India, Long the Home of Outsourcing, Now Wants to Make Its Own Chips

NEW DELHI â€" The government of India, home to many of the world’s leading software outsourcing companies, wants to replicate that success by creating a homegrown industry for computer hardware. But unlike software, which requires little infrastructure, building electronics is a far more demanding business. Chip makers need vast quantities of clean water and reliable electricity. Computer and tablet assemblers depend on economies of scale and easy access to cheap parts, which China has spent many years building up.

Dell computers at a plant in the state of Tamil Nadu. Dell assembles products in India, but does not make components there.

So the Indian government is trying a new, carrot-and-stick approach.

In October, it quietly began mandating that at least half of all laptops, computers, tablets and dot-matrix printers procured by government agencies come from domestic sources, according to Dr. Ajay Kumar, joint secretary of the Department of Electronics and Information Technology, which devised the policy.

At the same time, it is dangling as much as $2.75 billion in incentives in front of chip makers to entice them to build India’s first semiconductor manufacturing plant, an important step in building a domestic hardware industry.

But like so much of India’s economic policy, it’s doubtful that either initiative will have the impact the government is intending.

“Nobody disputes India’s need to build up manufacturing. Not doing so would be fiscally irresponsible,” said Gaurav Verma, who heads the New York office of the U.S.-India Business Council. But Mr. Verma said that India’s efforts to force international companies to manufacture in the country are futile. “The government needs to not mandate this, but create an ecosystem.”

The domestic purchasing mandate, known as the “preferential market access” policy, seeks to address a real problem: imports of electronics are growing so fast that by 2020, they are projected to eclipse oil as the developing country’s largest import expense.

India’s import bill for semiconductors alone was $8.2 billion in 2012, according to Gartner, a research firm. And demand is growing at around 20 percent a year, according to the Department of Electronics and Information Technology.

For all electronics, India’s foreign currency bill is projected to grow from around $70 billion in 2012 to $300 billion by 2020, according to a government task force.

“The problem we are facing is that the demand is growing so much that it is reaching nonsustainable levels,” said Dr. Ajay Kumar, joint secretary of the agency.

Dot-matrix printers, outdated in most of the world, are one of the few electronic products that India manufactures. Around 400,000 dot-matrix printers were sold in India in the year ended March 31, an increase of 2 percent from the year before, according to the Manufacturers’ Association for Information Technology, a computer industry trade group in India.

The government accounts for about 40 percent of the country’s electronics purchases, according to PVG Menon, president of the Indian Electronics and Semiconductor Manufacturing Association.

Officials hope to use that purchasing power to jump-start manufacturing of other computer goods. However, the government has adopted a broad definition of what it considers locally made, since so few electronics are currently manufactured here.

If at least 30 percent of a computer’s components are made in India, then it would qualify. The policy also allows prospective suppliers to show “value addition” in lieu of actually manufacturing the goods in India, said Dr. Kumar. For example, India does not manufacture hard drives, but it assembles and tests them. Under the policy, a hard drive that is assembled in India would be considered to be made there.

Computer makers contacted for this article declined to discuss how the new policy would affect their sales.

The big fish the government would like to land is a factory to produce microprocessors for computers.

A computer processor typically accounts for 25 to 35 percent of the total cost of a PC or laptop. India hopes that such a plant, which could cost as much as $5 billion to build, would help spur a bigger high-tech manufacturing industry, said Dr. Kumar.

According to Indian media reports, two consortiums have been in talks with the government to build microprocessor foundries.

The first is led by the Jaypee Group, one of India’s largest construction companies, which built the country’s Formula One track in Uttar Pradesh. It has partnered with I.B.M., which will provide the technology.

The second bid is from the Hindustan Semiconductor Manufacturing Corporation, an American company that, despite its name, does not manufacture any chips. It has partnered with the Geneva-based chip maker
STMicroelectronics.

But Ron Somers, president of the U.S.-India Business Council, said he doubted that India could provide a new chip-making facility with the basic infrastructure it needed to even keep the lights on. There have been several failed attempts to set up chip plants in the past. The most recent was in 2008 by SemIndia, a United States company run by Indian-American entrepreneurs. It ended acrimoniously when a dispute arose over the terms of the agreement between the company and the state of Andhra Pradesh where the plant was to be housed.

Critics warn that India’s efforts to encourage a high-tech revolution may come to naught once again unless it reduces some of the barriers to doing business in the country.

In the case of some electronics, the import duty on a finished product is cheaper than on the component parts, said Mr. Menon. Costs are also higher because of a lack of reliable power and the extra time it takes to move goods on the country’s poor roads.

Spurred by the new “Buy India” requirements, Dell, the largest PC retailer in India, explored the possibility of setting up manufacturing facilities there. Dell assembles computers in India, but does not manufacture any components.

“They flew in their suppliers from China and Taiwan to see if they could set up facilities. They said no,” said an industry official, who requested anonymity since he was not authorized to speak on behalf of the Texas-based company. “The market is too small, and logistically it is a nightmare.”

Dell declined to comment.

India has a model for success, said Mr. Verma of the business council: its automobile industry. In the 1980s, India opened its automotive industry to foreign companies, and in 1982, Suzuki Motor bought a majority stake in Maruti Udhyog. The joint venture produced the Maruti 800, India’s first affordable car.

However, the real watershed moment came in 1991, when India dropped its local manufacturing requirements. The industry exploded, and there are now about 40 million cars on Indian roads.

“India now has the sixth-largest auto industry in the world because of the ecosystem the government created,” Mr. Verma said.

Pamposh Raina contributed reporting.

A version of this article appeared in print on April 16, 2013, on page B2 of the New York edition with the headline: India, Long the Home of Outsourcing, Now Wants to Make Its Own Chips.