First, it will help the country reduce its imports from China (India’s trade deficit with China stood at $83.1 billion in 2022-23), pre-empt other geopolitical pressures that impact trading, and strengthen the country’s hardware supply chain. Second, it will help the country save millions of dollars in foreign exchange. Third, it has the potential to create thousands of additional jobs, while enriching the electronics manufacturing ecosystem and foster more research and development (R&D) in the country.
Fourth, it will help the country address a large addressable global IT hardware market, too. Fifth, the move is a part of the government’s target of achieving self-sufficiency in domestic electronics manufacturing by 2025–26, and in sync with the country’s aggressive digital push — be it with mobile phone manufacturing, ecommerce, digital payments, or even the shift from cable to over-the-top (OTT) platforms.
Mobile phone manufacturing shows the way
India imported all its mobile phones till 2005. Finland’s Nokia set up a factory in Chennai in 2006 but unfortunately had to shut down in 2014, and now another Finnish company Salcomp—a supplier of chargers to Apple—owns the factory. India had to focus on reducing imports of mobiles, which comprises the largest segment by proportion within electronics, failing which it would upset the overall target and also lead to a huge forex outgo.
With this in mind, the Indian government began focusing on providing incentives for companies to manufacture mobile phones in the country. It launched the production linked scheme (PLI) for large-scale manufacturing, providing incentives of 4–6% on the incremental sales of manufactured goods in a bid to offset the 8.5–11% cost disadvantage that the electronics sector was suffering as compared to countries such as China and Vietnam in terms of the high cost of finance, inadequate availability and cost of power, water and logistics, according to a joint report by the India Cellular and Electronic Association (ICEA) and McKinsey.
All these efforts have made India is the second-largest mobile phone manufacturer globally after China, and also the second-largest market for smartphones in the world. Further, the country may have 1 billion smartphones by 2026, up from the current 659 million, according to PwC. The government’s incentives have helped double the export of mobile phones from India to surpass ₹90,000 crore in the financial year (FY) 2022-23 from ₹45,000 crore in FY22, according to ICEA. The production of mobile phones has risen from about 60 million in 2014-15 to approximately 310 million in 2021-22.
But need more manufacturing than assembling
A laptop or tablet typically comprises about 20 components and assemblies procured from across the world. At the core is the motherboard (Printed Circuit Board Assembly, or PCBA), which functions as the product’s core and consists of the diode, transmitter, capacitors, resistors, and integrated circuits, or ICs. Other parts including the hard drive, memory, keyboard, liquid crystal display (LCD) assembly, webcam, Bluetooth, and battery, are connected to the motherboard to form a cohesive unit.
Since India imports more than 90% of the mobile components, mostly from China and Taiwan, the term “manufacturing” here refers more to “assembling” completely knocked-down kits (CKDs). And the country will have no option but to continue importing high-end chips since it does not have a cutting-edge semiconductor manufacturing plant. Most computer chips powering mobile devices and computers today use anywhere between 14 nanometre (nm) and 5 nm chips. One nanometer (nm) is equal to one billionth of a meter.
The lower numbers denote smaller, more advanced processors since more transistors are placed in the same areas, allowing for more efficient and faster processors. IBM’s new 2-nanometer chips, for instance, contain 50 billion transistors. Hence, the ones being currently proposed in India are 40 nanometre ones [‘Announcements on chip fabs soon’], which are not suitable for the high-end smartphones, laptops, tablets and PCs we typically use in our homes and offices.
But even 40 nm chips have a myriad of applications—they can be used in cars, medical devices, printers, digital cameras, game consoles, hard disk drives, digital television (DTV), set-top boxes, Internet of Things (IoT) devices, and wearable applications. Besides, it may cost about $3-5 billion to set up a 40 nm fab while a 5 nm would roughly cost upwards of $12 billion. Hence, while India is certainly not targeting this segment, its focus has been on boosting its assembling capacity till date.
Given that it will not have any cutting-edge chip fab in the near future, India will have to push electronics manufacturers and contract manufacturers to keep on adding value when manufacturing other electronic components. India currently has about 270 mobile manufacturing handset and component manufacturing units in the country—up from only 2 units in 2014. PwC expects Indian firms to venture into manufacturing chip-level commodities such as memory and storage units for mobile phones. It adds that India’s presence has grown from just 2% (assembly) value addition in 2014 to about 15% (assembly + sub-components) in 2022, and can grow its presence by another 8% by localising manufacturing of casing of phones.
Progress is being made, slowly but surely
iPhones, for instance, are currently assembled in India by at least three of Apple’s global suppliers—Foxconn and Pegatron in Tamil Nadu, and Wistron in nearby Karnataka state. JP Morgan analysts predict that Apple may make one of four iPhones in India by 2025, and that 25% of all Apple products including the Mac, iPad, Apple Watch and AirPods will be manufactured outside China by 2025 from the current 5%. Other companies that have a base in India include Samsung, Oppo, Vivo, Xiaomi, Micromax, Lava, Intex, and Reliance Jio.
According to a 28 March note by Counterpoint Research, Bharat FIH (a Foxconn unit) remained the top EMS player for smartphone manufacturing in 2022, followed by Dixon that was one of the first contract manufacturers to get approval under the PLI scheme in India, following which Taiwanese PC brand Acer announced it was going to manufacture laptops in the country at Dixon’s Noida factory. Dixon also manufactures smartphones for Samsung. Padget Electronics (a Dixon subsidiary), with the Motorola portfolio, emerged as one of the fastest growing EMS players in the same period.
