The new phase of the In­dian mo­bile man­u­fac­tur­ing in­dus­try

Here’s a sneak peek into the cur­rent state of the In­dian mo­bile man­u­fac­tur­ing in­dus­try.

Electronics Bazaar - - Contents - By the ComCon­nect Consulting re­search team

The In­dian mo­bile hand­set man­u­fac­tur­ing in­dus­try, which in­cludes smart­phones and fea­ture phones, is on a roll. Ac­cord­ing to data shared by the In­dian Cel­lu­lar As­so­ci­a­tion (ICA), In­dia is now the sec­ond largest mo­bile phone pro­ducer in the world by vol­ume, af­ter China. The an­nual pro­duc­tion of mo­bile phones in In­dia in­creased from three mil­lion units in 2014 to 11 mil­lion units in 2017. As more and more de­vices are man­u­fac­tured lo­cally, this im­proves em­ploy­ment op­por­tu­ni­ties in In­dia and helps re­duce the im­port bill.

The boom­ing mo­bile hand­set mar­ket in In­dia presents an at­trac­tive op­por­tu­nity to man­u­fac­tur­ers. Ma­jor global firms are look­ing at In­dia as a re­gional hub for man­u­fac­tur­ing and sales – to cater not only to the In­dian mar­ket, but to the SAARC, the Mid­dle East and African mar­kets as well. The gov­ern­ment of In­dia's re­cent no­ti­fi­ca­tion on the Phased Man­u­fac­tur­ing Pro­gramme (PMP) to pro­mote the in­dige­nous man­u­fac­ture of cel­lu­lar hand­sets has pro­vided a fresh im­pe­tus to this sec­tor.

In­dia's large do­mes­tic mar­ket is also an at­trac­tive propo­si­tion for global man­u­fac­tur­ers look­ing at new av­enues for growth. In China, the wide­spread de­sign and man­u­fac­ture of low-end elec­tron­ics seems to be slow­ing down, as the cost of en­gi­neer­ing and labour is steadily ris­ing. On the other hand, In­dia has a high avail­abil­ity of skilled man­power at much lower wages.

How­ever, in­dus­try mem­bers need to an­a­lyse the cur­rent shake-out in the mo­bile man­u­fac­tur­ing mar­ket, be­fore mak­ing ad­di­tional in­vest­ments.

Chang­ing mar­ket dy­nam­ics

Ac­cord­ing to the lat­est re­search from Coun­ter­point's Mar­ket Mon­i­tor ser­vice, In­dia's over­all mo­bile phone ship­ments grew 48 per cent YoY in Q1 2018. The mar­ket was driven by the fea­ture phone seg­ment, which dou­bled in Q1 2018 due to strong ship­ments of Reliance JioPhone, while growth in the smart­phone mar­ket re­mained flat, YoY.

The first quar­ter of 2018 kicked off with some brands sit­ting on a pile of in­ven­tory post the fes­tive sea­son in Q4 2017 – a sit­u­a­tion that con­tin­ued through­out the quar­ter as the in­dus­try moved to a full-view dis­play port­fo­lio. This quar­ter was also marked by fewer-than-usual smart­phone launches as only some brands re­freshed their port­fo­lios. How­ever, Coun­ter­point ex­pects de­mand to pick up from early Q2 2018 on­wards, driven by faster re­place­ment rates of ex­ist­ing 2G and 3G smart­phones by users up­grad­ing to 4G mo­bile phones.

Cur­rently, the top five smart­phone brands ac­count for more than 70 per cent of the mar­ket Q1 2018, which could ac­cel­er­ate the exit of small play­ers as well as lead to merg­ers and ac­qui­si­tions. Data shared by Sin­ga­pore-based re­search firm, Canalys, has showed that the top five — Xiaomi, Sam­sung, Oppo, Vivo and Len­ovo — ac­counted for about 77 per cent of the smart­phone mar­ket in the Jan­uary to March quar­ter of 2018, and Mi­cro­max, In­tex and Lava, the three In­dian play­ers in the ‘Top 5' list in 2015, were eased out. The fast-chang­ing dy­nam­ics and fierce com­pe­ti­tion in the In­dian smart­phone mar­ket may lead to con­sol­i­da­tion in the mar­ket.

In re­cent times, the mar­ket has seen more ex­its than en­tries. The smaller play­ers are strug­gling to set up lo­cal man­u­fac­tur­ing fa­cil­i­ties, es­pe­cially af­ter the 10 per cent duty on printed cir­cuit board assem­blies (PCBA), since they don't have enough vol­umes to jus­tify large in­vest­ments. Due to the com­pe­ti­tion, they can­not even in­crease prices.

