India’s share in global hi-tech manufacturing value added has remained where it was 15 years ago. Reason – lacklustre policies and lack of incentives. If India really wants to boost its exports of “high-tech” products, value-added manufacturing needs to be an integral part of its new Foreign Trade Policy. The Dollar Business identifies five industries that bear the potential to uplift India’s manufacturing sector, with of course, the right catalysts put in place by the policymakers

 

The new government, from day one, has been searching for ways to revive India’s manufacturing sector. Well, the reason is simple. India has been and remains a non-existent player in global markets when it comes to technology-intensive products. Although, today, India manufactures most of the products – from low innovation products like earphones and speakers to high technology products like missile and satellites, it still lags behind China, Thailand, and the rest of Asia as a manufacturing hub. That’s what is now turning out to be a real concern!

Technology intensive manufacturing has the ability to not only enhance revenue generation (through exports), but also the potential to have a multiplier effect on the overall economic growth. India has been talking about it for years. But nothing much has happened on the ground. The share of manufacturing in India’s GDP has stagnated at 15-16% since 1980 (Department of Industrial Policy & Promotion, GoI). On the other hand, other Asian economies like China and Singapore, with a clear focus on manufacturing, have shown the world what value added exports can do for an economy. Currently, India’s share in world manufacturing is just 1.6%. This is in stark contrast to China, where manufacturing contributes about 35% to the GDP and is about 14% of world manufacturing, up from 2.9% in 1991. In fact, contribution of manufacturing to GDP is much higher for countries like Malaysia (25%), Indonesia (25%) and Thailand (36%) as compared to India.

 

Behind the times

Although exports of hi-tech products from India grew at a CAGR of 26.7% during the five year period between 2007 and 2011 (with exports having touched $20.9 billion in 2011 as compared to $8.1 billion in 2007; source: Exim Bank), the country stands nowhere when compared with other developing and emerging nations in Asia like China, Indonesia, Malaysia and Singapore in terms of manufacturing value added.

Global value added of hi-tech manufacturing was $1.5 trillion in 2012, making up 14% of the manufacturing sector. While China, with a 23.92% global share, was the second largest producer of hi-tech products, India with a 0.93% global share was a distant laggard. If we consider the 15-year period from 1997 to 2012, the share of China’s hi-tech manufacturing industries in global value added in the high technology sectors has swelled from 3.29% in 1997 to 23.92% by 2012. Though United States, with a 27.28% global share, is the largest global producer of hi-tech products, it’s China that rules the segment when it comes to exports with a surplus of over $200 billion, followed by EU and US. On the other hand, India’s share in global hi-tech manufacturing value added has remained where it was 15 years ago – from 0.41% in 1997 to a still insignificant 0.93% (Data source: 2014 edition of Science and Engineering Indicators by US National Science Foundation).

 

 

Even when it comes to the share of manufacturing value added (MVA) in gross domestic products (GDP), India stands nowhere close to its Asian peers. While countries like China and Thailand can boast of over 30% MVA share in GDP, India’s share of MVA in GDP is just 14.9%. In fact, India ranks 52nd globally in terms of MVA as a percentage of GDP, lower than even Bangladesh!

Interestingly, the industries that dominate the hi-tech sector in China are the same as those in the developed nations, reflecting the country’s ability to displace local producers in those markets. However, that’s not the case with India, which focuses on just a few sectors.

 

Get the basics right

Economic theories associate hi-tech sector with the economic growth of a nation. As an economy grows, a shift from a natural resource based and low technology intensive manufacturing and exports to high technology intensive manufacturing and exports is bound to happen. Thus, it becomes an imperative for a developing country like India, to shift its focus from traditional export items, which are largely low in technology intensiveness, to medium and high technology intensive exports. Although improvement has been marked in medium-high technology intensive exports, dominance of low technology intensive exports still persists. This becomes a real concern when seen in conjunction with the rising manufacturing prowess of other comparable Asian economies.

No doubt, National Manufacturing Competitiveness Council (NMCC) has set a target that manufacturing will contribute 25% to the GDP by 2025. But for that to happen, manufacturing will have to grow at a rate that is 2.4% higher that the current GDP growth rate. To accomplish this task, proactive response is required from all stakeholders, including private players and public sector. The Dollar Business Intelligence Unit outlines three issues, which if addressed immediately, can help both the government and the industry achieve this target.

 

Waiting for that ‘Eureka’ moment

Lack of depth in technology is one of the biggest factors affecting the growth manufacturing in India. Most Indian manufacturers get stuck at the basic or intermediate level of technological capabilities, which places them way below their global counterparts in the manufacturing value chain. Hence, policymakers need to bridge the technology divide that exists between Indian manufacturers and their global peers. Overcoming this challenge would require greater incentives for research and development (R&D), investments in building technology infrastructure and promoting strategic joint ventures and overseas acquisitions by Indian manufacturers.

The current level of investment in R&D infrastructure in India is still way below global benchmarks. India’s R&D spend, as a percentage of GDP, is just 0.76% as compared to countries that have proven hi-tech manufacturing capabilities (Japan – 3.39%; Singapore – 2.23%; Germany – 2.88%; China – 1.84; and US – 2.85%; data source: US National Science Foundation). Even within the current R&D spend, the share of industry and business R&D for India is a miniscule 36% as against 68.5%, 75.7%, 77%, 67.3% and 76.5% in US, China, Japan, Germany and South Korea respectively. What’s most alarming is that the proportion of government R&D that goes towards industry is a paltry 6% (data source: BCG). This really calls for an immediate action on the part of policymakers. Incentivising innovation and promoting R&D will not only help encourage hi-tech exports but will also boost the economy apart from creating employment. “By investing in skills and widespread technology adoption to harness the technology trend, India can boost its GDP by $90 billion by 2020 – 2.8% above the current trajectory. These moves will also help create 10.8 million jobs by 2020,” says an Accenture report.

