IN­DIAN EMS IN­DUS­TRY

OP­POR­TU­NI­TIES AND CHAL­LENGES

Electronics Bazaar - - Front Page - By the ComCon­nect Con­sult­ing re­search team

The fo­cus on ‘Make in In­dia’ in the In­dian elec­tron­ics in­dus­try is in­creas­ing the op­por­tu­ni­ties for elec­tron­ics man­u­fac­tur­ing ser­vices (EMS) in the coun­try. Here is a sneak peek into where this in­dus­try is headed.

The fo­cus on ‘Make in In­dia’ in the In­dian elec­tron­ics in­dus­try is in­creas­ing the op­por­tu­ni­ties for elec­tron­ics man­u­fac­tur­ing ser­vices (EMS) in the coun­try. Here is a sneak peek into where this in­dus­try is headed.

The In­dian mar­ket for elec­tronic prod­ucts is poised for sig­nif­i­cant growth in the next few years. Ac­cord­ing to a joint study by AS­SOCHAM and NEC Tech­nolo­gies, do­mes­tic de­mand for elec­tronic prod­ucts is ex­pected to grow at a CAGR (com­pound an­nual growth rate) of 41 per cent dur­ing 2017-2020 to reach a turnover of US$ 400 bil­lion by 2020. The same study also men­tions that do­mes­tic man­u­fac­tur­ing of elec­tronic hard­ware, which is cur­rently grow­ing at a CAGR of 27 per cent, may touch US$ 104 bil­lion in 2020. This of­fers a huge op­por­tu­nity for the In­dian elec­tron­ics man­u­fac­tur­ing ser­vices (EMS) sec­tor. Over the next five years, ac­cel­er­ated lo­cal man­u­fac­tur­ing of elec­tronic prod­ucts to cater to grow­ing do­mes­tic de­mand will drive the EMS sec­tor in In­dia for­ward. Ac­cord­ing to a Frost & Sul­li­van re­port, the In­dian EMS mar­ket is ex­pected to reach a size of US$ 7.92 bil­lion by 2018.

Lo­cal firms backed by the ‘Make in In­dia’ ini­tia­tive, as well as global gi­ants look­ing to re­lo­cate their man­u­fac­tur­ing bases from China to al­ter­nate lo­ca­tions such as In­dia, Viet­nam and In­done­sia due to mount­ing labour costs, will pro­vide a strong im­pe­tus to the In­dian elec­tron­ics in­dus­try. Global as well as do­mes­tic elec­tron­ics man­u­fac­tur­ing ser­vices (EMS) play­ers are look­ing at In­dia as an in­vest­ment des­ti­na­tion with re­newed in­ter­est. The In­dian gov­ern­ment is also mak­ing earnest ef­forts to in­crease do­mes­tic man­u­fac­tur­ing.

Mar­ket op­por­tu­ni­ties

The EMS in­dus­try in In­dia has wit­nessed a lot of ac­tiv­ity in re­cent years, both at the pol­icy and or­gan­i­sa­tion lev­els. While there is a high level of op­ti­mism within this in­dus­try at present, there are also many chal­lenges that need to be ad­dressed, to help In­dia emerge as a ma­jor man­u­fac­tur­ing hub in the years to come.

In spite of that, the EMS mar­ket is ex­pected to be highly dy­namic in the com­ing year, with In­dia emerg­ing as a hot spot for elec­tron­ics man­u­fac­tur­ing among South Asian na­tions ow­ing to the low op­er­at­ing costs.

Sur­vey par­tic­i­pants in­di­cate that the top three sec­tors driv­ing

the growth of the EMS providers (Fig­ure 1) will be:

1. LED light­ing

2. Power elec­tron­ics de­vices 3. Con­sumer elec­tron­ics

Man­u­fac­tur­ing part­ner­ships in these three seg­ments have been grow­ing steadily, as the mar­ket de­mand for the prod­ucts is very high. At the same time, OEMs are striv­ing to cut costs to main­tain their com­pet­i­tive ad­van­tage in the face of rapidly chang­ing mar­ket con­di­tions, tech ad­vances and global com­pe­ti­tion.

Other op­por­tu­ni­ties for EMS providers are in med­i­cal elec­tron­ics and strate­gic elec­tron­ics (in­clud­ing aerospace, de­fence and rail­ways).

Ac­cord­ing to sur­vey par­tic­i­pants, the de­mand for EMS in med­i­cal elec­tron­ics is to­tally driven by the in­crease in health con­scious­ness and the higher av­er­age life ex­pectancy. More­over, the med­i­cal elec­tron­ics seg­ment has not been neg­a­tively im­pacted by re­cent gov­ern­ment re­forms like de­mon­eti­sa­tion and GST im­ple­men­ta­tion.

