment. A series of market studies during the last few years have forecast rapid growth of electronics hardware demand in India, going up from the existing US$40 billion to US$155billion by 2015 growing at 20%+ annual growth rate. This would be 12% of the projected GDP in 2015 against the present 2%. A manufacturing output of US$ 155 billion would have the potential to create employment of 21 million (7million direct + 14million indirect) and Revenue of approximately US$ 56 Billion (Rs.274,000Crores) including direct and indirect taxes (State and Central). Present total employment in the sector is less than 2.5 Million and Revenue is less than Rs.25, 000 Crores. During the last 10-15 years, countries such as China, Korea, Taiwan, Singapore and Malaysia have emerged as leading global IT hardware and electronics manufacturer/exporters and has contributed significantly to the growth of their economies. Indian electronics Industry has failed to keep pace with these countries and it is still in a nascent stage of development, though the countrys software industry is well developed and highly competitive in the global market. To ensure quantum jump in the production and export of IT hardware and electronics, the performances of factors of production like human resource, infrastructure, capital and technology needs to be enhanced through policy changes and managerial action to boost the competitiveness of this sector.

A multi-pronged approach has been adopted for the study on IT Hardware and Electronics industry in India. To assess the status of the industry, relevant data and information have been collected from secondary sources and through field surveys at the unit level across 12 states covering 93 manufacturing units. Profile of Indian Electronic Industry

The Indian IT Hardware and Electronics market is segmented product wise into seven broad categories namely, Consumer Electronics, Controls, Instrumentation & Industrial Electronics, Electronic Data Processing (IT Hardware), Communication & Broadcast Equipment, Strategic Electronics and Electronic Components.

The overall production scenario in the Indian Electronics and IT Hardware sector is far behind its current market demand of US$40 billion. The estimated production of various segments of the industry during 2007-08 was estimated at US $ 20 billion.

In recent times, some SMEs are making investment in the tax-exempted regions and are mostly doing Original Equipment Manufacturers (OEM) work for reputed Brands.


National Productivity Council, New Delhi ii

The electronics industry in India had initially grown around three major centers, Bangalore, Mumbai/Pune and Delhi. Bangalore not only has major public sector units in defence and telecommunication but also has a very fast-growing, organised private sector firms in computer and industrial products. Bombay /Pune has been always a preferred destination for private sector firms and MNCs. However, eastern India remained underdeveloped in electronics and IT hardware production. The secondary electronics centers include Hyderabad, Hosur, Thiruvananthapuram, Chennai, Kolkata, Vadodora, Mohali, Ahmedabad and Aurangabad. Uttar Pradesh has emerged as the leading state in the production of electronics and IT hardware since 2001. Delhi also occupies a significant place due to large concentration of small scale units making consumer electronic products and computers. Productivity & Competitiveness Trends Based on overall IT competitiveness index, US ranks number one. While India and China has been ranked at 46th and 49th respectively in 2006. India fares better than China because of its highly developed software industry but is far behind Chinas hardware sector. Even in the Asia-Pacific region these two countries are lagging behind countries like Japan, South Korea, Australia and Taiwan who are providing the most competitive conditions for operation of IT firms. In terms of IT labour productivity i.e., total output per employee in the IT industry, Taiwan ranks number one followed by South Korea, Ireland , Singapore and Australia. IT labour productivity of China is ranked 10th where as that of Indias is 22nd in the world. It clearly indicates that both India (considered to be a global IT Software giant) and China (a leader in IT hardware production/export) have attained their present status not because of higher labour productivity but because of their competitive advantage in certain factors, such as workforce size, low wages, English literacy etc. Productivity Productivity estimations carried out based on secondary data sources (registered factory sector) reveals that labour productivity in IT Hardware and Electronics sector at all India level increased from Rs. 188806 during 1995-96 to Rs. 324653 per person employed at constant 1993-94 prices. In the case of capital productivity, it increased from Rs. 0.32 per Rupee of capital investment in 1995-96 to Rs. 0.60 per rupee of capital investment in real terms. Total Factor productivity growth has reported a negative growth at the rate 5.07 percent per annum during 1995-96 to 2000-01. However Total Factor Productivity Growth recovered remarkably during the second phase under study i.e. (2001-02 to 2005-06). TFPG has reported a positive growth rate of 2.88 percent per annum during this period.


National Productivity Council, New Delhi iii

Factors Affecting Competitiveness Some of the important factors that are critical to competitiveness of the Indian IT Hardware and Electronics Sector are the availability of raw materials, quality human resources, physical infrastructure, technology and credit availability.

The manufacturing of Electronics and IT hardware sector in India is significantly dependent on imports of raw materials. During the year 2007-08, the imported raw material constituted 37.7 percent of the total raw material used. The high level of dependence on import of raw material is making the Indian products less competitive in the international market.

Unlike the Software Industry, Indian Electronics and IT Hardware industry is not able to take the advantage of available manpower as this Industry is highly dependent on skilled human resource (viz. entrepreneurs, managers, technologists, skilled workers) who would facilitate/carry out Research & Development resulting to innovation and product diversification through technology up gradation, cost effectiveness and quality control.

The inadequacy and inefficiency of infrastructure viz., roads, ports, high cost of electricity etc., is a deterring the productivity and competitiveness of the Indian Electronic manufacturing industry as the industry is generally dependent on import of raw material and components.

Lack of technology is one of the most important factors contributing to low level of competitiveness in Indian electronics and IT hardware industry. Due to low level of technical research and development, Indian industry is dependent on technical know-how of advanced countries like USA, Germany and Japan. Further in this sector, continuous innovations are leading to rapid changes in design and technology that give a competitive advantage in terms of cost, speed and quality. In the absence of economy of scales, Indian organizations find it unviable to procure and continuously upgrade the technology and machinery. In India the average cost of finance available to Indian entrepreneurs is 11-12%, which is more than double the average rate prevailing in the international market. As a result Indian enterprises are becoming non-competitive compared to their counterparts in the world market.

Field Survey Findings

A field survey of the manufacturing units and industry associations at different regions of the country was undertaken during March-April 2008 to find out the factors affecting the productivity and competitiveness of Indian IT hardware and Electronics manufacturing sector. An analysis of responses indicate that a majority of the them (83.9%) belonged to small scale sector and only 7% are from the registered manufacturing category and 95% of the respondents are local manufacturers without any foreign direct investment. The


National Productivity Council, New Delhi iv

involvement of these units in international trade is also moderate i.e. 41% units are engaged in exports as compared to 38% engaged in imports. Most of the manufacturing units have introduced various quality system accreditations like ISO 9001 and product innovations during the last five years. About 26.2% of the manufacturing units are having patents.

As regards to productivity and competitiveness, most of the IT hardware and electronics firms reported an increase during the last five years. While increase in total productivity has been reported by 66% of the units; 74.5% of the respondents have reported increase in labour productivity. The increase in productivity has resulted in overall competitiveness for 87% of the respondents. Further analysis suggests that 80-85% of the respondents have reported an increase in both cost competitiveness as well as price competitiveness. It is further noted from the survey that employment has grown in 63.3% of IT hardware and electronics firms whereas increase in casual labour is reported by 31.3% of firms. Demand growth for Indian IT hardware and electronics is reported for both domestic and export market. The increase in demand for IT hardware and electronics product in the international market has been experienced by 66.7% of the exporters. About 74% manufacturing units reported increase in profitability during the period 2000-2008.

About 90% of the industry comprises of small and medium sized firms and most of these firms have a market share of less than 10%. This observation clearly goes with the economic assertion that larger the number of firms smaller the market share of each firm. Recommendations

Since technology is critical to the sector, to develop electronics and IT hardware products built on latest available technology there needs to be continuous R& D leading to innovation and product differentiation based on technology. The right mix of unique and innovative products that are acceptable to the consumers is critical to sustain and augment profits in the long run. Government should strengthen Research and Development in Electronics and IT Hardware sector especially the applied research like product development through special grants to leading Research Institutes/Universities and Technical Institutes like IITs.