Easing the patent registration process, which takes almost twice the amount of time in India than in developed countries (7-8 years versus 3-4 years), rewarding successful commercialisation of innovation (like China where employers are required to pay employee innovators a certain amount of annual profits) and other such measures are bound to boost R&D and innovation in India.

 

Harmony or discord?

Another area that requires much attention is harmonisation of tax, duty structures and rationalisation of free trade agreements (FTAs) to ensure a level-playing field between imports and domestically manufactured products, if not an advantage in terms of factor costs. “The current system of taxation leads to distortions to the detriment of domestic manufacturers. While the difference varies across states, the overall tax and duty structure can cause a 17% cost disadvantage for domestic manufacturers,” states a Boston Consulting Group report.

 

Also, there are anomalies in the current duty structure for intermediate and finished products, that create advantages for importers over domestic manufacturers. Several cases exists in various sectors where import duty on an intermediate product is more than that on the finished product, which makes domestically-made product costlier than the imported product. For instance, while there is a basic custom duty of 10% on certain components of boilers, it’s just 7.5% on the final product, i.e. boilers. This affects the domestic boiler industry adversely. Another example could be insulin. While insulin injections attract a total import duty of 21.78%, insulin and its salts attract a total import duty of 25.85% discouraging manufacturing of insulin injections domestically. “The issue has become even more pronounced as India is now a part of number of free trade agreements with countries like Japan, ASEAN and South Korea etc.,” says a recent FICCI survey on inverted duty structure in Indian manufacturing sector.

It is high time policymakers review and harmonise such value chains if they really want to promote value added manufacturing in India. Agrees K. Chandrasekhar, Founder & CEO of Forus Health, a Bengaluru-based technology solutions provider, as he tells The Dollar Business, “The duties on imported finished goods should be higher than the components. That’s how you can encourage value added manufacturing.”

 

One for all. All for...

Developing clusters and special trade zones for hi-tech manufacturing will also help boost its exports from India. The reason is simple. Co-location of several production facilities not only increases supply chain responsiveness, but also decreases the time to market thereby increasing the product’s competitiveness. “Clusters have led to cost savings to the tune of 13% on an average relative to an isolated plant,” states a BCG report.

A good example of how clusters can boost a sector’s competitiveness can be Thailand’s Hard Disc Drive (HDD) clusters. These clusters, which house the entire value chain, have been a boon for Thailand’s HDD industry. In fact, within just five years of inception i.e. between 2001 and 2005, not only did the Thai value add in HDD rise by 30-45%, but Thailand’s share in the global production of HDD was augmented from 10% to 30%, making the country the world’s largest exporter of HDDs. China is another example of how cluster approach can be a boon for the manufacturing sector.

 

Time to act

It’s not just the hi-tech sector alone, as Prime Minister Modi has pointed out several times, India should aim at becoming an overall manufacturing hub – from electrical to electronics, from automobiles to pharmaceuticals, to almost everything. If that happens, hi-tech exports is automatically the next frontier. For that to materialise, proactive polices that not only incentivise innovation and hi-tech product development, but also promote hi-tech exports through appropriate incentives and financial enablers (for instance, a line of credit or a favourable duty structure) are required. Other issues such as erratic power supplies, gridlocked seaports and airports, governance etc. also need to be addressed if we want the manufacturing exports to rise from the current levels.

 

Our policies should also to be geared to take advantage of the growth potential in emerging and developing economies. Not to say, the value added manufacturing needs to be an integral part of India’s new Foreign Trade Policy (FTP). In fact, The Dollar Business Intelligence Unit has identified five industries – aircraft components, pharmaceutical, electric power machinery, electronics and telecom equipment – which if offered proper incentives in the forthcoming FTP besides overall support from policymakers on various fronts, can trigger a turnaround for India’s hi-tech sector.

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Aircraft Components - A Mars mission should be convincing enough

Barely three months after India proved to the world that a mission to Mars doesn’t call for a colossal, bailout sum, we are left wondering whether India’s manufacturing community in the aerospace industry needs more reasons to disbelieve that Made-in-India and Rocket Science are expressions separated by time. Perchance the sky between Earth and Mars is far too hollow to bridge India’s trust and potential

Steven Philip Warner, Editor-in-Chief | The Dollar Business

 

One rainy Bangalorean - afternoon of 2005,  engineer-turned-millionaire G. Raj Narayan, stopped by M. S. Venkatesh’s house. For two friends who had reveled in each other’s shadow since their teenage years, it was easy to find reasons to meet (undecided or otherwise). Only, with age, these reasons moved from imperfect arguments to prolonged discourses on scientific subjects. Sometimes, a subject would be discussed for months – the number of episodes exposing the conspicuously-designed narrow script of a typical drama season on television. “Our discussions on aircraft and choppers would be never-ending,” recalls Narayan while speaking to The Dollar Business.

Then, Narayan’s entrepreneurial dream had already taken shape – his electronic musical instruments business had gone global. On the other hand, Venkatesh had recently retired from Hindustan Aeronautics Limited (HAL) as the GM of its Helicopter Division. The two had worked on turnkey solutions at HAL until 1979, designing avionics and implementing aircraft projects for the Indian Air Force (IAF) for close to a decade. And this trust, Narayan was certain, was enough alchemy to make his abstract, original passion-turned-business idea turn to gold.