Aerospace and de­fence (A&D) OEMs have been in­creas­ingly de­pend­ing on EMS providers to ad­dress risk man­age­ment, lo­gis­tics and after-mar­ket ser­vice needs. EMS com­pa­nies with global sup­ply chains and ad­vanced tech­no­log­i­cal ca­pa­bil­i­ties are well po­si­tioned to ex­ploit this surge in de­mand. The Asia Pa­cific re­gion is ex­pected to be the hot spot for EMS providers as aerospace OEMs are fast shift­ing fo­cus to this re­gion. To­wards the end of the decade, emerg­ing mar­kets like In­dia are ex­pected to be­come a very lu­cra­tive des­ti­na­tion for EMS providers in the aerospace sec­tor.

With the ‘me­chan­i­cal to elec­tron­ics’ tran­si­tion in the au­to­mo­tive in­dus­try due to a rapidly ris­ing de­mand for en­ter­tain­ment, safety and un­der­the-hood elec­tron­ics, au­to­mo­tive elec­tron­ics is emerg­ing as one of the most ex­cit­ing ar­eas in the in­dus­try to­day. The in­creas­ing amount of elec­tronic con­tent and con­tin­u­ous tech ad­vances in this in­dus­try are act­ing as ma­jor in­cen­tives for OEMs and Tier 1 sup­pli­ers to out­source to EMS providers.

Prod­uct mix

The In­dian EMS providers have an affin­ity for a low-mix, high-vol­ume model. Es­sen­tially, this is a con­tract man­u­fac­tur­ing setup in which a few as­sem­blies are pro­duced in large quan­ti­ties. Such a pro­duc­tion ar­range­ment may last for weeks or even months, us­ing the same setup. The ben­e­fits of this model are that changeovers can be kept to the min­i­mum while equip­ment util­i­sa­tion rates are sig­nif­i­cantly higher. Con­tract man­u­fac­tur­ers have proved to be more ef­fi­cient with high vol­umes that re­quire min­i­mal en­gi­neer­ing changes. But con­sid­er­ing the low mar­gins in this model, op­ti­mi­sa­tion of sup­ply chain costs is crucial to its suc­cess.

The pros and cons as­so­ci­ated with the high-vol­ume, low-mix so­lu­tion are listed be­low.

Pros

1. Economies of scale

2. Higher pro­duc­tiv­ity due to min­i­mum changeover time 3. Op­ti­mum ma­chine util­i­sa­tion

Cons

1. Lower mar­gins

2. Highly com­pet­i­tive prices

3. Price re­al­i­sa­tion drops to dras­ti­cally low lev­els

While the low-mix, high-vol­ume pro­duc­tion model has been adopted for EMS com­pa­nies cater­ing to the mass man­u­fac­tur­ing seg­ment, there has also been a re­cent shift to­wards a high-mix, low-vol­ume pro­duc­tion process, which fo­cuses more on qual­ity and cus­tomi­sa­tion. Due to the higher mar­gins in this niche mar­ket, ma­jor changes in mar­ket dy­nam­ics of­ten do not im­pact the prof­its of such a pro­duc­tion model. This kind of pro­duc­tion ar­range­ment mostly caters to the strate­gic elec­tron­ics sec­tor, where the em­pha­sis is on faster through­put and a high qual­ity fin­ished prod­uct. OEMs that pre­fer such so­lu­tions are will­ing to pay a higher price with­out com­pro­mis­ing on qual­ity. How­ever, in this model too, suc­cess de­pends on con­trol­ling and im­prov­ing the sup­ply chain.

Growth strate­gies

EMS com­pa­nies op­er­ate as strate­gic part­ners of OEMs by pro­vid­ing them with a full range of ser­vices, which in­clude con­tract de­sign ser­vices, pro­to­typ­ing, fi­nal sys­tem assem­bly, con­fig­u­ra­tion, or­der ful­fil­ment, and even after-mar­ket ser­vices, in­clud­ing re­pair. By us­ing the ser­vices of EMS providers, OEMs can con­cen­trate on their core com­pe­ten­cies such as re­search and prod­uct de­vel­op­ment, brand build­ing, sales and mar­ket­ing. Out­sourc­ing to EMS providers also en­ables OEMs to gain ac­cess to the lat­est equip­ment, process knowl­edge and man­u­fac­tur­ing knowhow with­out hav­ing to make sub­stan­tial

cap­i­tal in­vest­ments, as the risks are con­verted into vari­able costs.