The price of the products need to be competitive but not at the cost of quality. A single

low quality product is enough to spoil the reputation of a manufacturing firm and will result in destroying the market demand for all other products of the brand in the long run.

However, base models of an electronic product (e.g, Mobile, watch etc) with some key

features may be placed on the shelves at lower rates than the similar available products of the competing firms. This will help firm in capturing the market sentiments of the Indias vast population. Simultaneously, to target the rich and elite class, exclusive models/ products need to be designed with advanced technology. Such


National Productivity Council, New Delhi v

products may be priced at high premium, as they would give the owner a sense of pride.

Customer Management or Customer Care is a crucial differentiator in the electronics

and IT Hardware Industry. Distribution network could be an excellent source of competitive advantage for a manufacturer of electronics and IT hardware products alongwith excellent after sales service network, strong brand positioning, to take care of customers.

Strengthening the global supply chain network as the industry is highly dependent on

the import of raw materials which would affect the competitiveness. The cost of the supply network or logistic management network also needs to be assessed through value chain analysis.

Scientific disposal of e-waste would ensure creation of safe environment & help in

sales promotion. The manufacturers of electronics and IT hardware firms may undertake the development of human capital and disposal of e-waste as a part of their corporate strategy under CSR. Efficient utilization of plant and machinery, reduction in waste etc. would result in raising the productivity level of the firms and lowering the cost of production, thereby increasing the profit margins providing a competitive edge to the indigenous manufacturing units in the domestic market and reduce import substitution.

Development of technical institutes according to the requirement of Industry will

ensure proper skill development and would help in solving the problem of unavailability of technical manpower.

Indian entrepreneurs or companies may explore the opportunities of undertaking

contract manufacturing as Electronics manufacturing services (EMS) companies to larger Original Equipment Manufacturers (OEMs)

Availability of quality manpower is declining and there is shortage of skilled and

trained personnel. The attrition rate is also high as the industry salary packages are not competitive with ITES sector. The current educational system in the IT sector is skewed towards Software rather than Hardware. Curriculum of ITIs should be redesigned and continuously updated to meet the changing requirement of Hardware & IT industry. Industry Associations may be involved in developing course curriculum and in plant training be made compulsory part of course curriculum. Industry/corporate bodies may be encouraged through tax benefits/ payment of management fee to adopt government run ITI or diploma colleges for effective and efficient management.


National Productivity Council, New Delhi vi

Lack of adequate physical infrastructure like transport system, roads, ports, airports etc. adversely affect the competitiveness and productivity of the IT hardware and electronic sector. Uninterrupted power supply is a necessary condition for operation of IT hardware and electronics units as power fluctuations lead to breakage of entire system. Adoption of PrivatePublicPartnership (PPP) model can facilitate faster and cost effective development of infrastructure. Current incentives to SEZs may be continued and IT Hardware Parks be developed within SEZs. Financial incentives need to be given to manufacturing units for establishing and maintaining of backup power units and for utilizing non-conventional energy sources.

The manufactures of IT hardware and Electronics products are generally dependent

on imported raw material. Weak supply chain network and lack of vendor support also affects the quality, productivity and competitiveness of the products. Government should ensure hassle free import of raw material and components by streamlining the import policy and systems and through simplification of import procedures.

Since productivity estimations based on Labour and Total Factor Productivity Growth rates have been found quite low in IT Hardware and electronics sector, there is a need for substantial up gradation of skill levels of the personnel engaged in the sector and also for the technological progress (R&D activities) in this sector.

It is recommended that the government should promote modernization of units through a special scheme with fiscal incentives and minimum import duties. Depending on the needs and performance of existing manufacturers, special loans may be granted for technology upgradation, infrastructure building or expansion of business.

Quality standards and systems need to be promoted among the Electronics and IT

Hardware manufacturing units. Electronics and IT Hardware manufacturing sector has a great growth potential in India and export market. Government needs to promote modern semiconductor industry for manufacturing various kinds of chips and other essential components. Promotional activities need to be undertaken to attract FDI and MNCs to start manufacturing units in India.

Fiscal incentives like rationalization of tariff on raw materials and capital goods,

lowering of excise duty on IT and Electronic goods, introduction of full Value Added Tax (VAT) etc in conjunction with free environment to the manufacturers, speed of business, proper communication, power supply, strong engineering and design base, adequate R&D facilities etc. are the key to a successful and competitive hardware IT industry.


National Productivity Council, New Delhi | Page No. 1

CHAPTER I

INTRODUCTION 1.1 Background The field of electronics is changing at a very fast pace. In common parlance though the term indicates a few isolated devices, in reality its now a meta-resource that can be converged with a wide spectrum of applications. In the changed scenario, electronic items are no more just a product for direct consumption but are enabler for improving the productivity and efficiency of other manufacturing sectors like automobile where it is applied. The electronic industry has the potential of creating enormous employment opportunities (both high skilled and low skilled). It further helps in the spread of education and healthcare through ICT (e-learning) and tele-health services to both rural and urban areas as well as implementation of e-Governance. Thus the growth of IT hardware & electronics has direct impact on the socio-economic development of a country and determining its competitiveness. During the last decade of 20th century, countries such as China, Korea, Taiwan, Singapore and Malaysia have emerged as global leaders in IT hardware and electronics manufacture and export. The growth of IT hardware and electronics sector has significantly contributed to the growth of these economies. India has not only failed to keep pace with the economic development of these countries but its IT hardware and electronics industry is still in a nascent stage of development, though the countrys software industry is well developed and highly competitive in the global market.

1.2 Objective of the Study Since India is trailing behind her neighbouring Asian countries in the production and export of IT hardware and electronics, a study on the major factors of production such as human resource, capital investment and technology would provide indicators for the future policy directions to make the sector more productive and competitive. Thus, the major objective of the present study is to assess the productivity and competitiveness of Indian IT Hardware and Electronics Sector. The study is aimed to identify factors hindering the progress of the sector and suggest measures for enhancing the competitiveness of the sector. 1.3 Methodology The study on IT Hardware and Electronics Industry has been carried out considering the nascent stage of development and the changing nature of competition in this emerging market. In this study, relevant data and information have been collated and compiled from both primary and secondary sources. For the compilation of field level data, detailed field survey was undertaken across 12 states through a structured questionnaire (Annexure 1). The states were chosen keeping in mind the concentration of the IT Hardware and Electronics industry and regional distribution across India. The stakeholders like senior management of various IT hardware and electronics manufacturing units as well as industry association members were



interviewed to find out the market realities and factors hindering productivity and competitiveness of the sector. A total 93 manufacturing units from IT Hardware and Electronic Sector participated in the NPC field survey (Annexure 2).

Productivity indicators for major factor inputs have been computed for Electronics and IT Hardware Industry during post liberalization (1991-2006) period from Annual Survey of Industry (ASI) data. Since the demand for IT Hardware and Electronics products are highly dependent on the external economy, the international scenario also has been analysed. Globalisation has also opened new market opportunities as well as challenges for the sector.

The competitiveness of the Indian IT Hardware and Electronics sector in the global market has been studied on the basis of the findings of various international studies such as IT competitiveness Index, 2007 by Economist Intelligence Unit and Trade Performance Index, 2006 by International Trade Center, ITC Geneva, Switzerland. The interactive market analysis tool developed by ITC has been used to find out changing share in Indias global IT Hardware & Electronics and Electronic Components market due to variations in competitiveness.