Rare. That particular day, the discussion was short. It began with avionics, led to the Jaguar and in less than two hours, the duo had decided to stage a comeback into aero components business. They also decided not to reveal that one of them was an exporter-manufacturer of musical instruments. “The world will laugh at us,” they thought. So, the duo floated a new company – Radel Advanced Technologies.

 

Today, Radel manufactures everything from rocket pods for fighter aircraft to airborne electronic modules used in aircraft engines to voice warning systems.

Narayan appears to have struck gold.  But while he confesses that the industry has been kind enough to make him a millionaire, the air of confidence with which he condemns much of what is confabulated in the name of cherished triumphs of private players in India’s aircraft manufacturing industry, is to say the least, convincing. As per him, the positive picture painted...is a fallacy.

Conduct some judgement on the ideals and realities of the industry and you will agree with Narayan that the alleged bumps on our road to manufacturing greatness are actually heights that will need some climbing. Little done, much left to be achieved is how the storyline reads for the Indian aircraft component manufacturing industry. For now.

Jet, set... upset

Until 2001, manufacturing in this industry was limited to the likes of HAL, NAL, DRDO, and other defence public sector undertakings (DPSUs). The big reason was protection. Even post-2001, when the government allowed 100% domestic investment by private firms in the aircraft and aircraft component manufacturing industry, the unclear conditions surrounding industrial licence (for supplying to the defence) and FDI up to 26% with ropes (not strings!) attached made it virtually impossible for private companies to dream of a future in this industry.

The introduction of the Defence Offset Policy in 2005 and its subsequently revised versions did bring some relief to manufacturers, but the backlog of $5 billion in offsets yet to be awarded to private Tier II and III suppliers in India (as of date) is a clear sign of the policy’s inefficiencies. And this situation is further set to worsen, as John Siddharth, Aerospace and Defence Expert, Market & Markets, tells The Dollar Business, “The total offset due is expected to double to $10 billion by next year.”

Even T-O-T (Transfer of Technology) as was originally envisioned through the policy has not occurred, as Aravind Melligeri, CEO, Aequs, tells The Dollar Business, “One of the main objectives of the Offset Policy was to effect T-O-T from global OEMs to indigenous aircraft manufacturers. The actual results of such a transfer have been disappointing.”

Three reasons can be imagined for this failure. One, the current offset policy allows OEMs to discharge their offset obligations without transferring advanced technology. Two, the OEMs lack confidence in indigenous manufacturing capabilities. Three,  the OEMs lack assurance that they will retain control of their intellectual properties. In short, global OEMs were and are still reluctant to transfer advanced technology. How toothless can a policy turn out to be?

 

A character change?

Besides a compromised policy, technical expertise is an issue. Industry observers maintain that in the name of R&D, design and innovation, the bulk of the work that is outsourced to India centres of leading aircraft manufacturers is plain documentation and CAD work. This problem also stems from the fact that for decades together, private players were disallowed to scale the boundaries of defence and commercial aircraft manufacturing. As a result, the pool of talent ordinarily seen in other indigenised sectors, never became reality in aerospace.

Besides shortage of technical expertise, issues like high investment costs, lack of clarity in certification parameters, minimal export-related incentives (that includes most notably, a pint-sized 1.9% duty drawback, and a 2% incentive under the Focus Product Scheme) are plaguing the industry.

Indeed, much is expected of a Civil Offset Policy in this particular industry, one that could be unveiled some time in FY2015-16. At the same time, it is important that both policymakers and investors understand that ‘Make in India’ becoming a reality in this industry will result from global aerospace companies sourcing from India out of choice and not due to offset mandates.

Unf‘air’ games

Currently, the small and medium-sized enterprises (SMEs) supply up to 25% of the sub-assemblies and components to public sector units like HAL and BEL or to big private Indian companies like M&M, HCL, Tata Advance Systems, etc. This has become a customary practice today as Narayan of Radel Advanced Technology shares his experience with The Dollar Business, “A few years back, Lockheed Martin visited our facility and were satisfied with our standards of manufacturing. But they refused to partner or deal directly with an SME like us. That was expected because a Lockheed will only deal with a Tata or an M&M and expect that these big OEMs will in turn outsource work to tier III suppliers.” SMEs in this industry are looked down upon as forever sub-contractors.

Isn’t this an unreported proof of how unfair the game has become for small to mid-sized firms in this industry in India who hope to have their components kiss the skies? It’s simply a consequence wrought by about two decades of negligence by bureaucrats.

 

For once, a PSU idol

For lack of scale and ambition, private manufacturers in this industry are mostly stuck between the Tier III and II levels. For the scenario to change, i.e. from foreign buyers’ purchase habit to be altered from compulsive to selective, India’s private players have to start stretching their imaginations beyond hydraulic pumps, actuator subsystems, linkages and pistons. This change in mindset is the prime challenge for both policymakers and private players.

Thankfully, a handful of Indian players – like Dynamatic Technologies, Samtel, Aequs, etc. – are aggressively building capabilities for potential Tier I and Tier II supplier partnerships. Some foreign OEMs – like Racaero, Safran, etc. – have also established their presence in India and are actively participating in Indian government contracts, while signing JVs with Indian companies.

Private players in India are fast trying to move up the value chain to shadow HAL. And that is not quite unexpected. Till date, the PSU has manufactured a dozen types of aircraft with in-house R&D, rolled out close to 3,700 aircraft, 4,000 engines and overhauled over 8,500 aircraft and 30,000 engines. With projects such as Medium Multirole Combat Aircraft, Light Utility Helicopter, Medium Lift Helicopters, the PSU is quite a model to emulate.

In the private zone, besides commonly-known giants there are some mid-sized Tier I and II indigenous suppliers that should serve as motivation for believers of ‘Make in India’. They are unique by themselves.

