Current Economic Statistics and Review For the Week 
Ended August 13, 2005 (33^rd Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

AGRICULTURE

o The Mid-term Appraisal of the Tenth Five Year Plan has highlighted the fact that agricultural diversification has to be a major element in the strategy for accelerating agricultural growth. Diversification can be done by focusing on the agro-climatic zone. Since the horticulture sector has a significant role in raising farm employment and income, it should be boosted by providing assistance in marketing arrangements including private sector involvement in marketing. Encouragement of down stream food processing is also another area, which can be developed. The Mid-Term Appraisal of the Tenth Plan has projected a growth of 4 per cent for agriculture including allied sectors of forestry, logging and fishing in the year 2005-06. Since the scope of expanding net sown area in the country is limited, the emphasis is being given to increase the coverage under crops through inter-cropping and multiple cropping. Intensive Cotton Development Programme, On Farm Water Management for Increasing Crop Production in Eastern India and Macro Management on Agriculture are some of the schemes already implemented to increase the agricultural production.

o With a view to aggressively promote agribusiness project development in the country, the Government has approved a scheme with an outlay of Rs.48 crore to provide venture capital assistance to agribusiness projects over the two financial years, 2005-06 and 2006-07 and set up a project development facility. The scheme will work alongside bank loans, operated by Small Farmer’s Agribusiness Consortium (SFAC) and implemented in close association with nationalized banks, SBI and its subsidiaries and other commercial banks. The cost of the projects has to be above Rs 500,000. Projects valuing Rs.2.5 lakhs and above proposed to be located in backward, hilly and North eastern states could also get venture capital assistance. 

o India’s Basmati exports in financial year 2004-05 touched an all time high of 11.2 lakh tonnes, up by 45 per cent. In value terms, the exports rose to Rs 2741.94 crores compared with the previous year’s figure of Rs 1,990.92 crores. Foreign exchange earnings from basmati have increased to $612 millions from $442 millions. The non-basmati rice exports also went up to 36.4 lakh tonnes from 26.01 lakh tonnes. In value terms, it surged to Rs. 3899.73 crores in 2004-05 from Rs. 2142.16 crores in the last financial year. Earnings of foreign exchange from non – basmati rice rose to $870 millions from $476 millions. 

o With the post – harvest losses in the horticulture touching Rs 60,000 crores, the Government has increased allocation for the horticulture sector. A decision has been taken to provide five-year tax holiday for the first five year for new food processing units in the country. Such units would also be provided 25 per cent tax exemption in the subsequent five years. 

o According to estimates by the Rubber board, India’s natural rubber imports has increased by 28.33 per cent to 30,000 tonnes during the first quarter of 2005-06 compared with 23,376 tonnes in the same period last year. India’s natural rubber exports fell by 258 tonnes during April-July 2005-06 to 5,500 tonnes, from 5,858 tonne during the same period in the last fiscal year. The high price prevailing in the domestic market at the beginning of the current financial year was cited as a major reason for the surge in imports and decline in exports.

CORPORATE SECTOR

o Reliance Industries limited has discovered coal-bed methane(CBM) gas at Sohagpur in shahdol district of Madhya Pradesh. The directorate general of hydrocarbons has certified the presence of 3.75 trillion cubic feet of methane gas at sohagpur.

o Anil Ambani controlled Reliance Capital along with Reliance Land Private Limited have acquired 30.55 per cent share in Adlabs Films.

o Bharti Tele-Ventures has announced Rs 1000 crore deal to outsource all its call centre operations over the next four-five years, to four leading BPO’s- Hinduja TMT, IBM Daksh, Mphasis and TeleTech Services.

o Hindustan Lever Limited has signed an agreement with Riddhi Siddhi Gluco Biols Limited for sale of its functionalised biopolymer business unit in Pondicherry, for nearly Rs 7 crore.

o The shipping industry is sailing ahead as stock prices of most of the listed shipping firms are going up due to increase in freight rates. The share price of Garware Shipping Corporation has gone up by 18 per cent. Shipping major GE shipping has risen by 5.21 per cent.

o Hindustan Lever Limited (HLL) has decided to merge associate company Vasishti Detergents Limited (VDL) with itself. The swap ratio is expected to be 1:10. VDL is a Rs 25 crore company which manufactures soaps and detergents from its plant at Ratnagiri. It supplies its entire output to HLL. HLL currently holds 33 per cent shares of VDL.

o Bennet, Coleman & company, which publishes the Times of India, will invest nearly Rs 100 crore in Videocon Industries.

o Indian Oil Corporation has decided to invest Rs 1500 crore in Gujrat for refinery upgradation, pipeline projects and setting up a crude terminal at Mundhra. 

o Tata Tea has planned an investment of Rs 500 crore in its UK based subsidiary-Tata Tea (GB) and Tata Coffee-for acquisition. At present Tata Tea holds 98.58 per cent in the UK based subsidiary.

o Mahindra British Telecom Limited (MBT) has posted a 63 per cent rise in its net profit to Rs 33.77 crore for the first quarter of 2005-06, from Rs 20.76 crore in April-June 2004.

o Man Industries Limited has reported a 106 per cent growth in its profit before tax to Rs 10.46 crore in April-June 2005-06.

o Pantaloon Retail (India) limited has reported a 103 per cent growth in its retail sales in July 2005, to Rs 130 crore against Rs 64 crore during the corresponding month last year.

