Can India sustain electronics sector's spark?
As one of the largest markets in the world, India was on the radar of several global electronics giants for years. It was the massive disruptions in the global supply chain due to strict lockdown measures in China induced by the Covid-19 pandemic that accelerated this focus on India.
The first signs of the change came from Apple Inc — which began assembling the flagship iPhone 11 model in July 2020. Just a few months into the pandemic, its supplier Foxconn started this process for the first time in India at its factory in Sriperumbudur, Tamil Nadu.
Several electronic manufacturers are looking to India in their effort to gradually diversify from China, the world’s largest manufacturing hub. Industry veterans say that the country is set to witness a new dawn in the sector. After all, the global supply chain for electronics is concentrated largely in south-east Asia.
In addition to the sheer market size that India offers to companies, its massive workforce, and vibrant presence of micro, small and medium enterprises could come to the country’s advantage despite tough competition from countries like Malaysia, Vietnam, and Indonesia.
Since 2020, giants like Cisco, Taiwan’s Delta Electronics, Apple suppliers Pegatron and China’s Luxshare have entered India to manufacture a range of electronics devices, including wearables, hearables, network switches, and routers. Global chip giant Micron is setting up a semiconductor fabrication plant (fabs) in Gujarat, while Foxconn is scouting for a location after exiting a joint venture with Vedanta.
Three years down the line, India is an integral part of Apple’s ecosystem with its smartphone exports from the country touching 7% from a mere 1% in 2020, according to various estimates.
While Cisco will launch production through a contract manufacturer in Chennai in the next few months, Luxshare is waiting for the nod for manufacturing having acquired a defunct Motorola facility in Tamil Nadu.
Foxconn has expanded its Sriperumbudur unit massively to employ over 35,000 people to assemble several models of Apple iPhones and is now spreading into Karnataka and Telangana where the Taiwanese major will not just assemble smartphones but manufacture high-end electronics components.
While traditional players in the electronics sector like Tamil Nadu, Karnataka, Uttar Pradesh, and Maharashtra will gain immensely from the shift, there are several obstacles in this path. There is a need for policy intervention, at this nascent stage, to ensure that growth is not limited to assembling units.
Policymakers should also direct their attention on creating an ecosystem that enables component manufacturing. Infrastructure and skilling the workforce for potential jobs in the sector is also paramount.
A step in the right direction
The Union Government has stepped in by rolling out schemes like production-linked incentive (PLI), Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), in its bid to become atmanirbhar (self- reliant), by utilising the opportunity offered by the pandemic.
Under PLI-1 and PLI-II for large-scale electronics, a total of 32 companies have been approved, attracting an investment of Rs 6,887 crore from April 2020 to June 2023, while Rs 12,000 crore has been invested under SPECS.
The PLI scheme has generated Rs 3.30 lakh crore worth of production nearly half of which is exports. It has provided jobs to 62,173 people, prompting the Union Government to set a target of Rs 2.63 lakh crore in electronics export in FY 24. The PLI scheme tenure from April 2020 to 2025 is expected to contribute production of more than Rs 8 lakh crore and generate jobs for 2 lakh people.
The pandemic and government policies also encouraged several domestic players to find opportunities in the traditional sector. These industries have seen immense growth with the proliferation of mobile phones and other devices, with notable among them being the Tata Group.
“We are seeing a healthy pipeline of investments in the form of expansion of the manufacturing capacities as well as value chain integration by bringing supplier ecosystems to the state of Karnataka. Tata Electronics have also applied for initiating a pilot project in an industry of national importance,” said Karnataka Information Technology and Biotechnology Minister Priyank Kharge said.
Other Indian electronics manufacturers like Lava, Micromax, and Dixon continue to produce smartphones and are ramping up manufacturing to cater to the growing market needs.
Buoyed by the opportunity and the trust imposed by firms on India’s massive labour force, the government has now set a target of achieving $300 billion in electronics manufacturing and exports by 2026. Currently, India’s exports constitute just 1.2 per cent of the global electronics market.
Union Minister of State for Electronics and Information Technology Rajeev Chandrasekhar said the government’s objective is to strengthen and diversify India’s electronics manufacturing ecosystem, with a focus on increasing the country’s participation in the global electronics value chains.