 

 

Dynamatic Technologies is already known for complex aero structures such as air frame structures, precision components, wing, rear fuselage, ailerons, flaps, fins, slats, stabilisers, canards and air brakes. The company has manufactured the ailerons and wing flaps for the Intermediate Jet Trainer HJT-36 and major airframe structures for the Sukhoi 30 MKI Fighter Bomber. It also works closely with Airbus and Spirit AeroSystems to assemble Flap Track Beams for the Airbus A-320 family on a single source basis. It has become the first to prove that a “fully functional” aero-structure of a major commercial jet can be manufactured by an Indian private sector player.

Aequs is another shining example. The company supports its aerospace customers on global programs related to aero structures, engines, accessories, actuation systems, aircraft interiors and ground support equipment and specialises in complete end-to-end solutions for the aerospace industry right from design and analysis to manufacturing. It is the only private player in India to have established an SEZ for manufacturing of aircraft components (in Belgaum).

Taneja Aerospace & Aviation (TAAL) is another growingly common name in the Indian aeronautical circuits. The only listed company from the private aerospace manufacturing space in India, it is also the only private manufacturer of complete aircraft in the country. [Note: It manufactures small civilian aircraft, aero-structures and aircraft parts.]

There are other private firms that are actively looking to move up the value chain in India. By some standards, they have already made a mark. These include the likes of Magnum Aviation (known for manufacturing aircraft and engine spares), Maini Precision Products, and SEC Industries (precision manufacturing, aerostructure components, parts and accessories of aircraft), Axis Aerospace (life cycle support, engineering and design), Samtel Display systems, Data Patterns, Avantel Avionics (aircraft displays, simulator systems), etc.

JVs signed by foreign manufacturers in India is another encouraging sign, a beacon of hope for India’s manufacturing capabilities. Agreements between Dassault Aviation and Tata Technologies, HAL and Elbit Systems, Lockheed Martin and Tata Advanced Systems, AgustaWestland and Tata Sons, Bharat Forge and Safran, Aequs and Magellan Aerospace, etc., are some examples.

Operating margins of 10-15% and 6-7% net margins from export-manufacturing are attracting bigwigs to invest in this industry. [Due to low volumes, without exports, players in this industry with only a sell-in-India focus will find living unsustainable.] Popular companies in the non-aeronautical manufacturing businesses such as TVS-Sundaram Clayton, RICO, HCL, Bharat Forge, etc., are thereby looking to make bigger inroads into this industry in the field of manufacturing mechanical, electrical, electronics and composites. What makes India special as an export-manufacturing cluster of clusters is, however, the major driver from an export perspective is – easy guess that – the advantage of low cost labor. The average manpower rate in an Indian MRO is approximately $35 per hour which is less than 50% when compared to Europe or US, where the cost to company varies between $75 and $80 per hour. “The cost advantage means margins from Indian MROs will be higher than the average global margins. Most of the global aerospace companies are setting up their R&D centers in India due to the cost advantage mantra,” says Siddharth of Markets & Markets.

Which brings us to the next question – the last mile. All R&D and little manufacturing makes the Indian aircraft manufacturing industry worth giving a pass. Now that’s an elephant in the room!

 

Elephant in the room

Experts complain that despite many claims, India has been rendered to a manufacturing zone meant for either low value-add sub-contracts or captive R&D work. Precisely why, despite years of existence in India and supplying billions of dollars worth of aircraft and components to both commercial buyers and the government in India, foreign players have not gone beyond “speaking” of a manufacturing facility and SEZ in the distant future, and “establishing” structures in the name of innovation centres.

Since 2006, Boeing has been promising a full-fledged MRO facility in MIHAN SEZ at Nagpur. For some trouble related to the Nagpur International Airport, the facility is yet to see the light of the day. Honeywell Aerospace, despite being a global provider of integrated avionics, engines, systems and service solutions for aerospace industry, currently maintains only a captive design and development center in India. It is of course, “looking to expand its presence in this area in India” as per a PwC report titled, ‘Changing dynamics in the Indian aerospace industry’. Like Boeing, Airbus too has been analysing ways to use India for component manufacturing since 2006. It had even announced that India will be one of the key centers for design and development of the A350 family. Today, it has a captive unit in Bangalore for everything from modeling and simulation to flight management systems and computational fluid dynamics (CFD). Everything except manufacturing! [For that, it has contracts signed with companies like Dynamatic Technologies, Spirit AeroSystems, TATA, Aequs, HCL, and even HAL.] Snecma, another supplier of aircraft also engages only in research, documentation, and availing of low-cost services offered in the MRO sphere.

With the Civil Offset Policy being talked about, it is important the foreign aerospace players are not only asked to source 30% (or x%) from India, but also made to invest a finite sum into developing manufacturing facilities in this industry. R&D centres are a good starting point. But the last mile – manufacturing plants – is still a question.

Emulate to prosper

If you can’t innovate, copy the leaders – you are bound to cover some ground. The growth of aerospace manufacturing industries in both China and Brazil were initially driven forward by huge investments by the respective state governments that established R&D and manufacturing clusters (unlike in India, where the only hopeless hope for the private players seems to be offsets).

In Brazil, the government helped establish a manufacturing giant in the aeronautical business called Embraer. This entity’s birth in 1969 gave rise to about 35-plus local aircraft assembly and manufacturing firms that started supplying both commercial and military aircraft, and helped Brazil become a net exporter in the aerospace sector. Today, Embraer has over 140 customers across 30 countries and is Brazil’s second-largest export-manufacturing entity. This close partnership with a Tier I supplier created magic for the country’s aircraft manufacturing industry.

