Can Dixon become India’s Foxconn?

It takes about 20 seconds for a typical air shower – a small room where high-velocity air is blown to clear away dust – to do its job. That’s close to the time it takes a single assembly line in a factory to put together a smartphone. The factory, which assembles Motorola phones, has 11 assembly lines and about 90-100 workers stand next to each other in a line. They make up a smartphone like pieces of a puzzle.

It all starts with the Liquid Display Assembly (LDA), an electronic board with the phone’s display on one side, and the circuitry on the back. The first worker attaches the main printed circuit board (PCB) to the back of this LDA and passes it to the next worker to attach the PCB to a sub-board below. In the following steps, camera sensors are attached to the LDA while a robotic machine applies coolant – a glue-like material that keeps the phone cool. It takes around 15-20 such steps to assemble a low-end smartphone.

Padget Electronics is a wholly owned subsidiary of Dixon Technologies India Limited, one of India’s oldest contract smartphone manufacturers. Even though companies such as Dixon have existed since the 1990s, the rise of China’s electronics manufacturing industry caused many to forget these firms.

In 2014, research firm Counterpoint Research ranked Micromax (which runs the manufacturing firm Bhagwati Products Ltd) as the top smartphone vendor in the country. But as Micromax, along with Lava and Intex, disappeared from the market, overtaken by Chinese players, people forgot that they also had significant manufacturing businesses.

However, the pandemic and changing global geopolitics have brought Indian contract manufacturers back into focus. And few companies have attracted as much attention as Dixon Technologies. In addition to Motorola, the company today manufactures smartphones for Nokia and Samsung. Work is underway on two more contracts. In 2022-23, it is expected to revenue 12,700 crore, which is almost double of what the company generated in 2020-21. According to Counterpoint Research, in the September quarter of 2022-23, Dixon’s share of all smartphones made in India was 7.8%, far behind India FIH, which manufactured 8.5% of all devices. India FIH is a Foxconn Technology Group company, one of the world’s largest contract manufacturing organizations.

Dixon’s stock underscores the growing importance of Indian contract manufacturing. it picked up from all around Over 830 in Jan 2020 3,859 in May 2022. While shares have declined, many analysts and brokerages remain bullish on the company’s prospects.

What is driving this optimism?

brand behind brand

Contract manufacturers such as Dixon, Bhagwati and Lava are also called electronics manufacturing service (EMS) providers, meaning they take specifications from companies such as Motorola and put together an electronic device. On the other hand, companies like Motorola are original equipment manufacturers (OEMs)—they own the original intellectual property (IP) and design products. Usually, they contract an EMS company to collect their product. Some companies like Samsung have been able to do both.

Sunil Vachani, chairman and managing director of Dixon, said that his company would never move to the OEM business model. The company, he stressed, wants to remain “the brand behind brands”. In doing so, it will never become competitive with the companies it produces for. A Motorola, therefore, would not have to worry about handing Dixon a contract because it knew that the company would not use what it learned from manufacturing Motorola products to create a competing and possibly cheaper product—which Essentially BBK Electronics, Xiaomi and many other Chinese companies have become giants in the field of consumer electronics in the past. decade.

In a way, this strategy is similar to the famous ECMMS business model of Taiwanese Foxconn. While ‘E’ is just technical language, CMMS stands for Component, Module, Move and Service. This explains how Foxconn established itself as a manufacturing giant by making acquisitions that gave the company more control over the ecosystem, and therefore, allowed it to offer better pricing.

Foxconn began in the 1970s as a plastic components provider specializing in connector and cable production. It grew into a complete systems integrator in the 1980s, 1990s and 2000s for large companies including Apple. It did this by gradually gaining control over the labor intensive parts of the industry and gaining the ability to put together PCBs, and various other modules of an electronic device.

Similarly, Vachani is keen to gain control over the components used in electronics equipment. The company, he said, will analyze the budget proposal to halve customs duty on open cell panels – a key component for making televisions (TVs) – and will also start injection molding for TV frames soon.

In the December quarter, the company also completed technology acquisitions of Bluetooth mesh technology (a connectivity standard that allows multiple devices to interact with each other) and new WiFi solutions for smart lighting from lighting solutions company Eban Illumination.

new factories

What financial investors look for in the manufacturing business is how you differentiate yourself, said one of Dixon’s original investors and the person who exited when the company went public in 2017. He said that this discrimination can come. Either by becoming a market leader or the firm can expand the market opportunity for itself.

Dixon is doing the second. Mobile phones are only a part of its business. The company also assembles products in consumer electronics, home appliances, medical electronics, lighting solutions, set-top boxes, IT hardware and reverse logistics. Expansion means building more factories. Vachani said the company is building five.