In­dus­try ex­perts in­di­cate that the dom­i­nant play­ers are not go­ing to loosen their grip on the mar­ket share they've gained any­time soon. There­fore, com­pe­ti­tion in the low price (sub-` 10,000) seg­ment – where most new play­ers en­ter – has be­come tougher. Be­sides, new play­ers need to bear the burden of mar­ket­ing, sales and distribution costs, which puts fur­ther pres­sure on slim mar­gins.

Boost for phased man­u­fac­tur­ing

The Min­istry of Elec­tron­ics and In­for­ma­tion Tech­nol­ogy (MeitY) re­cently no­ti­fied the Phased Man­u­fac­tur­ing Pro­gramme (PMP) with the ob­jec­tive of sub­stan­tially in­creas­ing do­mes­tic value ad­di­tion by es­tab­lish­ing a strong mo­bile hand­set de­sign and man­u­fac­tur­ing ecosys­tem in In­dia.

A Fast Track Task Force (FTTF) on mo­bile man­u­fac­tur­ing has been set up un­der MeitY. This task force has set a lo­cal pro­duc­tion tar­get of 500 mil­lion mo­bile hand­sets by 2019, with the es­tab­lish­ment of a siz­able com­po­nents in­dus­try worth US$ 8 bil­lion that will gen­er­ate 1.5 mil­lion jobs.

The PMP has been rolled out in a phased man­ner, aided by the ap­pro­pri­ate fis­cal and fi­nan­cial in­cen­tives to pro­mote in­dige­nous pro­duc­tion of phones and var­i­ous sub-assem­blies. This is likely to pro­vide an im­pe­tus to the re­lated sub-assembly and com­po­nents in­dus­try.

The PMP aims to make In­dia the mo­bile man­u­fac­tur­ing hub of the world, with do­mes­tic value ad­di­tion (which in­cludes lo­cal sourc­ing, assembly, etc) in­creas­ing from 6 per cent to more than 30 per cent over the next few years. This scheme will also pro­vide tax re­lief and other in­cen­tives on the lo­cally made com­po­nents and ac­ces­sories used for the de­vices.

In FY 2017-18, the PMP had cov­ered the do­mes­tic man­u­fac­ture of com­po­nents re­lated to me­chan­ics, die-cut parts, mi­cro­phones and re­ceivers, key­pads and USB ca­bles. In the cur­rent fi­nan­cial year (FY 2018-19), it is likely to cover printed cir­cuit board assem­blies (PCBAs), cam­era mod­ules and con­nec­tors, while in FY 2019-20, it is planned to pro­vide in­cen­tives for lo­cal pro­duc­tion of dis­play assem­blies, touch pan­els/cover glass assem­blies, and vi­bra­tor mo­tors or ringers.

The Phased Man­u­fac­tur­ing Pro­gramme (PMP), cou­pled with the im­po­si­tion of higher im­port du­ties, has in­cen­tivised lo­cal assembly and made the im­port of the prod­ucts that have been brought un­der this pro­gramme, un­vi­able. Com­pa­nies that have been de­sign­ing their prod­ucts and assem­blies are bet­ter placed to take ad­van­tage of the PMP pol­icy.

Un­der the PMP, the ini­tial plan was to make charg­ers and bat­ter­ies in In­dia, then move on to key­pads, USB ca­bles, ear­phones and some me­chan­ics – which means the metal and plastic parts. As a re­sult, value ad­di­tion in In­dia in the mo­bile phone space has im­proved grad­u­ally from around 5 per cent in 2014 to about 10 per cent in 2017. With the cus­toms duty im­posed on PCB assem­blies for mo­bile charg­ers and now on those for mo­biles, huge elec­tron­ics man­u­fac­tur­ing ser­vices (EMS) op­por­tu­ni­ties have emerged. This can in­crease the de­mand for com­po­nents and in­crease value ad­di­tion to the range of 15-20 per cent. A strong fo­cus on PCBs and in­cen­tivis­ing in­vest­ments in the PCB man­u­fac­tur­ing ecosys­tem will greatly im­prove the coun­try's chances of be­com­ing cost-com­pet­i­tive and en­hance its de­sign and man­u­fac­tur­ing ca­pa­bil­i­ties.

Trends in value ad­di­tion

The mo­bile man­u­fac­tur­ing in­dus­try's growth sta­tis­tics need to be taken with a pinch of salt, how­ever, as the level of ma­tu­rity in man­u­fac­tur­ing re­alised till date is re­stricted to man­ual semi-knocked-down (SKD) level assem­blies. In 2016, true lo­cal value ad­di­tion in man­u­fac­tur­ing and sourc­ing com­po­nents was less than 6 per cent of the to­tal US$ 11 bil­lion worth of com­po­nents used in mak­ing ap­prox­i­mately 267 mil­lion phones. This fig­ure is far be­low that of other coun­tries. To trans­form In­dia into a global man­u­fac­tur­ing hub, the in­dus­try needs to move to the next level of man­u­fac­tur­ing (be­yond assembly) in a phased man­ner.