In China, the government established aircraft manufacturing clusters and consolidated a much-fragmented industry. China established a conglomerate of aviation industries (AVIC) in the first half of the 1990s that was made up of about 210 firms. The group included engine and component manufacturers, and aero-structure designers and assemblers. Subsequently, AVIC was divided into two parts AVIC I (for commercial aircraft) and AVIC II (for helicopters and general aviation aircraft). What is a big lesson for India’s manufacturing industry is the fact that in China, the move up the value chain was gradual and steady – its industry started with manufacturing aircraft parts and assembling aircraft for the military (between 1960-1975) before moving to utility aircraft (in 1977), and finally to regional and commercial aircraft (starting 1998).

A combination of the Brazilian and Chinese models will allow the much-fragmented and disoriented Indian aircraft manufacturing industry to get streamlined and work in an orderly fashion to become popular globally.

The take off

No doubt, there is potential in India’s expertise in the process of aircraft manufacturing. Talking purely of capabilities, HAL supplies forward passenger doors (A320s), Over Wing Exit Doors (B757s), Uplock Box Assembly (B777s), Bulk Cargo Door (B767s), Freighter Conversion Kit (B737s), Gun Bay Door (F/A 18), Weapon door and tail cone (B P-8 I) in the aero structures market. In the avionics segment, Inertia Navigation Systems and Flight Data Recorders are its core strengths. Another example can be of the cabins of Sikorsky S-92 that are manufactured at Aerospace Special Economic Zone, Hyderabad in collaboration with Tata Advanced Systems (TASL) which are 100% indigenous. Sikorsky has even won a $1.24 billion deal for six US Presidential helicopters and the cabins for these helicopters will also be exported from India.

Given these, with the right talent pool in place and transparency and efficiency in policy implementation with single window clearance systems, everything from initial design to the final aircraft can be had. But a hurried approach won’t do. Indian private companies have shown the intent, but coordination of efforts and birth of manufacturing hubs like Bangalore, Chennai, Hyderabad and Belgaum will help unearth India’s real, sustainable advantage in this industry.

That day is not far. But not too near as we can see it.

 

 

 

Pharmaceutical - It’s still a long march to discovering glory

Indian pharma players have been capitalising on generics opportunities in India and abroad for long now. It’s about time they look beyond generics and focus on therapies and technologies that have the potential to take India up the global pharma value chain. But for that to happen the policymakers will have do more than just pay lip service to the needs of the industry, and real soon

Satyapal Menon | The Dollar Business

 

Going by the global buzz Pharma is big business in India. It is not just the export figures, presently valued at around $12 billion, which lends credence to the evaluation of Pharma being India’s forte, but also forecasts about the sector gaining momentum and consolidating on its stature year after year. The fact that a large chunk of exports are to United States and European countries – countries which emphasise on the highest quality standards and technologies – reflects the esteem that India enjoys in the developed world. A significant number of over-the-counter drugs sold in the United States is made in India, which also is a global leader in generics’ export.

But before you get overwhelmed with euphoria, there is a catch to it! India’s domination has always been in export of generics, active pharmaceutical ingredients (APIs) and drug intermediaries, which means that the product specifications or the formulae are there on the platter for the manufacturer to translate it into required forms and formulations. Moreover, generics get a head start in terms of consumer base because they are similar to the off patent or expired patent products which have already established their presence and efficacy in the market.  Generics, of course, have proved to be a boon to domestic consumers, emerging economies and low-income countries, because of their lower costs compared to patented products. So, while according all credits to the manufacturers for producing affordable medicine, their inevitable inclination to cater to the market demands should also be appreciated. But such propensity towards generics had also in many ways resulted in dearth of initiatives for innovations.Very little intellectual and financial capital is pumped into research & development (R&D), and new drug discoveries are very few and far between, except for significant endeavours in biotechnology segment.

No takers

Many off patent and expired patents have few or no takers and development of new chemical entities (NCEs) have no place or little space on the agenda of even many Indian Pharma majors. An industry source very succinctly explains the production process in the generic sector: “The recipe is the brainchild of the chef who provides detailed information about the ingredients to be added and the cooking procedure to prepare a cuisine. All we, as cooks, have to be do is to follow the instructions to a T, and mix the salt, spice and whatever else is prescribed, in exact proportions and process the ingredients to precision. Of course, you need to have the required kitchen appliances in place, and a good kitchen at that – read it lab or technological infrastructure.”

Even the government seems to have been affected by the inherent preoccupation with generics, as indicated by the list of drugs selected for focus product scheme (FPS) and incentives under the category of hi-tech products. There is no scope for promoting innovations. The 52-product list comprise a spread of ant-sera/antigens, vaccines, and antibiotics and cardio-vasculars, a significant number of which are generics, APIs and drug intermediaries. The list reflects little clarity on parameters applied for the selection of the products for incentivisation. It is open to a host of questions. First and foremost, what are the parameters applied for the selection of the products? Is it intended to promote discovery activities for new drugs, molecules or more efficacious and multi-potent variations of the original drug for a similar disease? Is it to enable the manufacturers equip themselves with the latest technologies for production? The big question is, in what context is the term ‘hi-tech’ being applied in pharmaceutical segment. Is it research technologies? Is it manufacturing technologies? Is it intellectual investment? Or, is it all three?  In case of generics, many players are already equipped with required hi-end technologies. Are incentives applicable to them? Does it apply to drugs under patent litigations that are presently being produced in the country?

