Domestically Manufactured Electronic Goods

Giving Preference to Domestically

Manufactured Electronic Goods

 

 

Domestically manufactured electronic products are expected to be more secure because effective monitoring processes can be put in place for manufacturing processes of security

sensitive electronic products

 

 

With increasing deployment of electronic devices and Information Technology applications in various sectors, the critical applications and associated infrastructure are becoming vulnerable to cyber attacks including espionage, financial theft and cyber terrorism. The forms of attack include backdoors, malicious code, identity-theft and information warfare. Instances of malware and other cyber attack tools pre-loaded on to electronic hardware equipment have been detected world-wide. Imported software and hardware IT products are often shipped with maliciously embedded malware. There have been concerns about supply chain security as computers, portable devices and other electronic devices pass through several suppliers before the final product goes on sale and somewhere along line someone could compromise a component or design a capability that could enable cyber attacks. Backdoors are not necessarily limited to software applications as hardware components, such as Embedded Radio Frequency Identification (RFID) chips or hardware encryption products could be compromised. Even critical infrastructure in civilian sector like Power System is being targeted with targeted attacks on Supervisory Control and Data Acquisition Systems (SCADA) emerging.

Using modified hardware provide attackers with a fundamental advantage compared to software based attacks. Due to the lower level of control offered attackers can more easily avoid detection and prevention. Hardware encryption products have also been found to be embedded with malicious software to enable leakage of encryption keys and reduction of encryption strength. In all these instances, the attack code is found to be hard coded in hardware.  
 

In a connected world, telecommunication is a vital and critical component of the economy. In the context of emerging cyber attacks, the security of the telecommunication infrastructure and network elements such as routers and switches and exchanges are of paramount importance. Maliciously modified devices are reality. Wikipedia cites several reports of cyber security breaches and views expressed by top  security experts which lend credence to these concerns. 

 All electronic devices work on extremely complex miniature semiconductor integrated circuits or “chips”. A typical electronic device may have several chips. A maliciously designed chip can initiate an internal trigger to launch a cyber attack or such an attack can be externally triggered through encrypted data sent through normal communication channels. By implication, both the connected and isolated devices are vulnerable. When conducted on a large scale, in a systematic matter, the effect can be devastating. Alternatively, a covert chip can send copies of confidential data to a third-party destination. Another threat could be the chip corrupts the data, thereby making the device malfunction at a critical juncture. A malicious hardware can be triggered months or years later, to open a backdoor to install software, which could launch an attack. The situation is further compounded because the technology has yet to develop which can detect such malicious hardware. 

Considering the potential for large scale damage and loss to life and property and limited technological capabilities available globally in testing hardware for detection of malicious backdoors, it is necessary that electronic hardware used in systems having security implications for the nation be manufactured indigenously to ensure trust worthiness. In March 2011, the Senate Armed Services Committee in US initiated an investigation regarding counterfeit electronic parts in Department of Defence supply chain and uncovered overwhelming evidence of large number of counterfeits making their way into Defense systems. It also found companies from one country were the primary source of counterfeit electronic parts; 1800 cases involving millions of parts were detected. Despite one of the best testing standards, especially for critical applications, the existing testing framework has not ensured counterfeits and defective electronic components getting into the system in the US. 

Domestically manufactured electronic products are expected to be more secure because effective monitoring processes can be put in place for manufacturing processes of security sensitive electronic products. Conformance to safeguards can be ensured and desired encryption levels and enforced.

 

Government Policy to Provide Preference to Domestically Manufactured Electronic Goods 

The Government has recently approved a policy to provide preference to domestically manufactured electronic products, in procurement of those electronic products which have security implications for the country and in Government procurement for its own use, consistent with our World Trade Organization (WTO) commitments. Electronic product or products having security implications and agencies deploying them will be notified by concerned Ministry/Department. The notified agencies will be required to procure the specified electronic product or products from a domestic manufacturer. When the electronic goods are specified by the concerned Ministries/Departments, rationale for such items being covered as essential security interest may also be clearly detailed. Listing of electronic goods as security sensitive can also be done by a designated authority which may take a project wise decision on which projects are sensitive from the security angle. In Government procurement, the policy will be applicable to all Ministries/ Departments (except Defence) and their agencies for electronic product or products purchased for Governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale. 

