Making India the hotspot of electronics manufacturing | Tech News

Making India the hotspot of electronics manufacturing

PLI scheme, while by no means a golden bullet, does address this disability of higher component costs to some extent.

| Updated on: Nov 07 2021, 18:37 IST
Electronics imports rose to $20.3 billion in 2020-21 from $19.1 a year ago, driven mostly by higher shipments of mobile phones and components.
Electronics imports rose to $20.3 billion in 2020-21 from $19.1 a year ago, driven mostly by higher shipments of mobile phones and components. (Pixabay)

The demand for ACE (appliances & consumer electronics) in India is growing, indicating a rise in consumer wealth (there has been a 151.7% increase in per capita GDP at constant prices between 2011-12 and 2019-20). The ACE market is expected to double in size to 1.48 lakh crore by 2025 (IBEF) as a result of tailwinds like low-cost consumer credit at point of sale, climate change, and changes in consumer behaviour. There is a significant growth opportunity for Indian companies operating in ACE. But like it is with most opportunities, there are significant challenges - the most pressing of which is India's dependence on electronics imports.

Indian companies have not invested in electronics R&D and manufacturing capacities in a significant way thus far, largely because of the limited market size and challenging investment climate. They have fulfilled a majority of their market demand through the import of finished products or the low tech assembly of imported modular subsystems. This has resulted in a significant reduction in our domestic value add in these products and, perhaps more dangerously, stymied the generation of domestic IP. Consequently, India is a net importer of electronics. ht (ELCINA).

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The economic value generated by manufacturing ACE that India consumes must be realised within our own borders. However, India still has a large distance to cover before we capture the majority of the value generated by our domestic demand. The union government has recognised that this is a matter of national importance and is taking several steps to boost electronics manufacturing, reduce import dependence, attract investments and create employment.

Policy measures such as the Production Linked Incentive for White Goods (air conditioners and LEDs) and other such PLIs are a good start. These schemes help address a critical constraint that makes it difficult for Indian companies to compete with their Chinese counterparts - higher component costs. Indian companies find it difficult to keep pace with the positive economics Chinese companies enjoy as a result of their large local manufacturing base, lower logistics costs, and strategic local costing. This disability has been estimated to be as high as 8-10% of BOM costs for ACE.

PLI scheme, while by no means a golden bullet, does address this disability of higher component costs to some extent. Approved manufacturers will enjoy incentives of 6% of the selling price in year one, gradually reducing to 4% in year five. The max sales value that is eligible for incentives is capped at five times the minimum investment threshold. For example, a company that invests INR 50 crore over 5 years may be eligible for a maximum sales incentive of INR 37 crore in the event they generate sales of INR 750 crore.

The PLI scheme is definitely a positive step and will most certainly boost investments in local manufacturing capacity. Indian companies will be able to capture a larger share of the value-add margin on products sold in the country and also benefit from the international trend of supply base diversification, thus boosting exports.

Another national programme that aims to assist the local manufacturing ecosystem is the Phase Manufacturing Programme(PMP), in which import duties for certain identified subsystems are increased year on year to incentivize localization.

Challenges ahead

PLIs, PMPs and other related schemes are a positive start, but further work will be needed to make the Indian manufacturing ecosystem globally competitive. There are multiple bottlenecks and infrastructural challenges that will need to be addressed in order to facilitate the growth of the Indian ACE industry.

First and foremost, is the lack of electronics R&D infrastructure. There are a variety of factors behind this stunted growth but one reason that is often cited as a key ecosystem challenge is long development lead times. The design to commercialization timelines in the Indian ACE ecosystem can often be restrictive - there are several industry cautionary tales where long development cycles led to product obsolescence before launch resulting in dead R&D investments. It can be argued that this is the nature of R&D and the linear costs and bandwidth required to build domain expertise and infrastructure are par for the course.

This model has not worked in the Indian context. In order for Indian OEM's to catch up with their global counterparts, they will need to explore differentiated innovation models like outsourced R&D or partnerships with firms that have the requisite domain expertise.

The second major issue is the scale conundrum. Procuring raw materials at the low costs required for competitive end-product pricing is only possible through economies of scale. But that scale of procurement cannot be reached if manufacturers cannot commit large volumes at the onset. This is a bit of a chicken and egg situation - the most likely way out of which will require a long term vision backed by significant amounts of capital.

A need for synergy

To foster the Indian economy, manufacturers must make a conscious choice to relocate their electronics supply chains to India. This relocation must be facilitated through government intervention in the form of incentives like the PLI scheme and finally, this shift must be realised through local ecosystem synergy.

All players in the ecosystem have to come together and leverage their specialisations through partnerships and innovative business models that enable cooperative growth. Our collective focus should be on unlocking the true potential of the Indian consumer electronics sector and positioning India as an electronics manufacturing powerhouse in the ASEAN region.

(This article has been written by Omer Basith, CEO and Founder, Virtual Forest.)

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First Published Date: 07 Nov, 18:37 IST