REWIRING THE CIRCUIT
Can India turn the growing anti-China sentiment globally into an opportunity for homegrown electronics?
AAshok Jana, 40, a driver in New Delhi, spent much of his spare time at work watching Bollywood films and news videos on his Xiaomi phone. Since the Covid outbreak, however, the phone has become a lifeline, allowing him to make daily video calls to his family in West Bengal.
Like Jana, hundreds of thousands of Indians today use Chinese smartphones. There is a wide array on offer, and even the high-end variants cost a fraction of comparable models from other big-name brands. In other words, they offer good value for money. Indeed, Chinese brands have made deep inroads into the $8 billion (Rs 604 billion) Indian smartphone market, with Chinese companies such as Xiaomi, Oppo, Vivo and OnePlus holding a combined market share of over 66 per cent (Q1 2019 estimate), according to Counterpoint Research, a global industry analysis firm. Xiaomi leads with a 29 per cent market share, followed by Korean giant Samsung (23 per cent). Until the early part of the past decade, Indian brands such as Micromax and Intex had a market share of over 54 per cent, which has now fallen to under 10 per cent.
China’s dominance extends beyond smartphones. It caters to over 60 per cent of Indian imports of electronic products and components. The Covid lockdown has critically impacted the production of electronic goods such as mobile phones, printers, computers and inverters the world over since printed circuit boards—the base of most electronic products—are mainly sourced from China. India’s requirements of aluminium, copper and chemicals in electronics manufacturing, too, are met by China. In such a scenario, say industry representatives, many manufacturers find it more viable to import electronic goods in SKD (semi-knocked-down) or CKD (completely knocked-down) form from China.
Now, as the world explores manufacturing destinations beyond China, India is aspiring to fill the vacuum. Union minister for electronics and information technology Ravi Shankar Prasad told india today that the Narendra Modi government aims to make India the electronics manufacturing hub of the world and is offering incentives towards the goal. “The Rs 50,000 crore incentive package announced includes production-linked incentives worth Rs 40,000 crore, cluster scheme incentives (Rs 4,000 crore) and a component manufacturing scheme (Rs 4,000 crore),” he says (see accompanying interview).
Currently, India has over 250 production units, up from two in 2014. The turnaround in the domestic electronics sector came after India allowed 100 per cent FDI through the automatic route, relaxed duties, introduced schemes such as the EPCG (Export Promotion Capital Goods Scheme) and Special Economic Zones that allowed tax sops, exempted duties on equipment required to set up semiconductor plants, approved the National Policy on Electronics (2012) and set up the National Electronics Mission. The stated objective of NPE1 was to create an ecosystem for a globally competitive electronic system and design manufacturing sector in India.
Thanks to all these efforts, India is now the world’s second-largest manufacturer of mobile phones. The country produced about 290 million handsets valued at Rs 1.81 lakh crore in 2018-19 from 58 million units worth Rs 18,900 crore in 2014-15. However, we still don’t make any of these phones ourselves and manufacture only a small fraction of the solar photovoltaic cells and modules currently used. India somewhat missed out on the third industrial revolution, characterised by decentralised manufacturing and global value chains, in the production of electronic goods, with its manufacturing ecosystem failing to keep pace with the likes of China and Vietnam. According to industry estimates, over 80 per cent of the global mobile phone sales revenue is concentrated among five companies—Samsung, Apple, Huawei, Oppo and Vivo. The assembling of mobile phones is centred in China (including Hong Kong) and Vietnam.
India incurred a forex bill of $40.6 billion for electronic goods in 2018—about 22 per cent of the total merchandise bill. It spent $18.7 billion on the import of mobile phones and parts
whereas exports of the same were worth only $2 billion. The forex bill for mobile phones and parts constituted 26 per cent of the forex spend on electronic goods. In the past five years, India has tried to substitute the import of mobile phones and parts by imposing duties on imports of finished mobile phones and parts, under the government’s phased manufacturing programme. So, even as the import of parts and components continued due to lack of volumes at home, imports of finished mobile phones came down, with the shift of assembling to India. Mobile handset exports, which took a huge hit after the shutdown of the Nokia plant in 2014, grew over eight-fold to Rs 11,200 crore and exceeded imports for the first time in 2018-19, according to industry association ICEA (India Cellular and Electronics Association).
