Monday, February 05, 2007

Why Product-making companies?

I insist on high tech product making companies for India. No matter what we do with our IT-ITES sector, we will not scale dramatically to be able to become an economic power. The GDP of India in 2005 is $720B of which the IT-ITES sector contributes less than 3.2% (it has improved in 2006 to approximately 4.5%). According to report from Goldman Sachs, Indian PPP measure of GDP will exceed that of US in 2038 and will be at approximately $23 trillion.
 
How do we get there from here? Do we just sit back and hope our current IT-ITES sector, which is primarily driven by services, will deliver us there or do we really take this as a dream and try to make it real or may be even make it sooner? 

Only a technology-product making company can add the right kind of money into India at a faster and quicker pace using smaller manpower. Just look at some of the statistics here (mostly from 2005):
  • Total output of Indian software industry for 2005 is $22.6 B (and for 2006 it is slated at $40B or little more).
  • The number of people directly employed by Indian IT-ITES sector is 1.3 million.
  • India is currently producing approximately 180,000 engineers for IT-ITES sector.
  • The rate of increase in output of employees is currently at 5.5% increase from previous year.
  • Assuming a steady increase for the next five years, the output in year 2010 would be approximately 220,000.
According to NASSCOM, India is poised to make $70 B in 2009 with a workforce of 2.2 million. This projection assumes that each employee with earn approximately $32,000 in 2009 while it is approximately $22,000 in 2005.
Now look at this for comparison:
  • Microsoft currently makes $40 B with 60,000 employees while Nokia makes $40 B with 40,000 employees. (each employee approximately makes $600,000 to $1M).
  • These two companies alone with a work force of 100,000 (in 2005) make more than the projected output for India in 2009 (with 2.2 million workforce).
No matter what we do, contribution of IT-ITES will be marginal in contribution towards Indian GDP unless something dramatic happens. And that can happen only with more technology-product making companies. 
 
Case of technology-product making companies

How do you think most developed countries have been able to remain competitive? According to NSF (National Science Foundation, USA), “High-technology industries are driving economic growth around the world”. According to the Global Insight World Industry Service database, “the global market for high-technology goods is growing at a faster rate than for other manufactured goods”. 
 
“Even during the recent, slow-growth, ‘post-bubble’ period (2000–03), high-technology industry continued to lead global growth at about four times the rate of all other manufacturing industries.”
According to NRC, Hamburg Institute for Economic Research, and Kiel Institute for World Economics 1996, “High-technology industries are R&D intensive; R&D leads to innovation, and firms that innovate tend to gain market share, create new product markets, and use resources more productively. These industries tend to develop high value-added products, tend to export more, and, on average, pay higher salaries than other manufacturing industries. Moreover, industrial R&D performed by high-technology industries benefits other commercial sectors by developing new products, machinery, and processes that increase productivity and expand business activity.”

What is the output of high-technology sector in each of these countries?
  • In India, high-technology sector accounted for 2.0% in 1980, 3.7% in 1990, 4.8% in 2000, and 4.8% in 2003.
  • In US, for 1980s it was 11% of total domestic production, in 1990s it was 13.5%, in 2000, it was 27%. In 2003, it is estimated at 34.2%.
  • In Japan, it was 17% of total Japanese domestic production in 2000. In 2003, it is estimated at 15.7%.
  • In EU, it increases from 9.5% in 1980 to 11% in 1990 to 13.2% in 2000. In 2003, it is estimated at 13.4%.
  • Countries like Taiwan (28.5% in 2003), Ireland (more than 50% in 2003) and China (19% in 2003) fare much better than India.
The case is strong for technology-product making companies. So, what are we going to do about it?
[To be Continued]

7 comments:

Abhijit Tongaonkar said...

A thought in right direction, so is the analysis ... while I wait for installment 2 of the post, the answer lies in study of the history ! Hi-tech product creation has been a near monopoly of the ameriacn / european society. These societies encouraged innovation, they had first mover advantage in local as well as their colonies. Also deep pockets generated from exploiting the colonies. Today, India can boast of not-so-shallow pockets but not-so-ready market for hi tech products - the way they are used in western world. Innovation in terms of use of technology for masses in terms of relevant applications is the key. IMHO, we have a long way to go.

Savita Kini said...

Sujai,

Your article is thought provoking. While I agree with you on the overall theme/business proposition about product making companies. The problem is really in the man power. Today the 180,000 engineers who come out of colleges, how many of them are really employable by the product making companies, let alone by services companies. Our engineering institutes have been mushrooming left/right/center since the dawn of the IT era, but we don't even have qualified professors for some of these industries.
My own hypothesis is that this trend of IT services companies has to continue, just because some of the students who come out of tier-2 & below colleges will atleast get hired, learn the skills of working on engineering products even if its just a small piece, the experience will atleast bring them up to speed. Lot of the projects which are outsourced are also much higher in the value chain then it was few years back.