BANKING HIGHLIGHTS

o Indian Bank has reported a 15.6 per cent growth in its net profit for the quarter ended June 30, 2005 to Rs.136.57 crore as against Rs.118.13 crore during the same quarter in 2004. 

o Punjab National Bank has extended the 12 hours banking services to its 650 centralised banking branches. This facility is currently available in 41 cities across the country. 

INSURANCE

o Motor and health hospital insurance claims have dragged down the net profit of United Insurance Company Ltd. to Rs.307.71 crore for the fiscal ended March 31, 2005 as agasint Rs.380 crore during the previous fiscal.

TELECOM

o India’s largest domestic BPO outsourcing deal, IBM Daksh, Mphasis, Teletech and HTMT have bagged Bharti Televenture’s Rs.1,500 crore contract to provide customers care services to Airtel’s 12 million subscribers across 23 circles for 3-5 years. This deal provides a new dimension to the domestic BPO business, which was so far considered unattractive compared to international BPO. Bharti deal could be the trigger to the large trend of more outsourcing in domestic BPO. The domestic BPO market in telecom alone is estimated to be around $600 million. All telecom majors are looking to outsource their non-core services like customer service, network management and IT to BPO firms, which have an expertise in the required domain. Recently, public sector company BSNL has also outsourced its services to Spanco in an Rs.80 crore deal. 

FINANCIAL MARKETS

• Capital Markets

 Primary Market

o Sasken Communication Technologies Limited is to tap the market with fresh issue of 50 lakh shares of Rs 10 each with a price band of Rs 230 to Rs 260 per shares to be decided through 100 per cent book-building process. The net offer to the public would constitute 16.36 per cent of the fully diluted post issue paid-up capital of the company. The issue opened on August 11 and close on August 17.

o FCS software solutions has tapped the market through initial public offer of 35 lakh equity shares of Rs 10 each at a premium of Rs 40 per share to raise an aggregate amount of Rs 17.50 crore. The issue is to open on August 22 and close on August 26.

o Except for one public offer, almost all other primary issues during the calendar year 2005 have fetched healthy returns between 21 per cent and 300 per cent. In fact, the returns on IPOs have been better than benchmark indices. 

 Secondary Market

o During the week under review, the stock indices remained steady as the BSE sensex and NSE nifty registered marginal gains of 13.49 points and 0.35 points, respectively. The market remained concerned about the US FED decision but as the rate hike was as per the market expectations, the market turned buoyant. On August 11, the BSE sensex touched an all-time high of 7842.55 points before closing for the day at 7816.51 points. As a result, the profit booking gained momentum and the indices fell. The average daily turnover on BSE increased from Rs 3,666 crore in the previous week to Rs 3,708 crore in this week, while the turnover of NSE fell from Rs 7428 crore to Rs 7209 crore during the same period. In case of FII investment in equities, FIIs turned net sellers on Thursday for the first time in nearly two months. 

o Between August 1 and 12, FIIs have been net buyers of equities to the extent of Rs 3,982 crore with purchases of Rs 15,884 crore and sales of Rs 11,902 crore. However, they have been net sellers of debt during the same period of Rs 156 crore with sales of Rs 304 crore and purchases of Rs460. Even the mutual funds have been net buyers of equities of Rs 750 crore with purchases of Rs 2,547 crore and sales of Rs 1,797 crore for the week under review. 

o IDFC made an impressive debut on the stock exchanges; it was listed at Rs 49.90 on BSE and Rs 60 on NSE, as against the issue price of Rs 34.

o Among the sectoral indices of BSE, the indices of PSU, Bankex, consumer durables, IT and oil&gas indices registered declines. While BSE sensex recorded gains of only 0.17 per cent, BSE mid-cap and small-cap rose by 2.5 per cent and 5.4 per cent, respectively. 

• Derivatives 

o The daily turnover on the F&O segment of NSE during the week ranged between Rs 15097 crore and Rs 19325 crore as against a range of Rs 12,999 crore to Rs 21,814 crore in the previous week. 

• Government Securities Market

 Primary Market

o The RBI re-issued 7.50 per cent 2034 and 8.07 per cent 2017 for notified amounts of Rs 3,000 crore and Rs 5,000 crore, respectively, at cut-off yields of 7.44 per cent and 7.14 per cent, respectively. 

o The yield set at the 91-day bills has eased from 5.32 per cent in the previous week to 5.24 per cent in this week. 

