With questions still being asked whether India can ever become a manufacturing hub, The Dollar Business caught up with Dr. Alok Bharadwaj, EVP, Canon India (and  Chairman of CII’s Office Automation and Imaging Division) to learn his views on the subject. “India can’t fix its manufacturing overnight, but it can fix its manufacturing policy,” believes Dr. Bharadwaj. We couldn’t agree more

Steven Philip Warner | @TheDollarBiz

TDB: You previously led the Indian IT hardware industry body MAIT as its President, and have been a part of many-a-discussion on India’s manufacturing capabilities in the technology sector. Where does India stand as a manufacturing and exports hub in the realm of IT hardware?

Dr. Alok Bharadwaj (DAB): I think India has lost a lot of time. There is no doubt that in time, manufacturing will continue to get a fillip. Problem is, that value creation has been eluding India. And the last decade or so, the advantage has gravitated towards China. And after Thailand, Malaysia and other South East Asian economies some time in the past, the advantage is now moving to Vietnam. All this while, there has been a lot of discussion at the policymaker-level, industry body-level and company-level on the need and urgency to boost manufacturing in India. I think we have been doing a bad service to the nation.

TDB: What surprises you most about the fact that despite a pool of engineers, India still lags in manufacturing?

DAB: Building a manufacturing base is no rocket science. All the countries I mentioned before have done it – they have found the economies of scale, the cost advantage and all other advantages required to create a global supply chain. India has succeeded in making itself a manufacturing hub in some businesses like auto parts, but in electronics and IT hardware, the whole discussion has always revolved around policies that are not encouraging manufacturing at a global scale. The ecosystem that is required for electronics manufacturing is not easy to create. In this business, you do not set up a manufacturing centre for one company or two companies. Setting up a facility for an ecosystem is a different ballgame altogether. So the starting point is government policies to make India to be a big electronic manufacturing base and I think that’s quite possible.

The more consumption we create, the more problems we will create in our imports. Because that would mean that we would need to import more electronic goods to India. It’s about the quality of life today. The latest number that our Ministry of IT discussed was that, by 2020 almost $500 billion worth of IT and electronic goods would be consumed by India. That would be more than the fuel bill. Meaning that India would be importing more electronic hardware than fuel. And if that is the case, given that fuel is something that we can’t manufacture, if we do not think about manufacturing electronic items in India, it will be a disservice to the nation.

TDB: Turning to Canon. At present, this world’s largest maker of cameras imports all its products sold in India. Do we expect this supply-side strategy to change in the near future?

DAB: Manufacturing is a different game than selling. So many companies – and Canon is no exception to this rule – have their sales offices in India, with R&D being treated as a separate vertical. And that list includes Canon. Decisions on manufacturing are taken after deciding on which zone is most conducive. For manufacturing, we look at supply chain, costs of manufacturing and policy. Going by this, if India does become a manufacturing destination, then surely, Canon will invest in setting up manufacturing unit here. From a logistics angle, India has a very long coastline and geographically, with Africa on one side and Asia on the other, it is a prime location for to-and-fro movement of goods.

TDB: India’s domestic market – how compelling is that for growth of both small and big-sized manufacturers in the IT hardware business today?

DAB: The first and prime aspect is India’s domestic consumption. Unlike in other smaller countries like Vietnam, where manufacturing is only for global supply, India consumes too. And if we continue to have a GDP growth of 7% every year, we will be able to create a reasonably strong domestic consumption market. That is one of the most compelling reasons for foreign companies to invest in India. If adopt an inside-out perspective, we see equal opportunities for both domestic and foreign, and small and large players. The large manufacturers can take the higher end of the value chain, while the smaller domestic players can become an integral part of the ecosystem by adding value at somewhat lower end of the value chain to begin with. And over time they can climb up the value chain by adding differential value.

TDB: What can the government do to encourage innovation so that we begin on a strong note to establish India as a manufacturing and exports hub?

DAB: Firstly, I think our educational system needs to be reconfigured. We cannot feel that we can build a strong R&D and innovation culture based on just one dozen IITs and some science institutes. We need a large number of institutes to make a big investment in the education curriculum that is focussed on creating research opportunities for Indian students. Secondly, we have to look at retaining talent in India to prevent brain drainage. So the private sector comes in here. Government alone cannot help the cause of making India an R&D-rich nation. Thirdly, we are not giving high priority to patent-filing. India will have to build very strong patent protection laws.

TDB: For players in the IT and electronics business, rupee devaluation has been a big concern. You think so?

DAB: More the consumption, more the vulnerability. And we are in a Catch 22 situation today. The more India develops, more will be its dependence on IT and electronic imports, therefore there will be a greater exposure to movements in the rupee value. Rupee exchange rate is a very big concern for the IT industry because of two reasons. One is that it is very unpredictable and suddenly renders a profitable business unprofitable.

TDB: So has the rupee movement impacted Canon in recent months as well?

DAB: Yes. It impacts all importers. Canon as a company, whenever we import, we get supply credit. So a devaluing currency syndrome brings in this basic problem that we always have to pay more than the cost of imported products. For many companies, if we talk about long-term government contracts, when the rupee devalues, the contract transforms into a death trap for many companies in the IT industry. A volatile rupee is a big pain for the industry.

TDB: What would you say about establishing IT and electronics manufacturing zones as an effective way of dealing with rupee volatility?

DAB: If we have to become a net exporter of IT and electronics, one of the elements is to establish an ecosystem for manufacturing which is best done in an SEZ or a manufacturing zone. That is the way it is worldwide. Issue is – how do we make these zones almost like non-India? So what is an Indian system? The typical characteristic of an Indian system is that there is no predictability. You are not sure when you will have the goods delivered –  due to delays in transport or some customs issue, etc. What is required is near 100% predictability in supply chain and processes to make India a real manufacturing hub and a net exports market. Anything short of that won’t do. We need to create a non-India within India. And that will only be possible when the rules of the land and infrastructure are made different from what they currently are. We have to invest in ports and highways.

TDB: So is that the complete solution?

DAB: No. It’s only one part of the solution to make India a world-class manufacturing centre and net exporter. The policies and tax laws should be absolutely immune to change. We make laws and change them in no time. This only increases the factor of unpredictability. Whenever a new state government takes charge, it changes laws. We must announce policies that are immune to change. Even if we adopt a bad policy and realise that after ten years India has lost because of that policy, we should retain it. Long-term planning & stability can as such come to pass. Concrete formation of right policies is important. And it is critical that we delight our big foreign investors. Stable policies will add to India becoming a manufacturing hub.