The Yearbook of World Electronics Data, 2004-2005, Volume 2& 3 by Reed Electronics Research Ltd, England, World Competitiveness Yearbook, 2007 & 2009 by IMD, Switzerland and Knowledge Assessment Methodology, 2006 by World Bank are also elucidated to identify the strengths and weaknesses of the business environment that has a bearing on the competitiveness of IT Hardware and Electronics sector in India. 1.4 Organization of the Report

The report is presented in seven chapters. Chapter I provide the introduction, objective and methodology of the study. Chapter II deals with Indias position in the world IT Hardware and Electronics market. Further, the production scenario of IT hardware and Electronics sector in India is substantiated in this section. Chapter III discusses productivity scenario in the international IT industry (including hardware and Software). This is followed by analysis of the productivity trends of the Indian IT Hardware and Electronics Sector for the period 1991-2006. Chapter IV deals with the competitiveness of Indian IT Hardware and Electronics Sector. Further, this chapter also discusses the competitive advantages and disadvantages of this sector. The government policy is discussed in the relevant areas to understand its influence on the Sector. Chapter V, analyses Indian IT Hardware and Electronics sector based on results of a field survey that was carried out across Indian states. Chapter VI provides issues and concerns of the sector and Chapter VII provides recommendations for enhancing productivity and competitiveness of the sector.

1.5. Limitations & Constraints Keeping in view of the initially set scope of work to focus the study mainly on secondary data sources, which has its own limitations as regards to reliability of data



in working out futuristic projections. In order to substantiate the secondary data, field evidences have been also included through a primary survey later on.

Due to the limited budgetary provisions, the unit level data survey coverage was undertaken with limited scope and coverage. The outcome of the study and the recommendations thereof are generic in nature. However, efforts have been made to minimize such constraints through analyzing various data sources available to arrive at broad recommendations for the development of the sector. The recommendation have been formulated which are implementable in nature.



CHAPTER II

IT HARDWARE & ELECTRONICS SECTOR: AN OVERVIEW

2.1 World Electronics Market

It is interesting to note that top electronic hardware manufacturing countries are not always leading component manufacturers in terms of their contribution (in percent) to world production. For example, USA leads in equipment manufacturing whereas Japan is leader in component manufacturing. Moreover, the production base of electronics hardware is gradually shifting to countries like China and S. Korea. After USA and Japan, it is China that has emerged as 3rd largest electronic hardware production center and its share has grown from 8.3 per cent in 2001 to 14.7 percent in 2004. The ranking of India along with the top 10 electronic hardware and electronic components producing countries is shown in Table 2.1. These top 10 countries together contribute nearly 80 per cent world electronics production and 85 per cent of world electronic and components production respectively.

Table 2.1: Ranking and share (%) in Electronics Production

Country Electronics

Ranking Share (%) 1998 2001 2004 1998 2001 2004

China 3 3 3 4.8 8.3 14.7 France 8 11 11 3.4 2.7 2.4 Germany 4 5 5 4.6 4.3 3.9 India 28 29 24 0.4 0.4 0.5 Japan 2 2 2 18.1 16.7 14.9 Malaysia 10 7 6 2.7 3.5 3.6 S. Korea 6 4 4 3.8 4.7 5.8 Singapore 7 9 8 3.5 3.1 3.2 Taiwan 9 8 7 3.1 3.4 3.6 UK 5 6 9 4.4 4 3.2 USA 1 1 1 29.8 28.2 25.1

Source: Kumar (2006), Electronics Information and Planning, Vol 33, 3 4, Dec2005-Jan-2006 Japan and USA together contributed 48.6 per cent of electronic component production in 1998, which decreased to 43.4 per cent during 2004 where as that of China improved from 4.1 per cent in 1998 to 10.1 per cent during 2004. Countries of the Asia Pacific Region viz., South Korea, Taiwan, Singapore, Malaysia and Thailand have significantly improved their share in electronic component production as detailed in Table 2.2 where as countries of Western Europe Viz; Germany, UK and France have shown consistent reduction in their share to world electronic production.



Table 2.2: Ranking and Percentage Share in Electronics Components Production

Country Ranking Share (%) 1998 2001 2004 1998 2001 2004 China 4 4 3 4.1 6.9 10.1 France 10 10 _ 2.4 2.1 _ Germany 6 8 8 3.9 3.8 3.3 India 28 28 22 0.32 0.26 0.18 Japan 1 1 1 24.3 24.89 23.7 Malaysia 5 5 5 4 4.8 5.7 South Korea 3 3 4 7.9 7.4 8.7 Singapore 7 6 6 3.7 4.4 5.1 Taiwan 8 7 7 3.6 4.2 4.6 Thailand _ _ 10 _ _ 2.4 UK 9 9 9 2.9 2.1 2.4 USA 2 2 2 24.3 21.9 19.7

Source: Kumar (2006) Electronics Information and Planning , Vol 33, 3 4, Dec2005-Jan-2006

Share in Electronic Component Production 2004

3.30.18

23.7

5.78.7

5.1 4.6 2.4 2.4

19.7

05

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India

Japa

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Malay

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S. Ko

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Singa

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Taiw

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The share of high-cost locations (such as the United States, Western Europe and Japan) in worlds production of electronics output declined from 75 per cent in 1995 to 53 percent in 2005. However, during the same period, the share of Asia/Pacific region in the global electronics production increased from 20 per cent to 38 per cent and that of China alone increased from 3 per cent to 16 per cent. Chinas production is 18.75 times that of India and its share in global production is more than 20 times that of Indias. The figures for Electronics Manufacturing in countries like China, S. Korea, Singapore in 2005 are $210 billion, $95 billion and $45 billion respectively as compared to Indias $12.7 billion. Thus, India has under-performed with respect to not only China but also other Asian countries as well.

It is worth noting that though there has been a change in geographical map of production units of electronics and IT hardware, there is no significant growth in indigenous manufacturing companies. This may be attributed to the fact that the bulk of the components and electronic products produced in Far East and other developing countries are subsidiary production units of MNCs with headquarter in USA, Japan or Germany. Relatively low cost assembly based production has shifted to China, Countries of Far East viz., Taiwan, Singapore, Malaysia, Thailand, Philippines and



Latin America. The focus of USA, Japan, South Korea and Western Europe countries has shifted to high technology and knowledge intensive manufacturing. 2.2 An overview of Indian Electronics and IT Hardware Industry The Indian electronics industry has been broadly classified into two categories, namely IT Hardware & Electronics and Software. The production of IT (Hardware and Software) and electronics, which was worth about Rs 150 million in 1960, has increased to Rs 1730 million in 1971 and Rs 8900 million in 1981. It has further increased to Rs 94,344 million in 1991 and to Rs 35,01,300 million in 2008.

During the period 1991-2008, the electronics industry as a whole experienced an overall annual growth of 23.69 per cent. However, major growth can be traced to Indian software and services industry that grew at the annual rate of 40.63%, in comparison, the IT hardware and electronics sector experienced a moderate growth of only 14.34% during the same period. By 2008, the production of software and services in India reached Rs. 25,80,000 crore. The Business Process Outsourcing (ITES-BPO) sector has emerged as a key driver of this phenomenal growth in the Indian software and services Sector. It is of course, encouraging to note that in recent decade (2001-2008) IT hardware and electronics sector has experienced a higher growth than the last decade (1991-2000). But production of electronics and IT hardware as a proportion of total production in the electronics industry has been continuously declining as it declined from 45 percent in 2000 to 26 percent in 2008 (table 2.3).