Each Ministry/Department would notify the sector specific electronic product or products for which preference would be accorded to domestically-manufactured electronic product or products. However, generic products which are procured across sectors, such as, computers, communication equipment etc., would be notified by the Departments of Electronics and Information Technology/ Telecommunications, as the case may be. The notification issued by each Ministry/Department for providing preference to domestically manufactured electronic product or products, either for reasons of security or for Government procurement, would specify the percentage of procurement to be made from domestically manufactured electronic product or products but it shall not be less than 30% of the total procurement value of that electronic product or products. Further each Ministry/ Department would also specify the domestic value addition requirement which the electronic product should satisfy for the product to qualify as domestically manufactured electronic products. However, such specification should not be below the generic value-addition of domestically manufactured electronic products provided in the policy. The preference to domestically manufactured electronic goods shall be subject to matching of L1 price and on satisfying technical specifications of the tender.  

The graded value-addition norm for domestically manufactured electronic products is described in Table below:

 

 

Challenges in Operationalizing the Policy

 

The policy is likely to address the security concerns as well as spur investment in the Electronics System Design and Manufacturing (ESDM) sector. However, there are several challenges in operationalizing the policy. These challenges relate to determination of which electronic good to notify, and in which sequence, what value addition to be prescribed to qualify as domestically manufactured electronic product, how to assess the value addition objectively, and without creating an inspector-raj. There are no precedents of a similar effort having been launched in other sector.

 

To answer some of these challenges, efforts to create operational guidelines for the said policy are underway. These guidelines have been extensively discussed with all stakeholders, including concerned Ministries/Departments and industry representatives. Some of the thinking which has emerged from these discussions has helped create a draft set of guidelines which are objective, fair and transparent in the process being adopted. Some of the salient features of the draft guidelines are as follows. “Bill of Material”: is defined as the sum of costs of all inputs which go into the product including parts, subparts, components, assemblies, manufacturing costs including cost of design and development/ assembling/testing/sourcing/power/ finance/logistics/insurance done inhouse, and/or by external Electronic Manufacturing Service provider, royalties or licensee fee for IPR, and/or in-house R&D costs incurred/ amortized to create IPR, embedded and other software integral to the device. The “profit after tax” and warranty cost of the manufacturer is not part of the BOM. Domestically Manufactured Electronic Products are defined as those electronic products which are manufactured by entities that are registered and established in India, including in Special Economic Zones (SEZs), and engaged in manufacture of such electronic products in India and would include OEM and their Contract Manufacturers, but not traders. In addition, such products are required to meet the criteria of domestic value-addition as laid down in the Policy, for being classified as DMEP.

 

The guidelines also suggest that while Ministry/Departments should strive to notify all electronic products relating to their sector but should take up those electronic products which constitute significant part of the demand for Government on priority. It stresses on the need for developing an understanding of the domestic manufacturing base preceding the identification of an electronic product for notification under the Policy. Only those electronic products in respect of which at least one domestic manufacturer exists, shall be notified. Consultation with industry, as necessary, may  be carried out. The configuration/ specifications representative of the entire range of a product should be categorized in a single notification. For example, there may be a separate notification for Desktop PCs, Servers and Tablets, but all Desktop PCs, with different configurations, may be clubbed under a single notification. Since identification of all electronic products cannot be taken up simultaneously, the products having high value of procurement in Government may be identified for notification on priority. Moreover, it also suggests that each Ministry/ Departments should assess the prospective annual demand for Government procurement over the next 5 years, with the objective of encouraging development/ investment in such manufacturing, along with the prospective date on which the product will be notified for applicability of the policy.

