Sunday, May 29, 2016

Electronics as Bare Necessities in India: A New Sectoral ‘Innovate in India’ Paradigm

Fitbit is the hugely popular global manufacturer of fitness band and activity trackers. It has recently launched through Amazon in India its fitness watch Fitbit Blaze at Rs 20000 (USD 300). In US it is sold at a maximum of USD 200, with deals in shops like Best Buy dipping the price lower. Fitbit Charge HR is retailed at USD 225 (Rs 15000) in India, compared to USD 125 in US, promotional pricing being USD 100. Microsoft Surface Pro 4 in its mid-range specification (i5, 4GB, 128 GB) costs Rs 90000 (USD 1400) on Amazon India which is the price in US of the top rated Surface 4 Pro (i7, 16 GB, 256 GB) model. Similar is the case with all other electronic products, from smart phones to flat televisions and from washing machines to refrigerators, whether they are wholly imported or made in India.

A UHD curved television costs Rs 300000 (USD 4500) in India while in the US a comparable model costs USD 2500. The usurious pricing of Apple electronic products in India is well known.  It cannot be said that the rather high pricing that prevails in India is only due to import duties, if any. Customs duties on different types of products range from 6 percent to 28 percent, duties on parts being on the lower side. Samsung claims to make its latest range of Galaxy S7 smart phones in India; but they are priced no less with prices upwards of USD 800, a near 50 percent premium on corresponding unlocked models in US. Clearly, whether imported into India or made in India, electronic products seem to have their own premium pricing logic. The economics of electronic products need greater research, it appears.

Bare necessities

Someone must really put their pencil and pen to paper to understand the economic travesty of electronics in India. A pencil in India is probably 10 percent of the cost in US and a pen is probably 20 percent of the cost. There is no reason why we should not aim at cheaper pricing for electronics products in India, in terms of purchase power parity. Given that the exchange parity between US and India is 66 to 1, the impact of high pricing of electronic products on the consumer surplus in terms of broader ability to purchase more necessary products is evident. The price premium (over above the basic benchmark price) that is embedded in one electronic product such as a smart phone (which may be say, Rs 25000) sucks away the money that could be spent on 333 rice packs of 1 kg, 100 knowledge books of Rs 250 each, 12500 A4 white sheets, 2500 ball pens of Rs10 each, subscription for 5000 issues of daily newspaper, or an angiogram, in a manner of speaking.

The comparison is not to suggest that people of India should shun electronics. A nation, in contemporary and futuristic times, can only grow when it is electronics-oriented. However, it must just not be through only consumption of electronic products (that too imported ones); it must be through design and manufacturing of electronics products, from multiple base chips to a range of products in India. A review of history of developed nations suggests that only those nations which balanced competencies in electronics and non-electronics could become
 leaders in industrial development. The point is that electronic products must also be designed, manufactured and sold in India in a manner as natural as any of the bare necessity products. Electronics is no longer a luxury class of products; it is a class of bare necessities!

No more monopolies

There was a time in the 1980s when the semiconductor industry was dominated by Japanese manufacturers such as NEC, Toshiba, Hitachi, Fujitsu, Mitsubishi, Matsushita, Sony and Panasonic. From the 1990s, however, Intel began to dominate the chip industry, partly abetted by Japan’s strengthening Yen. In the 2000s, it came to be believed that Intel and to an extent AMD only can dominate the chip industry. India, apart from failing to see the importance of a domestic electronics base, lacked the confidence to establish such an industry for want of basic research base in semiconductors. However, other manufacturers in US such as Qualcomm, Micron, Broadcom, SanDisk and Nvidia and manufacturers from Korea such as Samsung and SK Hynix began researching for newer chips and started dominating the chip manufacture. Part of the decline came from a dip in personal computer chips but the more significant decline was because of Intel’s misjudgement on the growth of mobile devices and the need for customized mobile chips.