Note: In case of software for calculating CAGR 1991-2000, the 1993 data is used instead of 1991 Source: Data from 1991-1999, Guide to Electronics Industry, Data from 2001 to 2006 is from Dept. of IT website and 2000 is from Economic Survey 2006-07

Table 2.3: Electronics Production Scenario in India

Year

Production (Rs Crores) Growth (%) Total Electronic

Computer Software

Electronics Hardware

Electronics Hardware Production Share (%)

Total Electronic

Computer Software

Electronic Hardware

1991 9434 _ 9434 _ _ _ _ 1992 11016 _ 11016 _ 16.77 _ 16.77 1993 14567 1550 13017 89.36 32.23 _ 18.16 1994 17789 2351 15438 86.78 22.12 51.68 18.60 1995 21290 3900 17390 81.68 19.68 65.89 12.64 1996 25253 5700 19553 77.43 18.61 46.15 12.44 1997 30959 9300 21659 69.96 22.60 63.16 10.77 1998 39998 15200 24798 62.00 29.20 63.44 14.49 1999 50754 23000 27754 54.68 26.89 51.32 11.92 2000 68650 37550 31100 45.30 35.26 63.26 12.06 2001 76750 44600 32150 41.89 11.80 18.77 3.38 2002 92800 56000 36800 39.66 20.91 25.56 14.46 2003 113200 70500 42700 37.72 21.98 25.89 16.03 2004 145300 95500 49800 34.27 28.36 35.46 16.63 2005 178500 124000 54500 30.53 22.85 29.84 9.44 2006 231575 167175 64400 27.81 29.73 34.82 18.17 2007 282860 203060 79800 28.21 22.15 21.47 23.91 2008 350130 258000 92130 26.31 23.78 27.06 15.45

CAGR (1991-2000) 24.67 57.67 14.17CAGR (2001 to 2008) 24.21 28.50 16.23CAGR (1991 to 2008) 23.69 40.63 14.34



2.2.1 Segment-wise Growth in Indian Electronics and IT Hardware

During the period 2001 to 2008, the production of electronics and IT hardware showed a CAGR of 16.23 percent (Table 2.4). The Indian IT Hardware and Electronics market is segmented product wise into seven broad categories namely, Consumer Electronics, Controls, Instrumentation & Industrial Electronics, Electronic Data Processing (IT Hardware), Communication & Broadcast Equipment, Strategic Electronics and Electronic Components.

The Software for exports reported the highest CAGR of 29.11 % followed by Communication and Broadcast equipment at 27.35%. In view of GDP growth rate of around 8%, during this period, the growth of both consumer electronics segment (10.75%) and electronics components (7.92%) was only moderate. Table 2.4: Segment-wise Production Growth in Indian Electronics and IT Hardware

(Rs Crore)

Item 2001 2002 2003 2004 2005 2006 2007 2008 CAGR% (2001-2008)

IT Hardware & Electronics (Total )

32150 36800 42700 49800 54500 64400 79800 92130 16.23

Consumer Electronics 12300 13580 14850 16500 17500 19500 21950 25140 10.75

Control, Instrumentation Industrial Electronics

4480 5400 5980 8300 8600 10100 11530 12530 15.83

Electronic Data Processing/IT Hardware

3520 4180 6600 8680 10500 12500 15100 14090 21.91

Communication & Broadcast Equipment

4450 4800 5150 4770 6300 9200 16400 24180 27.35

Strategic Electronics 1750 2330 2670 2850 3070 4500 5400 6560 20.78

Electronic Components 5650 6510 7450 8700 8530 8600 9420 9630 7.92

Software (Total) 44600 56000 70500 95500 124000 169000 202230 258000 28.50

Software for Exports 34000 44000 55000 75000 97000 132025 158550 203330 29.11

Domestic Software 10600 12000 15500 20500 27000 35150 44510 54670 26.41

Total Electronics 76750 92800 113200 145300 178500 231575 282860 350130 24.21

Note: CAGR = Cumulative Average Growth Rate Source: Dept. of IT (website & Annual Report 2007-08 & 2008-09)



Consumer Electronics: Consumer electronics contributes more than 30% of the total electronic hardware production in the country and the Colour TV segment would be the largest contributor with a domestic market of more than 12 million units. The shift in demand with rise in income is prominent in the TV market. The Black and white TV (B/W TV) is continuously registering a negative growth where as CTV is steadily rising. Most of manufacturers of B/W TV are shifting to grey market due to high level of taxation on this product, which is meant for rural masses. Similarly, the DVD/VCD/CD Players market is steadily taking over the Analog Audio segment, which is experiencing a declining trend.

The growth in CTV segment may be attributed to rise in income as well as enthusiasm of majority of Indians to watch popular sports events such as Cricket and daily sops that are being broadcasted. The introduction of DTH broadcasting has further contributed to the rise in demand of LCD TV and Home Theater. The high end products, particularly Liquid Crystal Display (LCD) TVs have registered 400% growth in 2006-07 and the total market for the LCD TV and the Plasma TV is projected to be over 150,000 and 50,000 respectively. Till now there is not a single LCD TVs production unit in India. However, rapid increase in the sale of this product has prompted a few MNCs and Indian companies to announce their intention to start production of LCD TV in India.

Introduction of Conditional Access System (CAS) has resulted into an exponential growth in the Set Top Boxes (STB) market. However, STB are mainly imported, as customs duty on STB is zero. STB production is expected to take off and more than 2.5 million STBs would be produced in the year 2007-08 if customs duty on STBs be made at par with other consumer electronic products. The overall production scenario in the Indian consumer electronics segment is far behind its current market demand. In recent times, some SMEs are making investment in the tax-exempted regions and are mostly doing Original Equipment Manufacturers (OEM) work for reputed Brands. Of course, it is encouraging to note that Samsung



Electronics is setting up production unit for Colour TVs and Monitors in Tamil Nadu and LG Electronics has also announced investment and making India hub for exports.

Control, Instrumentation and Industrial Sector: The application of electronics and information technology is mainly seen in the Control, Instrumentation and Industrial Sector. Moreover, newer technologies involving wireless sensors and sensor networking are emerging as potential application in the field of industrial automation technologies as these are inexpensive and easy to install. Though manufacturing of related hardware in technology areas like Distributed Control Systems and UPS is increasing in India, still there is substantial dependence on imported hardware and software for this sector.

The Department of IT has already realized that subsystems that constitute a part of the knowledge enabled enterprise control system are presently available in India as independent packages. But integrating these modules developed by different vendors using varied interfacing and communication standards is a wearisome task due to lack of inter-operability. To overcome this problem, national collaborative development initiatives on next generation Automation Technologies have been already conceptualized by the DIT to bring out an open standard based flexible control system, in a holistic manner.

IT Hardware Industry: The development in the overall Indian ICT sector and ITES in particular during the period 2001 to 2008 is continuously increasing the domestic demand for IT hardware and this push factor is encouraging local firms to raise their production level. The IT hardware industry though is far behind that of Chinas, in recent times (2001-2008) has grown at more than 16 percent per annum. Communication & Broadcasting Sector: There is no doubt that the growth in Information and Communication Technology (ICT) has contributed significantly in Indias economic development. The over all tele-density reached 17.16% during December 2006. The gross telephone subscribers has reached to about 190 million, out of which 150 million are mobile telephone subscriber and total broadband connections in the country have reached 2.10 million by December 2006. A target of 250 million telephones (tele-density of about 22%) and broadband connectivity of 10 million subscribers have been set to be achieved by end of 2007 and by 2010 broadband subscribers is expected to be around 20 million. check

The huge mobile handsets Indian market has tempted world renowned mobile set manufacturers to set up production base for mobile hand sets in the country to not only meet local demands but also to cater to international markets. It is highly encouraging to see that worlds top five mobile handset makers - Nokia, Motorola, Samsung, Sony-Ericsson and LG have started their manufacturing in India.

Strategic Electronics: In India the technology applicable to strategic sector as well as strategic technology for civilian and defense sector is not available off the shelf. In order to ensure acquisition of the state-of-the-art technology, it is desirable to focus on production in the strategic electronics sector.