If the products have been selected keeping the Chinese competition in perspective, then in many of the instances it beats logic. We lag behind China in having certain technologies in place – like the fermentation technology. But, more than that it is cost-effective production capabilities that has positioned China as an attractive destination. Elucidating on the strengths that gives China the edge over India, Dr. Ahmed Kamal, Outstanding Scientist, CSIR-Indian Institute of Chemical Technology pointed out to The Dollar Business, “China has developed pharma clusters where all common facilities are available and shared among companies, enabling them to produce cost-effective products. In fact, today, most of the bulk drugs are exported to the world by China because of the lower cost factor. Even India is importing from China.” No doubt India too does have cluster development schemes and proposals, but most of them have yet to see the light of day.

Low potential

An analysis of the products mentioned in the current hi-tech products list indicates low export potential for many of the products, except for vaccines and to some extent antibiotics which have a reasonable presence in overseas markets. According to the International Trade Centre (ITC) figures, India’s total exports under HS code 2937 (hormones, prostaglandines, thromboxanes and leukotrienes, natural or reproduced by synthesis; derivatives and structural) was a little over $132 million in CY2013 with United States being the biggest market valued at over $93 million, followed by Iran with $24 million exports. USA’s total imports was at $1.5 billion and the total world imports was over $17 billion. China’s exports to the world under the same HS code was valued at around $900 million with India being the biggest importer valued at a little over $173 million.

India also does not have significant presence in products under HS codes (mentioned in that order in Hi-tech products list) 30021011-20 in terms of exports. However, vaccines exports (HS codes 30022011 – 300220124) have been reflecting a positive trend with cumulative exports valued at nearly $600 million during CY2013, and to add to that a trade plus a trade surplus of a little over $91 million with imports valued at a little over $508 million. China’s exports under 3002 HS code is a little over 300 million, and it also a trade deficit valued at over $3 billion to boot. The figures prove that prophylactics, i.e., vaccines segment to be more specific, has been indicating its potential to scale up to a level of consolidation in India.

 

Slow but steady

In fact, there are a few areas which hold big potential. For instance, the biotech segment in India has proved its capability and capacity, time and again, to rise to the occasion for creating preventive solutions to existing and even new diseases. Biotechnology majors like Serum Institute of India (SII), Biocon, Bharat Biotech and Sanofi-Shanta have established their R&D credentials by launching efficacious and multi-potent vaccines, apart from having many more in the pipeline.

A case in point is SII which has developed the world’s first adsorbed liquid HDC (human diploid cell) rabies vaccine, while Sanofi-Shanta recently developed and launched Shan5 – a pentavalent vaccine (five individual vaccines conjugated in one intended to protect infants from Haemophilus Influenza type B, Whooping Cough, Tetanus, Hepatitis B and Diphtheria). The prequalification by the WHO helps Shan5 secure the supply of pentavalent combination vaccines in over 50 emerging and low-income countries.

Another landmark achievement, which also came as a shot in the arm for drug discovery in India, was when Ahmedabad based Zydus Cadila, in 2013, launched India’s first indigenously developed drug for treatment of diabetic dyslipidemia or hypertriglyceridemia in Type II diabetes, not controlled by statins alone – Lipaglyn or Saroglitazar. Commenting on the launch Pankaj R. Patel, CMD, Zydus Cadila, said, “It has always been our dream to take a molecule right from the concept stage up to its launch.” Considering that 80% of all diabetic patients are estimated to be suffering from diabetic dyslipidemia, such drug holds big potential.

 

 

Stem cell

Another fastest emerging area in medical palliatives is stem cell therapy or regenerative medicine. Unfortunately, due to inexplicable reasons, this area has not been given a status of prominence by policymakers, despite the curative solutions it offers for a comprehensive range of diseases and chronic conditions from cancer to wellness. The early phase of research on stem cells had triggered furore about ethical issues involved in extracting foetal stem cells for treatment of various diseases. But, the discovery of alternatives like stem cell extracts from the cord blood, bone marrow and various other sources in the body, with proven properties to replace the damaged cells and regenerate new cells, had the world keyed into this incredible therapy.

India has also developed capability in regenerative medicine, with many qualified medical professionals trained at premier institutions across the world involved in stem cell treatment for various diseases. One of the off-shoots of stem-cell is the proliferation of storage banks for cord blood stem cell extracts, which could be used anytime for treatment during the lifetime. Cancer, hip replacement, spinal cord injuries are among the innumerable conditions and major diseases where stem cell with its potential to regenerate the affected cells, can prove to be effective.  Regenerative medicine in India continue to be confined in an area of darkness, and the way this therapy is treated, reflects lack of knowledgeable policymakers to acknowledge the amazing power and potency of stem cells. According to a GBI report, the stem cell market in India is estimated to touch $ 600 million by 2017. This certainly calls for policymaker’s attention.

 

Waiting for next step

The last few years have witnessed a flurry of activity among the pharma players – both Indian and MNCs – in the country with companies entering into collaborative cross-linkages among themselves. Interestingly, there was less focus on new drug discovery and more on licenses available on the shelf. The objective was to capitalise on market opportunities in India and abroad. The outcome of this tendency was a series of patent violation litigations and disputes between the generic producers and companies manufacturing patented drugs. Critics point out that this fixation to generics and lack of innovations has its genesis in ease with which formulated drugs can be produced without going through research and development pipeline. The very mention of drug discovery is bound to provoke the oft-parroted and common refrain from the many pharma majors that they had tried their hands in discovering new chemical entities and molecules and in the process burnt their fingers. They point out that the investment is too risky and not worth the long wait for development and discoveries. Result: Discoveries have been just trickling out of pipeline with many getting dried up inside.