 Secondary Market

o Despite the rising international oil prices and strong domestic industrial growth, the market remained buoyant due to the ample liquidity in the system. Sentiments improved further as the US fed rate was hiked. But a remark by the RBI governor that the central bank would carefully respond to volatile oil prices as they impact inflation and exchange rate pulled the sentiments down. However, better than-market expected results of the central loan auctions propped up the market sentiments. But as the global crude pirces spiraled to $ 68 a barrel, the market turned subdued. The fall in inflation rate to 3.84 per cent hardly affected the market as the international prices spiraled higher. The weighted YTM on 7.38 per cent 2015 has increased from 6.99 per cent on August 5 to 7.02 per cent on August 12.

o The US Fed has hiked its benchmark federal funds rate by 25 basis points to 3.50 per cent; this is the tenth consecutive hike since June 2004. 

o The RBI is to pay the government a dividend of Rs 5,400 crore for the year ending June 2005, which is same as the amount paid in the previous year. 

• Foreign Exchange Market

o Due to the cash-dollar shortage created by the sustained mopping up of dollars by state run banks and record high international oil prices, the rupee fell from Rs 43.48 to Rs 43.53. 

o The six-month forward premia rose from 0.89 per cent on August 5 to 0.92 per cent on August 12. 

• Commodities Futures derivatives

o The NCDEXAGRI index fell from 1249.37 on August 6 to 1242.20 on August 13. Aggressive selling and negative clues from global markets caused most of the commodities to dip into the negative territory. However, Guar seed and chana remained volatile and maintained their position in the top active traded list. 

o Commodities trading in the second half of July have been affected due to the rains as the daily average turnover across all exchanges has fall from Rs 5,300 crore in the first half of July to Rs 4,237 crore. The cumulative total turnover has also fallen from Rs 68,502 crore in the first half to Rs 64,010 crore in the second half. 

o A stand off between National Multi Commodity Exchange (NMCE) and a group of coffee buyers on the issue of delivery on the expiry of the July contract is likely to escalate with the latter deciding to take up the matter with the Forward Markets Commission (FMC).

o The center is considering to amend the Forward Contract (Regulation) Act, 1952 with a view to strengthening and providing autonomy to FMC. A bill to this effect is likely to introduced in the Parliament soon. 

o Due to the vagaries of monsoon initially being deficit then later being surplus, the prices of quiet a few commodities have risen sharply. For instance, prices of Grade A Parboiled Rice on NCDEX has shot up from Rs 1,030 per Mt on July 4 to Rs 1,110 on August 3, showing a rise of 7.77 per cent. 

INFLATION

o The annual point-to-point inflation rate based on wholesale price index has declined to 3.84 per cent during the week ended July 30, 2005 from 4.07 per cent registered during the previous week. This rate is the lowest since August 2003. The inflation rate was at 8.02 per cent in the corresponding week last year.

o The WPI for the week under review has remained constant at previous week’s level of 194.5 (Base: 1993-94=100). The index of primary articles’ group also remained steady at previous week’s level of 192.5 The index of fuel, power, light and lubricants group has risen marginally to 304.4 from the previous week’s level of 304.2. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has declined a tad to 170.6 from the previous week’s level of 170.7, mainly due to decline in the price indices of food products group in this category.

o The latest final index of WPI for the week ended June 4, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 192.8 and 4.39 per cent instead of the provisional levels of 192.5 and 4.22 per cent, respectively. 

o The contained rate of inflation in the month of July is attributed mainly to the high base effect. However, the floods in states like Maharashtra, Gujarat and Orissa resulting in an expected decline in farm output and a possible effect of high international oil prices on domestic oil market, raises doubts about such easing effect to continue during the later half of this fiscal. 

LABOUR

o The Board of trustees of the Employees’ Provident Fund Organisation (EPFO) has proposed few changes in the Employees’ Pension Scheme, 1995 (EPS), which covers the private sector, as well as some PSUs. Some of the important proposals are:

Raise pensionable age from 58 to 60 years.
Link pension with average salary of last five working years instead of 1 year under the existing norm. 
Link annual increments with pension

o The purpose behind raising retirement age is that the increased working age of two years per person will increase the contribution to the scheme substantially, while the liability towards him will decline. The rationale behind the second proposal mentioned here is that the last year’s salary in most of the cases is likely to be higher than that of the previous four years and offering the pension based on the average of last five years salary will reduce the monthly pension burden considerably. Many of the proposals are aimed at covering Rs. 20,000 crore gap between the assents and liabilities of the EPS scheme. The proponents also emphasised that this would enable the scheme to do away with the system of putting a cap of Rs.6500 on the salary used to calculate the pension, which is quite disadvantageous to the employees with higher salaries. 

o At a time when the centre is planning to replicate Maharashtra’s Employment Guarantee Scheme (EGS) to enact the Employment Guarantee Act, a Rs. 9.1 crore EGS fraud in the model states’s Solapur district has set off alarm bells. There were number of serious defects in the implementation of the scheme such as forged signatures and manipulated musters resulting into exceeding number of ongoing works as compared to the number of works approved. The corruption in Solapur points to the biggest problem in the efficient handling of the scheme. Therefore, it is extremely important to devise foolproof ways to ensure that the leakages from the system are not allowed to add to the already daunting costs of the EGS scheme at the national level. 