Electronic Components: Electronics and IT Hardware manufacturing scenario in India is expected to improve with the presence of global Electronics manufacturing services (EMS) majors like Flextronics, Jabil, Elcoteq. These companies would not only create potential for a quantum jump but are expected to create a downstream effect by greater demand for components and assemblies. Companies like Flextronics, Nokia and Jabil Circuit have committed investments to the tune of $100- 150 million over the next 2-3 years which will largely cater to domestic demand for Communication and IT products. In 2005, Moser Baer after announcing its plans to enter in the high growth Photo Voltaic business has made initial investment of Rs. 3390 million in Indias first renewable energy SEZ at Greater Noida, UP to set up a Photo Voltaic cell and module manufacturing project with an 80 MW capacity. 2.2.2 Geographical Distribution of Electronics and IT Hardware Industry There is lot of variation in the geographical distribution pattern of Indian Electronics and IT hardware production. The electronics industry in India had initially grown around three major centers, Bangalore, Mumbai/Pune and Delhi. Bangalore not only has major public sector units in defence and telecommunication but also has a very fast-growing, organised private sector firms in computer and industrial products. Bombay /Pune has been always a preferred destination for private sector firms and MNCs. However, eastern India remained underdeveloped in electronics and IT hardware production. Table 2.5 gives the growth of electronics production during 1991 and 2002 in top 10 states.

From 2001, Uttar Pradesh is the leading state in the production of electronics and IT hardware. Delhi also occupies a significant place due to a large concentration of small scale units making consumer electronic products and computers. The physical location of the plant is considered for calculation of the share of small scale units as well as the share of different States in production and employment in the electronics production. During 2002, the top three states viz., Uttar Pradesh , Maharashtra and Karnataka accounted for almost 58 per cent of the total electronics production of the country (Table 2.5).

Table 2.5: Top 10 States in Electronics & IT hardware Production

States 1991 2002

Production (Rs Crores)

Share (%) Rank

Production (Rs Crores)

Share (%) Rank

Total Units (No.)

SSI

Uttar Pradesh 1915 19.69 1 7715 20.96 1 170 115Maharastra 1762 18.12 2 7219 19.62 2 809 693Karnataka 1750 18.00 3 6232 16.93 3 363 289Delhi 921 9.47 4 3190 8.67 4 354 330Andhra Pradesh

585 6.02 6 2030 5.52 5 169 132

Tamil Nadu 622 6.39 5 1839 5.00 6 278 220Haryana 170 1.75 12 1451 3.94 7 97 59 Gujarat 361 3.71 8 1260 3.42 8 244 199Kerala 421 4.24 7 1121 3.05 9 88 57 Madhya Pradesh

151 1.55 13 787 2.14 10 43 26

Source: Guide to Electronics Industry2003, Dept. IT, GoI



Further analysis of regional distribution shows that the Northern region mainly Delhi and its surrounding areas account for over 38 per cent of production. The East is underdeveloped relative to its population. The West accounts for 25 per cent of electronics production, mostly in Maharashtra (Mumbai and Pune) contributed mostly by private sector firms both in small scale and organised sectors. The South, primarily Bangalore, accounts for about 30 percent of production. Table 2.6 gives the sectorwise electronics production during 2002 in top 10 states. Table 2.6: Sectorwise Electronics Production in Top 10 States (2002) (Rs crores)

States Consumer Electronic

Control, Instn & Ind Electronic

Computer Hardware Telecom

Strategic Electronic

Electronic Component Total

Uttar Pradesh

4230 400 550 1130 295 1110 7715

Maharastra 3680 1055 1360 185 74 865 7215 Karnataka 950 1830 350 800 1062 1240 6232 Delhi 1410 200 350 75 5 1150 3190 Andhra Pradesh

265 505 150 270 660 180 2030

Tamil Nadu

950 310 145 177 37 220 1839

Haryana 400 25 25 585 126 90 1451 Gujarat 540 180 15 125 _ 400 1260 Kerala 320 160 15 420 11 195 1121 Madhya Pradesh

35 52 _ 90 _ 610 787

Source: Guide to Electronics Industry 2003, Dept. IT, GoI

To spread the geographic base of the electronics industry states were encouraged to establish electronics development corporations for promotion and development of electronics in their respective states. Special incentives like sales tax concessions, creation of separate industrial areas for electronics, subsidy for setting up units in backward areas, financial participation either as joint sector or assisted sector, etc are also being provided by many of the states. This action, combined with the dispersion of additional public sector units, encouraged the emergence of several secondary electronics centers. For example, Hyderabad, which reflects the expansion of ECIL, is the most important of these. Other secondary centres includes Hosur, Thiruvananthapuram, Chennai, Kolkata, Vadodora, Mohali, Ahmedabad and Aurangabad.



CHAPTER III

PRODUCTIVITY GROWTH IN IT HARDWARE &

ELECTRONICS SECTOR

3.1 Global Scenario

The Economist Intelligence Unit (2007) ranked 64 countries in terms of IT labour productivity (Total output per employee in the IT industry). Output has been measured as value of production for both IT hardware and software in US Dollar for the year 2006. Table 3.1 reports that among the labour productivity is highest in Taiwan, followed by South Korea, Ireland, Singapore and Australia. IT labour productivity of China has been ranked 10th where as that of Indias rank is 22nd in the world.

Table 3.1 : Labour Productivity in World IT Market

Rank Country Total Output per Employee(US$)* 1 Taiwan 386,413 2 South Korea 310,393 3 Ireland 278,451 4 Singapore 216,941 5 Australia 208,014 6 Switzerland 194,826 7 United States 154,173 8 Japan 148,560 9 New Zealand 148,384 10 China 136,506 11 Denmark 127,777 12 Norway 119,481 13 United Kingdom 107,184 14 Belgium 96,593 15 Germany 82,255 16 Israel 75,936 17 France 70,564 18 Austria 62,280 19 Brazil 49,154 20 Greece 44,037 21 Hong Kong 39,629 22 India 39,033 Note*Output is for 2006 US$value for hardware and software production. Source: Economist Intelligence Unit, 2007.



The study clearly reveals that both India (considered to be a global IT Software giant) and China (a leader in IT hardware production and export) have attained their present status not because of higher labour productivity but due to their competitive advantage in certain factors such as availability of educated workforce, low wages, language attributes such as, English speaking population (in case of India) etc.

3.2 Electronics and IT Hardware Industry: Organized Factory Sector

The Electronics and IT Hardware Industry comprises of organized as well as unorganized industries. Due to lack of data on the operation of unorganized industries, an analysis of the organized factory sector is done to get an idea of the Indian Electronics and IT Hardware Industry. Annexure 3 shows the methodology used for analyzing the electronics and IT Hardware Industry. The structural constituents of the Electronics and IT Hardware Industry may be understood from the analysis of organized factory sector that mainly consists of large-scale enterprises. Further, impact of globalisation and various government policies on the electronics and IT hardware sector may be analysed through the developments in the organized factory sector. The data are collected from Annual Survey of Industries, Central Statistical Organisation (CSO), Government of India.

The data from 1990-91 to 1998-99 for the Electronics and IT Hardware Industry pertains to 3 digits NIC 1987 code. For the later years, the equivalent of 2-digit NIC Code are calculated by adding the 4- digit NIC codes as per the concordance table given by CSO (Annexure 4).

The number of factories in the Electronics and IT Hardware Industry is showing a declining trend during the last one and half decade and the rate of decline is higher during the latter period i.e. 2000-01 to 2005-06 than during 1990-91 to 2000-01. The number of person engaged also declined at the rate of 0.34 percent during the period 1990-91 to 2005-06. The decline in employment is greater during in the recent times (2000-01 to 2005-06).



