For the Narendra Modi-led government, which has just completed three years in power, numbers mean a lot. When it comes to the ‘Make in India’ policy aggressively promoted by Narendra Modi himself and his key ministers, the numbers vary across sectors. However, one sector that Mr. Modi can be proud of is electronics manufacturing.
According to data from the Department of Industrial Policy and Promotion (DIPP), FDI inflows into India in 2016 calendar year jumped 18% to a record $46.4 billion, with the services sector attracting the most ($7.5 billion) followed by telecommunications ($5.5 billion). A closer look at the often repeated ‘record’ foreign direct investment flow since the launch of the ‘Make in India’ campaign shows that most of it has flown into sectors such as services, software, and trading, which have traditionally been the largest recipients of FDI. The over 48% increase in FDI into India has not really touched the manufacturing sector, except the automobile sector, which had become a great example of ‘Make in India’ even before the initiative was launched.
The 2016 Niti Aayog report noted that the electronics manufacturing industry has received a tiny part of the total FDI into India from 2000 to 2015 – only $1.68 billion or 0.66% of the total FDI inflow of $258 billion. When answering in Parliament whether ‘Make in India’ has made any impact in the electronics sector in December 2016, Minister of Commerce and Industry Nirmala Sitharaman said that “total FDI inflows in the electronics sector grew from $96.94 million in FY 2014-2015 to $208.39 million in FY 2015-2016”.
Interestingly, a few months before that, Electronics and IT Minister Ravi Shankar Prasad told reporters the FDI in electronic manufacturing has touched an all-time high of 1.23 trillion rupees ($18 billion). Probably, he was referring to the report of the India Electronics and Semiconductor Association (IESA), the group that promotes local manufacture of computer hardware and electronic items. Earlier in 2016, it said that the government had received 156 proposals with an investment commitment of 1.14 trillion rupees ($16.8 billion) – a sixfold jump in proposed investments in the so-called Electronics System Design and Manufacturing (ESDM) sector. But the key word here is ‘proposed’.
Nevertheless, the growth of India’s electronics industry – IESA and EY expect the ESDM sector to grow at a compound annual growth rate of 16-23% to reach $171-228 billion by 2020 – is primarily driven by huge domestic demand for various products, from smartphones to power blocks, as a result of the growing middle class and rising incomes, growing internet penetration that is slowly touching more and more rural areas, and also digitization of India’s everyday life, although sometimes a forced one (for example, the government’s move to withdraw 86% of cash from circulation in November 2016).
At the policy level, the government has been helping the sector to grow by imposing various duty arrangements or schemes, like the Modified Special Incentives Package Scheme (M-SIPS), which provides subsidies and tax reimbursements (the scheme was launched by the previous government much earlier than ‘Make in India’); introducing the Preference for Domestically Manufactured Electronic Goods (PMA) policy that provides preference to domestically manufactured electronic products in government procurement for its own use; and creating the Electronics Development Fund (EDF) – ‘Fund of Funds’ – to participate in funds providing venture capital to companies developing new technologies in the area of electronics and IT.
These two factors, the demand growth and aggressive government policies, resulted in reviving of interest in electronics sectors from both domestic and foreign players. The past two years have seen multiple foreign manufacturers, such as Samsung, Foxconn, LG, Lenovo, Xiaomi, and local players, especially mobile phone makers, set up manufacturing units in India.
During 2015 only, Indian smartphone maker Karbonn Mobile India set up a plant in Noida, Chinese computer maker Lenovo started assembling smartphones at its facility in Chennai run by Singapore-based contract manufacturer Flextronics International Ltd. Smartphone brands Xiaomi Corp. and InFocus partnered with Taiwanese multinational electronics contract manufacturing company Foxconn for manufacturing mobile phones in Andhra Pradesh state, while another Chinese smartphone vendor, Gionee, tied up with Foxconn and India’s Dixon Technologies to manufacture its mobile devices in India. Chinese telecommunications equipment manufacturer Coolpad Group partnered with India’s Videocon Industries for manufacturing about half a million Coolpad devices at its facility in Maharashtra. And these are just few examples.
“In the last 2 years, we have invested more than $500 million as India is the most important market for Xiaomi’s vice president and the managing director of Xiaomi India, told BRICS Business Magazine. “In 2015 and 2017, we announced two factories in India in partnership with Foxconn. With our new manufacturing units, more than 95 percent of Xiaomi’s smartphones sold in India are now manufactured in India.”
Jain adds that ‘Make in India’ has helped Xiaomi in achieving quality and efficient production at a lower cost, and the cost benefits can be passed on to the consumers to help the company cross $1 billion in revenue in 2016.
