Electronics with Chinese chips are sending data back via backdoors: HCL co-founder Ajai Chowdhry

The last few years have been encouraging — the government says that India has topped $100 billion in annual electronics manufacturing as a result of generous subsidies doled out to the sector.

But, Chowdhry is not bursting with happiness yet.

“The dramatic expansion of electronics revenue in India over the last 4 to 5 years is because of manufacturing services businesses like the Dixons and Foxconns of the world. They generate large employment, scale and exports. But you don’t have enough value addition,” he said.

The 74-year-old is working with the government to create a blueprint to eat China’s lunch in hardware manufacturing. Along with a few of his industry peers, Chowdhry is planning to submit a memo to the government in the next couple of weeks on how to rapidly drive up local value addition in electronics.

In a conversation with Moneycontrol, he dwells on how to make India a hardware nation, competing with China and other Asian tigers in manufacturing, and why quantum tech should be built locally, among other things.

Edited excerpts

How do you think local value addition can be rapidly increased?

Our main recommendation is that if we have to make our semiconductor fabs successful, we need to design hardware products and chips in India. If they are designed in the United States or South Korea, then our chip fabs will not get the business. The objective is to dramatically increase the value addition in the country with design as a major component.

Just like there is a design-linked incentive scheme for semiconductor chips, there should be another for electronics products. In addition to that, our recommendation is that we should create a large component manufacturing capability in India, because a large number of components of electronics like mobile phones get imported.

A lot of lower priced electronics products today are made end-to-end in China. Do you think it is possible for India to eat into a significant part of that value chain?

We are looking at a long term view of the electronics industry. And we believe that the potential in the country is very high, and today, because of geopolitical reasons. A lot of people want to move from China to other countries. The movement to other countries is happening, and Vietnam was the 1st country that got the benefit, then came Malaysia and Mexico. There is some bit in Singapore, but majorly the first three countries.

India has got added into that list in the last few years. But again, all that movement from China until now has been all around manufacturing services. We want to take the next step which is towards moving products from China to India, starting with design.

It is said that 20 percent of the world’s chip designers are Indians and a lot of that work happens within the country. But, we don’t own that intellectual property (IP) and hence lose on the value addition. Is that something you are focussed on?

We want to see a lot of that talent working for global capability centres (GCCs) in India to start their own chip design companies — an Indian company designing for India with IP in India, headquarters in India and owned by India. If these conditions are met, then we must provide them special incentives from the government.

When our engineers work in any of these GCCs, what are we really doing? They are basically being paid a salary, and that's all. There's no real value addition out there. The value addition goes to the owner of the chip or the owner of the company, and the IP sits abroad.

Foreign chip design companies are requesting the government to give them incentives as well to expand their design operations in India. Do you think they should get such incentives?

Design benefits should come to Indian companies. What is our objective? Our objective is to create value in India for Indian companies. These companies are only using us as manpower. Engineering and R&D exports out of India is about $39 billion which is the value of the manpower. It has nothing to do with IP.  It is the transfer price of these GCCs. The real value of what we are doing in the country could be $100 billion.

There is a school of thought that we should not be spending billions of dollars to attract semiconductor manufacturing and use that money for skilling services sector workers like chip designers. Do you agree?

This is all old thinking. The new thinking is that we should have the whole ecosystem. We have a large domestic market. The government buys a whole bunch of electronic products for defence, space and atomic energy. The drone and electric vehicle industries need products.

Every chip that is there in all these industries are all imported today — and 90 percent of that is from China. We are just taking a huge security risk. We are also feeding jobs to China. Why should we do that?

China is sending us a whole bunch of chips in all kinds of products. A lot of these chips from China have back doors. All the data goes back to China. There was a case 6 months ago that investigating agencies were probing – data from chips employed in attendance machines of Indian government offices was going back to China.

HCL was one of the pioneers in hardware manufacturing in India. Why didn’t the hardware sector take off like software did?

There was no government support available. Between India and China, there is a disability of at least 12 to 14 percent, and this has been known to the government for the last 30 years. Inside that is the cost of shipment, duties on certain components, a large value in terms of cost of land and a huge difference in the cost of money. But, nobody was listening. All companies like HCL that started hardware got no support. All the support went to software because the thinking was to let China make hardware, while India would do software.

You are working closely with the government’s National Quantum Mission. At a conference in Delhi last year, industry officials said that India should just focus on building use-cases in quantum and access it on cloud from the likes of Amazon, rather than invest in the hardware. What’s your view?

It costs millions of dollars to do quantum computing on the cloud. For the period we don't have a quantum computer, we'll buy a few quantum computers to do research on. But we are not going to use quantum computers only on the cloud, because it's very expensive. We will create our own quantum computers.

The amount of money that AWS and all these companies are making out of India just for normal computing is phenomenal. Their margins on those products are around 90 percent.

There is a similar thinking in artificial intelligence that India must focus on use-cases rather than foundational large language models which can be accessed on the cloud. What do you think?

As far as AI is concerned, I will leave it to software companies and startups to decide which part of AI they want to work on. But you must remember that data in India is available. Data in America is not available. For example, there is a regulation in America due to which you cannot share patient data. If you have data, then you can do AI.