Apple’s EMS partners Foxconn Hon Hai, Wistron and Pegatron were among the top 10 EMS players in India in 2022 in terms of volume. In terms of value, Hon Hai and Wistron led the EMS landscape. Both of these manufacturers also received the PLI incentive in the recent disbursements. Among OEMs, OPPO led the ‘Made in India’ smartphone shipments in 2022 with a 22% share, followed by Samsung, according to Counterpoint.
The rise in domestic mobile manufacturing also picked up with mobile services providers offering 4G and 5G services beyond large cities. What helped was that the government also provided skill training to about 1.6 million candidates in the electronics sector, across sub-sectors such as semiconductor and components, consumer electronics and IT hardware, electronic manufacturing services (EMS), solar and light-emitting diode (LED), printed circuit board (PCB) design and manufacturing, industrial automation, e-mobility and battery, communication and broadcasting, and security and surveillance.
But India could do so much better with more local language content and apps. For instance, China and Vietnam developed mobile manufacturing while simultaneously nurturing the broader electronics industry, and building massive manufacturing clusters with facilities that include uninterrupted power supply, residences, roads, schools, hospitals, direct tax incentives, and labour-friendly laws.
Replicating the success story
Having achieved a fair bit of success in assembling mobiles in the country on a large scale, the government is pushing to reduce its import dependencies and replicate this success in other segments too, which explains the restrictions of laptops, tables, all-in-one PCs, and servers falling under the HSN8471 (The Harmonized System of Nomenclature code, or the HSN Code, is used for classifying goods under the Goods and Services Tax, or GST) category.
It’s a move that is in sync with the National Policy on Electronics (NPE) 2019 target of $400 billion by 2025. Of this, $190 billion pertains to mobile phone manufacturing and the remaining $210 billion can be addressed through the production and export of laptops and tablets, among others. Other than reducing the dependency on China, there are other benefits such as employment creation by way of 5 lakh additional jobs, adding 1.26% to India’s GDP by 2025, attracting a cumulative inflow of foreign exchange to the tune of $75 billion, and investment of over $1 billion—all of which may result in manufacturing value of $100 billion, according to ICEA.
NPE 2019 aimed at providing fiscal incentives for boosting exports and transforming India into a manufacturing and export hub. And as per the reintroduced PLI Scheme 2.0 for IT Hardware, announced this May by the Ministry of Electronics and Information Technology (MeitY), the “expected cumulative incentive outlay” for IT hardware over six years is about ₹17,000 crore ( ₹16,939 crore—1 July 2023 or 1 April 2024 or 1 April 2025 for six years).
Easier said than done
The global market for laptops and tablets alone is pegged at about $220 billion per year over the next five years. In India, the market size is estimated to continue to be around $7 billion for the same period, according to market research firm International Data Corporation (IDC). But challenges abound since India continues to import 87% of laptops and 63% of tablets, according to a joint report by the ICEA and consultancy firm EY. According to Counterpoint, too, while the laptop/PC market size is close to $8 billion annually, approximately 65% of the 12 million units are being currently imported.
The global manufacturing hubs are limited to a handful of countries with China being the predominant supplier to the world (66% market share (2019); $100 billion in value), according to ITC Trade Map. India’s top five trading partners—the US, European Union (EU), the UK, Japan, and China—consume 71% of the global laptop production. Of this, 58% is accounted by four who are net importers and the remaining 13% is consumed by China, according to IDC. Likewise, these five countries also consume 79% of the global tablet production, including exports—63% by the four who are net importers and the remaining 16% by China.
But given the estimated size of the $220 billion annual global market, even a 15% market share of laptops and tablets could make it to India’s high-ranking exports by 2025, according to EY. Besides, India can export laptops and tablets to its top trading partners comprising the US, European Union (EU), Korea, Gulf Cooperation Council, Indonesia, and Switzerland (UN Comtrade Data).
PC makers including Samsung, Foxconn, Flextronics, Jabil, Wistron, Lenovo, Dell and HP already have a manufacturing presence in India. According to EY, these global companies “have a leaner cost structure, better economies of scale, understanding of core operations and technology and invest heavily in R&D”, and domestic manufacturers can augment the offering of this segment.
As of 2019, India’s exports as a percentage of the world market constituted a paltry 0.015% in 2019, according to IDC. Among the major importers from India are Singapore, the UAE, and China (which comprises roughly half, 46%, of the entire exports). Becoming a global export hub for electronics in general and for laptops, tablets, and desktop computers, in particular, appears to be a formidable challenge. But India has some positives too including the availability of labour at competitive wages, being 80% cheaper as compared to China on a GDP per capita basis, according to World Bank data, and a demographically young workforce in the decades to come, aided by geopolitical factors, according to the International Labour Organisation (ILO).
In its June 2022 report, ICEA asserted that if India devises the right policies to incentivize manufacturing and offset cost disabilities. As highlighted above too, hurdles like high cost of power, tax, and ease of doing business renders India almost 10%–20% less competitive than Vietnam and China, respectively, according to ICEA. The country will also have to address other factors such as the high cost of capital, power, logistics, land development support, R&D subsidy, etc., jointly and independently by the Centre and states.
If these issues are addressed satisfactorily, ICEA expects India to capture one-fourth market share of the global supply chain by 2025. The government’s import restrictions, effective 1 November, are just a step in this direction.
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Updated: 06 Aug 2023, 09:47 AM IST