Vikas Jain, co-founder of Micromax, one of the largest Indian phone manufacturers, stated a year ago that one of the key focus areas for the company “will be to 100 percent make in India. With an already functional plant at Rudrapur, we are now looking at adding three more plants with an investment of $460 million as well as creating job opportunities for over 10,000 people by 2017”. However, Micromax did entertain the request to comment on company’s achievements on this front.
Over the past two years, more than 40 new mobile manufacturing units and 30 components or accessory units started operations in India, according to Electronics and IT Ministry data, with domestic production of phones growing from 110 million units (valued at $8 billion) in 2015-2016 to 175 million units (valued at $14 billion) in 2016-2017.
But the actual scale of the ‘MakeMake in India’ campaign in electronics, as well as its potential and its impact on India’s economy was questioned when Apple came to India with a proposal to manufacture its smartphones there. The proposal came with – a request for tax exemptions for setting up a manufacturing unit. Since the end of 2016, Apple officials were in talks with the government regarding concessions such as a 15-year customs duty holiday on imports of iPhone kits, new and used capital equipment, and consumables that the California-based company has sought.
While at the time of going to print, no official decision has been communicated to Apple by the Indian government (hence, Apple India’s spokesperson refused to comment on the matter as well as company’s further plans), media reports suggest that the government might have rejected Apple’s demands for tax exemptions on the grounds of the new tax regime that is coming in force in India in July 2017 – the long anticipated goods and services tax (GST) regime that is going to replace more than 10 indirect taxes charged by the central government and state governments.
Presently, the Indian government had earlier levied BSD and CVD duties on all inputs for manufacturing mobile handsets, except chargers, batteries, and headphones. Since Apple does not intend to source its components locally, it had asked for the removal of all forms of duties, pre- and post-GST, on completely knocked down and semi-knocked down units of its iPhones that will be assembled in India. The government had introduced the Phased Manufacturing Programme for mobile handsets to increase domestic value addition. Under PMP, since 2016, headphones, chargers and batteries are subject to a CVD of 12.5% on imports while domestic manufacturers’ imports are exempted from BCD and CVD, and excise duty of two percent is levied on domestically manufactured headphones, chargers, and batteries. For the current fiscal budget, the Ministry of Electronics and IT had proposed that such rules should be extended to five more sub-assemblies of mobile handsets to promote the manufacturing of these components in India, but the revenue department did not accept it.
According to industry players, what is important in Apple’s case is that the company was not just trying to get duty and tax exceptions, but, following a simple investor’s logic, was trying to get assurance of policies’ clarity and continuity that would make large and long-term investments viable. India is known for its unpredictability – the rules, the policies, and even laws can change overnight (some of the largest telecom operators have suffered big losses when India cancelled earlier issued telecom licences due to allegations of corruption).
According to the Niti Aayog report, India’s domestic consumption of Electronic Hardware in 2014-15 stood at $63.6 billion. Imports accounted for 58% of this consumption. Experts and industry players argue that even with ‘Make in India’ working in full force in electronics manufacturing, the imports of electronic components will not decrease – the reason is simple. The so-called manufacturing that is taking place in India currently is not actually manufacturing, but assembling with most of the components still being procured in China. Experts point out that the local value-addition as a result of manufacturing of the sets in India is often less than five to six percent.
“We estimate more than 180 million mobile phones, worth some $9 billion at retail value, will be assembled in India in 2016. This is from a total of 267 million mobile phones worth $13 billion expected to be sold in India in 2016. However, of this total, only an estimated $650 million worth local value addition will be possible. … This means that the overall localization rate will be just under six percent of the total value,” a joint report by IIM Bangalore and Counterpoint Researcher says.
It adds that China, which has built its manufacturing ecosystem over more than a decade has local value addition as high as 70%. In countries like South Korea and Taiwan, the local value addition is above the 50% level, while other emerging manufacturing hubs such as Vietnam or Brazil have reached levels of 30 and 20% respectively.
Currently, the handset makers in India import semi-knocked down (SKD) units, which include the circuit board and the microchip set of the mobile, accounting for more than half the value of the phones. Most of the other components, including the display screen, Wi-Fi antenna, and mic are also imported and then soldered together in India. To this, the ‘Made in India’ components – battery, charger, USB cable, and earphones – are added, and then the finished product is put into the box along with the accessories and the instruction manual.
CMR’s April 2017 report notes that Samsung, Intex, and Foxconn were the top three original equipment manufacturers (OEMs) in India by the end of 2016 while Foxconn was the largest contract manufacturer in India (Foxconn’s Andhra Pradesh facility makes phones for Asus, Gionee, InFocus, Microsoft, Oppo, Xiaomi).