“The PLI scheme's success and popularity underscore the growing interest and confidence among companies in India’s electronics manufacturing potential,” he said.
Comprehensive ecosystem
While schemes like PLI will go a long way in bringing fresh investments with companies getting pay-outs from the government based on their production, industry experts say time has come to move up the value chain by going beyond assembling phones and getting into component manufacturing.
One of the biggest criticisms of the PLI scheme is that it focuses more on assembling, neglecting the need for creating an ecosystem for the industry.
The problem with assembling, insiders also added, is that it brings in low-paying jobs. Design, on the other hand, ensures high-paying jobs and leads to creation of a robust ecosystem.
Pointing out the need to shift attention to designing components, Ajai Chowdhry, co-founder of HCL, explains in the absence of a complete supply chain, many companies might move out once the schemes are withdrawn or come to an end.
Terming PLI as a “solid policy”, he added, “besides production and job creation, PLIs should also create supply chains, complete ecosystems, and ensure component manufacturers flock to India. If it is just about manufacturing volume, it is not a long-lasting policy,” he told DH.
“The biggest benefit that we have is that India is a huge market. If we nudge a bit and push with extra incentive, we will get the result,” Chowdhry added.
While the PLI does create capacity in India, Angshuman Bhattacharya, Partner and National Leader (Consumer Products and Retail) at global consulting firm Ernst and Young, India, said concentrating only on assembling might result in creating overcapacity that could hurt the market.
“We should be looking at component manufacturing, design, and innovation to increase our margins, by making full use of technology. We need to focus on value-addition and create an excellent ecosystem around the front-end, which is assembling products,” he added.
Only when the value chain moves up and technology is leveraged, will MSMEs and start-ups be able to tap into the innovation ecosystem. “We should move to IPR in terms of technology to create the right supplier ecosystem and emerge as a viable alternative to China and Taiwan,” Bhattacharya said.
“India should get a major portion of the diversification plans of global firms though Vietnam is also in competition. The export market is left largely untapped and even in the domestic market, a decade of growth is ahead of us,” Bhattacharya told DH.
Another industry expert, who did not wish to be named, said proprietary manufacturing is what India should excel in. “Each of the components will go through several quality standard tests and any malfunction will need a series of tests. India possesses the skill for component manufacturing, and we should excel in sectors like display, core processors and all mechanical components,” he told DH.
Pankaj Mohindroo, Chairman, India Cellular and Electronics Association. (ICEA), too agreed that PLI is a short-term measure that enables competitiveness but said the country’s electronics sector is on the right track as assembling is the first step towards emerging a global hub.
“Based on the foundation laid by smartphone manufacturing, we are doing over 20 per cent of the world's volume now, besides catering to other segments as well. The right way to start is assembling and then venture into component manufacturing, which is already happening,” he said.
Former RBI Governor Raghuram Rajan recently emphasised that a key deficiency of the scheme is that the subsidy is offered for finishing the phone in India and is not based on how much value is added by manufacturing in India.
Chowdhry also stressed on “real value addition” and designing components in India, while regretting that the percentage of value addition right now is very low at 8 per cent.
“I appreciate the fact that there is a clause in PLI for the telecom industry which provides an additional percentage for companies that design in India. This is the way forward. The inclusion of an extra percentage of incentive if the design is made in India is good,” he said.
Though the Union Government criticised Rajan for his statement, it is already discussing ways in which companies can increase the local value addition in products that are assembled in India to 60 to 80 per cent in the next five to ten years.
Several industry experts believe that assembling is the first step towards setting up a global electronics manufacturing hub. Mohindroo said, “Based on the foundation laid by smartphone manufacturing, we are doing over 20 per cent of the world's volume now, besides catering to other segments as well. The right way to start is assembling and then venture into component manufacturing, which is already happening.”
He added that companies like Foxconn, which plays a major role in the global supply chain of electronics, getting into component making in India is the fruition of hard work that has been put in for the past few years.
Mohindroo also said India is not into import substitution and it is not something that the country is aspiring for. “In fact, we would not mind even if imports grew three times of what they are now. Because China's import is USD 600 billion. And we are just starting now, and we have to go step by step,” he added.
Localisation
To promote localisation, ICEA has embarked on the task of creating 100 champions by inviting big brands to venture into the sector and by encouraging existing players to increase their footprint.