PUBLIC FINANCE

o The customs collection during the first four months of the current fiscal (April-July) rose to 30 per cent to Rs. 19,784 crore compared to Rs. 15,246 crore during the corresponding period last year. A zone-wise break-up shows that the custom collections in the western and sourthen zone have increased by almost 43 per cent and 24 per cent, respectively, during the period under review. The collection in the north zone remained almost static, while the eastern zone has witnessed an increase by over 31 per cent. The static growth in the northern zone was on account of changes in the warehousing norms requiring payment of customs duties at the port and excise duty at the point of manufacture. This has forced the Central Board of Excise and Customs to rework the targets for the various zones for the current fiscal. (BS)

o The empowered committee of state finance ministers on VAT will appoint a private consultant for preparing a coding system for the VAT, based on the harmonised system of nomenclature (HSN). The consultant will be appointed before October and for which the committee has already invited bids. 

o The first draft of the Eleventh Five-Year Plan (2007-08 to 2011-12) is expected to be ready in August, since the Planning Commission has already started working on the approach paper. The draft, which will elaborate on alternative models to achieve the targeted 8 per cent growth will be prepared by Planning Commission member Kirit Parikh. The Eleventh Plan will, among other things, include a long-term reform agenda that was identified in the mid-term appraisal of the Tenth Five-Year Plan.

o The Comptroller and Auditor General (CAG), in its report for the year ended March 2004 has chided Maharashtra state government for using its contingency fund to finance regular schemes such as giving scholarship to girls students. The fund is reserved exclusively for emergencies arising due to natural calamities or other such causes. CAG said that the government has sanctioned Rs. 6.6 crore from the contingency fund for scholarship. Further, despite withdrawal of the amount, scholarships have not been disbursed to girl students. 

o The Finance Ministry, in a decision to provide taxpayers some more time to familiarise themselves with the practices and procedure of payment of advance fringe benefit tax, has said that no interest would be payable on the first installment of the advance fringe benefits tax paid upto August 31. 

o The Planning Commission, with a view to merger the plan and non-plan expenses has prepared a paper which will be considered and cleared by the internal Planning Commission before it is taken up at the Committee of Secretaries level. The paper highlights the problem areas, which need to be looked into the plan and non-plan distinction. However, the paper also asserts that some form of distinction will have to continue. It further states that the Finance Commission should not be allowed to make grants for social and development related issues. 

CREDIT RATING

o The Small Industries Development Bank of India (SIDBI) will set up a credit rating agency for small and medium enterprises (SMEs) in association with Dun & Bradstreet by next month. The company, which is a joint venture between the above mentioned entities, will empower the lending banks to quickly assess the status of SMEs they will lend to.

o Icra has assigned an A1+ rating to the Rs. 6 billion (enhanced from Rs. 5 billion) certificate of deposit programme of Yes Bank Limited (YBL). The rating factors in the profile of YBL’s principal shareholders, its adequate capitalisation bolstered by the recently concluded initial public offering of Rs. 3.15 billion and Icra’s expectation that the principal shareholders would be able to support the capital requirements of the bank in the medium term.

o Following Crompton Greaves Ltd.’s (CGL) announcement of acquisition of the Pauwels Group (PG), Fitch Ratings has removed the ratings of CGL from rating watch evolving. 

o At the same time, the agency has also affirmed CGL’s ratings at A+(ind) and the rating on its INR1 billion short-term debt/commercial paper programme at F1+(ind).

o Crisil has downgraded the ratings assigned to Majestic Auto Ltd.’s (MAL) Rs. 29.2 million non-convertible debenture issue from AA+ (SO) to AA (SO). This rating downgrade is in line with the revision in Crisil’s rating on MAL’s group company Hero Cycles Ltd. to AA/stable/P1+ from AA+/stable/P1+. However, the rating continues to be based on the strength of unconditional and irrevocable guarantees provided by its group company.

o Crisil has reaffirmed the P1+ rating assigned to Saint Gobain Glass India Ltd.’s (SGGIL) Rs. 500 million short-term debt programme. The rating continues to reflect SGGIL’s strong operational efficiencies and demonstrated ability to market its products in the domestic and export market. 

o Crisil has reaffirmed ‘AAAf’ rating assigned to Birla Sun Life Asset Management Company’s Birla Bond Index Fund (AAIF). The rating indicates that the portfolio holdings of BBIF provide very strong protection against losses from credit defaults. 

EXTERNAL SECTOR

o The leather industry in India is seeing a boom as Indian manufacturers are attracting international buyers. The export market for footwear has recorded a growth of 11.45 per cent over the previous year.

o Mumbai’s status as a major leather exporter has got a boost with its share in exports increasing to 7 per cent over the last three years. In 2003-04, the total value of Indian leather exports was Rs 9623.71 crore. Of this, the share of mumbai-based exporters was Rs 734 crore, which is around 7 per cent of the total exports.

o Bilateral trade between India and Pakistan grew by 76 per cent to $600.77 million in the fiscal year 2004-05. The growth is attributed to the trade initiatives undertaken by the two countries during the last fiscal year. While India’s exports to Pakistan have nearly doubled to $505.44 million in 2004-05 from $286 million in 2003-04, its imports from Pakistan have also increased to $95.33 million in 2004-05 from $57.74 million in 2003-04.

