It is Time To Shift Focus From Software To Hardware

It’s been an axiom for some time that India has a core competence in software, which, on the face of it, is a great thing, considering that “software is eating the world”, according to the founder of web browser Netscape and now venture capitalist Marc Andreessen. But things on the ground look a little dicey. The information technology (IT) services industry is in a downturn, the India Stack and Aadhaar initiatives for Digital India are being attacked by privacy advocates. Meanwhile, China is on the verge of overtaking the United States (US) in artificial intelligence (AI), and has overtaken it in the use of digital money, and India is way behind in robotics/drones/internet of things (IoT), and especially in semiconductors.

There are several good reasons for putting some focus on electronics, particularly on the electronic system design and manufacturing (ESDM) industry. One is that, as I have said in these pages before, there is the fear that India will have a giant trade deficit of $400 billion in electronics as we become one of the largest consumers of electronic gadgets such as smartphones. Another is that these are strategic technologies where we simply cannot afford to be dependent on the tender mercies of uncertain suppliers like China – imagine if we have to depend on them for sensitive defence gear, especially in the wake of Doklam.

The third is the increasing abstraction of electronic hardware. Software blossomed once platforms – largely Windows and the far more open UNIX/Linux (and its derivates like Apple’s IoS and Google’s Androld) – became available: software developers didn’t need to bother about the intricacies of the platform, and could focus on writing to the interfaces that were guaranteed to be unchanging. Similarly, as “open source” electronic hardware platforms such as Raspberry Pi and Arduino become more widely available, quick prototyping becomes a software activity (although full product design is still complex). Similarly, the success of companies such as Qualcomm and ARM show how fabrication-less design is viable. Thus India’s software strengths can be made useful here.

Fourth, devices of the future (in particular the billions of IoT devices) will almost certainly be a mixture of hardware and software: it will likely have capabilities for both data analytics and for AI built in. How much of this will be done on the cloud and how much has to be done locally is an interesting design question in itself. The earlier walls between hardware and software are being knocked down with the explosion of data, as well as the sudden emergence of machine learning.

There is a fifth reason, which has to do with the nature of strategic business at large. There are three mechanisms that companies (and countries) use to gain competitive advantage. Michael Porter, who wrote about the competitive advantage of nations, and Michael Tracey, who considered the strategies market-leading companies use, would agree that you could follow either
a) operational excellence,
b) customer intimacy, and
c) product and service innovation.

The success of Japan – and especially of China – in manufacturing has been based on operational excellence: that is, they are able to do things particularly well efficiently. That has also been the secret of the success of Indian IT services companies. But this can be “disrupted” – that over-used term, but it is meaningful – by others who change the rules of the game. And so it is happening to the likes of Infosys, which may explain the churn there more than problems with any manager.

The Indian education system too is largely focused on operational excellence. The British destroyed traditional education, which focused on complex skills like rhetoric, ethics, creativity, aesthetics, grammar etc., and forced upon us a system tailored to the production of unthinking, but obedient, sepoys, clerks, and coolies. And they have succeeded in creating a nation full of sepoys, clerks, and coolies. The Western system of education, invented after the Industrial Revolution, is meant for drone-like factory workers to toil in their “Satanic mills” – and that in itself is going out of style, as machines take over the routine, mundane tasks, which is leading to massive inequality in income. It will be twice as bad for India, unless we revamp the education system wholesale to produce creative thinkers, but I digress.

That is not to underestimate the skills of Indian engineers (it’s probably a racial memory sort of thing, not because of, but despite the lousy rote education they receive), but these have to be channelled in the right direction. One of the big problems we have had in the past is that Indian engineers were building products and services for customers they did not understand, ie. those in the West. But now, the demand is going to come from Asia and Africa, ie. customers the Indian engineer can intuitively understand, and therefore, they can innovate in ways that make sense for themselves, and tune them for customers they understand. The time is ripe for that.

The ESDM market is an arena where they could do a lot of innovation. The area is broad: products, components, semiconductor design, manufacturing, LEDs, telecom equipment, and importantly, product design. Commerce Minister Suresh Prabhu said that “Make in India” includes design too; I have been shouting this from the rooftops for a while, including in these pages. Design is a skill that we have aplenty – note the profusion of traditional designs, and even recent “frugal engineering” cases such as GE India’s electrocardiography machine, the Mahindra Scorpio and the Tata Nano – that could be turned into a core competence for the country with sustained effort. (Traditional Indian designs such as the profusion of fabric designs, kolam/rangoli type patterns, are intricate and complex. The Tata Nano is a success story of engineering and design, although it has been a market failure for other reasons, having to do with customer intimacy: a cautionary tale again in that you need to be fanatically customer-focused to be able to win.)

Some estimates suggest that ESDM revenues could grow at 40 per cent compound annual growth rate (CAGR): and the nation simply cannot afford to let this be dominated by multinational corporations, as has happened in the first generation of electronic goods, from televisions (TVs) to washing machines to laptops and tablets. The government of India has in fact recognised this and set up some initiatives.

Incubation

There are four electronics-focused incubators officially set up by Ministry of Electronics and Information Technology (MeitY) along with state governments and educational partners: Electropreneur at Delhi University, a medical electronics-focused centre at Indian Insititute of Technology (IIT) Patna, Maker Village for consumer electronics at IIIT Trivandrum and Cochin, and the Fabless chip design incubator at IIT Hyderabad (Disclaimer: I was earlier associated with Maker Village, but no longer). These incubators can be the nuclei for electronics clusters to grow around them. In addition, there is the IoT Centre of Excellence promoted by NASSCOM in Bengaluru (and its newly announced branches elsewhere).