Hence, the pharma sector’s objective should now be to consolidate on the expertise, credibility, credentials and generics’ footprints it has embossed in the global markets. Be it bulk drugs or formulations, India has positioned itself as a lead player, which explains the global focus on India as a pharma hub. Factoring in the practice of foreign pharma companies outsourcing and offshoring different stages of process as well as drug discovery research, India has been gaining in research expertise and evolving as a knowledge and skill-centric hub for hi-tech products and innovations. From here it just requires a little leap forward to enter the drug discovery domain.

For that to happen policymakers need to erase their cloistered mindset focused on generics and think in terms of supporting and encouraging the development and discovery endeavours by new entrants and entrepreneurs who think out of the box. There are huge unmet medical needs, many among them comprising ever arising new requirements. The government should also create a policy framework for the creation of common Patent Pool in PPP mode. It is high time India take a leaf out of Israel’s pharma industry. According to the Israel Advanced Technologies Industries Association, the majority of Israel’s 85 pharmaceutical companies are small and medium enterprises. Of these 85 companies, 25% are involved in drug discovery, 19% are involved in the development of “New Chemical Entities,” and 18% are involved in drug delivery.

Policymakers should realise that ‘hi-tech’ is not just about process technologies and increasing the market size. It’s more about exploring new avenues, creating innovative solutions for existing & evolving diseases. Need we say more?

 

 

 

Electronics - Can it continue its winning streak?

Electronic goods have emerged as major hi-tech export items from India, growing at a double-digit rate over the last few years. However, despite an impressive growth, the gross manufacturing value addition has remained at abysmal levels. If the industry wants to continue riding the high tide, its focus should now be on design-led growth instead of demand-led growth

Neha Dewan | The Dollar Business

 

It was a simple exercise, but one that revealed some interesting insights. When The Dollar Business asked a group of college students in the national capital region (NCR) to name some of the top electronic brands, predictably the brands that got maximum recall value were primarily either Japanese or Korean. When quizzed specifically to name any Indian hi-tech electronic brand, the responses just drew a blank look in return. And it is really not difficult to understand why these dazed expressions came through.

An overview of the Indian electronics industry can put things in better perspective. As per a report by India Brand Equity Foundation (IBEF), the electronics market is the largest in the world and is anticipated to reach $400 billion in 2022 from $69.6 billion in 2012. In essence, the market is projected to grow at a CAGR of 24.4% during 2012-2020. Broadly, the sector is divided into six main sub-segments – consumer electronics, industrial electronics, computers, communication and broadcasting (C&B) equipment, strategic electronics and electronic components.

When it comes to India, the electronics production in India has also been growing at a fast pace. As per the same report, the total production of electronics hardware goods in India is estimated to reach $104 billion by 2020. In FY2013, the C&B equipment segment constituted 31% of the total production of electronic goods in India. The consumer electronics segment was next in line at 23%.

Still a laggard

However, all is not hunky-dory. India still lags behind in certain integral capabilities such as electronics systems design and manufacturing (ESDM), an area which can give the much-needed fillip to the sector. A project report on ‘Electronics Development Fund’ by the Department of Information Technology (Ministry of Communications and Information Technology), highlights how, despite the growth, the gross manufacturing value addition has been at abysmal levels. This can effectively imply that if this situation isn’t addressed, it won’t be an exaggeration to say that a time may come when the electronics imports might be at par with oil imports!

The domestic production in ESDM is projected to reach $100 billion by 2020. This can be expanded to $400 billion, with its contribution to the GDP reaching almost 20%. Sounds good! But what’s alarming is that without the necessary systems in place, and to meet the ever increasing demand, the import of electronics is also expected to increase to as much as 16% of India’s GDP and the trade imbalance is projected to reach $323 billion by 2020.

Compare this with the electronics sector in countries such as China and Singapore. In the last two decades, China, for instance, has become the second largest manufacturer of electronic goods in the world with sales revenues scaling $840 billion in 2013. In 1995, this figure stood at only $48 billion in China – yet the growth in less than 20 years in the country’s electronics manufacturing industry has been nothing short of phenomenal.

Similarly, if one looks at the Singaporean economy, the electronics industry is the backbone of the manufacturing sector with over 5% contribution to the country’s GDP and about 25% to the total manufacturing value-add. And it all started in the 1960s when Singapore became the first country in Southeast Asia to have a TV assembly plant, the only in the region at that time. Since then, Singapore’s electronics industry has grown to become a vital node in the global electronics market.

India certainly can take a cue from these economies to build the right environment for manufacturing of electronic goods. Needless to say then, the objective is and should be to make India a global hub for electronic goods to cater to the increasing demand locally and abroad. Delving further within the electronics’ domain, The Dollar Business identified three products which have immense export potential waiting to be tapped.

Potential earners

One product that has immense potential, both in India and abroad, is Fundus Camera. Fundus photography, used by ophthalmologists and medical professionals, shows the images of the interior of the eye. The fundus camera is used for this function and consists of a special low power microscope with an attached camera. It is primarily helpful in detecting and assessing retinal detachment as well as other eye diseases.

 

This complexity in design makes it a rather niche product, with only a few players manufacturing the product globally. Japanese Topcon, Canon and German Zeiss are some of the known international names in the domain. Players in India include Bangalore-based Forus Health, which has developed an affordable pre-screening device – 3nethra. The non-invasive imaging device can detect major issues such as diabetic retinopathy, cataract, glaucoma, cornea problems and refractive errors. And herein lies an export opportunity – one that combines cost and innovation – thereby auguring well for the Indian electronics sector.