Table 3.2: Registered Manufacturing of Electronics and IT Hardware Industry ( All India) Characteristics 1990- 91 2000-01 2001- 02 2003-04 2004-05 2005-06 CAGR

Total Period

(1990-91 to 2005-

06)

Period I

(1990-91 to 2000-

01)

Period II

(2000-01 to 2005-

06) Number of Factories 1591 1583 1432 1314 1371 1359 1.05 -0.05 3.01

Number of Workers 96770 97270 87274 85540 91416 103129 0.43 0.05 1.18

Total Persons Engaged 158991 151130 135387 132941 138300 151102 0.34 -0.51 0.01

Value of Output at Constant

Prices (1993-94=100)

802656 1342528 1233887 1557086

3828149

2273716 7.19 5.28 6.13

GVA at Constant Prices (1993-94=100)

198493 263448 262123 301222 654219 490556 6.22 2.87 31.19

Fixed Capital at constant prices (1993-94 =100)

242532 461698 411513 611201 1305165 1043311 10.22 6.65 11.15

Source: Annual Survey of Industries factory Sector (various years)

It is very encouraging to note that the value of output at constant price has increased during 1990-91 to 2005-06 at a CAGR of 5.23 percent. However, the growth in the value of output during 2000-01 to 2005-06 is higher than that of 1990-91 to 2000-01. This has resulted in an increase in the growth of gross value added at a CAGR of 3.26 percent during 1990-91 to 2004-05. The growth of GVA at constant prices during the period 2000-01 to 2004-05 is also higher than that of 1990-91 to 2000-01 (Table 3.2).



The individual item wise performance analysis of the electronics and IT hardware industry during the last one and half decade is given in Table 3.3 and Table 3.4. The number of factories and workers employed in the manufacturing of four segments out of five product segments reported decline during 1990-91 to 2005-06 (Table 3.3). However, Gross Value Added at constant prices have contributed substantial increase for all the five segments of IT Hardware and Electronics sector.

Table 3.3: Key Characteristics of Electronics and IT Hardware Industry Segment Characteristics 1990-91 2000-01 2005-06 Manufacture of office, accounting and computing machinery (NIC 98: 3000)

Number of Factories 257 224 180 Number of Workers 14044 11753 14368 Total Persons Engaged 27348 19343 21776 Value of Output at Constant Prices (1993-94=100) 161425 303958 455913 GVA At Constant Prices (1993-94=100) 42487 60190 147509 Fixed Capital at constant prices (1993-94=100) 41030 78832 207741

Manufacture of electronic valves and tubes and other electronic components (NIC 98: 3210)


Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy (NIC 98: 3220)


Manufacture of television and radio receivers, sound or video recording or reproducing apparatus, and associated goods (NIC 98: 3230)

Number of Factories 542 334 235 Number of Workers 24052 22822 20224 Total Persons Engaged 36524 32892 28904 Value of Output at Constant Prices (1993-94=100) 268015 726901 729674 GVA At Constant Prices (1993-94=100) 39088 101366 110461



Fixed Capital at constant prices (1993-94=100) 59270 181207 252169

Manufacture of watches and clocks (NIC 98: 3330)


Source:EstimatedfromASISummaryResultsofFactorySector During the period 1990-91 to 2005-06, there has been negative growth in the numbers of factories, the amount of fixed capital and workers employed in almost all the segments of electronics and IT hardware sector viz., manufacture of office, accounting and computing machinery, manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy, manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods and manufacture of watches and clocks (Table 3.4). This might have resulted in declining the growth rate of the gross value added as well as value of output in the manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy and manufacture of watches and clocks.

However, during the period 1990-91 to 2005-06, the manufacture of electronics valves and tubes and other electronics components showed positive growth in all the characteristics viz., the numbers of factories, the amount of fixed capital, workers/persons employed as well as value of output and gross value added. But in recent years ie., from 2000-01 onwards, a decline has been noticed in the number of factories and workers employed.



Table 3.4 : CAGR in Registered Manufacturing of Electronics and IT Hardware Industry ( All India)

Segment Characteristics

Compound Annual Growth Rate Total Period (1990-91 to

2005-06)

Period I (1990-91 to

2000-01)

Period II (2000-01 to

2005-06) Manufacture of office, accounting and computing machinery (NIC 98: 3000)

Number of Factories 0.91 -1.36 4.28Number of Workers 1.18 -1.77 4.10Total Persons Engaged 2.28 -3.40 2.40Value of Output at Constant Prices (1993-94=100) 4.31 -9.55 8.45GVA At Constant Prices (1993-94=100) 2.35 2.88 19.64Fixed Capital at constant prices (1993-94=100) 4.45 3.73 21.38

Manufacture of electronic valves and tubes and other electronic components (NIC 98: 3210)

Number of Factories 4.48 6.79 0.45Number of Workers 7.08 10.80 3.55Total Persons Engaged 5.89 8.96 3.87Value of Output at Constant Prices (1993-94=100) 12.42 16.50 13.68GVA At Constant Prices (1993-94=100) 11.76 15.48 4.41Fixed Capital at constant prices (1993-94=100) 14.61 19.24 5.13

Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy (NIC 98: 3220)

Number of Factories 1.42 -2.12 2.43Number of Workers 3.34 5.05 1.97Total Persons Engaged 4.23 -6.28 1.60Value of Output at Constant Prices (1993-94=100) 0.67 -3.25 8.89GVA At Constant Prices (1993-94=100) 4.18 -8.32 11.32Fixed Capital at constant prices (1993-94=100) 0.30 -3.27 26.89

Manufacture of television and radio receivers, sound or video recording or reproducing apparatus, and associated goods (NIC 98: 3230)

Number of Factories 3.18 -4.73 6.79Number of Workers 0.35 -0.52 2.39Total Persons Engaged 0.70 -1.04 2.55Value of Output at Constant Prices (1993-94=100) 6.88 7.99 0.08GVA At Constant Prices (1993-94=100) 6.56 7.51 1.73Fixed Capital at constant prices (1993-94=100) 7.73 8.66 6.83

Manufacture of watches and clocks (NIC 98: 3330)

Number of Factories 0.75 1.12 4.50Number of Workers 0.22 0.34 3.59Total Persons Engaged 1.09 1.63 7.48Value of Output at Constant Prices (1993-94=100) 11.07 14.41 1.30GVA At Constant Prices (1993-94=100) 3.30 2.62 5.44Fixed Capital at constant prices (1993-94=100) 1.42 -4.89 5.33

Source:EstimatedfromASISummaryResultsofFactorySector



3.3 Partial and Total Factor Productivity Growth All India

In this section we estimate partial (labour and capital) and total factor productivity growth rates for IT Hardware & Electronics Sector at all India level for the period 1995-96 to 2005-06. As explained in the earlier section, GVA is considered as the variable for output. It is assumed that there are only two major factors of production such as labour and capital. Labour is considered as the total persons engaged in manufacturing or production process of IT Hardware & Electronics products while capital is estimated as the real value of capital investment (at constant 1993-94 prices) in the manufacturing process. Detailed methodology used for the construction of variables and the estimation procedure adopted for productivity growth rates has been given in detail in Annexure 3. Labour Productivity, Capital Productivity and Total Factor Productivity in the Electronics and IT hardware sector has been calculated from Annual Survey of Industries (ASI) data, published by CSO. The present study analysed the productivity scenario of the Electronics and IT Hardware Industry after liberalization i.e., from 1995-96 to 2005-06. Labour productivity has grown from Rs. 188806 per person engaged in 1995-96 to Rs. 324653 per person in 2005-06 (Table 3.5). In the case of capital productivity it may be noticed that it increased from Rs. 0.32 in 1995-96 to Rs. 0.71 in 2005-06. Total Factor Productivity Growth during the same period exhibited substantial year to year variations.

Table 3.5: Productivity and Productivity Growth Rates:

Year Labor Productivity

(Rs.)

Capital productivity

(Rs.)