At another level, monopolies in manufacture of electronic products got dismantled more decisively even earlier. Korea, followed by Taiwan and China started manufacturing a range of electronics equipment, including more lately tablets and smart phones. Japan, of course, maintained its pioneering dominance in electronics while European countries which were early pioneers recovered and kept making progress with renewed technologies. Throughout all this, China has emerged as the world’s chosen base for electronics manufacture, irrespective of the brand, so much so they have by now established their own status independent electronics producers (Lenovo, Haier, Huawei, TCL, ZTE etc.,). That a Chinese company (Foxconn) has become a white knight for a Japanese company in deep trouble (Sharp) shows the extent to which China has matured in electronics.  India has missed the boat during this period.

Ways to go

India has the promise to be the next hub for electronics manufacture as China has been a couple of decades ago, notwithstanding the missteps even on the few first steps such as Nokia Park. Notwithstanding this, Foxconn has signed an agreement with Government of Maharashtra to set up a USD 5 billion electronics manufacturing park. There are two routes to spur electronics manufacture in India. One is to encourage contract electronics manufacturers such as Foxconn to set up their manufacturing bases in India. The parallel step is to encourage electronics giants such as Sony, Panasonic, Samsung, LG and Apple to set up their own manufacturing bases in India. Both these strategies are likely to lead to a good multiplier effect on the industrial economy of India with newer component bases, newer manufacturing processes, and large number of jobs. What happened in automobile industry can be foreseen in electronics too in India. That may not be the whole story, however. 

The key to developing an electronics base lies in research into new materials, and new processors. Samsung has over 500 patents on graphene, the new material for a host of futuristic technologies. Similarly, global giants have patents on other materials belonging to classes of metals, polymers and biomaterials as well as wearables, sensors and other futuristic gadgets. Water and dust resistant smart phones use materials that conduct signals but do not allow water in their openings. Now, Apple would like to use a material that makes antenna holes invisible. It is difficult to conceive of developing new electronic products without developing new materials. For example, a new development in wearables envisages wearable skin-like polymer. Manufacturing of new electronic products under contract or captive use is one great leap for India but development and manufacture of new materials and new components would be an even greater leap.

100% research

China and India achieved major milestones in manufacture through 100 percent special economic zones for manufacturing. China has, however, gone forward by facilitating exclusive zones for innovation research and demonstration. There are 14 such zones in China now. China has also promised minimal governmental intervention in such zones and research endeavours.  In 2006 itself, China identified lack of indigenous technology intellectual property and indigenous innovation as two major national problems. A nationalistic Chinese government declared in 2006 that without independent innovation, China would be unable to claim an equal place in the world or achieve national honour. Apart from providing financial grants and incentives to encourage R&D, Chinese government openly traded access to the vast Chinese market for technology transfer by MNCs. In fact, as many as 400 of Fortune 500 firms have their R&D centres in China.

Interestingly, China has provided targeted support to key emerging industries over the last decade. These are electronics, supercomputing, semiconductors, digital machine tools, robotics, and more recently nanotechnology and rare earth materials. China has also relied on overseas Chinese diaspora in the fields of science and technology to lead such innovation efforts. India needs to develop a completely novel innovation strategy which has path-breaking elements. The following are suggested: (i) complete electronics value chain, from chips and semiconductors to electronic devices and electronics in other devices, (ii) Internet of Things, (iii) new materials (iii) nanotechnologies (iv) wearable technologies, and (vi) autonomous devices and equipment. The current strengths in information technology, heavy industries, capital goods and other industries must, of course, be continuously reinforced with new innovations.

100% research will happen with 100% support from public and private sectors, and all scientific and technical personnel in India and abroad. Governments in India are pooling or providing thousands of acres for airports, seaports, roads and conventional industries, and even financial cities and capital cities which support construction activity and provide direct employment generation. A few thousand acres must be allocated for National Innovation Centres for setting up world-class laboratories in the above areas, and provided free of charge in exchange with equity ownership, with returns expected from commercialized technologies through equity ownership. Governments, public sector corporations and private sector companies must also start making bold moves by acquiring stakes in overseas technology companies developing leading edge technologies. Electronics and electronic products in their various hues are the basic necessities of life, and require dedicated focus, investments and nurturing by all stakeholders in India. Otherwise, Indian economy will continue to fork out huge premiums on imports, and more importantly will not be able to fulfil its true scientific and technical potential.

Posted by Dr CB Rao on May 29, 2016


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