The facilities these incubators provide are a superset of what software incubators offer: infrastructure, funding, marketing, promotion, productisation, mechanical design, partnerships, acceleration, access to service providers. Presumably, there will be others coming up in the private sector once there is a clear return on investment available.

There are some differences with the ubiquitous software incubators: the infrastructure is far more affordable to an entrepreneur on a shared services model than in software. Here you need hardware kits such as tinkering labs with prototype boards, IoT platform kits, robotics and drone equipment, wearables boards and prototyping equipment, printed circuit board manufacturing, industrial robots to assemble and populate the boards, fab-lab-type equipment for mechanical design, including 3-D printing of enclosures, and testing facilities. All this costs a lot of money, and MeitY is investing heavily in making these facilities available to entrepreneurs. Maker Village, for instance, has an industrial-strength production line available on a commercial basis to outsiders as well.

There are also challenges being held with partners to direct the creation of new, marketable ideas. For example, Maker Village joined with Bosch to find solutions to five challenges identified by Bosch, which led to the identification of a number of startups for further support.

Companies can join the incubators at the idea stage for pre-incubation; those that have progressed to proof-of-concept can join for a full incubation programme that may last around two years (as it takes that long to create a prototype, user-test it and get ready to go to market).

Those that have already built a prototype may join for acceleration and productisation. More than in software, productisation is a lengthy and expensive process for electronics: you have to worry about the mechanical design for consumer aesthetics, design for manufacturing, and create the jigs, tools, dies and so on for mass production: all very expensive and highly skilled work that is not easy to contract out unless a partner has a tool shop.

College students may not be the best candidates for such incubation, because the process of electronics innovation may well require some field experience, but the tinkering labs could be used by them to come up with new concepts, which may well be pre-incubatable.

Early-stage funding can come first from the government at the seed stage with loans, grants or convertible debentures which can be turned into equity. Angel funding and private sector participation is also available in early-stage investment – industry partners are keen on co-creating intellectual property with startups, and are willing to invest in the most promising of them. In later stages, once there is a viable prototype that has some market interest, MeitY has a Rs 10,000-crore electronic development fund that is invested through professional venture capital firms. There are also modified special incentives packages.

In addition, there are other funds, for example via Biotechnology Industry Research Association Council, also targeted at medical electronics. There are other funds as well as tax benefits and IPR (intellectual property rights) support from the Commerce Ministry through the Startup India initiative. Several state governments are also investing heavily in startups, for instance through the Kerala Start Up Mission.

Mentoring and hand holding support is a major part of what the incubators offer. By accessing the tacit knowledge of experts, including retired electronics engineers, it is possible to sharply reduce development times. By using the services of other professionals, such as market researchers, accountants, IPR lawyers, design thinking experts, marketing and public relations firms, and accelerators and entrepreneurs-in-residence, startups will have the benefit of broad support.

Of particular note is the value of access to industry partners who have the ability to help productise, including the complex mechanical engineering aspects, and test the product for stringent certification requirements. They may further have a good brand, and well-oiled distribution channels that can help take products to market. Many companies from the industry will become partners to the incubators, not purely for altruistic purposes, but often as market extension activities for themselves.

Some partners are looking to nurture startups which they can then acqui-hire, in the same manner as Silicon Valley giants invest in accelerators such as Y-Combinator – to identify people with good ideas early and to prevent competitors from getting at them.

None of all this should be taken to mean that creating electronics products will be a cakewalk. In fact, in the last couple of years of meeting with innumerable would-be electronics entprepreneurs, I have identified a few myths that I would like to disabuse others of.

Myth 1: Come and get free funding. This is a pervasive idea that you can game the system, get some government grants and play around for a while. Generally, this will not work, as the stringent evaluation system for startups will ensure that the principals, the idea, and the market prospects are all fairly good.

Myth 2: School and college students can easily create electronics companies. Maybe they can come up with ideas, but they are unlikely to be able to build the businesses. Bill Gates and other college dropouts did do well in business, but the chances are pretty low.

Myth 3: The idea is everything. My experience has been that if one person has an idea, usually about 10 others have the same idea at the same time. It’s not the idea, but the implementation, including the business model, that is interesting. Many entrepreneurs are extremely possessive of their idea; my response is that unless you have received a patent or other IPR for it, you probably haven’t done anything truly novel, so focus on how you can implement it better than someone else can.

Myth 4: “The incubator has to give me everything” syndrome. Some entrepreneurs believe that just because they signed up and are paying the rent, it is the incubator’s problem to make them successful. Not so. At the other extreme end, there are successful entrepreneurs who want the incubatees to “suffer as I did”, that is, give them nothing, make them slog for everything. The right model is somewhere in between.

Myth 5: Marketing is easy. Most startup founders have absolutely no idea about marketing, and cannot understand why their wonderful product is not flying off the shelves. They need to know that customers are a very finicky lot, and may not quite see the value in your product that the makers see, and that there is a huge problem of “crossing the chasm”. My belief is that, as is normal around the world, 90 per cent of startup firms in these incubators will fail in going to market. Thus the importance of trying to hook up with a big company in the same market space.

Myth 6: Productisation is simple. Nothing could be farther from the truth. Founders usually believe that building a prototype is half the battle, and once the prototype is ready, it’s a piece of cake. Not quite. Productisation will probably take three times as much effort as making the prototype, in particular when you consider the perils of beta testing and certification.

But if people are willing to stick it out, making a successful electronic product for India will most likely mean access also to a billion people in the Indian Ocean rim, in South East Asia and Africa. These are indeed interesting times.