o Pakistan is unlikely to immediately accept India’s request to open the Wagah-Attari land route on a permanent basis for a large number of commodities. It is also unlikely to allow the import of diesel from India for the time being.

o An analysis of 42 service sector segments done by the Federation of Indian Chambers of Commerce and Industry revealed that 16 sectors have achieved a growth of over 20 per cent in 2004-05, which along with 10-20 per cent growth in other 18 sectors, have put the overall service sector on a positive growth trajectory.

o The International Gemological Institute (IGI), the gem and jewellery certification laboratory in India has launched the Laserscribe, a diamond laser inscription system, for both jewelers and consumers. The inscription can be used by the jewellers to mark their diamonds as certified, and consumers can personalise their diamonds by inscribing a message on the diamond.

o India and Indonesia have agreed to explore the possibility of entering into a comprehensive economic agreement or partnership agreement as part of their efforts to deepen the bilateral trade between the two countries and attain a target of $10 billion by the end of this decade. At present, the trade between the two countries is $3.3 billion.

o India’s largest foreign direct investment of $12 billion by Korean steel major Posco in Orissa is likely to be delayed. The company has decided to wait for the outcome of a detailed feasibility study on the proposed plant, which is expected to complete by early next year, before reaching its board in Korea for approval of release of funds.

o The government said that FDI guidelines for the telecom sector would be issued shortly. According to national common minimum programme FDI would continue to be encouraged particularly in areas of infrastructure, high-tech and exports. Telecommunication sector meets this description.

o The state government of Andhra Pradesh has announced the allocation of 200 acre of land in Kancha Imarat, Shamsabad, 25 km from Hyderabad to develop special economic zone (SEZ) for the gems and jewellery industry. This SEZ will be the third one catering to gems and jewellery segment. Santacruz (Mumbai) and Salt Lake (Kolkata) are the other SEZs in this segment.

o Civil aviation minister said in Parliament that the civil aviation policy, in its current form, permitted only an Indian citizen to start an airline in the country. Therefore, investments by PIOs in domestic carrier will be taken as foreign direct investment, and will remain within the 49 per cent ceiling.
 

Theme of the week:

Electronic Manufacturing Services (EMS) Industry: A Review *

In the 21st century, Information and Communication Technologies (ICTs) have begun to influence every facet of economic and social life in every society; their potentials are perceived to be so immeasurably great, both in their extend and pace of application, that it is difficult to predict the shape of things to come. Of late, there is hardly any country in the developing world, which has not initiated policy measures and institutional interventions to accomplish the advantages of new technology for development. ICT is a general-purpose technology, and thus has wide applicability in various manufacturing and services sectors. It thus has the potential to affect virtually all sectors of the economy by infusing greater information and development content in products and processes. More importantly, it has spawned new products and has made existing products more versatile. Therefore, the ICT is generally considered as technology of the new millennium. 

Impact of ICT

Developments in ICT have changed the way economic activities are being organised nowadays. The impact can be seen in two ways: 
1) The way the ICT industry itself has changed during the last few years and, 
2) The way ICT has impacted on other economic activities as in the manufacturing and services sectors. 

ICT Industry

One can trace the beginning of the ICT industry to the birth of internet in the late 1960s and the emergence of the personal computer (PC) in the 1970s. However, ICT in its present context actually picked up momentum in the early 1990s when, it was aided by the advancement in communication technology. In short time, the PC and the web based technology jointly emerged as a powerful tool for business and general development. Since then, ICT has integrated computing, communications and graphics through the process of digitalisation. The pace of technological change has been accelerating in the ICT industry, which has been driven by both innovations in hardware as well as the software segments. 

Qualitatively, the most important change that has been made possible by ICT is that it has separated product development from the production processes. The idea of reorganisation of basic work has its roots in the ‘division of labour’ theory propagated by Adam Smith in 1776. Growth, according to Smith, is rooted in the increasing division of labour. Following Smith, the Industrial Revolution had accelerated the process further imparting greater efficiency and productivity in the manufacturing sector. 

Supply Chain Management

In the mid-1980s, the linear production system of sequential steps was rearranged such that different parts get out-sourced in different places, often thousands of miles away in different countries or in different regions of a country and were transported to an assembly point for just-in-time delivery. The process was known as supply-chain management (SCM). In short, SCM is defined as, “the integration of the supplier, distributor, and customer logistics requirements into one cohesive process to include demand planning, forecasting, materials requisition, order processing, inventory allocation, order fulfillment, transportation services, receiving, invoicing, and payment”. In the mid-1990s, the process of SCM turned out to be the key word in almost all the manufacturing activities as it deals with the planning and execution issues involved in managing a supply chain. SCM has resorted to the well-known economies of scale (inputting large amounts of resources and generating proportionately larger outputs) as well as economies of scope (manufacturing different products by deploying common resources) in the process. The SCM process has totally altered the production dynamics in the ICT industry. 