The first factory to manufacture telecom equipment is ready. The second factory, which will be dedicated to manufacturing wearable products (smartwatches, true wireless headphones, etc.), will become operational in March. Another will be used to manufacture refrigerators and will be operational by April. The fourth factory is Dixon’s largest at one million square feet. It will be dedicated to manufacturing mobile phones and is expected to be ready by August-September this year. The last factory will come up on a 20-acre plot in Andhra Pradesh and will be dedicated to manufacturing surveillance products such as security cameras.

Meanwhile, Dixon announced a joint venture with Bharti Airtel in April 2021 to manufacture telecom and networking products such as routers and modems. While consumer electronics already generate substantial revenue ( 864 crore in the December quarter of 2022-23 with an operating profit of Rs. 26 crore), Vachani has identified refrigerators as a growth area. Wearables are another bet, as will laptops after the government announced a production linked incentive (PLI) scheme for the sector. The scheme provides cash incentives to companies on incremental production.

Saurabh Gupta, Dixon’s CFO, said during its January 2023 earnings call that the company has “major growth” across all verticals in 2023-24. And TV may grow between 15% to 18%.

In September 2022, Dixon becomes the first firm to achieve profit-value 53 crore – from PLI scheme for mobile phones. In fact, at least five of Dixon’s manufacturing segments are set to receive PLI benefits — apart from phones, there are IT hardware, lighting, washing machines and telecom.

“He (Dixon) has been here for more than two decades,” said Tarun Pathak, director of research at Counterpoint Research. And then, obviously, looking at exports as an opportunity as well,” he said.

Vachani agreed, saying the company aims to earn approx. 1,200 crore from exports in future. Exports are not significant at the moment, but going forward, the company hopes to ship mobile phones and lighting products. While the US is the main export market right now, Dixon has plans to expand into Africa and the Middle East as well.

from EMS to ODM

In the early 2000s, companies such as HCL, Wipro, Zenith and ALTOS tried to develop a complete ecosystem for personal computer manufacturing in India. Industry veterans recalled how governments at the time didn’t pay attention, dismissing them as “screwdriver companies”. This was one of the biggest mistakes made by Indian governments. The Modi government’s focus should not be on making India a manufacturing alternative to China. Go on the same path. That goal can only be achieved when companies like Dixon move from an EMS model to what’s called an Original Design Manufacturing (ODM) model.

“Manufacturing as a paradigm constantly chases low cost,” said PVG Menon, a veteran consultant in the electronics industry. By adding ecosystem and design capability. Offer ready-made modules with which to quickly realize products.”

ODMs are located somewhere between OEM and EMS firms. ODMs have the key licenses and IP required to manufacture electronic products and equipment. To be sure, the transition to being an ODM isn’t likely to make a big difference to Dixon’s margins. However, it does allow a contract manufacturer more freedom and better visibility into their own business. For example, in September, Dixon announced that it had obtained licenses from Google for the Android and GoogleTV platforms for television.

Vachani said the company plans to launch its first India certified design for televisions in the first quarter of 2023-24. He also said that the company already has ODM status in lighting and washing machine segments and expects to achieve this status in telecom business in the next financial year.

Challenges and Developments

Dixon, however, isn’t immune to the global recession or the electronics industry’s supply chain nightmare. In a January earnings call, Dixon noted that two new mobile phone contracts were in the works, but at the same time, demand for Motorola phones had declined, causing the company to revise its estimates.

The firm has revised its growth estimates for 2022-23 due to a poor December quarter. While Dixon was expected to generate revenue earlier 16,500-17,000 crores, estimates have now come down 12,200- 12,700 crores.

Analysts said the two new mobile phone customers Dixon is set to acquire could be key to the company’s growth.

An analyst at a top securities firm, who did not wish to be identified, said the guidance revision, along with a global market slump, has cost Dixon a few points. “The thinking among some investors is that Dixon may struggle to efficiently allocate funds to the right sectors. Smaller rivals may move faster into growth sectors,” the analyst said.

Companies such as MEPL (Sky Electronics), Sun Industries Pvt Ltd, ELIN Electronics, NTL Electronics, Vimal Plast India, etc. compete with Dixon in various markets – from television and lighting products to home appliances. The company’s biggest competitors in mobile phones are India FIH and Lava.

The analysts cited above, however, do not believe that smaller firms pose a greater risk. They don’t have the benefits of scale that Dixon has accrued over the years and may struggle for capital.

“You have to understand that Dixon is one of the largest EMS players in India. Its only real competition is Foxconn. Lava, Bhagwati, etc. cannot expand fast enough in other segments. So, there is no reason not to be bullish on Dixon. No reason,” the analyst said.

Certainly, investors would like to see the company as India’s answer to Foxconn.