Ecosystems, Clusters and Supply-Chains

India currently consumes $100 billion worth electronic goods a year. According to government estimates, this number is expected to go up to $400 billion by 2020. While introducing the discussion paper on the new electronics manufacturing policy, government advisor Sam Pitroda said that India's electronic imports could exceed India's oil imports in 2020 if India does not build an electronics manufacturing base.

Mr. Pitroda's intentions are noble and I highly admire and respect him. However, for his vision to become a reality, India needs to overcome several hurdles that appear insurmountable at this time.

To understand how manufacturing begins, takes off and flourishes in a particular region, we need to understand the role played by ecosystems or clusters and the importance of an effecient and cost competitive supply chain.

We are all familiar with the existence of clusters. The movie industry in Los Angeles and Mumbai in India. The automobile industry in Detroit, Japan and now in places like Chennai and Pune in India. The ship building industry in Korea. The technology industry in the San Francisco Bay area. The diamond cutting and polishing industry in Surat, India. The labor intensive textile goods and toy industry in the Pearl river delta in China and the electronics manufacturing industry in Shenzen in China.

What we need to look at is how and why these clusters develop. This blog post is clearly not the place to discuss in detail a subject that is potentially a PhD thesis topic. However, we can draw some broad generalizations that can help us think about the subject.

Clusters can develop in a region if it has a critical raw materials or factor inputs that are needed for an industry. Clusters can also develop because a region is a first mover in a particular product or industry and it attracts resources and talent from around the world putting in motion a virtuous cycle. Clusters can develop if they have special access or proximity to a large potential demand base for a particular product or industry.

However, factors like the ones mentioned above are only the minimum conditions for the development of clusters. The magic potion that fires up the engine of development of a cluster is the presence of risk-taking entrepreneurs, government support and access to capital.

When there is a huge supply vacuum and demand is gallopping, the presence of risk taking entrepreneurs is sufficient and government support is not essential for the development of clusters. Capital is not a constraint and finds its way to entrepreneurs.

However, in a world with excess supply and where existing clusters already have massive government support, development of another cluster is not possible without the presence of all three factors (entrepreneurs, government support and capital).
The Chinese government hollowed out the manufacturing bases of countries like USA, Japan, Southern Europe, Korea, Taiwan and Malaysia by rolling out the red carpet for entrepreneurs to invest in and develop manufacturing ecosystems for one product/industry after another. It provided virtually free land, assured power supply, developed roads and ports, stable and low taxes, cheap capital and combined it with China's natural resource base of abundant labor.

The result was that the entire ecosystem of raw material producers, component manufacturers, service providers, skilled technicians and large scale manufacturers developed in China for every industry.

For India to take advantage of its home market growth and to use it as a platform to build manufacturing industries in the country (whether electronics or power equipment or anything else), India will have to provide at minimum the enabling environment that already exists for companies in China.

Mere creation of tarrif barriers and compulsory local sourcing requirements will not result in the development of a manufacturing ecosystem in the country. These measures will only result in a rise in prices and a decline in standard of living of Indian consumers. It will be foolhardy to expect that the entire electronic component supply chain will move to India just because the market exists here.

Without government support, capital and knowhow intensive industries like electronics manufacturing will not develop in India and India will continue to remain dependent on imports - warm and fuzzy discussion papers and intent documents notwithstanding.