Manufacturing 2.0? Dell's lessons for India’s big workshop push

The 500 workers at India’s Dell factory, clad in blue uniforms and the occasional bright pink salwar kameez, are all Indian. Computers leaving the assembly line go to millions of newly affluent Indians feeding an explosion in consumer demand. But the boxes of component parts on the floor say “Made in China”.
That fact alone says a lot about how far the country’s manufacturing sector has to go to match its world famous information technology and services prowess and sustain searing economic growth.

India needs to crank up its industrial base to wean itself from service sector-led growth and tame a trade deficit which could more than double in three years, mainly because of billions of dollars worth of Chinese imports.

Shabby infrastructure, cumbersome bureaucracy, a meandering tax regime and a nascent local supplier base are holding back industrial growth and more foreign investment.

“We are really taking baby steps in the IT manufacturing space,” M R Sundaresan, executive director at Dell, said. “We have a huge opportunity to be able to build on this.”
“Electronics are still largely imported into the country,” he said. “We don’t have a component or parts manufacturing supply chain available in the country.”

While Dell is bullish about India’s prospects as a global growth driver, it is held back by issues ranging from a pesky permit system and the country’s fragmented taxation methods.
One of the biggest challenges is an underdeveloped supplier base to make components, such as microprocessors, locally. The result is a “chicken and egg” dilemma for the country. Dell needs component makers to set up shop in India, but big players will only come when there are enough Dells to drive demand.
This matters, because India can no longer rely on a mix of its IT and service sector clout, remittances from its citizens working overseas and capital flows to finance a huge import bill of one of the world’s fastest growing economies.

Dell’s challenges are by no means unique, but reflect what firms grapple with as they seek to expand in one of the world’s hottest economies, from stifling labour laws to sudden government changes that catch companies off guard.

Dell prides itself on making desktops and laptops to order, delivering from the factory straight to a customer. But sending a finished item to certain Indian states requires the customer to obtain a permit from a local tax officer, which the delivery truck driver then has to produce at state checkpoints.
“It’s an impediment to the ease of doing business,” Sundaresan said.

“The transport industry is highly immature, fragmented,” he said. “The guy who comes and delivers it to your home, is not a company. He’s still a person who owns one truck.”
Dell’s annual revenue in India is closing on $2 billion. Its factory in Tamil Nadu, one of India’s most business friendly, caters to 90% of local demand. But most of the components needed to assemble computers are sourced overseas.
The rise of Texas-based Dell Inc, the world’s No.2 maker of personal computers, as a manufacturing heavyweight in India is a snapshot of how the country is striving to follow in China’s footsteps as an industrial giant.
Dell started in India as a services provider, setting up shop in 1996 and opening up a series of call centres for customer support to anywhere from the US to Africa and riding a crest of a software and services boom that has tagged India as the back office to the world.

The tipping point for demand came in 2007. Strong double-digit growth in computer sales in India had made the time ripe for Dell to set up a manufacturing hub to lower costs and slash delivery times to customers, helping it to expand in a bulging white collar market with economies of scale. It now employees nearly 25,000 people in the country, second only to the United States

Dell also prides itself on having been the country’s first major personal computer exporter out of its Indian factory — Dell’s third in the Asia-Pacific region — selling mainly to markets nearby in the Middle East. In time, greater expansion could follow.
“If I get more and more of my ecosystem locally, there is no reason why I shouldn’t be able to ship to western Europe as well as to the US,” Sundaresan said.

Asia’s third-largest economy is starting to shed its status as a manufacturing laggard with an influx of global big-hitters, to a sector once infamous for its red tape, countless licence requirements and pitiful output before liberalisation.
The government is pinning its hopes on the growth of the likes of Sriperumbudur to lift manufacturing to 25% of GDP from about 16% by 2025 to create jobs for tens of millions expected to join the workforce during that time.
However, no matter what incentives companies such as Dell get from states, national problems persist. Chennai’s sea port is the export-import point for many multinational firms who set up nearby. But the road to the port is strewn with trash, has shabby shops and slums with thatched roofs.

“Manufacturing has suffered quite a lot in the past ten years,” said Shanker Gopalkrishnan, president of the Madras Consultancy Group, of Tamil Nadu industry.
“If you don’t service these industries well, there is a danger of losing business to another  country.” Reuters