On Monday, Prime Minister Narendra Modi and South Korean President Moon Jae-in, both wreathed in smiles, snipped a ribbon and opened Samsung India’s vastly expanded factory in Greater Noida that will be able to turn out over 120 million mobile phones annually. That’s double current capacity and will make the Noida plant Samsung’s biggest mobile-phone manufacturing site globally. The plant will also make TVs and air-conditioners and serve as a key Samsung export hub.
Does Samsung’s ambitious blueprint for the Indian market mean India’s electronics industry is starting to catch up to rest of the world? As always, this country is a pile of contradictions. At one level, India’s legendary love for gold has been overtaken by its yen for shiny toys like mobile phones, iPads, cameras, automobiles and consumer durables such as washing machines and air purifiers that now come loaded with electronics. The result of this new ardour is that India’s electronics import bill has doubled in five years to $57 billion. By contrast, India’s dollar spend on gold imports amounted to just $34 billion in the last fiscal year, having shrunk 40 per cent from a $56-billlion peak in 2012.
The booming demand for electronic goods might have been great news but for the fact that India’s electronics industry is still at the toddler stage. It’s only just moved from crawling to taking baby steps. For the most part, components for goods like mobile phones are imported and assembled here. Currently, domestic value addition in manufacturing is less than 50 per cent for appliance and consumer electronics — otherwise known as ACE — products and just 7 per cent for smartphones, far below the global average, according to a PriceWaterhouse report. Hence the huge outgo of foreign exchange.
And, by the looks of it, India’s insatiable desire for electronic goods is only going to rise even more steeply. That’s why the government is urgently looking for ways to capture a larger share of the electronics manufacturing value chain. It’s framing a National Electronics Policy expected to be unveiled in the near future that’s almost certain to prescribe an export-led strategy. Also, it first hiked and then reduced duties on ‘open cell panels’ which are the costliest component in LED TVs. After the duty reduction many TV manufacturers are now expected to assemble TV panels in this country.
Mobile appetite
There’s real urgency for the government to move quickly to boost the domestic components industry to prevent demand for phones and consumer durables pushing the electronics import bill stratospherically higher. For instance, look at the challenge posed by Indians’ insatiable mobile-phone appetite. As recently as 2014-15, this country made just 6 million mobile phones but that number exploded exponentially to hit 175 million in 2016-17 and the figure is expected to grow even faster into the 2020s.
Still, the government can take heart from Samsung’s massive expansion plans in India and China's Xiaomi, which this year beat Samsung for the top spot here, is encouraging its suppliers to open shop in this country. Xiaomi's also making printed circuit boards for its phones in India, which helps the company keep costs under control. That also means greater value addition taking place in this country. Xiaomi’s also aiming to launch its ‘Made in India’ TVs next month. Rising labour costs in other markets like China and India’s huge and still relatively untapped large domestic demand are pushing global companies to look far more seriously at this country.
No other Indian sector has seen demand rocket faster than that for mobile phones. But other sectors are growing rapidly. Earlier this year, Panasonic added refrigerator manufacturing to its Haryana plant where it also makes air-conditioners and washing machines. Similarly, Voltas has just tied up with Turkish firm Arcelik to manufacture refrigerators, washing machines and microwave ovens. Its plant is expected to start production by mid-2019.
The importance of electrical goods is best explained in a government report which pointed out that: “Between electrical and electronic goods, the difference is getting increasingly blurred since the conventional electrical products frequently use electronic parts in them.” Demand for refrigerators has grown in the last five years, from 8.5 million in 2013 to 12.2 million in 2017. “The ACE market is expected to grow at a compound annual growth rate of 9 per cent between 2017 and 2022,” says Manish Sharma, president, Ceama (the Consumer Electronics and Appliances Manufacturers Association).
Value-addition
But how does India turn into a fast-moving player that can grab much larger domestic value-addition and also become an export giant? Electronics manufacturers note it’s tough to be globally competitive because of inefficiencies of the Indian system that add 10 -12 per cent to manufacturing costs. To overcome logistical issues like poor roads, electronics manufacturers say they will need to be organised in clusters with suppliers nearby. Andhra Pradesh and Karnataka, for instance, are both looking at creating electronics industry clusters. Andhra Pradesh also has set a target of creating 200,000 electronics jobs by next year which it’s widely conceded the State is unlikely to meet.
To rapidly scale up the domestic components industry, experts also say that we need to further promote large-scale demand to provide the economies-of-scale needed to create a business case for domestic manufacturing. We need to improve cost competitiveness by either lowering the cost of capital or reducing operational costs. Lower input cost will lead to domestic manufacturing becoming cost-competitive and commanding a higher share in both the domestic and export markets.
Ceama, meanwhile, says it wants to increase local value add by 2x-3x but needs government help. It’s urging temporary tariff barriers to develop the supply base, duties to ring-fence imports from FTA countries and correcting GST aberrations hurting domestic manufacturing.
Vinod Sharma, Managing Director, Deki Electronics, points out: “In defence, for instance, China sets up a company and offers it an assured market. In India, government officials say we will test but no guarantee we will buy”. India is still a minnow in the world of electronics production. The world market is reckoned to be around $2 trillion. Our domestic market is a comparatively paltry $65 billion. Can we turn into a giant? We can’t afford not to be. We’re too large a country and too hungry for electronics and the only solution is to create as much value as possible on our own shores.