Mobile phone exports from India are set to increase from around $5 billion in 2021-22 to around $10 billion last year. This growth was mainly driven by Apple, which is expected to account for half of mobile phone exports from India in 2022-23. Overall electronics exports grew from $13 billion to nearly $20 billion. As good as this news is, benchmarking against other countries shows how far we can go. In 2022, Vietnam, a country the size of Madhya Pradesh, will export $114 billion in electronics. China exported about 900 billion dollars. What can we take to green our electronics exports and turn them into a thriving eco-system? The answer is deceptively simple but critically important and highly sensitive: Prioritize building a large export cluster around a large anchor investor.
To confirm, let us look at two recent electronics-export success stories. In 2008, Vietnam had virtually no electronics industry to speak of. It pulled out all the stops to attract investment from Samsung by offering a corporate tax holiday for five years. It also identified a northern part of Vietnam as its primary electronics manufacturing hub and assured support in terms of ease of setting up and expansion of operations for manufacturers in the region. As a result, there are 11 Samsung factories in just 800 square km of Bac Ninh province, where Samsung first established operations. The company alone exports $65 billion worth of goods from Vietnam and directly employs around 110,000 people. Vietnam positioned the northern region around that province as a hub for electronics manufacturers looking to diversify away from China. The sector is responsible for almost the entire $114 billion worth of electronics exports from the country. Starting largely with low-value commodities, Vietnam has now created a base on which to move up the value chain. Several major investments have been made in the recent past in the components and semiconductors sector.
Similarly, in the 1980s, when China started its economic reforms, it established four Special Economic Zones (SEZs) each about 500 km² in size. Extreme flexibility was allowed when it came to the legal framework and ease of doing business in these areas. The primary goal was to develop industry there. This allowed China to attract early investors from Hong Kong and Taiwan (notably Foxconn). As of 2001, Foxconn had low value but large contract manufacturing operations in Shenzhen from companies such as Apple, Intel and Sony, to name a few. Over time, the industrial and electronics ecosystem that emerged led to several domestic electronics giants such as Huawei and BYD. The Shenzhen region alone recorded exports of more than $250 billion in 2018, and Foxconn’s two Shenzhen campuses are estimated to employ more than 400,000 people. Other SEZs in China focused on different industries and achieved largely similar results.
The history of manufacturing has been replete with geographic clusters since the beginning of the Industrial Revolution. Manchester emerged as a looming city, while Detroit became ‘Motown’ and Silicon Valley sprang up around Stanford University as a digital hub. Network effects and economies of scale mean that industrial development usually occurs in geographically concentrated areas. In India too, Tiruppur is a well known successful textile cluster, as is Ludhiana for sports goods and Kanpur for leather.
The main difference is that most Indian groups emerged organically, whereas China, Vietnam and other East Asian countries have been able to form competing groups. We have been unable to replicate this model on a large scale, mainly because we do not prioritize export-competition. As a result, our efforts to create industrial parks are scattered across the country, averaging 0.5 sq km in size, with minimal or no infrastructure or regulatory easing. Industries in these parks have to deal with the same challenges of red tape, customs clearance and power and labor problems that the rest of our industry faces.
Governments, especially the states, need to take the lead on this. They should think of clusters not as small industrial parks, but in terms of large areas (minimum 250 sq km), where they will prioritize responsiveness to regulatory and infrastructural needs of the industry. The focus should be on finding a large anchor investor and easing the way for any related entity coming into the space. In this way, initial scale can be built for low-value, high-volume products, but that scale will quickly develop an ecosystem around it that moves up the value chain and provides high-skill jobs. Is, as are the stories of Vietnam, China and China. Our own automobile industry certifies.
We have a golden opportunity to turn things around. Companies are looking to diversify away from China given the current geopolitical situation, but this window will not last long and we have many competitors. India can be a great option if we set a target of reaching $100 billion in exports from just one big electronics cluster, and prepare all the ducks needed to make it happen.
We already know that Apple is looking to diversify away from China. Like Vietnam did with Samsung, we must make every effort to build a competitive cluster to take electronics exports from India from $20 billion to $100 billion in five years.
Ramesh Mangaleshwaran and Rahul Ahluwalia are the Chairman of the Governing Council and Founding Director of the Foundation for Economic Development respectively
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