Electronics Bazaar

The new phase of the Indian mobile manufactur­ing industry

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

- 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.

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

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