“The positive thing about ‘Make in India’ – attracting foreign OEMs to assemble/manufacture in India – has been progressively achieved. However, at the same time, it has not resulted in the strengthening of domestic brands. There is a need to revisit the initiative that focuses on empowering domestic brands within the global trade regime,” said Faisal Kawoosa, principal analyst of industry intelligence practice at CMR. “The entire ‘Make in India’ program should have elements that not only attract manufacturing but also gives impetus, especially for local brands, toward building a thriving ecosystem. Otherwise, we are seeing non-local brands, especially from China, gaining market at the cost of Indian brand share.” added Kawoosa.
M. N. Vidyashankar, the president of the India Electronics and Semiconductor Association (IESA) agrees. “We see a lot of investments flowing into the country. But if you ask me how much of value addition is taking place… There is a difference of ‘Make in India’ and ‘Made in India’ where ‘Made’ can be seen as an acronym. ‘M’ for making, ‘A’ for assembling, ‘D’ for designing, ‘E’ for engineering. In terms of ‘Make in India’ and assembly, we are doing well, but we are yet to get to make an impact in terms of design and engineering. Things are going to happen, but we will see this in the year to come,” Vidyashankar told in the interview with BRICS Business Magazine.
If what is happening in India today is not really what ‘Make in India’ aimed to achieve, what’s next, you ask? Developing the electronics components manufacturing ecosystem, the industry players answer.
There are enough reasons for electronics brands to manufacture in India, and with India changing rapidly, it becomes more and more realistic. However, achieving full-cycle manufacturing with a high percent of local value-addition will take time, industry experts agree. “When compared with other manufacturing destinations, India has a huge workforce, an emerging supply base, and availability of natural resources required for production, such as iron ore and aluminium, cotton, and coal for power generation. All these factors help India become an attractive manufacturing destination,” Manu Jain of Xiaomi India believes. “But some of the challenges that India faces include lack of infrastructure, inefficiencies in transportation, low internet speed, high power costs, and tax reforms. The differential tax rate in different states is one of the challenges. India’s tax rates currently are much higher than some other countries. There have been discussions on enhancing transparency in respect to taxation and checking tax base erosion in India. It is not about lower tax rates but responsive tax administration that provides certainty and consistency in tax treatment. We hope GST will be able to address the challenge”.
Sanjay Joshi, country manager of Edimax India (the company produces wireless network equipment), says the company has recently started contract manufacturing of some of its products – namely powerblocks, in India, while the rest is produced in China and Taiwan. “There are couple of reasons why we want to focus on SKD manufacturing. We are able to get the products in much quicker time than we could get them from China or Taiwan, and in the case of power banks, with growing market and shrinking margins, as it has already become a mass product, time to market becomes very important,” Joshi told BRICS Business Magazine.
At the same time, he adds, products like pen drives where the main component is memory, cannot be manufactured in India as 80% of the cost of a pen drive is the memory, which attracts high duty when imported in India. “This is why things have not been moving so fast in electronics, although I see a lot of mushrooming of power banks, LED monitors, phone sets manufacturers, which is way ahead. I’ll tell you, these are many factories going bankrupt in China and they are blaming the Indian prime minister for taking away the jobs,” Joshi adds.
Imran Merchant, product head at Fox Mobiles, India’s indigenous feature phones maker, agrees India is growing fast in phone making because certain duties were waived off, but India still lags behind more mature manufacturing economies like China. “The kind of manufacturing that is happening in India is purely assembling. But the more big companies set up shops here, the faster the ecosystem grows, and people will start manufacturing components here,” Merchant says, adding that India cannot take the same path as China did. “India has to find its own path, and although manufacturing is an importance part of it, just manufacturing, like in the case of China, will not work in the case of India. You will see that eventually local players will be more focused on some other services, like innovations or design, and large foreign players will be more focused on outsourcing lower-end jobs to India.” India has yet to overcome certain challenges, despite the overall investment climate, which has somewhat improved in the past few years, along with the industrial base and quality of workforce. India still has a long journey to attract more investments that could also become quality rather than quantity investments.
“If you are serious about making the ‘Make in India’ initiative a real case, you should start with making free trade zones; you have it in Dubai, in Singapore. Whatever you bring there or take out of there – it attracts no duty. Also, they (the government) should increase export incentive, and then there will be enough reasons for factory setups and creating employment. They should start offering free infrastructure, with free power, water, no political interference and corruption; that is what will work for the electronic industry,” M. A. Mannan, country head at Corsair India (manufacturer of PC components and peripherals), said in a conversation with BRICS Business Magazine.
M. N. Vidyashankar reminds us that 20 years ago, when India’s automobile manufacturing sector started developing and global players started coming in, the ecosystem was not there. It took two decades to build it. “Today, this is a total transformation. Every big automobile player in the world has a base in India. Two year ago India was the largest exporter of automobiles in the world. Yes, China produces more, but India exports more cars than China,” he says. “Now, in electronics, we need a component-based ecosystem to develop, and if we get big names like Apple and others, it will be a big boost.”
