Category: Operations Management

India’s Bid to Ramp Up Electronics Manufacturing

Posted on February 10, 2012

Can India become a global destination for electronics manufacturing? This question was center-stage at the ISA Vision Summit held in Bangalore recently by the India Semiconductor Association, which represents the country’s electronic system design and manufacturing industry. The theme of the event was “Growth Drivers for Emerging Markets: Semiconductors and Electronic Systems.”

Currently, India accounts for only around 3% of the global electronics market and around 1% of global production. But industry leaders and government officials believe that with the huge increase in domestic demand fueled by a growing middle class and rising per capita income, the opportunity is there for India to become a significant global player.

Electronics sales in India were around $40 billion in 2009, and are expected to reach $100 billion by 2014 and $400 billion by 2020. Some players are optimistic that the market may grow to even higher figures. “We believe that by 2020, the domestic demand for electronic products in India can go as high as even $1 trillion,” Pradeep N. Dhoot, group president of Videocon Industries said during a keynote address. Dhoot pointed out that unlike the rapid expansion in India, the $1.75 trillion global electronics market has been posting annual growth in the low single digits for the past few years and is expected to continue at that pace.

India’s manufacturing opportunity lies in the gap between the expected demand in the country and the rate of domestic production. Although the market for electronics in India is expected to reach $400 billion by 2020, domestic production is only projected to account for $100 billion if it continues at the current pace. “Given the right impetus, the scale and the unique requirements of the Indian market will make it very attractive for players to design and manufacture here,” noted Ajai Chowdhry, chairman HCL Infosystems.

In a bid to develop indigenous capabilities in electronics, the Indian government has recently instituted a policy that will grant preferential market access in government procurement to electronic goods manufactured in India. With large pan-India government projects such as the national optical fibre network, the national knowledge network and e-governance programs in the works, this move would open up huge opportunities for domestic production.

Decisions regarding the opening of a semiconductor fabrication plant are also expected to be finalized by the end of the year. Sachin Pilot, minister of state for communications and information technology, said that the earlier government attempts to set up such a facility did not yield the desired result. “We are more flexible this time round and are ready to meet halfway. We have decided that we will get it done,” he noted. R. Chandrashekar, secretary of the department of IT and department of telecommunications added that “significant progress has been made and we are in serious discussion with a few players.”

One of the key concerns of the industry has been that there is not enough value addition and enough intellectual property creation in the country. The preferential market access policy stipulates that there must be 25% to 40% value addition. “This means that the [intellectual property] must be in India,” Chowdhry said. “This will give the confidence to industry players to make the necessary investments. I see it as a breakthrough and transformative step.”

Similarly, the setting up of a fabrication plant is seen as an important piece of the electronics manufacturing ecosystem. ”It has to be seen in the larger context,” according to Rajendra Kumar Khare, chairman and managing director of SureWaves, a Bangalore-based company that is creating an integrated grid for multiple forms of digital media. “India has tremendous design capabilities and most global [original equipment manufacturers] have strong design centers in India. Having a [fabrication facility] will go a long way in strengthening the entire [electronics system design and manufacturing] ecosystem in the country. This, in turn, will enable India to capture a larger pie of the domestic and global market.”

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Are Takeovers Taking Over Indian Pharma?

Posted on August 24, 2011

The Indian pharmaceutical sector seems to be in danger of losing its “Indian” prefix. Today, Aventis Pharma, which is headquartered in Mumbai but part of the Sanofi Group of France, announced that it had signed a deal to acquire a unit of Mumbai-based Universal Medicare that markets and distributes branded health and nutritional products in India. Also, Indian business daily The Economic Times reported that Takeda, Japan’s largest pharmaceutical firm, has “begun talks with two of India’s biggest companies for purchasing either of their pharma businesses.”

Over the past few years, the pharma sector in India has seen several high-profile mergers and acquisitions. In June 2008, Daiichi Sankyo of Japan took over Ranbaxy, India’s largest pharma company, for $4.6 billion. In May 2010, U.S. multinational Abbott Labs snapped up the domestic formulations business of Piramal Healthcare for $3.72 billion. Takeda’s reported targets are Cipla and Lupin — No. 1 and No. 5, respectively, in the country’s pharma sector. Both companies have denied that any talks are taking place. Takeda has declined comment, Reuters reported.

The takeover trend has some in the Indian government worried. Union health minister Ghulam Nabi Azad last year asked his counterpart in the commerce ministry to implement special restrictions on foreign direct investment (FDI) in the pharma sector. The commerce ministry appears to be on the same page. According to Indian newspaper Deccan Herald, a commerce ministry paper has warned: “There is a concern that [Indian drug companies'] takeover by multinationals will further orient them away from the Indian market, thus reducing domestic availability of the drugs being produced by them.”