Labor Productivity

Growth Rate(%)

Capital Productivity

Growth Rate(%)

Total Factor Productivity Growth Rate

(%) 1995-1996 188806 0.32 1996-97 198538 0.32 6.87 0.72 6.09 1997-98 172448 0.28 5.11 -14.64 11.61 1998-99 215684 0.61 -12.92 119.89 -70.92 1999-00 206085 0.70 -17.48 15.51 51.55 2000-01 219214 0.55 6.07 -21.65 -23.68 2001-02 249254 0.72 1.86 31.31 4.52 2002-03 294370 0.63 19.13 -12.97 17.83 2003-04 300522 0.46 -0.62 -25.96 15.04 2004-05 252559 0.54 -12.57 17.12 -16.74 2005-06 324653 0.71 40.44 30.11 20.33 Average 1995-00 196312 0.45 4.61 30.37 5.07

Average 2000-06 273429 0.60 9.05 2.99 2.88


In order to get a clearer picture of productivity growth scenario, we have converted the growth rates into an index. It may be noted from Table 3.6 that Capital Productivity Growth Index has grown from 100 in 1995-96 to 239.45 by 2005-06. In the case of Labour Productivity, it may be seen from Table 3.6 that it increased from



100 in 1995-96 to 135.89 by 2005-06. Similarly Total Factor Productivity Growth Rate Index has grown from 100 in 1995-96 to 115.64 by 2005-06. Both Labour Productivity Growth Index and Total Factor Productivity Growth Indices report substantial decline till 2001-02. However, later years report positive growth in the indices.

Table3.6:IndexofLabour,CapitalandTotalFactorProductivityGrowthIndices:

Year

CapitalProductivityGrowthIndex

LabourProductivityGrowthIndex

TotalfactorProductivityGrowthIndex

199596 100.00 100.00 100.00 199697 100.72 106.87 106.09 199798 86.08 111.99 117.70 199899 205.98 99.06 46.78 199900 221.48 81.58 98.34 200001 199.84 87.65 74.65 200102 231.14 89.51 79.17 200203 218.18 108.64 97.01 200304 192.22 108.02 112.05 200405 209.34 95.45 95.30 200506 239.45 135.89 115.64


Labour,CapitalandTotalFactorProductivityGrowthIndices



CHAPTER IV

COMPETITIVENESS ANALYSIS OF IT HARDWARE &

ELECTRONICS SECTOR

4.1 Benchmarking IT Industry Competitiveness The growth potential of domestic IT industry (both hardware and software) depends on the existence of favourable conditions in several interrelated areas like the quality of the IT and communications infrastructure, the supply of local talent, the research and development (R&D) environment and the legal regime, not to mention the overall business environment. A study undertaken by the Economist Intelligence Unit 2008 ranked 64 countries by assessing the enablers of competitiveness and determining their relative importance in IT sector performance.

In the overall IT competitiveness index, US ranks number one as its IT environment combines scale and quality in the key areas that promote competitiveness, including education, infrastructure and encouragement of innovation, as well as solid legal protection. India and China has been ranked at 46th and 49th respectively in the overall IT competitiveness index. India fares better than China because of its highly developed software industry but is far beyond Chinas hardware sector. Even in the Asia-Pacific region these two countries are lagging behind countries like Japan, South Korea, Australia and Taiwan who are providing the most competitive conditions for operation of IT firms. The relative IT competitiveness ranks of countries in Asia-Pacific region are given in Table 4.1.

Table 4.1: IT industry competitiveness in Asia-Pacific Region Rank Country Score 1 Taiwan 69.2 2 Australia 64.1 3 South Korea 64.1 4 Singapore 63.4 5 Japan 62.2 6 New Zealand 56.6 7 Hong Kong 54.1 8 Malaysia 34.2 9 Thailand 31.5 10 Philippines 29.8 11 India 28.9 12 China 27.6 13 Sri Lanka 24.9 14 Indonesia 23.1 15 Bangladesh 22.4 16 Vietnam 21.4

Source: Economist Intelligence Unit, 2008.



Actually, in case of both India and China, the negative impacts arising out of weaknesses in the industry environment has been overshadowed by positive effects of their competitive advantages in factors like huge workforce, low wages and vast english speaking population (India). However, this high growth of Indias IT software industry as well as Chinas IT hardware manufacturing cannot be sustained in the long run unless immediate attention is given by policymakers to improve the business environment in their respective country.

Future rivalry for Indias and China s positions is likely to come from countries like Russia, Brazil, Malaysia and Vietnam, as well as smaller markets such as Estonia, Lithuania and Chile as the skills base of each of these countries is improving. The warning bell has already been sounded India and China will need to improve here as well, as their cost advantages will erode; greater innovation will be required of their IT firms to remain competitive on a global scale"(EUI, 2007). Thus, finding of this study needs to be taken seriously by Indian policy makers and sincere efforts need to be taken to improve the business environment, infrastructure both social and physical, etc., encourage R&D activities and innovation to remain competitive in the global market.

The Standing Committee on Information Technology (2004-2005) Fourteenth Lok Sabha has already reported that the policy environment needs to be much more conducive to the manufacturer, more so, in view of the zero per cent duty which will become effective w.e.f. 2005 under the WTO agreement. Further, creating basic infrastructure e.g. guaranteed communication, uninterrupted power supply, speed of business for having competitive advantage and a thriving business climate is government responsibilities, to transform the struggling IT hardware and Electronics industry into a vibrant and competitive Industry. 4.2 India in Trade Competitiveness Map of IT Hardware & Electronics

Competitiveness of the Indian IT Hardware and Electronics sector is further analysed using the Trade Performance Index (TPI) which has been developed by the International Trade Center (ITC) Geneva, Switzerland, with the aim of assessing and monitoring the multi-faceted dimensions of export performance and competitiveness by sector and by county. This particular index is used in this study as TPI calculates



the level of competitiveness and diversification of a particular export sector using comparisons with other countries. It further brings out gains and losses in world market shares and sheds light on the factors causing these changes. Moreover, it monitors the evolution of export diversification for products and markets.

The competitiveness of Indian IT hardware and Electronics at the aggregated level may be assessed from the change (variation over time) in Indias share in the world IT hardware and Electronics market. A positive change indicates that Indias share in world market has increased and thereby implying the fact that competitiveness has enhanced during the time period under consideration for analysis. 4.2.1. IT Hardware and Consumer Electronics

India has been ranked at 47th in 2006 in terms of trade performance of IT and Consumer Electronics where as the relative change in its world share is only 0.0528% during the period 2002-2006 against 0.1855% during 1998-2002 (table 4.2). Table 4.2: Decomposition of Indias share in World IT & Consumer Electronics Market

Indicator's description Change between

2002 2006 Change between

1998-2002 Value Rank Value Rank

Change Index Share in world market (%) 0.09% 37 0.07% 40 Relative change of world market share p.a (%) 0.0528% 0.1855%

Competitiveness effect, p.a. (%) 0.1105% 25 0.2206% 16

Initial geographic specialisation, p.a. (%) 0.0063% 64 0.0056% 45 Initial product specialisation, p.a. (%) -0.0317% 85 0.0597% 21 Adaptation effect, p.a. (%) -0.0323% 71 -0.1004% 72 Number of exporting countries for the ranking in the sector 107 96

Average Current Index 47 46 Source: International Trade Center, Geneva (2006)

The effect of geographical specialization on Indias share in the world market has been not only positive but also increased during the period 2002-2006 as compared to that of the previous period (1998-2002). However, the negative impact of adaptation effect is a clear indication that India is not able to adjust its exports to changes in world demand in IT hardware and Electronics Market. But it is encouraging to note that the positive impacts of competitiveness effect of 0.1105% played a significant role in overcoming the combined negative impacts of product specialization and adaptation effect on Indias share in the world IT hardware and Electronics Market.