The ever in­creas­ing end user de­mands and fast-paced tech­no­log­i­cal de­vel­op­ments com­pel OEMs to con­tin­u­ously in­tro­duce new and in­no­va­tive prod­ucts into the elec­tron­ics mar­ket. Con­se­quently, they have to in­creas­ingly de­pend on EMS providers who of­fer sig­nif­i­cant ben­e­fits such as cost sav­ings, re­duced timeto-mar­ket, qual­ity and flex­i­bil­ity.

Since OEMs are very se­lec­tive in choos­ing their EMS part­ners, the lat­ter need to fo­cus on nur­tur­ing long-term re­la­tion­ships with their cus­tomers through en­hanced val­ueadded ser­vices, strate­gic part­ner­ships and al­liances, as well as through di­ver­si­fi­ca­tion.

In re­sponse to the grow­ing com­pe­ti­tion in the in­dus­try, EMS providers con­tin­u­ously adopt in­no­va­tive and strate­gic busi­ness mod­els. These in­clude bet­ter knowl­edge of cus­tomer needs, un­der­stand­ing the busi­ness mod­els of cus­tomers/ OEMs, ef­fec­tive com­mu­ni­ca­tion tools, cre­at­ing a global foot­print and fo­cus­ing on core com­pe­ten­cies. Ac­cord­ing to the sur­vey par­tic­i­pants, the top three strate­gies (Fig­ure 2) to get a com­pet­i­tive ad­van­tage for ac­quir­ing EMS busi­ness in the elec­tron­ics in­dus­try should be: 1. Pro­vid­ing value added ser­vices 2. Main­tain­ing scal­able busi­ness

so­lu­tions

3. Ef­fec­tive sup­ply chain man­age­ment

EMS providers should also fo­cus on cus­tomer-cen­tric mod­els, pen­e­trate into niche mar­kets and use ef­fec­tive in­for­ma­tion technology tools.

More­over, con­sid­er­ing the in­tense com­pe­ti­tion, the sur­vey par­tic­i­pants feel that EMS providers need to en­hance their value propo­si­tion by of­fer­ing in­te­grated and end-to-end so­lu­tions, and also en­ter into strate­gic part­ner­ships with OEMs.

Turnkey man­u­fac­tur­ing gains im­por­tance

All the sur­vey par­tic­i­pants ac­knowl­edge that turnkey man­u­fac­tur­ing ser­vices are the need of the hour to ful­fil the in­creas­ing de­mand for ‘on­estop shops’ for EMS in the elec­tron­ics seg­ment.

Some­times, OEMs fol­low the con­sign­ment con­tract man­u­fac­tur­ing model to main­tain greater con­trol over the ma­te­rial plan­ning and ac­qui­si­tion pro­cesses. This also min­imises the risks as­so­ci­ated with a ven­dor­man­aged pipe­line. How­ever, in the case of elec­tron­ics, with its typ­i­cal low-mix high-vol­ume pro­duc­tion model, OEMs pre­fer a par­tial or fully turnkey model, in which the EMS provider con­trols the ac­qui­si­tion of ma­te­rial too. This helps OEMs in re­duc­ing costs and re­main­ing ag­ile to ad­dress rapidly chang­ing mar­kets.

A com­mon best prac­tice among OEMs is to have sys­tems that can an­a­lyse the to­tal ac­qui­si­tion cost and use it to eval­u­ate EMS sup­pli­ers as well as other types of con­tract man­u­fac­tur­ers. These sys­tems also as­sign a value to in­tan­gi­bles, such as the ease of work­ing with a ven­dor.

Turnkey projects need a high de­gree of tech­ni­cal skill that can be cus­tomised ac­cord­ing to the spe­cific re­quire­ments of the OEMs. Only a few In­dian EMS providers of­fer turnkey so­lu­tions for PCBAs, us­ing Chip-on­Board (CoB), sur­face mount (SMT) and through-hole tech­nolo­gies. They also pro­vide com­plete as­sem­blies, in­clud­ing plas­tic mould­ings, metal-die cast­ings and sheet metal fab­ri­ca­tion, apart from fin­ish­ing, paint­ing and print­ing – in short, they de­liver the com­pleted unit.