“We need domestic firms for sustaining and expanding the ecosystem over time. We want to create 100 champions who can compete globally who should grow multi-fold and compete across the world,” Mohindroo said.
The electronics industry currently needs domestic captains to fuel growth and allow MSMEs to leverage the same as in the case of automotive and pharmaceutical sectors.
“Only those with financial muscle can create the demand. Once the big players from the domestic sector come in, the whole ecosystem will be created. If there is one large scale employment sector, the MSMEs, and start-ups benefit,” Bhattacharya added.
India could also impose a few conditions on foreign firms entering the country, said K E Raghunathan, Chairman, Association of Indian Entrepreneurs. The country could make it mandatory to tie up with a local manufacturer, to commit a certain level of production for the domestic market and increase value addition.
“Unless we increase localisation, the import and export trade deficit will continue as companies will import components and export end goods. This is of no use but for providing employment. The government should come up with attractive incentives for companies that can promise to increase their value addition to about 50 per cent,” Raghunathan said.
He cited the example of several South Korean firms setting up factories in Tamil Nadu with Indian partners. “Unless the companies tie up with local MSMEs and start manufacturing components, mere assembling or manufacturing will not help,” he said.
However, Mohindroo red flags the idea, saying such mandates won’t work with global companies as they have other choices too.
“If the company wants a local partner, then it is fine. But this should not be by regulation because we need these investments badly, and we cannot be choosy. We need more companies to increase our exports which is less than 2 per cent globally now,” he added.
Industry sources said besides accelerating localisation, the government should set real-time targets for companies that are benefitted under the PLI as taxpayers’ money is involved. “Ministers concerned should review the targets every three months. The government as an institution should monitor the progress,” an insider said.
Skill development
Governments, both at the Centre and states, should focus on skill development of youngsters to tap the huge number of jobs that the sector will create as more companies make India their home, said Mohindroo and Raghunathan.
“The state governments should pitch-in to train their youngsters to work on a modern assembly line. These jobs need semi-skilled labour, and they need to be created in huge numbers,” Mohindroo said.
Upgrading training centres that create skilled workers that suit the needs of Industry 4.0, stressed Raghunathan. “We should focus on human capital too,” he said.
While India has enough skilled persons in electronics design, semi-skilled workforce for electronics assembling and manufacturing is very less, said skill development expert Anbuthambi Bhojarajan.
“These companies recruit diploma, ITI, and plus-two students, especially girls, for such jobs. We need to focus a lot on these semi-skilled workers and give these training programmes the much-needed impetus,” he said.
Another focus area is tweaking of labour laws to allow flexible working hours for the workforce in the sector as the industry says India is now competing with south-east Asian countries Malaysia, Indonesia, and Singapore which allows 12-hour shifts.
“We need to be flexible when we aspire to be a manufacturing hub. The industry provides a very good environment with air conditioning facilities and the workforce should be allowed to decide. If people are willing to work for 12 hours, why not. The objective here is not to increase the overall working time, but to ensure less disruption,” Mohindroo added.
However, A Soundararajan, TN state unit President, Centre of Indian Trade Unions (CITU) said the Union and State governments should stop “watering down” the existing labour laws to benefit the electronics manufacturers who are setting up shops in India.
“Labourers have the right to form unions or associations under the existing labour law. We should be given that right. But no new company that has come in now allows trade unions which denies us the right to represent,” Soundararajan said.
About 70% of the strikes by labourers these days pertain to their right to form labour unions. “Moreover, the income deficiency that arises due to inflation should be neutralised,” he said, flagging “huge recruitment” of non-permanent labourers in various names as another major problem faced by the work force.
“The contract labourers are mistreated in many places. Their well-being should also be ensured. Such massive recruitment through contract isn’t a good development,” Soundararajan added.
An industry insider also said the governments should also focus on hard infrastructure besides the soft infrastructure provided to companies.
“We need to make electronic manufacturing clusters with facilities like dormitories. It is only then that the workforce will be charged up and feel very comfortable and able to reach their workplace within a few minutes. Hard infrastructure is necessary for the industry. We should look at the China-model,” he said.
(With inputs from Gyanendra Keshri and Ajith Athrady in New Delhi; Bharath Joshi in Bengaluru)
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