Another product that holds a lot of promise is display wall or video wall. Although exports of display walls from India have started showing some movement only since FY2009, they have the potential to become a big forex earner going forward. However, it’s still early days as far as manufacturing of display walls in India is concerned, with little movement on that front at present. Hitesh Bhardwaj, Group Business Head – Power Electronics, Radio Frequency, Visual & Imaging Division, Mitsubishi Electric India feels that the right environment is still missing in India to encourage manufacturers.

Photoelectric sensor is yet another product that offers big money going forward. Also known as photo eye, this device helps to detect a change in light intensity. Used mainly in industrial manufacturing, these sensors offer some obvious advantages. Their compact size versus the sensing range makes them a great fit for almost any application.

 

Way forward

Although the government has already set up electronic hardware technology parks (EHTPs), special economic zones (SEZs) and allowed 100% FDI in the electronics hardware manufacturing under the automatic route, there is a lot more that still needs to be done. In fact, the focus should now be on design-led growth instead of demand-led growth. This imply that investments in R&D centres, technology incubation centres needs to be increased. Building a world class infrastructure, restructuring duty tariffs, increasing relevant marketing spends and positioning the ‘Made in India’ tag at par with international brands are all efforts that can pace up growth for this sector.

Moreover, as Bhardwaj of Mitsubishi Electric puts it, “Let’s do ‘Make for India’ first... only then can we look at ‘Make in India’. That’s a more realistic way forward.” Do you agree? Well, we do!

 

 

 

Telecommunication & Power – Telling tale of Indian Power & Telecom

With close to $20 billion per annum trade deficit under HS Code 85, which covers bulk of the electrical, electronic and telecom equipment, the Modi government has its work cut out. And while ‘Make in India’ might be a good initiative and recent ITA talks collapsing a bit of a boon, what the country needs is nothing short of a ‘shock and awe’ to bring things under control

Shakti Shankar Patra | The Dollar Business

 

One bit of news that for some strange reason never made headlines last month was the Information Technology Agreement (ITA) talks ending without any resolution on the 12th of December. The objective of the agreement being bringing down tariffs on IT items in stages to zero, opinions are divided on whether the talks collapsing was a good thing or a not so good thing for India. While those who think the talks collapsing was the best thing that could have happened, point at the fact that signing ITA - I in 1997 had a devastating impact on India’s domestic electronic and telecom equipment industry, those in favour of the agreement feel India can never become a manufacturing powerhouse if its IT hardware products are charged higher duties by importing countries – a likely outcome if India doesn’t become a signatory to ITA - II.

Absolute shocker

But do we even have the capability to manufacture such hardware? If not, is it because of ITA? Let’s look at some figures. Most would agree that for most of the 1990s and early 2000s, cordless phones were in high demand in India. And before signing ITA - I in 1997, India had a basic duty of 42% on the import of cordless phones. Till that year, and even for a few of years following 1997, India’s cordless phones trade was fairly balanced. Yes, India was actually a pretty big exporter of cordless handsets! But then because of signing ITA - I, India had to gradually bring down the duty on handset imports – from 42% to 35% in 1999, then to 25% in 2000, followed by a reduction to 15% in 2004, followed by a move to zero in 2005. A look at how Indian exports and imports fared in these eight years – between 1997 and 2005 – is simply put, stunning. For, while in response to every successive cut in duty, imports surged, exports barely took off. And this is the root of all fears of ITA - II.

 

Bigger picture

Having seen what kind of impact ITA - I had on India’s telecom equipment and IT hardware trade, it’s but natural for people to be skeptical of ITA - II. No doubt, ITA - II has its benefits, but almost all of these benefits are for those countries that have strong manufacturing capabilities. At the same time, signing ITA - II would be directly in conflict with Prime Minister Narendra Modi’s ‘Make in India’ campaign. But even those who are opposing India signing ITA - II, deep down know it’s not a question of if but when. For, it’s been 17 years since ITA - I was signed and in the meantime, a lot of technological changes have occurred, which makes an amendment/extension only logical. So, even if the need of the hour might be opposing ITA - II, in the long run, India badly needs to get its manufacturing house in order – be it that for telecom, electronic or electrical equipment. Having discussed some interesting electronic equipment earlier, let’s now focus on some telecom and electrical equipment.

 

Little stars

At the core of most telecom equipment are digital multiplexers that allow multiple inputs to be independently switched to a single output. But while India’s imports under HS Code 85219090 (under which digital multiplexers are traded) were worth $59.7 million in FY2014, exports were worth just $1.6 million – proof of how far behind India is in the manufacturing of telecom equipment. The same is the case when it comes to protocol analyzers that are installed in computers and networks to enhance protection against malicious activity, as a supplement to anti-virus software and firewalls. For, while total imports under HS Code 90308990 (under which protocol analyzers are traded) were worth $77.1 million in FY2014, exports were worth just $8.6 million. If you thought this was bleak, so is the case with most other telecom equipment.

Even when it comes to power equipment, the picture is the same – anaemic growth in exports, if at all, and rising dependence on imports. Let’s take the example of something as basic as a static converter, which is traded under HS Code 850440. While India’s exports of static converters were down 15.9% in FY2014 to $318.7 million, imports were up 6.2% to $742.7 million. And to get a sense of just how far behind we are, shouldn’t we figure out what was China’s exports of the same? Well, the answer is just 52x more!

 

Mission possible

Looking at the state of Indian telecom equipment manufacturing, it’s ironic that one of the missions of Department of Telecommunications, which comes under Ministry of Communications and Information Technology, is “to make India a global hub for telecom equipment manufacturing and a centre for converged communication services.” While becoming a manufacturing hub looks very difficult in the foreseeable future, the least we can do is start the process by encouraging higher education, encouraging FDI and last but not the least, not signing ITA-II until we are reasonably capable of competing with the Chinas of the world.