The fear is on two fronts. The first concerns the price of drugs. India has traditionally imposed controls on the cost of life-saving medications. But the number of regulated drugs has come down from 347 in the 1970s to around 70 now. If largely multinational corporations are left in the industry, they could opt to collectively withdraw certain drugs from the market unless they are allowed a price hike. Secondly, Indian companies are concentrating their research on diseases that are of greatest concern to the Indian population. If multinationals take over, the thrust could well shift to Western lifestyle diseases.

Multinationals are eyeing India because they see rapid change in the country. Currently, government spending on health care is only $32 per capita compared to $4,590 per capita in wealthier nations, according to the World Health Organization. But medical spending is expected to increase sharply as India’s population ages and incomes rise. “India is one of our most important markets in the emerging world,” says Antoine Ortoli, a senior vice president at Sanofi.

While the value of the deal with Universal Medicare has not been disclosed, it is likely to be smaller than earlier takeovers because the acquisition only involves distribution and marketing rights — Universal will continue to manufacture the products. Indeed, some analysts suggest that India could ultimately become a manufacturing base for multinationals.

But why haven’t Indian pharma firms attempted more takeovers of their own? Some acquiring companies – like Sun Pharmaceutical, which in 2010 completed its purchase of Taro Pharmaceuticals of Israel — have scored a measure of success. Others – like Dr. Reddy’s Laboratories, which took over Betapharm of Germany in 2006 — have been nearly swamped by the foreign company’s losses. Another issue is that the pharma industry globally succeeds on the basis of blockbuster drugs and high R&D spending. But Indian companies have prospered because of reverse engineering; they typically don’t have the funds or the culture to develop blockbusters.

Ajay Piramal, CEO of Piramal Healthcare, which was sold to Abbott, was himself a takeover specialist in an earlier era. He diversified from his textile business with a series of acquisitions — the Indian subsidiaries of Nicholas Laboratories, Roche, Boehringer Mannheim, Rhone Poulenc, ICI and Hoechst Research Center. On selling Piramal Healthcare, he told Indian economic daily Business Standard: “I don’t think we were in a position to take the company global. Abbott has the strength and aspirations to do that.”

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Outsourcing Units Equal Access for Multinationals in India

Posted on August 18, 2011

A few years ago, analysts had sounded the death knell for information technology and business process outsourcing (BPO) captive units set up by multinationals in India. Their logic was simple: The cost equation of outsourcing was more in favor of third party players, and captives, with their small team sizes, could not be competitive. In 2007, a research report titled, “Shattering the Offshore Captive Center Myth,” noted that more than 60% of captive centers were struggling due to “lack of management support, spiraling costs, attrition and integration issues.”

But captives are now proving the naysayers wrong. According to a recent study done by the Everest Group, 37 new captives were set up in India by multinationals between January 2008 and December 2010. Of these, 23 were established last year alone. Twenty-one captives have also announced significant expansion. Meanwhile, only 13 were divested during that two-year period, more for internal reasons of the parent company — for instance, Lehman Brothers, which went bankrupt and closed operations — than for specifically India-related causes.

“Earlier, the conversation [in a multinational] used to be around either having a captive unit or a third party vendor. Now it’s no longer an ‘either–or’ conversation,” says Gaurav Gupta, managing partner (India) for global services advisory firm Everest Group. “The model that is clearly emerging is a hybrid one. Companies have realized that in order to get the best value, they need to leverage the multi-sourcing model.”

Karthik Ananth, director at Zinnov Management Consulting, points to the fundamental shift in the drivers for captives. “In the initial years, it was all about cost and talent. But over the years, this has fundamentally shifted to also add innovation and access to emerging markets. Companies are looking at India as a hub for driving innovation for not only the domestic market, but also for other emerging markets like West Asia [and] Africa. So captives now are no longer about a tactical play, but a strategic pillar for multinationals.”

Talking recently to Indian economic daily Business Standard, Sandeep Dhar, CEO of Tesco Hindustan Service Center, the Bangalore-based captive unit of the U.K. retailer Tesco, noted: “For Tesco, the India center is 75% of its IT capabilities and talent base. Besides, the cost it incurs would be a fraction of what the company earns. [Moreover], a third-party vendor would treat the CIO of Tesco as his customer, but for us the person walking into the store is the customer.” Dhar added: “The Bangalore team is making a serious … contribution for Tesco’s business to grow. At present, we are largely working for the U.K. business. But our mandate is to work for all the centers of Tesco stores across the globe, to provide standardized operations for all the Tesco units and also run innovation initiatives for the group.”

Zinnov’s Ananth suggests that going forward, multinational captives in India will not only take on more high value and critical work for their parent organizations, they will also start owning a lot more of their companies’ relationships with the third party vendors in India. “Being based locally, they understand the local realities better and can have better conversations with the vendors,” he says. “And vendors, in turn, will augment the capabilities of the captives by providing them with access to the ecosystem.” Gupta of Everest adds: “The onus … is on the captives to remain ahead of the curve.”

