We need just one big cluster to become an electronics hub

To substantiate, let us look at two recent stories of electronics-export success. In 2008, Vietnam had virtually no electronics industry to speak of. It pulled out all stops to attract investment from Samsung by offering a corporate tax holiday for five years. It also earmarked a northern part of Vietnam as its primary electronics manufacturing hub and assured support in terms of ease of setting up and expanding operations for manufacturers in this region. As a result, just the 800sqkm Bac Ninh province, where Samsung first set operations up, has 11 Samsung factories. This company alone exports goods worth $65 billion from Vietnam and directly employs about 110,000 people. Vietnam also positioned the northern region around that province as a hub for electronics manufacturers looking to diversify away from China. This region accounts for almost the country’s entire $114 billion worth of electronics exports. Starting with low-value items on a large scale, Vietnam has now built a base on which it can further ascend the value chain. Several large investments in the fields of components and semiconductors have recently been made there.

Similarly, in the 1980s, when China had just begun its economic reforms, it set up four Special Economic Zones (SEZs), sized about 500sqkm. Extreme flexibility was allowed when it came to legal frameworks and the ease of doing business in these zones. The primary goal was to develop industry there. This allowed China to attract early investors from Hong Kong and Taiwan (in particular, Foxconn). By 2001, Foxconn had low value but large-scale contract manufacturing operations in Shenzhen from several companies like Apple, Intel and Sony, to name a few. Over time, the industrial and electronics ecosystem that sprang up led to several home-grown electronics giants like Huawei and BYD. The Shenzhen region alone recorded over $250 billion in exports in 2018, and Foxconn is estimated to employ over 400,000 people on its two Shenzhen campuses. Other SEZs in China focused on different industries and have had largely similar results.

The history of manufacturing is replete with geographical clusters, right from the start of the Industrial Revolution. Manchester emerged as a loom city, while Detroit became ‘motown’ and Silicon Valley sprang up around Stanford University as a digital hub. Network effects and economies of scale have meant that industrial development typically happens in geographically concentrated areas. Even in India, Tirupur is a famously successful garments cluster, just as Ludhiana is known for sports goods and Kanpur for leather.

The main difference is that most Indian clusters came up organically, while China, Vietnam and other East Asian countries have been able to create competitive clusters. We have been unable to replicate this model at scale, mainly because we do not prioritize export-competitiveness. As a result, our attempts at creating industrial parks have been scattered all over the country, in sizes that average 0.5sqkm, with minimal or no infrastructure or regulatory easing. Industries in these parks have to deal with the same challenges of red tape, customs clearances and electricity and labour problems that the rest of our industry does.

Governments, especially of states, need to lead the way on this. They should think of clusters not in terms of small industrial parks, but large regions (minimum 250sqkm) where they will prioritize responsiveness to industry’s regulatory and infrastructural needs. The focus should be on finding a large anchor investor and easing the path for any related unit that wants to come up in that region. In this way, initial scale may get built for low-value, high-volume products, but that scale will quickly develop an ecosystem around it that goes up the value chain and delivers higher-skill jobs, as the stories of Vietnam, China and our own automobile industry attest.

We have a golden opportunity to swing 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 splendid alternative if we set ourselves the target of reaching $100 billion in exports from just one large electronics cluster, and line up all the ducks needed to deliver on it.

We already know Apple wants to diversify away from China. Like Vietnam did with Samsung, we too must do whatever it takes to build a competitive cluster to take electronics exports from India from $20 billion to $100 billion in five years.

Ramesh Mangaleswaran & Rahul Ahluwalia are, respectively, governing council chairman and founding director of the Foundation for Economic Development