Plan to make electronics sector worth $400 bn by 2025

The first of a two-part series analyses the feasibility of goals set for electronics manufacturing

The first of a two-part series analyses the feasibility of goals set for electronics manufacturing.

It’s an ambitious target. The government wants the value of domestic electronic hardware production to jump nearly six-fold in five years — from $70 billion in FY19 to $400 billion in 2025. And to achieve this objective, it is banking on one segment — mobile devices, which, it hopes, will contribute half the production value of electronics.

The plan is to transform India into the world’s biggest export hub for mobiles after China and overtaking Vietnam (which together with China controls 80 per cent of the global export market). This will require mobile manufacturers in India to increase their production value seven-fold from current levels and export 58 per cent of what they produce in value, as against only 12 per cent currently. At present, domestic manufacturers account for just 5 per cent of the global mobile production value, which is projected to hit $647 billion by 2025. And a third will come from India.

But sceptics say this may be a pipe dream, especially since the Centre failed to achieve the target set in the National Electronics policy of 2012, which was to hit $400 billion for electronics by 2020. It also said that the country would earn $80 billion in exports from the sector by 2020. As it turned out, India was able to achieve just one-tenth of that in FY 19.

But others see a discernible change in the government’s strategy for achieving those objectives. Global players like Apple and Samsung and home-grown electronics companies like Lava and Micromax say that the government’s approach has shifted from an “import substitution policy” to one focused on pushing exports.

The cornerstone of the new policy is the production-linked incentive (PLI) scheme for mobile devices and components, which provides incentives ranging from 4-6 per cent of the production value over five years, provided firms meet minimum investment and production value targets. The scheme is aimed at addressing India’s disability vis-à-vis China and Vietnam (ranging from 9 per cent to 21 per cent) when it comes to the cost of production.

To bump up exports, the government has also announced schemes for electronic component manufacturers so that they can bring their global supply chain to India. There are incentives, too, for setting up large manufacturing clusters. In fact, a generous $6.3 billion over eight years has been earmarked for this effort, and the bulk of this is going into the PLI scheme ($5.3 billion). The government hopes to generate production worth $106 billion and exports to the tune of $77 billion through these schemes by 2025.

Earlier, the government was banking on the phased manufacturing programme (PMP) to encourage domestic production of mobiles. But this was based on hiking import duties on components to force value addition, so that components would be made in India rather than be imported. Despite that, the value addition in phones has been only 18 per cent. Hence, the overdependence on the local market was sharply increasing the electronics import bill, which was not sustainable without a big surge in exports.

Pankaj Mahendroo, president of the Indian Cellular and Electronics Association, says that the PMP scheme has helped ensure that 96 per cent of mobiles sold in India are made in India. However, to get scale and be globally competitive, exports need to be ramped up, he says. “The PLI scheme is a game changer. It will get us scale, volume and value, encourage component vendors to come to India and make mobile devices the largest export in terms of value by 2025,” he said.

Out of India’s $53 billion import bill for electronics in FY 19, over $12-13 billion was for components of mobile devices. And an ICEA presentation points out that at the envisaged domestic production of $80 billion by 2025 the import bill would surge to $37 billion.

The way out, experts say, is to follow the example of Vietnam, which has a far smaller domestic market, and become a net foreign exchange earner. That would bring in scale (in terms of value and volume), component manufacturers and the global supply chain would set up shop in India, and value addition would go up without PMP.

Moreover, because PLI scheme is structured in a way that global players can get the financial incentives only if they make phones above $200 billion, the average value of phones will go up sharply. This would be a key reason for component players to rush in.

But a major worry regarding the PLI scheme is whether it can create home-grown champions. A senior executive at a leading domestic mobile device manufacturer says: “The scheme is written for the Apples of the world. The PMP scheme encouraged domestic players to set up assembly operations. Now most of them have had to close shop. Home-grown brands have hardly any market share now. They have been destroyed.”

However, others like Lava see a huge opportunity for Indian players. Says Hari Om Rain, chairman, Lava International: “It’s a historical change in thinking. The under $200 market (where global players will not operate) is 66 per cent in volume and 25 per cent in value equivalent to $113 billion. With the disability taken care of by PLI, our labour costs will be 15 per cent lower than China and we can out compete them in this segment both as OEMS and with our brands.”

Thanks to the incentives, global firms like Apple could also shift some of their capacity from China to India. This also chimes in with growing USChina tensions and the need for companies like Apple to hedge their dependence on just one country.

Yet, many things could derail the Centre’s plan. “The Centre’s obsession with value addition might lead them to stop the disbursements of incentives. They have to be patient for five years as it takes 2-3 years for the supply chain to move in,” says a senior executive of a global mobile firm.

The Centre should also keep in mind that value addition in China is less than 40 per cent, and the rest has to be imported. “But as long as one has a net foreign exchange surplus, it should not matter,” the executive says. Also, with the Covid-19 crisis, the production value targets of PLI for FY21 may need to be tweaked.

The good news is that the scheme is getting traction. Wistron and two firms controlled by Foxconn , Chinese entrant BYD and Indian players like Lava, Micromax, and Karbonn, have signed up to avail the PLI scheme by July 31. As many as 10 firms (five each of global and homegrown) can be accommodated under the incentive scheme.