In the early 1990s, the ICT has further refined this traditional form of production methods by shifting more value-added to product development than to production itself. In the present IT age, the expenses incurred for the corporates in planning a product, designing it and retaining its brand name are more than to these actually costing to produce it. ICT has accelerated this process beyond recognition, and has shortened the product development period. Thus, the emphasis on product development has increased in relation to actual production. Within the production cycle, the value-added has shifted more to specific parts that contain greater technical complexity, say chips and software, as opposed to the assembly of the whole product, the so-called Wintel effect.
Incidentally, Wintel refers to the combination of the Windows operating system running on Intel microprocessors. The term is often used sarcastically to indicate the close alliance between Intel and Microsoft. Because Windows 3.x and Windows 95 run only on x86 microprocessor architectures, Intel and Microsoft support each other in ways that many feel is unhealthy for the computer industry as a whole. However, it should be pointed out that Windows NT runs on several non-x86 microprocessors, and there are other operating systems, such as Linux, that run on Intel microprocessors. As a result, an antitrust case was imposed against Microsoft, which was a landmark case of antitrust intervention in network industries. The United States Department of Justice and 19 States sued Microsoft alleging (i) that it monopolized the market for operating systems of personal computers and took anti-competitive actions to illegally maintain its monopoly; (ii) that it attempted to monopolize the market for Internet browsers because such browsers would create competition for operating systems; (iii) that it bundled its browser (Internet Explorer) with Windows; and that it engaged in a number of other anti-competitive exclusionary arrangements with computer manufacturers, Internet service providers, and content providers attempting to thwart the distribution of Netscape s browser. The District Court Judge found in most points for the plaintiffs and ordered the breakup of Microsoft into two companies, one with all the operating systems software, and one with all other products of the company. The District Court also imposed a number of severe restrictions on the business conduct of Microsoft. 

Electronic Manufacturing Services (EMS)

The complexity of out-sourced production system, its computer-aided-design (CAD) and specification, and material content, and movement through time and space are all coordinated by a closely monitored information system. Logistics of this manufacturing system that would not be possible without ICT has emerged to be a task in itself and is known as electronic manufacturing services (EMS). The EMS consists of a group of specialised companies whose scope includes order receiving, material procurement, SCM, design and proto-type production or testing and management of the distribution of finished goods. In the electronics industry, the company whose brand they bear never touches few of the end products. Instead, the manufacturing is contracted out to specialists, creating an industry known as EMS or simply contract manufactures (CMs) or EMS providers. Their customers are original equipment manufacturers (OEMs). 

In place of traditional contractual relationships between client and suppliers, arrangements with EMS providers represent a sort of extended enterprise – a set of partnerships between product developers and specialists in components, distribution, retailing and manufacturing. These changes have altered the traditional roles of OEMs, original design manufacturers (ODMs) and CMs. Much of the matured products have become low value-adding processes. These qualitative changes have not happened in one or two isolated cases. Rather they are the norm in the entire ICT industry and especially in the PC industry. Emerging and established electronics OEMs can meet and exceed growth expectations because EMS providers are able to meet demand spikes and effectively mange inventories. 

Today’s dynamic technology market requires a quick response to customers’ changing needs. Cost-effective high-volume offshore manufacturing, world-class supply chain, quality control systems and scalability are the basic benefits that are rendered by EMS providers. There are a few reasons why outsourcing works particularly well in electronics. First, from a production perspective, most electronics products are manufactured similarly and do not involve complicated production processes. As a result of basic similarities in finished goods, electronic manufactures have an easier time subdividing their skills, equipment and information systems to handle many different work orders. Second, the competitive, fast-changing nature of the electronics markets has forced discipline on this manufacturing segment. It is through the ICT that the entire SCM system has begun to benefit the manufacturing sector. Inventory levels in the manufacturing sector have drastically come down in recent years. 

History of the EMS industry

The trend to replace in-house manufacturing with outsourced manufacturing began decades ago. In the electronics industry, EMS providers began primarily in the business of printed circuit board (PCB) assembly and consignment work. Consignment contractors own no material but simply assemble what was provided. Rapid growth of the contract manufacturing industry did not occur until the 1990s. 

In the mid-1990s, OEMs have simply increased their reliance on contract manufacturers instead of increasing capital investment. The EMS providers, shared by multiple OEM clients, are able to leverage the advantages of year-round full-volume production. At the end of the 1990s, OEMs started increasingly outsourcing almost every aspect of production from design to final assembly. The scope of outsourcing practice has been extended beyond the component level to the complete production of a brand name product. The EMS provider is no longer just a vendor, but takes responsibility for the engineering, manufacturing and distribution of customer products. EMS providers have become full-fledged partners in product design and development, essentially extensions of the OEMs they service. Contract manufacturing is projected to grow faster than the electronics industry as a whole, a benefit to contract manufacturers of all sizes.

Uses of EMS

Today, we are experiencing two trends that are having far-reaching effects on both industry and consumers: short product life cycle and mass customisation. For instance, cell phones have a life cycle as short as 6 months. With such a short product life-cycle, taking a lead and being first to market is the key for a company’s survival. Nowadays consumers increasingly demand a highly customised, high quality product to be delivered quickly and in addition, at a competitive price. 

