Archive for the ‘Why Product-making companies?’ Category

Why Product-making companies?

April 2, 2007

I insist on high tech product making companies for India. No matter what we do with our IT-ITES sector, we will not scale dramatically to be able to become an economic power. The GDP of India in 2005 is $720B of which the IT-ITES sector contributes less than 3.2% (it has improved in 2006 to approximately 4.5%). According to report from Goldman Sachs, Indian PPP measure of GDP will exceed that of US in 2038 and will be at approximately $23 trillion.

How do we get there from here? Do we just sit back and hope our current IT-ITES sector, which is primarily driven by services, will deliver us there or do we really take this as a dream and try to make it real or may be even make it sooner?

Only a technology-product making company can add the right kind of money into India at a faster and quicker pace using smaller manpower. Just look at some of the statistics here (mostly from 2005):
Total output of Indian software industry for 2005 is $22.6 B (and for 2006 it is slated at $40B or little more).
The number of people directly employed by Indian IT-ITES sector is 1.3 million.
India is currently producing approximately 180,000 engineers for IT-ITES sector.
The rate of increase in output of employees is currently at 5.5% increase from previous year.
Assuming a steady increase for the next five years, the output in year 2010 would be approximately 220,000.

According to NASSCOM, India is poised to make $70 B in 2009 with a workforce of 2.2 million. This projection assumes that each employee with earn approximately $32,000 in 2009 while it is approximately $22,000 in 2005.

Now look at this for comparison:
Microsoft currently makes $40 B with 60,000 employees while Nokia makes $40 B with 40,000 employees. (each employee approximately makes $600,000 to $1M).
These two companies alone with a work force of 100,000 (in 2005) make more than the projected output for India in 2009 (with 2.2 million workforce).

No matter what we do, contribution of IT-ITES will be marginal in contribution towards Indian GDP unless something dramatic happens. And that can happen only with more technology-product making companies.

Case of technology-product making companies

How do you think most developed countries have been able to remain competitive? According to NSF (National Science Foundation, USA), “High-technology industries are driving economic growth around the world”. According to the Global Insight World Industry Service database, “the global market for high-technology goods is growing at a faster rate than for other manufactured goods”.

“Even during the recent, slow-growth, ‘post-bubble’ period (2000–03), high-technology industry continued to lead global growth at about four times the rate of all other manufacturing industries.”

According to NRC, Hamburg Institute for Economic Research, and Kiel Institute for World Economics 1996, “High-technology industries are R&D intensive; R&D leads to innovation, and firms that innovate tend to gain market share, create new product markets, and use resources more productively. These industries tend to develop high value-added products, tend to export more, and, on average, pay higher salaries than other manufacturing industries. Moreover, industrial R&D performed by high-technology industries benefits other commercial sectors by developing new products, machinery, and processes that increase productivity and expand business activity.”

What is the output of high-technology sector in each of these countries?
In India, high-technology sector accounted for 2.0% in 1980, 3.7% in 1990, 4.8% in 2000, and 4.8% in 2003.
In US, for 1980s it was 11% of total domestic production, in 1990s it was 13.5%, in 2000, it was 27%. In 2003, it is estimated at 34.2%.
In Japan, it was 17% of total Japanese domestic production in 2000. In 2003, it is estimated at 15.7%.
In EU, it increases from 9.5% in 1980 to 11% in 1990 to 13.2% in 2000. In 2003, it is estimated at 13.4%.
Countries like Taiwan (28.5% in 2003), Ireland (more than 50% in 2003) and China (19% in 2003) fare much better than India.

The case is strong for technology-product making companies. So, what are we going to do about it?