Some EMS com­pa­nies also of­fer PCB man­u­fac­tur­ing and EMS ser­vices to­gether. This en­ables the com­pany to pro­vide bet­ter value added ser­vices to its cus­tomers. The com­bined ex­per­tise stream­lines work and helps EMS com­pa­nies to be bet­ter in­te­grated within the pro­duc­tion value chain. This ar­range­ment re­duces the turn­around time for the cus­tomers as they have to deal with a sin­gle ven­dor.

Orig­i­nal de­sign man­u­fac­tur­ing in de­mand

Elec­tronic prod­ucts need con­stant de­sign re­vi­sion, as end users ex­pect cre­ative and con­tin­u­ous in­no­va­tion. There­fore, elec­tronic prod­uct de­sign and de­vel­op­ment is of­ten out­sourced to ODMs (orig­i­nal de­sign man­u­fac­tur­ers). The sooner an OEM en­gages a con­tract man­u­fac­turer for prod­uct de­sign and de­vel­op­ment ser­vices, the bet­ter— par­tic­u­larly when the prod­uct be­ing de­signed moves into the pro­duc­tion and ramp-to-vol­ume phases. The ODM is ex­pected to have ex­pe­ri­ence in de­sign­ing and man­u­fac­tur­ing sim­i­lar prod­ucts. This en­ables the OEM to min­imise costly de­sign it­er­a­tions, helps bring the prod­uct to mar­ket sooner and adds sev­eral other ben­e­fits to the con­tract man­u­fac­tur­ing re­la­tion­ship.

Al­most all the sur­vey par­tic­i­pants in­di­cated that ODM ser­vices are in de­mand. De­sign is the best value

added ser­vice that an EMS com­pany can pro­vide. More­over, ODMs can de­velop unique prod­ucts based on the In­dian mar­ket’s needs, com­bin­ing ‘De­signed in In­dia’ with ‘Make in In­dia’.

How­ever, 7 per cent of the sur­vey par­tic­i­pants do not see any value in work­ing with ODMs, in the In­dian con­text. Ac­cord­ing to them, most of the elec­tronic prod­ucts are al­ready ma­ture, hav­ing been well de­vel­oped in China and other mar­kets. In­dian prod­ucts need ef­fi­cient man­u­fac­tur­ing strate­gies rather than ODMs, as there is min­i­mal ‘Mak­ing in In­dia’ and more ‘Bolt­ing in In­dia’ in this space.

Scope in re­verse lo­gis­tics

In­dia is still not a use-and-throw mar­ket for elec­tronic prod­ucts. After sales ser­vices, in­clud­ing re­pair and main­te­nance, are quite im­por­tant for the In­dian con­sumer.

Echo­ing this view, 60 per cent (Fig­ure 3) of sur­vey par­tic­i­pants say that the ad­di­tional scope for busi­ness lies in the area of re­verse lo­gis­tics. They feel that ser­vices re­lated to re­pair/re­work­ing and re­fur­bish­ment work will not only help EMS firms get ad­di­tional busi­ness from the OEMs but also en­able them to play a role in ewaste man­age­ment. How­ever, con­sid­er­ing the com­plex­ity of the re­verse lo­gis­tics pro­cesses, only a few ex­pert EMS providers in In­dia can en­ter this space.

The chal­lenges in mov­ing for­ward

The suc­cess of In­dian EMS play­ers de­pends on sev­eral fac­tors. We asked the sur­vey par­tic­i­pants to sug­gest the

pos­si­ble chal­lenges that could de­rail the growth of this in­dus­try. Here is a col­la­tion of their opin­ions:

• In­ef­fi­cient sup­ply chain for the re­quired elec­tronic com­po­nents

• Un­fair play­ing field, since com­pa­nies from com­pet­ing coun­tries (China, Viet­nam, In­done­sia, etc) have ac­cess to fi­nance at a much lower cost

• Lo­gis­tics in­ef­fi­cien­cies and in­fras­truc­tural bot­tle­necks, re­sult­ing in greater turn­around time and costs

• Higher cost of in­fra­struc­ture

• Short­age of skilled man­power

• Lim­ited sup­port from the gov­ern­ment

Sur­vey par­tic­i­pants feel that only a suc­cess­ful res­o­lu­tion of the above men­tioned is­sues through ap­pro­pri­ate in­dus­try ini­tia­tives and gov­ern­ment in­ter­ven­tions will help this in­dus­try to move ahead.

Fig­ure 1: Fore­cast of the main sec­tors that will drive growth in the EMS do­main in In­dia

Fig­ure 2: Sug­gested busi­ness strate­gies for growth

Fig­ure 3: Pre­dicted de­mand for re­verse lo­gis­tics in the elec­tron­ics sec­tor

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