As a result, almost each and every company – even established ones like HP and IBM – needs to re-evaluate itself and identify its core competencies. The industry is moving to one in which competition is supply-chain vs supply-chain, not simply company vs company. In order to strengthen or reposition their competitive advantage companies such as Nokia, Lucent Technologies, Ericsson, NCR, IBM, Apple Computer HP and Phillips have all liquidated manufacturing plants and chosen to partner with major EMS providers. 

Rapid Growth

Throughout the 1990s, the EMS industry continued to outpace the rest of the electronics industry with bulk of outsourcing in telecommunications, computers and computer peripherals. OEMs in the computer and telecommunications sectors continue to be the driving force for EMS providers. In 1998-99 the computer and communications segment accounted for approximately 50 per cent of the revenues of EMS providers. The EMS industry has enjoyed a 20 per cent annual growth rate in the last few years. Total revenue of the worldwide EMS industry as a whole in 2004 was estimated at around $200 billion.

Advantages of EMS Industry

During the 1990s, EMS industry has witnessed phenomenal growth. The rationale for the existence and growth of the industry are as follows: 

1) Low material costs: Due to large-scale production EMS providers have more leverage in purchasing raw materials. Purchasing power due to increased size and shared inventories of common parts can result in lower component costs.

2) Core competency: By outsourcing manufacturing activities, electronics OEMs can devote their attention to design and demand creation. 

3) Economies of scale: EMS has resorted to the well-known economies of scale by inputting large amounts of resources and generating proportionately larger outputs. 

4) Return on investment: Manufacturing processes often require heavy capital investment, which often takes a long period to pay back. With shortened product life cycles, it is harder to make capital investment decisions. For an OEM, these difficult decisions are removed if the CM takes care of the entire manufacturing process, resulting in better return on investment for the OEM. 

5) Marketing: With shortened product life cycles, being first to market is extremely important. Since manufacturing is the core of a CMs business, by using the best practices and latest technology, the CM can bring the product to market quickly. In addition, CMs are flexible enough to be able to respond quickly to positive or negative changes in demand.

6) Risk Sharing: One of the major advantages possessed by CMs is that they are able to transfer their risks to either suppliers or OEM customers as much as possible. The unique position of an EMS provider in the electronics supply chain enables it to effectively diversify and share with suppliers or OEM customers the risks pertaining to demand uncertainty and capital investment in capacity.

7) Globalisation: Markets have become global rather than local in nature. By establishing a global presence, CMs are able to serve both types of customer in an efficient manner. They are able to take advantage of lower labour costs in various regions as well as providing short lead times and reduced supply chain costs in satisfying demands locally. 

Extended EMS

EMS providers are adding services such as engineering design, warranty repair, and customer service and support. Having transformed themselves from PCB manufacturing to integrated EMS providers, EMS industry leaders now have added a new, critical layer in global integrated manufacturing services: design for manufacturing (DFM). At its core, DFM is designed to get OEMs products to market faster and more cost-effective than ever before. The purpose of DFM services is to bridge the performance gap between raw components and the assembled packages, as well as various ‘volume’ manufacturing processes that ensure quality and reliability in order to deliver smaller and higher performing OEM products. DFM services can simultaneously anticipate new technology trends and meet the customer’s expected service levels. Another great benefit of DFM is that these real-time, automated design systems receive feedback from design, test, supply chain and manufacturing operations.

EMS Providers

Presently, the top EMS providers have turned out to be super contractors who are revolutionising the manufacturing process. They command dozens of factories and supply networks around the world. Increasingly, EMS providers are offering an array of services from design to inventory management to delivery and after-sales service. A few case studies of EMS providers are presented below:

1) Flextronics International: This is a Singapore-registered but San Jose-based global EMS provider which is among the five largest EMS providers in the US since 1997. Founded in 1969, Flextronics gradually moved to establish a significant manufacturing presence in the US and the Asia-Pacific region, with operations in San Jose, Singapore, Hong Kong, China and Malaysia through the early nineties. During 1994 to 1998, the company completed eight acquisitions in three continents; as a result, the company’s annual revenue has grown tenfold in three years to $5.74 billion in 1999-2000 from $640 million in 1996-97. 

Flextronics has changed its role from that of a ‘vendor’ to a ‘virtual factory’. It now offers engineering services, manufacturing and distribution. Thus, it is now regarded as a leader in flexibility and speed within the EMS industry. The company produces products in the communications, networking, computer, medical and consumer markets and has a diverse customer base consisting of multinational OEMs such as 3Com, Palm, Hewlett-Packard, IBM, Microsoft, Motorola, Nokia and Ericsson. In June 2000, Flextronics signed a five-year, $10 billion contract with Motorola Inc. to manufacture cellular phones, set-top boxes, pagers and other wireless equipment. 

2) Solectron Corporation (SC): Headquartered in Milpitas, California, SC has transformed itself into the world’s premier supply-chain facilitator for electronics technology, manufacturing and service solutions. Today, the company has become a major supplier of computer peripherals, PCs, mobile phones, LAN and WAN products, telecommunications equipment, workstations, avionics, mainframes, semiconductors and test equipments. SC’s major OEM customers include IBM, Hewlett-Packard, NCR, Ericsson, Mitsubishi and Nortel. The company produces motherboards for IBM laptops, electronic cash registers as well as all retail and computer products for NCR Corporation and cell-phones for Mitsubishi Corporation (perhaps the first time that a Japanese electronics manufacturer has hired an American company to assemble its products.)

