India is well-known for its software prowess. But on the hardware front, the progress is rather slow. However, a recent report by market research firm iSupply Corp. suggests that the country has been making gains in this sector also. Already, 50 EMS/ODM providers are operating in India, ranging from global players including Flextronics and Solectron to indigenous firms including Deltron, TVS Electronics and Sahasra. Market research firm iSuppli Corp. expects further moves by international players to add production in India in the coming years.

According to a recent study by iSupply, India’s contract-manufacturing business is expected to nearly triple in revenue over the next five years, a development that will present both opportunities and potential pitfalls for the worldwide electronics supply chain. Revenue generated by Electronics Manufacturing Services (EMS) providers and Original Design Manufacturers (ODMs) in India will expand to $2.03 billion in 2009, rising at a CAGR of 21% from $774 million in 2004, the iSuppli report predicts. Indian EMS/ODM revenue will grow by 20.8% to reach $935 million in 2005.

Like China, an obvious allure of locating electronics production in India is the nation’s low labor costs, according to Adam Pick, senior analyst with the EMS/ODM service at iSuppli. Labor costs for conducting electronics manufacturing in India are between 30 to 40% less than in the United States or in Western Europe, Pick noted. Other equally important benefits from operating in India include a fast-growing domestic market, an excellent education system, the nation’s technology parks and the recent improvements in the country’s transit and utility infrastructure.

However, iSuppli does not expect the Indian contract-manufacturing industry to pose a significant threat to China’s position as the epicenter of electronics manufacturing in the short term. India’s contract manufacturing activities primarily serve the nation’s indigenous demand. OEMs primarily outsource manufacturing to cater to the Indian domestic market, although export of Indian-assembled electronic goods does occur. In the longer term, i.e. 2009 onward, the report predicts that India may compete with the Chinese providers in select products as the nation’s share of the global electronics market increases.

For OEMs, using contract manufacturing services in India can help them penetrate the local market. However, OEMs face specific risks associated with using contract manufacturers in India. Fluid exchange rates combined with volatile oil and component prices lead to unpredictable costs. Changing government policies along with shifting government regimes also contribute to an unpredictable political environment. Doing business in India is often disjointed, with an inefficient bureaucratic system that causes frequent delays. However, for OEMs able to manage these risks, the opportunity in India is significant.

The semiconductor fabrication segment has a small existing base in India with only two fabs, which both are developing chips for the defense and strategic sectors. However, semiconductor suppliers are expanding their manufacturing activities in India to serve the growing contact-manufacturing industry in the nation. As evidence of this trend, groundbreaking commenced this week on a 200 mm fab in Hyderabad operated by Nano-Tech Silicon India Ltd.