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A New Era for China

Posted on April 14, 2011

For the past few decades, the availability of cheap goods from China “has pretty much subsidized the standard of living in the developed markets,” according to William Fung, managing director of Li & Fung, the Hong Kong-based trading company that sources and coordinates supply chains for about 30% of the brands found in the average American shopping mall.

During a recent appearance at Penn Fashion Week with designer Vera Wang, Fung detailed the new complexities his company is facing as retailers experience greater pressure to keep up with changing trends, expand into new markets and streamline production.

In a video interview with Knowledge@Wharton (which can be viewed in its entirety below), Fung discussed in more detail what he sees as one of the key changes for the next generation of retail — China’s transition from a significant source of goods to a consumer market that sets the trends for the rest of the world.

“China works in 30-year cycles,” Fung noted. “If you look at 1949 to 1979, from the founding of the People’s Republic to the opening up of China by Deng Xiaoping, during that 30 years, the world had no China. The world lost China. China closed itself off…. As a result, everybody did their commerce and went about their business very much without considering China.”

After Deng opened up the Chinese labor market beginning in the 1970s, however, “China burst on the world [growing the global labor force by] 20% to 25%.] China was “very productive, very aggressive, they knew that they were behind and they were trying to catch up,” Fung said. As a result, the world was hit with an onslaught of low-priced goods; meanwhile, “the China effect” kept the lid on labor costs in other parts of the developing world.

“But now that era seems to be ending,” Fung told Knowledge@Wharton. “What has happened is that China understands, first of all, that it needs another model for growth…. [Leaders in China now] understand fully that they have to raise the standard of living among their people. Now the country is moving into an era of consumer spending, domestic consumer spending, as a real alternative engine for growth in China.”

As consumer buying power in China grows, Fung predicted that demand for top-of-the-line goods will begin to increase among the country’s population. “As a result, there will be a lot of innovation and design that’s specifically tailored for the Chinese market. When that happens, that will also influence the rest of the world,” just like Americans’ increase in consumption after [World War II] meant that many products were initially created for the American market, Fung said.

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The Name of the Game is Shame

Posted on March 30, 2011

Brazil plans to push the government bureaucracy overseeing $11.6 billion in construction projects for the 2014 World Cup and 2016 Olympic games into meeting building deadlines by regularly publishing project progress – or lack thereof — in an effort to manage by naming and shaming.

The idea is that the threat of embarrassment or shame will prod all players to ratchet-up efforts and meet the goals. Worries have been growing that construction schedules for the two big events were falling behind. The Financial Times reported that Pele, Brazil’s retired celebrity soccer player, said Brazil could embarrass itself and not be ready for the games if it did not push new stadium construction and rehabbing to move faster. Most projects have fallen behind schedule and some construction has not yet even begun.

So the thinking is to shift any blame and embarrassment from the national level down to those in the bureaucracy actually responsible for meeting goals, with the aim of averting disaster.

Does the name-and-shame management technique work? Usually, yes, says Jonah Berger, a Wharton marketing professor. It can be very effective in improving general accountability and making people more likely to achieve goals, he says. “If it is easy to hide and say, ‘I’ll get it done next year,’ and if no one is looking, it won’t matter. But if the schedule is made public, you are more likely to get it done on time.”

Similar principles apply to governments, companies and individuals. “If you want to lose 10 pounds and you don’t tell a friend, then you are less likely to reach your goal. If you tell a friend and don’t reach your goal, the friend can always say, ‘you didn’t do what you said you were going to do.’”

Such peer pressure works because “we care about how we look to others and how others will see our behavior. That encourages us to do the right thing.”

Brazil is not the first to use a name-and-shame approach. In the U.K. just last month defense secretary Liam Fox said he would name and shame defense companies that look likely to miss contracted delivery dates.

“Where projects are falling behind schedule or budget, the MoD (Ministry of Defence) personnel responsible will be brought to account in front of the project board,” Fox told the Financial Times. That’s shaming staff. But he also plans to publish a list of “projects of concern” every quarter that will name and shame companies running programs that fall behind schedule or where costs start to run higher than budgeted.

“Why would companies want to keep information about potentially failing contracts from their own shareholders?” Fox said. Why indeed!

Greece, meantime, recently suffered criticism from the European Union and the International Monetary Fund, which claimed the country was avoiding implementing a name-and-shame program that could embarrass prominent tax evaders into paying up. The Greek government finally adopted the practice. The measure was part of a larger effort, including tougher jail sentences for those convicted of tax evasion, to increase the rate of tax collection.

And last year, India announced it would create a public database of its worst environmental polluters, an approach similar to that adopted by China in 2009, in yet another finger-wagging effort to assign shame and blame.

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