The ministry of electronics and information technology (MeitY) came out with three schemes recently to promote domestic manufacturing of electronic goods, and especially mobile phones. The Rs 50,000-crore schemes - production-linked incentive, components and semiconductors manufacturing and manufacturing clusters - have received mixed response from the industry, and there has been a sense of hope that India could align itself to the global supply chain and take away market share from China and Vietnam, who control a bulk of the market.
Replicating Maruti's Model
Consider this. During the early days of Maruti Suzuki, it was importing totally assembled cars from Japan's Suzuki which was also the 26 per cent shareholder in the Indian entity. Over the years, Maruti began importing semi-knocked down units (SKD), and later completely-knocked down (CKD) from Suzuki. This led to spike in the imports of auto parts from $4 million in 1980 to $155 million in 1986 - hurting India's foreign exchange reserves.
In 1987, when Suzuki increased its shareholding to 40 per cent, it proved to be a big turning point. How? This led to gradual development of domestic auto ancillary ecosystem in the country when Maruti was no longer dependent on imports to make cars. This model was followed by other carmakers like Toyota, Hyundai, Mitsubishi and others who were joined in by their auto parts producers in the country.
With nearly 90 per cent of the global mobile market controlled by top six players - Apple, Samsung, Oppo, Vivo, Xiaomi, and Huawei - the government wants these brands to expand their presence in India. While Apple, Samsung, Xiaomi, Vivo and Oppo are already assembling phones in the country, they could use the incentives to help them lower the cost of production for making phones in the country. For instance, product-linked incentive alone would result in cost savings of about 6 per cent, the other two schemes would further bring the costs down - bringing the cost structure at par with Vietnam.
The pull factor
The key element in making India a global mobile manufacturing hub is to attract the Big Six. These players already have been doing some manufacturing in the country for the past few years (primarily to serve the domestic demand), they have just started using India as an exports base to serve other countries.
The recent schemes are expected to lure these brands to further increase their presence in India, and benefit the domestic market. How? The brands like Samsung and Apple have a global distribution network, and if they are sufficiently incentivised, they could integrate India to their distribution chain besides bringing in technology and R&D (research and development) capabilities into the country.
Although the government has outlined the need to create five global and five domestic champions through its schemes, it's likely that domestic manufacturers will have to rely hugely on the global players in the initial years. "Domestic companies can initially begin by becoming white label suppliers to some of the global lead firms and, in turn, improve their production systems. With the right policy environment and stimulus, these Indian companies could reach global scale," says a recent ICEA-EY report.
Benefitting from US-China dispute
While the COVID-19 pandemic has deteriorated the already-strained links between the US and China, the Indian government thinks that it has a fair chance of pulling some business out of China. How? The trade dispute between China and the US began in May 2018 when the US government imposed import tariffs on Chinese goods. China retaliated in a similar fashion. Over the past two years, the trade war has transformed into geo-political fight between the two nations with the US raising concerns over China's role in handling coronavirus crisis. It seems that this brawl is unlikely to end soon. As such, China has become the new enemy of the world for being the place from which the deadly virus germinated.
But it's understood that the US-China fight alone would not prod companies to move out of China, and hence, the MeitY, under the leadership of minister Ravi Shankar Prasad, quickly prepared a set of schemes to lure global brands.
Being a large country with sizeable population, India is a large consumer of smartphones. The domestic mobile market is expected to grow at a CAGR (compounded annual growth rate) of 17.6 per cent till FY26 to reach $80 billion, as per ICEA-EY report. But that's not good enough for global brands to expand base in the country. Why? That's because the opportunities in the exports market are huge. For instance, China exported mobile phones worth $224.07 billion in 2019 whereas Vietnam exported $63.1 billion in the same year. India's exports stood at just $1.6 billion in FY19.
"Given the size and scale of investment required to achieve economies of scale and enhance export competitiveness, domestic market alone may not be attractive enough to encourage global lead firms to develop manufacturing ecosystem," said the ICEA-EY report.
But there's a catch. India cannot give direct exports incentives as it would be in violation of WTO norms. "We cannot have a scheme with direct linkage to support exports. The current scheme, which is being challenged by the US, would likely to discontinued, and hence the government has come out with these new incentives," says Bipin Sapra, partner at EY.
One of the biggest underlying reasons to push domestic manufacturing is to have a healthy fiscal position. For instance, India ran a current account deficit of $63.38 billion on account of imports of electronics. That's a huge number to create trade imbalance. Then, there's also fear that the electronics imports would surpass oil imports in a few years if it continue to grow at the current pace.
While reducing the dependence on imports is a long-haul process, the quickest way to minimise the forex outgo is to increase exports. there's a belief that even if India continues to import higher amounts of electronics products, it can cover that up with higher exports value which will ultimately add to the foreign reserves of the country. The National Policy on Electronics (NPE) 2019 has already outlined the target of exporting 600 million units valued at $110 billion by 2025/26. To achieve that target, India really needs to leapfrog, and plug itself into the global supply chain.
About 8-10 years ago, when China took off as a global mobile manufacturing hub, its cost advantage was partially driven by the availability of cheap labour. Same was the case with Vietnam. In the recent years, the overall increase in per capita GDP (gross domestic product) in these countries has made labour expensive. While there's no doubt that a lot of mobile manufacturing processes have now been automated, the industry will still require huge amount of people which is where India is at a gainful position given its young demography and comparatively cheaper labour cost.
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