3) Cisco Systems: A networking products company today outsource around 40 per cent of its products. Cisco’s main role is in defining and designing the product. It subcontracts the physical production and delivery processes of the product. In such a case, an OEM needs mainly concept, design and marketing staff.

4) Quanta Computer (QC): Taiwanese company QC, which is the largest notebook PC maker in the world today, was basically an original equipment manufacturer (OEM). The big brands in the notebook business, for instance HP and Dell, buy notebooks from Quanta and paste their labels on them.

5) BenQ: Another Taiwan-based company BenQ is among the top three TFT-LCD monitor producers in the world. What makes it different from others is the fact that it sells more than 45 per cent of its monitors under its own brand name.

6) Taiwan Semiconductor and Manufacturing Company (TSMC): This is the world’s largest chip foundry company (a chip foundry produces chips that are often designed by other companies).

7) Moser Baer: Since inception, the company has always endeavored to create its space in the international market, something that very few Indian manufacturers have been able to achieve. In order to strengthen its foundation, the company has implemented a sustainable model of low costs, high margins, high profits, reinvestment and capacity growth. Along the way, deep relationships have been forged with leading OEMs, with the result that today there are hardly any players in the field that Moser Baer (MB) is not associated with. 

MB India is engaged in the manufacture of optical and magnetic storage media products. The storage media comprising of various compact disk (CD) and digital video-disk (DVD) constituted over 95 per cent of the company’s sales in 2002-03. The company derives more than 85 per cent of its revenues from exports supplying to major OEMs across the world. Currently, 11 of the top 12 largest OEM customers worldwide source their media requirements from MB and the company is able to offer an enhanced quality-service-delivery capability to these customers. It is among the top five largest producers of optical media in the world with an international market share of around 11 per cent. It is also the largest manufacturer in India and estimates its domestic market share to be over 40 per cent. 

Investments have been imperative for MB to derive economies of scale and to integrate backward for the supply of key raw materials. The company operates in an industry where large capacity is required to derive economies of scale and where prices of products decrease at a faster pace. On the other hand, it is an evolving sector marked by rapid technological changes and innovations. The forte of the company has been its re-engineering capabilities and providing quality products at competitive rates – the competitive advantage being the huge pool of low cost technically qualified personnel. A drawback for the company has been its heavy dependence on imports for its raw material requirements, whose volatility can easily erode its margins. With all these initiatives, MB is strengthening its foundation of being a truly multinational company. 

Recently, MB has entered into a technology license agreement with Hewlett-Packard (HP), one of the largest technology companies in the world, to manufacture optical media (all CD and DVD formats) using the unique ‘LightScribe’ technology. As one of the first media companies collaborating with HP on the deployment of LightScribe technology, MB is working to enhance the manufacturability, functionality and appeal of customised recordable and re-writable optical media for professional, commercial and consumer applications. MB is currently the only major media manufacturer in the world to form part of this project, which underlines the capabilities in applying cutting-edge and innovative technology development to commercial manufacturing processes.

Preferred Destination for EMS provider

EMS providers view China as the preferred assembly site as labour-cost is a significant element of the production cost. China is specifically chosen for high-volume, low-margin work. However, China is poised to become Asia’s premier manufacturing site. It has a potentially huge market, low overhead (due to low administrative costs, tax benefits, etc) and low labor costs. Products manufactured in China can serve both the Chinese domestic market and the markets of Japan, Korea and Southeast Asia. A similar phenomenon is occurring in Eastern Europe (specifically Romania and Hungary) and Mexico. Low labor costs and proximity to their respective European and North America markets make Eastern Europe and Mexico ideal regions for major EMS providers to place their manufacturing sites. 

Issues

The EMS industry is a low margin industry. The attraction for investors is that the industry has sought to minimise risk. A contract manufacturer (CM) owns very little finished goods inventory. If the market shifts or a competitor enters the market, it is the OEM who takes the majority of risk of over supply and obsolescence. On the procurement side, the CM is increasingly leveraging its purchasing power to demand that its suppliers own inventory of raw materials. At present, through Vendor Managed Inventory (VMI) or Supplier Owned Inventory programs, CMs are reducing procurement risks.

There is a possibility that OEMs will, over time, become purely design and marketing companies. Competition in the future is expected to be supply-chain vs supply-chain instead of company vs company. However, brand name recognition will still be vital, meaning larger brand names will have to coordinate their supply-chains and go to market as one entity.

Finally, a word on India

In order to gain a substantial market share of the world EMS industry, India has to focus more on establishing hardware parks that have a cluster of products and companies that collaborate closely, offer access to research and development labs and ensure that the labs work closely with local companies. India’s greatest disadvantage is that the best of IT institutions and universities do not focus on research; their focus essentially is on churning out qualified graduates. Even the emphasis on research and research qualifications is limited.

*  This note has been contributed by Bipin K. Deokar.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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