4.2.2 Electronic Component Market

The Trade performance of India in the Electronics Component Market has been ranked at 42nd in 2006. The relative change in Indias share in world market though is positive but declined from 0.1930% during 1998-2002 to 0.1050% during the period 2002-2006 (table 4.3). This may be attributed to sharp decline in competitiveness effect during the period 2002-2006 though the impacts of both product specialization and adaptation effect on Indias share in the world IT hardware and Electronics Market were positive during this period. Table 4.3: Decomposition of the change in Indias share in the World Electronic Components Market

Indicator's description Change between

2002 2006 Change between

1998-2002 Value Rank Value Rank

Change Index Share in world market (%) 0.32% 32 0.20% 34 Relative change of world market share p.a (%) 0.1050% 0.1930%

Competitiveness effect, p.a. (%) 0.0867% 32 0.9452% 3 Initial geographic specialisation, p.a. (%) 0.0113% 52 -0.0076% 58 Initial product specialisation, p.a. (%) 0.0049% 62 0.0104% 42 Adaptation effect, p.a. (%) 0.0021% 45 -0.7550% 112 Number of exporting countries for the ranking in the sector 119 114

Average Current Index 42 37 Source: International Trade Center, Geneva (2006)

4.3 India Vs China

It is a well recognized fact that the success of Electronics and IT Hardware Industry depends on the availability of technology, human capital as well as overall development of the Countrys ICT.



Table 4.4: Development of ICT in India vis--vis China

India China Innovation System Researchers in R&D / Mil. People, 2004 119.00 708.00Total Expenditure for R&D as % of GDP, 2004 0.85 1.44Manufacturing. Trade as % of GDP, 2004 15.29 50.35*University-Company Research Collaboration (1-7), 2006 3.30 3.90*Availability of Venture Capital (1-7), 2006 4.20 2.90Patents Granted by USPTO, avg 2001-05 316.40 448.20High-Tech Exports as % of Manuf. Exports, 2004 4.90 29.80*Private Sector Spending on R&D (1-7), 2006 3.80 3.60*Firm-Level Technology Absorption (1-7), 2006 5.50 5.00Value Chain Presence (1-7), 2006 4.80 3.80ICT Total Telephones per 1,000 People, 2004 84.50 499.40Main Telephone Lines per 1000 People, 2004 40.70 241.10Mobile Phones per 1,000 People, 2004 43.80 258.30Computers per 1,000 People, 2004 12.10 40.90Households with Television (%), 2004 37.00 91.00International Internet Bandwidth (bits per person), 2004 11.40 57.40Internet Users per 1,000 People, 2004 32.40 72.50Price Basket for Internet (US$ per month), 2003 8.70 10.10*Availability of e-Government Services (1-7), 2006 3.55 3.96*Extent of Business Internet Use (1-7), 2006 3.80 3.50ICT Expenditure as % of GDP, 2005 5.91 5.28Education Adult Literacy Rate (% age 15 and above), 2004 61.00 90.90Average Years of Schooling, 2000 5.06 6.35Gross Secondary Enrollment, 2004 53.50 72.50Gross Tertiary Enrollment, 2004 11.80 19.10*Internet Access in Schools (1-7), 2006 4.00 3.80Public Spending on Education as % of GDP, 2003 3.30 2.10*Quality of Science and Math Education (1-7), 2006 5.70 4.20*Extent of Staff Training (1-7), 2006 4.50 3.50*Quality of Management Education (1-7), 2006 5.90 3.50Note: * is based on the statistical score on a 1-7 scale of a large sample group in a particular country responding to the question Source: Knowledge Assessment Methodology 2006, World Bank

Table 4.4 reveals that Chinas ICT sector is well developed. But India is better off than China in some innovation system indicators like availability of venture capital, private spending on R & D, firm level technology absorption and the presence of a well developed value chain. India has higher public spending in education and internet access in school. The extent of staff training as well as quality of science and mathematics education and management education is also better in India.



Table 4.5: Market and Production Rankings in the world: India Vs China Sector Production Market

India China India China Rank Rank/Share (%) Rank Rank/Share (%) EDP 27 2 (16.0) 27 3 (10.5) Office Equipment 18 2 (17.6 21 5 (5.4) Control & Instrumentation

21 8 (2.4) 22 3 (7.0)

Medical & Industrial 26 4 (3.5) 22 4 (5.4 Radio communication (incl. Mobile phones)

23 4 (7.1) 25 4 (5.4)

Telecommunications 27 3 (9.0) 26 3 (7.9) Consumer Electronics 13 1 (21.8) 11 2 (8.9) Electronic Components

26 3 (8.3) 27 2 (17.3)

Total 29 3 (11.1) 26 3 (10.8) Source: Yearbook of World Electronics Data 2004/05, Vol 2 & Vol 3

But when it comes to performance in production or market share China is much ahead of India (Table 4.5). This clearly hints that there are some critical factors other than the level of ICT development, which has enabled China to have a competitive edge over India.

The answer to the mystery of Chinas success in IT hardware and Electronics market lies in its large domestic consumption led by the Government itself, unique package of investment and tax incentives, high competition among the local Governments for attracting hardware industry related investments, high investments in infrastructure sector, flexible labour laws and linking of access to domestic market with condition of local manufacturing (Fifth Report of Standing Committee on IT, 2004-2005).



4.4 Competitiveness Factor Identification

It is necessary to have an insight on the basic strengths and weakness of Indian economy (Table 4.6) under which the IT hardware and Electronics sector of the country is presently operating.

Table 4.6: Indias Competitiveness Strengths and Weaknesses Factors Strengths Weaknesses Economic Performance

Relocation of R&D facilities is not a threat to the future of your economy (survey)

GDP (PPP) per capita Estimates : US$ per capita at purchasing power parity

Relocation of production is not a threat to the future of your economy (survey)

GDP per capita US$ per capita Real GDP Growth Percentage Change, based

on national currency in constant prices Export of goods (% of GDP)

Real GDP growth per capita percentage change based on national currency in constant prices

Employment percentage of population

Relocation of services is not a threat to the future of your economy (survey)

Unemployment rate percentage of labour force

Govt. Efficiency

Consumption tax rate Standard rate of VAT/GST

Government budget surplus/deficit % of GDP

Ageing of society is not a burden for economic development (survey)

Tariff barriers tariffs on imports. Most favoured nation simple average rate.

Collected Total Tax Revenue Percentage of GDP

Start up procedures number of procedures to start a business

Central government foreign debt percentage of GDP

Corporate tax rate on profit maximum tax rate, calculated on profit before tax

Employers social security contribution rate compulsory contribution as a % of an income equal to GDP per capita

Country credit rating rating on a scale of 0-100 assessed by the institutional investor magazine ranking

Business Efficiency

Compensation levels (Estimates: Total hourly compensation for manufacturing workers (wages + supplementary benefits), US$

Labour Productivity (PPP) estimates: GDP (PPP) per person employed per hour, US$

Working hours (Average number of working hours per year)

Overall Productivity Estimates: GDP (PPP) per person employed US$

Remuneration of management Total base salary plus bonuses and long term incentives, US$

Female labour force (%of total labour force)

Banking and financial services professions Gross annual income including supplements such as bonuses, in US$

Labour force (% of population)

Remuneration in services professions (Gross annual income including supplements such as bonuses in US$)

Investment Risk Euro money country credit worthiness scale from 0-100

Infrastructure Mobile telephone costs Mobile cellular tariffs US$ per minute local call, off-net (peak)

Pupil-teacher ratio (primary education)Ratio of students to teaching staff

Fixed Broadband Tariffs Monthly fee (residential), US$

Mobile telephone subscribers (No. of subscribers per 1000 inhabitants

Fixed telephone tariffs US$ per 3 minutes local call (peak)

Pupil-teaher ratio (secondry education) Ratio of students to teaching staff

Qualified engineers are available in your labour market (survey)

Life expectancy at birth Average estimate

Science in schools is sufficiently emphasized (survey)

Human Development Index combines economic-social-educational indicators (Source:HDR)

Source: WCY 2008, IMD Switzerland



Against this background, the present study attempts to identify the factors that are either facilitating or hindering the competitiveness of the Indian IT Hardware and Electronics Sector with the help of Porters diamond model. 4.4.1 Factor Analysis

The factor condition is analyzed through the contribution of various factor endowments like natural resource, human resource, physical infrastructure, technology and capital resource towards competitiveness of this sector.

Raw Material Availability: The manufacturing of Electronics and IT hard

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