India has witnessed remarkable success in the field of information technology and business process outsourcing (IT-BPO) over the two decades. Total export revenues earned by IT-BPO sector have grown to USD 69 billion in FY12, with the overall sector (including hardware) touching revenues of USD 100 billion.1 The domestic hardware market comprising desktops, laptops, servers, printers, storage, networking peripherals is the largest segment within the domestic IT-BPO market. This segment is expected to reach revenues of nearly USD 13 billion.1
This growing market, which is currently sized at USD 13 billion, has been led by BFSI, Manufacturing and Government, which have the maximum share in hardware spend in India.2 Factors such as infrastructure requirement in public sector, capital-intensive nature of manufacturing firms and increasing need or modernization of banks has been driving the spending of these three verticals. While these three verticals lead the market in the current scenario, sectors such as Communications and Media, Financial Services and Healthcare are expected to ride the next wave of growth witnessing growth rates of 12 percent, 11.6 percent and 11.4 percent respectively.2
Although the segment is promising and has immense potential, the increasing demand-supply gap remains to be a cause of concern. While the demand for hardware was estimated to be USD 13 billion in FY12, the production of goods stood merely at USD 6 billion.3 Growing demand for hardware fuelled by modernization across verticals, clubbed with the slow rate of increase in domestic production, is widening the demand-supply gap. While this is seen as a challenge, it is also unveils a plethora of opportunities for hardware manufacturers, be it global or India, who can gain significantly while bridging this chasm.
Growth drivers of the Indian IT hardware ecosystem
The key drivers of the Indian IT hardware ecosystem are:
- Growth in per capita income and corporate spend on hardware: Nearly 10 million households now have income levels above USD 10,000 per annum in 2012.3 Transformation of IT hardware from an aspiration to a utilitarian need has made these products more affordable for people
- Government focus on digital education: Various state governments in the country, like Tamil Nadu and Uttar Pradesh, have mandated laptops for all school children. This is driving a massive spike in the demand for laptops and other computer hardware
- Increasing spending from IT services industry: IT and ITES industries continue to drive the demand for the IT equipment. With Indian firms adopting automation, the demand for IT equipment is increasing
- Need for innovative products at low cost: Innovative low cost products like the Aakash tablet are also driving demand from both consumers as well as the government.
Challenges faced by Indian IT hardware manufacturers
- Inadequate infrastructure interrupting growth: Lack of power, land acquisitions issues and poor transport links restrict hardware manufacturing firms
- Tax issues: When compared to low cost destinations such as China and Taiwan, India’s current tax structure makes the final product less competitive
- Limited preferential access for local firms: As of now there are no preferential laws or incentives in place which enforce usage of domestic products to some extent.
KPMG in India point of view
The IT hardware industry can play a big role in providing products and solutions to aid the India growth story. It has the potential to leapfrog India to next generation of technology adoption and holds immense transformational potential for various industry verticals.
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While India has the fastest growing Hardware market, the absolute size of the market is still small when compared to leading countries such as China and Japan in Asia Pacific.4 Other economies such as China, Malaysia and Vietnam have been taking significant steps to enhance manufacturing capabilities. China has become the world’s manufacturing hub, Vietnam has turned into an attractive destination for Electronic Manufacturing Services (EMS), and semiconductors and Original Device Manufacturing (ODM), and Malaysia has also transformed into an industrialized market.4
In order to drive high growth in the industry, it is imperative for the government to provide impetus to the domestic IT manufacturing industry. Some of these measures include Convert existing clusters such as Sriperumbudur and Noida into Centers of excellence; creating a joint Government-Industry committee to market India and attract investment in India; incentivizing investments in India by creating a model where the subsidy or rebate given to a manufacturer is determined on the basis of the value addition; focusing on R&D; and creating a fund to promote manufacturing, business and growth for the industry.
1. NASSCOM Strategic Review 2012
2. Ovum, IT Hardware Global Forecast Model, March 2011
3 Report of Task Force to suggest measures to stimulate growth of IT-ITeS and Hardware manufacturing industries in India, MIT, Govt. of India, December 2009
4 KPMG in India Analysis; 3 Report of Task Force to suggest measures to stimulate growth of IT-ITeS and Hardware manufacturing industries in India, MIT, Govt. of India, December 2009