Often when the topic of manufacturing comes up in India, we also hear the word “screwdriver”. Derisively dismissing India’s manufacturing renaissance as screwdriver-giri is fashionable in academic circles. This is very wrong.

Screwdriver

We often hear from academics like Raghuram Rajan and others, who are identified with the Rahul Gandhi - Congress camp, derisively dismissing Indian efforts to improve its share of manufacturing as ‘screwdriver’. They are also opposed to government spending money on incentives to such companies, instead wanting them to focus on education and ‘providing spectrometers to Engineering colleges’. Ironically, state governments in Karnataka or Tamilnadu, controlled by anti-Modi parties, also offer their own incentives to assembly and manufacturing companies that can be termed ‘screwdriver’. First, there is really no conflict between providing primary or higher education and encouraging manufacturing, even for a cash starved government. Let us also ignore the pathetic track record of Congress governments they advised and supported when it comes to primary and higher education.

Now let us assume the worst - that other than using screwdrivers to assemble, pack and ship, manufacturing companies that are invited to setup shop in India with incentives, do nothing else. This is of course not true, but let us ignore that.

Even then, I will argue that, let them come! Give them reasonable investment and performance based incentives and make them stay. Fine tune those incentives to match issues and extra costs they face in India as well as what others like Indonesia, Vietnam are doing. We are not the only game in town. Once they are in, magic will happen. Supply chains, ecosystem will evolve. Even if the companies themselves shut shop and go out of business, the seed they bring will grow into a big tree and then a forest. That is without them even trying! This is where example of Taiwan is critical.

Bit of history

When it comes to developing a high tech manufacturing economy, there are no shortcuts. Each step forward is a saga of sweat, blood and tears. There are numerous reverses possible too. It takes years, if not decades to get to a certain level where reputations are there and momentum is natural and easy. Whether it is Italy for haute-couture fashion or Switzerland for watches or Taiwan for electronics, Rome wasn’t built in a day.

Let us just take one company - Acer. It is now a huge company and very well known. But it is not a mushroom that shows up after a shower. Founded in 1976 by Stan Shih along with his colleagues, it built its business gradually. Stan Shih initially worked for a company making calculators - Unitron. They too started as assemblers, or screwdriver in Rajan speak. Unitron itself was started by Andrew Chew who in turn worked as techie in a company called Philco-Ford. His co-founder worked at Bell Labs. Shih has referred to Chew as his mentor and “Gen 0” of Taiwan semis if he himself is called “Gen 1”. Interestingly, the large computer assembler Quanta which is largely unknown as it is a OEM, was also started by Barry Lam that worked for another calculator making company - Santron.

The point I am trying to make is simple - catch them first then watch them grow. Businesses fail. Products become obsolete. But knowledge is forever. Once you have a culture of entrepreneurship and conducive policies, things will happen by themselves. India has the talent that can make it happen. If only our babus can be controlled.

Iphone example

A recent article in Business standard triggered this piece. According to this article, Apple Iphone ecosystem’s value addition in India has crossed 20%. It also says China itself adds only about 30-35% value. So keep it in perspective. It is well known that bulk of the money that we pay to buy an Iphone goes to Apple - it is a hugely profitable business.

Now, this 20% started from practically zero. While government’s encouragement no doubt played a role, I suspect it is more of natural business logic, supply chain evolution and cost conscious business decision making that matters. All of which are somewhat beyond direct government control. Having worked with and observed such companies closely, I can say this.

1. First the main assembler will setup shop. Yes, it is screwdriver to start with.
2. The purchasing guys will start looking for components to buy locally for cost and delivery reasons - often starting with very basic, low value stuff.
3. Word gets around, component vendors will beseech you, start offering their products to test and consider. Some will work out, some may not.
4. Your overseas vendors who supply molds, sub assemblies, plastic or metal parts etc., will find if Apple can move there, why not us. It will take a few years, but some will move. Often this is forced by the main vendor. I know of at least one component maker that has dozen factories in different cities in China simply because each one caters to one big OEM who wants them close!
5. Some bright engineer that works for these companies will try start their own business - either as ancillaries or something else altogether.

Sit back and watch, the ecosystem grows!

Of course, it is not just sitting back but governments, at Center and states, must continue to nurture and put in place effective policies, infrastructure and develop talent. Work with these companies to refine our tech colleges and training institutes. Attract investments, give tax breaks etc. Make sure they don’t have to worry about basic things like power or water. Educate the labour force both in tech skills and in bargaining skills without killing the bird that can lay golden eggs.

If the government foolishly says “We don’t want you come here and do screwdriver, either do 100% here or nothing”, I bet you it will be NOTHING! Who is the loser?

This is why it is important to seek advise from and listen to industry experts. Our own babus running state agencies promoting investments must ideally have industrial background. Academics who have not manufactured a single widget or worked in any productive company their entire careers, even if well meaning, can often offer useless advise. And if they are agenda driven and mix personal ambitions and agendas into their advise, you are likely to do even worse.

– Ganesh