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October 7, 1998


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The New Intel (R)  Pentium (R) II Xeon (TM) Processor
The New Intel (R)  Pentium (R) II Xeon (TM) Processor

Chinaware to hardware: Why are computer giants busy building hardware factories in China, relegating India to a mere trading base? Zasha Penn

Computer hardware factories from chip fabrication plants to hard disk drive assembly lines are coming up rapidly in China. And that is happening at the expense of India's grand aspirations in the global infotech business.

Email this story to a friend. Why are the IT monoliths from the liberal West opting for 'communist', 'non-English speaking', 'introvert' China and rejecting 'democratic', 'English speaking', 'extrovert' India?

The answers are subtle. But significant pointers can be found in a recent Sino-Indian comparative study by Dennis Philbin. He is the vice-president and managing director of IDC Asia Pacific.

But first here are some facts in figures.

Between 1996 and 2002, IBM would have invested $ 2 billion in the Chinese hardware sector. Of this $ 70 million will go in a hard disk drive manufacturing facility. The other investments are in engineering technology and research and development. The same IBM, in a joint venture with the Tatas in India, is against the National Task Force on Information Technology's ideas on building a manufacturing base in the country.

Intel is setting up a flash memory manufacturing unit in Shanghai. It will entail an investment of $ 198 million and a research centre costing $ 50 million.

NEC is setting up a $ 2 billion semiconductor plant in China. Hewlett-Packard is investing $ 200 million and Motorola $ 1.2 million in the country, all in hardware ventures.

The principle reason for these heavy investments, the Philbin study claims, could be the Chinese law that multinationals can sell their computers in the country only if they have a manufacturing base there.

Consequently several centres of computer manufacture have sprung up across China and multinational companies have begun huge investments in localising software. Microsoft is leading the localisation endeavour with its Chinese versions of the Windows operating systems.

The insistence on setting up manufacturing base in the country has paid rich dividends to the local Chinese companies too. Legend, a Chinese hardware company, has become the number one IT company in the country. In the first quarter of 1998 it shipped 420,000 PCs. That figure has put it ahead of IBM, HP and even Compaq.

PCs in China are reaching a four million annual sales figure. 'Owning a PC has become a status symbol,' Forbes magazine commented in a recent issue.

In India the domestic PC business is languishing. The high-end of the market goes to multinational brands. The huge low-end goes to the 'grey market operators' that comprises people who assemble unbranded PCs from imported parts and sell them at rock bottom prices.

As a result, the domestic Indian brand is sandwiched in a narrow space between the foreign brands and the grey market.

To make matters worse, the government, which is the single largest buyer of PCs, has been insisting on buying foreign brands. In fact, the Manufacturers Association for Information Technology, the largest industry grouping in the country, had to petition the authorities against mentioning foreign brands in tender notices for purchase of computer hardware.

On the other hand, in China, the government completely supports the local brand. The Philbin study quotes the 34-year-old chief of Legend's PC division, Yang Yuanquing, as saying, "If the quality and price are the same, they (the Chinese government) will buy a domestic brand first."

Other countries that have established strong domestic manufacturing base for IT like Taiwan and Malaysia also follow the same principle of promoting the local manufacturing companies and giving them preference while buying.

In Malaysia a multinational manufacturing company has to partner with a local company. This is the essence of the 'Bhumiputra' policy that has enable the nation to build good capacities in sectors as divers as cars and computers.

Why then are these simple solutions not taking root in India?

A part of the blame must be put on the highly contorted tax structure. The taxation policy has consistently moved in a direction that makes trading cheaper than manufacturing!

The excise duty on manufacturing is so high that it is significantly cheaper to simply import. That is the prime mover behind the flourishing grey market.

As a result, in India, even superpower brands like Intel have their most significant partners in the sea of faceless grey market assemblers! People who, by definition, are 100 per cent importers.

In fact, ahead of the deadline commitment at the World Trade Organisation, India has brought down the import duty on infotech components and sub-systems to zero.

It is true that there still exists duty on import of finished IT products. But there too, the domestic industry cannot escape entirely.

Here's why: Excise duty on locally made computers is based on 'invoice price' while the import duty on finished items is based on 'transaction price', giving a huge price advantage to the importer over the manufacturer!

Despite this multinational computer companies in India are still pressing for removal of duty on import of even finished products. And the domestic hardware companies are unhappy that the WTO's Information Technology Agreement, better known as the ITA, has been brought forward.

Ajai Chowdhary, president of HCL Infosys, an Indian computer maker, explains inconsistencies in government policy on this front. He points to taxation and import rules that encourage manufacturing of cars in the country. Here the rules are the exact opposite of those for the computer industry. "Why is the logic different for computers as against cars?" he asks.

Chowdhary claims the argument trotted out by computer multinationals that the volumes in India are too small to promote manufacturing is beside the point.

If Opel or any other high-end car maker can think of setting up a manufacturing base in India with capacities as low as 20,000, why can't a computer company set up a 50,000 capacity factory here and make it viable? asks Chowdhary. That should be actually easier, he claims, because design and engineering talent available in India for computers is far better than for cars.

The Prime Minister's Task Force for Information Technology and Software Development had set up a 'hardware panel'. That panel has now listed over 700 ancillary units that could take up small volume manufacturing.

Industry sources believe that the figure could easily be 7,000 units as a five-fold jump in demand for computer hardware is expected.

If Indian companies fail to cash in on this hyper-growth curve a large number of jobs for skilled labour would be lost besides the opportunity to make the country a significant player in the information technology dominated economics of the next century.

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