Industry representatives believe the new decade could well be a make-or-break one for manufacturing in India, which enjoys the advantages of a huge domestic market and a young demographic profile. “Companies might see an opportunity if, say, Apple wants to relocate some of its manufacturing to India,” says an industry insider. “If a majority of the manufacturing shifts to India, then the entire ecosystem shifts too. The government needs to project some success stories not only to the investors, but the public as well.”
In May 2018, the United States imposed heavy tariffs on tech goods imported from China, inviting retaliatory tariffs from Beijing. While trade diversions happened across global supply chains, India failed to capitalise on it. An ICEA report says the US-China trade war led to higher communication equipment imports from Vietnam and Taiwan to the US. But there was no tangible increase in the value of exports from India to the US nor could it attract the big firms and move up the supply chain ladder.
China’s electrical machinery and equipment exports are valued at $557.1 billion—26.3 per cent of its total exports. At $19.97 billion, India’s electrical imports from China are a minuscule percentage of Beijing’s total exports in the sector. The US is China’s top market for electrical exports.
For MNCs, the Covid pandemic has amplified the importance of diversification of supply chains, and this presents an opportunity for India. Mohammad Athar, a partner with PwC India, says his firm has been holding discussions with companies in the electronics space, but the one con
“THE JOURNEY OF ANY SECTOR BEGINS WITH THE BASICS. ONCE WE START MANUFACTURING COMPONENTS, SPECIFIC PRODUCTS WILL START COMING”
— Mohammad Athar, Partner, PwC India
cern that most have is whether new projects launched will get implemented within a specified timeframe.
The government’s production-linked incentive will range from 4-6 per cent on incremental sale of mobile phones and specified electronic components, and will be applicable from August 1. According to the notification, companies that manufacture phones priced Rs 15,000 and above and are ready to make a cumulative investment of Rs 1,000 crore over four years will qualify for the incentive of 6 per cent for the first two years, followed by 5 per cent for the next two and 4 per cent in the fifth year. For domestic mobile phone companies, the investment threshold is Rs 200 crore over four years and the sales criteria Rs 5,000 crore in five years; for component manufacturers, it is Rs 100 crore for four years and Rs 600 crore of sales in five years.
However, as per industry estimates, the budgetary allocation toward production-linked incentives for mobile phone makers is a meagre 0.5 per cent of the target set under NPE, 2019. Indian manufacturers are at a disadvantage compared to their counterparts in China and Vietnam, who enjoy a cost advantage differential of about 15 per cent and 5.8 per cent, respectively. China will fight hard to prevent manufacturers from shifting out. It could announce attractive stimulus packages and respond in ‘unconventional ways to keep its global supply chains intact’, says the ICEA report.
Indian mobile devices-maker Lava International recently announced it was shifting its China operations to India. “At the moment, 70 per cent of our production is for India and 30 per cent towards exports. But we see that changing to 60 per cent for exports and 40 per cent for India over the next few years,” says Sunil Raina, president and business head, Lava International. “Through the scheme money, we will be able to expand existing capacity and service other brands as well. We will be able to provide capacity to other companies. From three million phones a month, we are looking at doubling our capacity.”
However, India’s quest for self-reliance in electronics may run into infrastructure and logistical hurdles and capacity shortages. As the country forays into production of displays, fabrication plants and other high value-added components, it will need skilled labour and access to raw material at competitive costs, besides the need to remove bureaucratic hurdles that hinder the ‘ease of doing business’.
“AT PRESENT, 70% OF OUR PRODUCTION IS FOR INDIA, 30% FOR EXPORTS. WE SEE THAT RATIO CHANGING TO 60% FOR EXPORTS IN THE NEXT FEW YEARS”
— Sunil Raina, President and Business Head, Lava International