Manufacturers spend less than a percent of their revenues on IT

by CXOtoday Staff    Mar 28, 2013

IT spending

The manufacturing sector plays an important role in the Indian economy, both as a significant contributor to GDP, as well as a source of employment to a large section of the Indian population. However, compared with other major economies, manufacturing is a relatively smaller sector in India. For India, value added by manufacturing sector as a percent of GDP has been around 15 percent over the last few years, as compared to the nearly 30 percent level recorded in China and South Korea.

According to the CII–BCG IT End User Survey 2013, the manufacturing sector has been a laggard for the economy, growing at less than 7 percent per annum over the last five years—compared with the 7.6 percent rate of GDP expansion in the same period. This can be attributed to a number of challenges faced by the sector, such as poor infrastructure, policy coordination, labour issues, as well as lower levels of technology penetration.

Consisting largely of medium and small–sized enterprises, the Indian manufacturing sector is highly fragmented. It is estimated that SMEs account for 45 percent of industrial output. The rest comes from either the large companies (domestic companies and MNCs operating in India) or the micro enterprises spread all across the country. A large part of the MSMEs are present in clusters spread across the country.

Current IT adoption and buying behaviorOn an aggregate level, the larger companies have higher adoption of IT, as compared with smaller businesses. The current IT needs and buying behavior are summarized below:

Large enterprises: This segment can be divided into two parts—late adopters of IT (old set–ups with greater dependence on legacy systems) and the early adopters. While the former are focusing largely on having the basic systems upgraded, the latter are looking at enhancing their operations through greater application of IT over and above the standard ER P and CRM solutions. In terms of the need for IT, however, both of them are similar, but have varied priorities due to the different starting points. Most of the IT purchase is based on smaller contracts and large outsourcing deals, like in telecom, are non–existent in this sector.Mid–size companies: This segment is similar to the larger enterprises, as far as IT adoption is concerned. However, due to their lower geographic spread and smaller scale (as compared with bigger businesses), the need of mid–sized enterprises for IT infrastructure is intrinsically lower.

SMEs: This segment accounts for about 45 percent of the country’s total manufacturing output, but does not spend much on IT. They tend to use IT only for the most critical applications, based on the respective industries they operate in. Most of them do not have a complete ERP implementation in place, and tend to use only the parts of it that are most critical to their functioning. Being cost sensitive, SMEs prefer to use the cheaper local versions of ERP software. The buying, therefore, is largely through local vendors.

Micro–enterprises: The smallest of the companies use IT primarily for document processing and management.

The level of IT adoption is also a function of the nature of the sub–sector. Automotive and pharmaceutical companies typically show advanced adoption rates, unlike textile companies which have a lower need for IT. For example, the IT system in automotive companies needs to be linked to those of their vendors (ancillaries) so that just–in–time delivery can be ensured. Many process industries like chemicals, cement, etc. are at the intermediate level of adoption, requiring greater stress on a supply chain management than on other processes.Most manufacturers are price–sensitive, and hence have typically not spent much on IT. Most companies in this sector spend less than a percent of their revenues on IT.

Business trends driving IT adoptionOperational improvements: Indian manufacturing companies are facing challenges from foreign players that are setting up shops in the country, as well as from new domestic players arriving on the scene. In the face of this competition, it is important for industry players to move toward better and more efficient processes, and to bring about these changes, greater use of technology is inevitable.

Cost optimization: In the light of the recent slump in demand, as well as the massive influx of cheaper products from other low–cost countries, Indian companies are actively looking at ways to reduce their operational costs and discretionary spending.

Government initiatives promoting use of technology: The Government is taking steps to make the sector more competitive by setting up the NMCC (National Manufacturing Competitiveness Council). It has also taken specific steps to give a fillip to the use of technology in this sector

–Reducing duties or providing subsidies for technology upgrades in pharmaceutical, textile and food processing companies

–Introducing schemes for technology development in MSMEs, sensitizing SMEs to IT and emerging trends like cloud

Key areas of opportunity

Low–cost solutions and delivery for MSMEs: Considering that this is a highly price–sensitive segment, cloud–based solutions—for both applications as well as infrastructure—could well be the answer to cater to the needs of MSMEs. Shared applications and infrastructure will provide them access to the IT at affordable rates. Subscription–based deployment models (SaaS—Software as a Service) for various applications, including ERP, could be the way forward for MSMEs. For example, a manufacturer of self–adhesive tapes, with an annual turnover of less than INR 10 crore, adopted a cloud–based entry–level ERP/CRM solution to address budget constraints. This helped them increase productivity, shorten sales cycle and improve decision making due to greater visibility and insight.

Greater infrastructure outsourcing by larger companies: A large number of the bigger enterprises still manage their IT in–house. As they look for cheaper alternatives, many of them, particularly those with higher IT adoption and multiple locations, will find it cheaper to outsource their IT infrastructure. Cloud could also be a potential area of investment. Hero MotoCorp, for example, has put its entire dealer management system on the cloud. However, this is still not a top–of–mind agenda for many CIOs in this space.

Value–adding industry–specific software: For companies that have a relatively higher level of IT adoption, the next wave of investments will be in applications geared toward process improvements and performance enhancement. Industry–specific applications that are built on existing ERP and CRM will drive IT spending in this segment.