Why corporates want to be in Chennai

Several companies ranging from Dell to Nokia have opted for Chennai as their manufacturing base, thereby wresting from nearby Pondicherry the title of hardware manufacturing hub. Let’s check out the reasons for TN capital’s fast rise in this sector.

Electronics manufacturers are booking a one-way ticket to Chennai. Long known for its automotive manufacturing and more recently for IT and BPO services, the city is fast emerging as a key centre for electronics manufacturing. Tamil Nadu’s capital region, including Sriperumbudur, has already seen investments from Nokia, Motorola, Flextronics, Foxconn and Dell.

More’s to the way these investments are driven by the region’s physical infrastructure, availability of skilled workforce and over all business environment.

This coupled with the growing domestic market, and global players’ quest for low-cost sourcing hubs have made Chennai one of the natural destinations for electronics manufacturing, says observers.

However, that has not always been the case. Earlier, most manufacturers gravitated towards Pondicherry, a union territory about 160 kms south of Chennai. HCL Peripherals, IBM (now with Lenovo) and Acer, all went to Pondicherry for their assembly and manufacturing plants, thanks mainly to tax holidays and other incentives the government offered.

However, tax holidays come with sunset clauses, after which the location loses its appeal. In some cases, benefits of better infrastructure and access to talent could overweigh tax outgo. Mr Maqbool Hassan, VP, IT Infrastructure Solutions of Accel Frontline, said the company was drawn by the tax holidays when it went to the union territory seven years back.

It no longer enjoys the tax holiday. Any expansion in the future would happen in Chennai. “Chennai has better infrastructure, bigger talent pool, and of course we are head-quartered there,” Mr Hassan said.

A good number of companies seem to second Mr Hassan. For smaller companies, part of Chennai's attraction is in the investments announced by large players such as Nokia and Dell.

Nokia’s mobile device production facility in Chennai is already operational. Flextronics' facility coming up with a $100-million investment is set to go on stream by the end of this year. Dell, which announced a $60-million investment, recently, expects to start making desktop computers here by the first half of 2007.

Motorola which would invest another $100-million expects to launch production in 2007. Mr Shaktikantha Das, industry secretary, Tamil Nadu, says the state government is expect-ing more such investments and a couple of them are already in the pipeline.

These investments however didn’t happen in a vacuum. They were primarily driven by global factors, which, in first place, led these MNCs to look at India, observers say. The key reason is growing domestic demand for electronic goods.

While 45% of India’s demand for these goods was met through imports in 2005, it is set to rise to 90% in the next six years, even if domestic production more than doubles during that time, according to IDC figures.

According to India Semiconductor Association, domestic consumption of electronics goods would grow to $363 billion by 2015 from the $28 billion in 2005.

If the growing demand is a pull factor, the risk of putting all eggs in the Chinese basket is a major push factor, observers say. Such shifts from one region to another have always happened, Mr Kapil Dev Singh, country manager, IDC India said at Connect 2006, an ICT event organised by CII in Chennai recently.

Adding,”Taiwan emerged as the hot destination for electronics manufacturing in 90s, giving way to China to tackle cost pressure. Then, China emerged as the electronics manufacturing destination for the world in the last one decade. Since, India and China are two economies which no one can afford to miss, investments are likely to flow to India also.”

Why Tamil Nadu, and particularly, why Chennai? Mr K Rajaraman, special secretary, at the state government’s industries department, believes a number of factors make Chennai the ideal location for manufacturing within the country. Chennai and Ennore ports make exports and imports convenient.

Air connec-tivity is good too: Chennai services 250 direct passenger flights and 28 cargo flights, making it the largest in south India. Talent is another huge draw the state’s college, polytechnics and industrial training institutes produce 79,800 engineers, 63,000 technicians and 21,000 skilled workers every year.

Stable power, friendly government policies, access to healthcare and education, and lower cost of living are other advantages, he added. MNCs agree.

While launching the facility in Chennai, Nokia President Pekka Ala-Pietilä said, “We selected Chennai to be the location for the factory thanks to the availability of skilled labour, friendly business environment, support from the state government, good logistics connections and overall cost-efficiency.”

More recently Mr Paul-Henri Ferrand, vice-president of South Asia, Dell said, “Thestate offers an exceptional work force and unique strategic-investment zone, along with easy proximity to a large base of current and potential Dell customers.”

Interestingly, Chennai’s strength in traditional industries, automotive, healthcare and software also played an important role in attracting these investments. Mr Lakshmi Narayanan, president and CEO, Cognizant, points out that today the growth drivers for corporations are at the intersection of business and technology.

“For example at the intersection of automotive and IT is auto-motive electronics, at the intersection of healthcare and IT is medical instrumentation and-telemedicine, and at the intersection of entertainment and IT is animation and gaming,” he said.

“Tamil Nadu is very well positioned to leverage its traditional industries and IT to create a powerful value proposition for global corporations and consumers.

Further, with triple play (convergence of audio, video and multimedia) being cited as the next big wave in telecom, newer investments by telecom companies in Chennai, coupled with a flourishing entertainment and IT industries, newer growth drivers are clearly visible,” Mr Narayanan said.