Hanish Bhatia, Senior Analyst, Devices and Analytics, Counterpoint Technology Market Research
It is estimated that more than a billion smartphones will be sold in India over the next five years. This will drive the number of smartphone users from over a quarter of a billion to more than half a billion in the same time. This will still mean that only 55 percent of the total population will have smartphones. In this 5-year period, the close to a billion smartphones, together with almost half a billion feature phones, that will be sold in India, will consume more than USD 80 billion worth of components. If these are not sourced or manufactured locally, they will need to be imported.
The Make in India initiative has been successful at driving some indigenization of assembly of mobile phones, with 130 units by end 2017. We estimate more than 230 million mobile phones were assembled in India, representing nearly 80 percent of the total domestic demand in CY2017. However, local value-addition (defined as locally sourced components used by manufacturers for local manufacturing) continues to remain low with nearly 7 percent of value-addition happening in India. China which has built manufacturing ecosystem over more than a decade, with local value-addition as high as 70 percent that satisfies not only domestic demand but also export demand. In some countries, like South Korea and Taiwan, the local value addition is also above the 50 percent level. In other emerging manufacturing hubs, such as Vietnam and Brazil, value-addition has crossed 30 percent and sub-20 percent levels, respectively.
Comparison of Production Across Economies
Together, China, India, Brazil, Indonesia, and Vietnam now account for almost 85 percent of the world total mobile handset manufacturing. While India and Indonesia have lately started pushing domestic manufacturing through new initiatives, China, Brazil, and Vietnam have robust policies and frameworks for almost a decade now. As an example, Vietnam offers mobile manufacturers a 30-year tax holiday at just 10 percent tax, which can be further extended to 100 percent exemption. While in China, government offers many incentives for traditional manufacturing industries, including ODMs, in China’s less developed mid-west region. However, in the wealthier coastal zones, government incentives are more targeted toward smart manufacturing, i.e. robotics. Brazil on the other hand offers between 55 percent to 100 percent state tax return apart from a 75 percent reduction in income tax.
India’s Make in India initiative with certain state and center level incentives and Indonesia’s much talked about 30 percent local sourcing rule of LTE devices have seen players starting their domestic manufacturing operations in past couple of quarters in these two growing Asian countries.
With labor wages increasing in China and the possible withdrawal of fiscal incentives in Brazil, due to the tough economic environment, manufacturers have started to rethink their next manufacturing hubs. In such a scenario India is strongly positioned as next big destination in terms of manufacturing as it is the only market in the world which has huge domestic demand as well as being a viable export hub. It is also one of the fastest growing economies. In addition to cheap labor it also offers a rich pool of software developers which can create value addition in terms of local apps and services for the phone manufactures. However, to make this happen we need to ensure a strong component ecosystem in India and subsequently increase the current local value addition, which lies in single digits.
Therefore, it is critical for the Make in India initiative that it enters the next phase and transforms the manual semi-knocked-down (SKD) level assembly and minimal amount of local component sourcing into a large-scale manufacturing ecosystem over the next few years. Currently, most of the components and sub-components are imported and assembled in a semi-knocked-down format. There is hardly any incentive or effort to meaningfully invest in research, design, development, advanced surface mount technology (SMT) led printed circuit-board (PCBA) manufacturing, or attempts to attract key component suppliers to form a robust local manufacturing ecosystem.
Progress and The Way Forward
At present, India is one of the most attractive investment destinations for mobile phone manufacturing. While Indian government also aims to make China like manufacturing ecosystem, Chinese firms are leading from the front under the Make in India campaign. Chinese OEMs were quick to set-up assembling units in India and now they plan to further localize the manufacturing. Several EMS (electronics manufacturing service) players have also come forward considering the volume of opportunity. These players include global manufacturing leaders such as Foxconn, Wistron, Flextronics, Jabil, etc. Overall, the industry has attracted more than USD 0.5 billion capital investments, with a significant investment from Taiwanese ODM – Foxconn, operating under the name of Rising Star India with facilities in Sri City and Pune.
Government incentives and policy roadmap, such as effective duties on key components along with attractive incentive structures, plays a major role in foreign investment in mobile manufacturing. Although, India’s trade treaties at WTO restricts India to create cost differentials through import duties, but, there are several ways to incentivize local manufacturing. Schemes such as M-SIPS, which offered 20–25 percent subsidy on CapEx, played a pivotal role to boost smartphone manufacturing ecosystem. Apart from this, various tax benefits were being provided by state governments. Government incentives coupled with strong domestic demand was the key factor that provided India with the initial manufacturing boost, but achieving higher manufacturing localization will require strong government push.
Counterpoint Research jointly conducted a study with IIMB researchers and collected data that analyzed the current state of mobile phone manufacturing in India. The study provided a practical phased approach to maximize the local value addition by identifying the possibility of indigenization of key components and corresponding sub-components that make up a mobile phone. This phased approach is expected to drive the true local value addition to more than 30 percent by 2020 and potentially to as much as 50 percent thereafter.
For this to happen, high value components such as: PCBA, camera, display, housing, must be completely manufactured in India. This will follow on from the move toward domestically assembling chargers, batteries, and other low-value accessories. To begin with this involves greater investment in industrial design, PCBA design and surface-mount-technology (SMT) level assembly although many of the major silicon components will continue to be sourced from overseas. However, we believe manufacturing of major sub-components of chargers, batteries, and cameras can be accomplished locally. Sourcing and assembling these key high-value components from local manufacturers will drive greater value addition.
However, a PMP program must be accompanied with broad-based economic reforms, investment in infrastructure, clear manufacturing policy roadmap, strong domestic demand coupled with high investor confidence for mobile manufacturing to develop further in India. Also, India must do away with decades old governance hurdles created by unnecessary paperwork and clearances required from innumerous central and state bodies.
At present, bringing the SMT (surface mount technology) capability in India is the next step forward. We can expect manufacturers with high volumes to be early adapters. SMT enables assembling of components on PCB (printed circuit board) – a significant cost component of smartphone. Therefore, we can also expect various component suppliers/manufacturers from China to mushroom around the SMT facilities.
Going forward, Indian smartphone market is expected to grow significantly, from demand as well as manufacturing point of view. Existing players are realigning their market strategies to further penetrate online and offline channels. Also, Jio’s disruption with 4G feature phone can prove to be a game-changer, considering the price sensitive Indian consumers. Hence, we can expect further changes in existing market placement of Indian, Chinese, and Global OEMs. The aggressive approach by existing brands is expected to drive innovation and manufacturing localization in-line with Make in India campaign. Together, existing market forces are expected to benefit the Indian consumers in future.