Creating product companies is not just about engg design, its also about the business models, the target market being there. If we are to continue to build products for the western markets, again thats not really sustainable.

Local markets will be the key. Only in mobile we are seeing that as an immediate opportunity. For other hw products, we are still using OEM business models. Thats not really saying we have product companies.

Overall, its going to be atleast 5-10 yrs, till high tech can reach reasonable levels of 13% & above for India.

In between all that, one has to also look at how our crumbling democracy is able to reach out to more of the people and make them become part of the global economy and not just the top 10%. There alone will be the market that we need for product companies.

Anonymous said...

"The case is strong for technology-product making companies. So, what are we going to do about it?"

For our part, Chennai is playing host for Proto.in (www.proto.in) and the second edition is coming up in August. The second wave of the indian economy HAS to come from startups that dare to push beyond, and can innovate. Innovation is going to become key to differentiate our thoughts, and ideas, and to create an identity in the global space.

I am scared to think the other alternatives if we miss this boat - we simply might not get back on it again.

Do shoot me an email at vijay (at) vijayanand.name. I would be great to touch base.

Vijay Anand
www.vijayanand.name

Sujai K said...

Vijay:
We met at Proto.in

You are doing a great work. Proto.in is definitely one of the ingredients towards spawning product making companies in India.

I wish you all the best with future Proto.in and hope that it will continue to foster and promote new product makers.

Meanwhile, I will pen down some of the thoughts.

If each of us do our part, I don't think it is long way.


Sujai

Badri said...

Hi Sujai..

I agree with you when you say "Only a technology-product making company can add the right kind of money into India at a faster and quicker pace using smaller manpower."
True !! and well said. I was thinking of this from a bigger perspective; meaning; products being manufactured by Indian companies in all sectors right from A-Z i.e. Agriculture, Manufacturing, Software / Hardware, Textiles etc. I think if of the booming sectors encourages Indian product makers; then all the other sectors can follow suite.
If i am not wrong loads of FDI is being pumped into the Retail Industry which covers most of these. (With Wal-Mart also having entered the scenario recently)
I guess Television / media and Education are the only areas which have remained untouched and represent a bold competition to the outside world. (NDTV, DD, ZEE, SUN N/w etc and out IITs, RECs, IISc, TIFR etc)
So; lets start at the root level. Say; in agriculture and textiles, why not encourage our own products being sold in the market instead of things like Van Heusen / Peter England etc. But it is the people who go for these products; because of which they are making money and investing more; thus not allowing the growth of Indian Product makers.
Why is khadi not selling; when Peter England is earning loads ? Why is Bata not selling as much as Nike / Reebok ? Why are soft drinks like Coke / Pepsi selling more than our local ones(i dont know the names, prev. we had Gold Spot / Torino etc..) ? Why is Mysore Sandal not selling as much as HLL's products ? Since when did HAL / BEML / NGEF / DRDO become "less competent" than foreign players in their respective industries; so much so that NGEF had to be closed down ?
OK.. i might need to recall more such examples !!
But does all this mean that there is no Innovation in the products that we make ? No way !! I say; give us a chance and we will prove it !!
What Savita Kini says maybe true: "students who come out of tier-2 & below colleges will atleast get hired, learn the skills of working on engineering products even if its just a small piece, the experience will atleast bring them up to speed." meaning that students (as freshers) may not be competent enough to work on products immediately. But isnt it also true that the curriculum that has been brought in has been encouraged more by the IT boom and not the motive to create true engineers ?!!
I urge you to please look into all the sectors in the above perspective. There maybe similar examples in the Telecom, S/W and the like. Maybe I am too young and inexperienced to talk abt. this. But from a common man's perspective this would be a starting point atleast.
So; if we as the citizens encourage Indian products; why wouldnt the investments flow in for Indian Companies ? This is one strong ques. that always comes to my mind when i come to think of it. So apart from all the efforts that would come to our minds plz. consider the above option also; so that we have a response from the receiving end.
As Sujai said "If each of us do our part, I don't think it is long way.
".
Thanx.

Badri said...

Please check a small article on the comparison between IT companies and Product making companies:
http://fasttracks21.blogspot.com/

Kalyan said...

I will go with you on Product making companies. Its time in India for product making companies. There is one more blog on product making companies. Just for the readers who is interested in this article please do read the following article. Very good comparison by top service company and product company with stats
http://venkatrv.blogspot.com/2007/01/look-at-table-below-infosys-bellwether.html

Written by successful entrepreneur Mr. Venkat Rajendran, Founder of Deccanet Designs