Ac­cord­ing to Coun­ter­point, al­most 96 per cent of the smart­phones in the In­dian mar­ket are now as­sem­bled

or man­u­fac­tured lo­cally due to the in­creased fo­cus on the Make in In­dia pro­gramme and ris­ing im­port du­ties. As the In­dian gov­ern­ment has in­creased du­ties on com­pletely built units (CBUs) and PCBAs this quar­ter, go­ing for­ward, the mar­ket will shift from semi-knocked down (SKD) to com­pletely knocked down (CKD) level man­u­fac­tur­ing.

High do­mes­tic con­sump­tion and pol­icy re­forms, such as ef­fec­tive du­ties on key com­po­nents, along with at­trac­tive in­cen­tive struc­tures, will drive do­mes­tic value ad­di­tion through lo­cal com­po­nent sourc­ing. This will also cre­ate a de­mand for elec­tron­ics man­u­fac­tur­ing ser­vices in In­dia. The IIM-B and Coun­ter­point joint study es­ti­mates that more than US$ 15 bil­lion worth of com­po­nents will be sourced lo­cally over a pe­riod of five years through 2020. This will re­sult not only in sig­nif­i­cant sav­ings in for­eign ex­change and in cre­at­ing over a mil­lion di­rect and in­di­rect jobs, but will also boost the en­tire ESDM ecosys­tem.

Ac­cord­ing to the study, in the next five years, lo­cal sourc­ing of Level A com­po­nents and sub-com­po­nents, as well as the lo­cal­i­sa­tion of as­sem­bling/ man­u­fac­tur­ing ser­vices, will re­sult in greater val­uead­di­tion – more than 30 per cent by 2020, with a po­ten­tial for this to grow to as much as 50 per cent there­after (Fig­ure 1). Greater in­vest­ments in in­dus­trial de­sign, PCB de­sign and SMT line assembly will help drive this growth, although many of the ma­jor

sil­i­con com­po­nents will con­tinue to be sourced from overseas. How­ever, com­plete lo­cal­i­sa­tion of the ma­jor sub-com­po­nents of charg­ers, bat­ter­ies and cam­eras can be ac­com­plished soon.

From a tech­nol­ogy per­spec­tive, true value ad­di­tion will need to keep pace with emerg­ing trends, such as: • Ad­vanced de­vices en­abled with 5G, In­ter­net of Things (IoT) and aug­mented re­al­ity

• Au­to­mated man­u­fac­tur­ing pro­cesses util­is­ing re­al­time an­a­lyt­ics and ro­bot­ics

• Dig­i­tal prod­uct de­sign and ad­vanced pro­duc­tion us­ing in­no­va­tive cas­ing ma­te­ri­als through 3D print­ing • These trends have the po­ten­tial to take the In­dian mar­ket to the next level.

Mov­ing for­ward

One of the pit­falls of the PMP is that the ben­e­fits could be un­re­lated to the value ad­di­tion the man­u­fac­turer is do­ing. Thus a graded ap­proach is rec­om­mended, wherein the in­cen­tive that the man­u­fac­turer earns is linked to do­mes­tic value ad­di­tion. In­dia has lim­ited pol­icy op­tions as it is a sig­na­tory to ITA-1, which pre­cludes the im­po­si­tion of cus­toms du­ties on 217 tar­iff lines that con­sti­tute the lion's share of im­ported elec­tron­ics. Lo­cal com­po­nents man­u­fac­tur­ing has been the big­gest ca­su­alty of ITA-1, which has re­stricted In­dia's op­tions to cre­ate a strong value chain and en­sure high value ad­di­tion in the ESDM sec­tor. If the in­dus­try can ad­here to the PMP route for the next four to five years, it will be able to gain enough mo­men­tum to smoothen the road ahead for In­dia to truly be­come a global man­u­fac­tur­ing hub.

The mo­bile man­u­fac­tur­ing sec­tor suf­fers from a host of prob­lems, in­clud­ing strin­gent labour laws, poor in­fra­struc­ture and an in­ad­e­quate sup­ply chain. These fac­tors are hin­der­ing the growth of this sec­tor, and lead­ing to sub-op­ti­mal profit lev­els for lo­cal man­u­fac­tur­ers. Favourable gov­ern­ment in­ter­ven­tion may help re­move some of these hin­drances. The in­dus­try, too, needs to fo­cus on re­search and de­vel­op­ment as well as in­tel­lec­tual prop­erty (IP) cre­ation in sync with emerg­ing tech­nol­ogy trends, to help man­u­fac­tur­ers be­come in­no­va­tors and ex­plor­ers rather than im­i­ta­tors and as­sem­blers.

Fig­ure 1: Fore­cast on the to­tal lo­cal value ad­di­tion un­der the Phased Man­u­fac­tur­ing Pro­gramme (Source: IIM-B)

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