 

The percentage of total procurement value for which preference is provided to domestically manufactured electronic products should be so fixed after an understanding of the domestic manufacturing base including the available production capacities with the indigenous manufacturers and their number as well as that of their suppliers of inputs, which should, interalia, meets the value addition norms proposed to be notified. This would inter alia depend on the availability of multiple domestic manufacturing units with sufficient capacities, so that the Government requirement can be fulfilled without compromising on timelines. The after-sales service support network of domestic manufacturer/s also needs to be factored in.

 

The guidelines for deciding the value-addition for the electronic product being notified is proposed to be determined as follows. This involves identifying main inputs as per industry norms, constituting the Bill of Material (BOM) for the electronic product. The granularity at which the inputs need to be identified (i.e. the number of inputs) should not be very large and be based on industry practices. Secondly, the value of input should, as far as possible, be clearly discernible based on industry billing practices. Thereafter the status of manufacture of the input needs to be ascertained and accordingly, define what would mean to manufacture the input domestically. Based on the cumulative understanding of these inputs, the value addition will be determined.

 

The policy has attracted great deal of interest and responses. There have been concerns whether the policy is discriminatory to foreign companies and whether it is compatible with the commitment sunder the WTO; whether it would actually help achieve cyber security objectives, whether it would eventually help in developing a manufacturing base of electronics in India. There are also concerns regarding tis wide scope in terms of electronic products which it covers. A factual analysis of the policy will show that these concerns are largely unfounded. Let me briefly reiterate some of the basic facts relating to the policy.

 

The Policy does not per se mandate preference to any electronic product. It only provides an enabling framework. Each Ministry/Department is free to decide whether any products are to be notified under the policy. Department of Electronics and IT does not notify preference for all products, but only those products which it is concerned with.

The Policy is in conformance with India’s WTO commitments. The procurement by Governmental agencies is exempted from the provisions of GATT (Article III). Besides, India is not a signatory to Government Procurement Agreement (GPA) of the WTO and, therefore, is not constrained by the stipulations of the GPA. Article XX and XXI of General Agreement on Trade and Tariffs (GATT) provide for member countries to take such steps as are necessary in its essential security interests. The extant scheme also does not differentiate between Indian companies and foreign companies and the benefit of the scheme is available to all companies manufacturing electronic products in India without discrimination. India also allows 100% Foreign Direct Investment (FDI) in electronics hardware manufacturing which further provides a level playing field to foreign companies (except in strategic products relating to defense, Space etc.). The extant scheme does not provide any price preference to domestic manufacturers over imported electronic products. Neither is any concession with respect to technical requirements is provided.  

Several countries including USA, Australia, and Taiwan among others have put various restrictive clauses regarding entry of foreign companies in their country on security grounds. According to reports, US blocked bidding by Huawei Technologies for wireless networks for emergency responders. The US Committee on Foreign Investment blocked Huawei’s attempt to take over Server Company 3Leaf Systems. Australia recently blocked Huawei from taking part in that country’s National Broadband Network. Taiwan had earlier blocked Chinese companies from participating in telecom networks in that country.

The policy should not be seen in isolation. The overall National Policy on Electronics framework, including the five key pillars, would make it extremely competitive to manufacture electronics in India. The new National Manufacturing Policy also addresses these concerns and will further improve the manufacturing ecosystem in the country.

Several companies in the ESDM sector have already started looking for alternative bases as part of China plus one strategy and to be proximate to the large demand of the South Asian market. The policy provides additional incentive to do so.

 

Conclusion

The policy to provide preference to domestically manufactured electronic goods is one of the several initiatives which have been taken up by Government of India as part of its effort to develop India into a secure and globally competitive destination for ESDM sector. The companies which manufacture in India take advantage of several other financial incentives as announced under the Modified Special Incentive Package Scheme, Electronic Manufacturing Clusters scheme, and above all, can take advantage of the talent pool available in the country.

 

By : Ajay Kumar, The author is Joint Secretary, Department of Electronics & Information Technology, Government of India.