07 February, 2024
During a panel discussion at the recently concluded Source India, organized for the 13th time by the ELCINA in Chennai, my friend Josh Foulger asked me, "What does India bring to Global Value Chains?" The context of the discussion revolved around electronic components and was attended by Deki Electronics.
India has done well at the ongoing 4 X 400 meter relay of electronics manufacturing. The first leg has been the “large scale assembly” of mobile phones, now followed by LEDs, air conditioners and hopefully, soon IT hardware. This very positive, extremely significant achievement has surprised many. This would not have been possible, but for the twin policies of a carrot, in the form of a robust PLI scheme and the stick, wielded by a 20% import duty on mobile phones.
As the PLIs will soon enter their end years, demand for extensions not withstanding, the baton needs to be carried forward by the development of a global scale electronic components manufacturing ecosystem. This will require India to invite, nudge, cajole, and persuade global value chains to shift, at least partly to India. The required carrots and sticks are under serious consideration.
This leg of our relay race should be followed closely by the establishment of a “product design” ecosystem. Indian environment requires customized design solutions in order to address the issues arising out of the quality of our electric supply, reliability considerations based on our climate, our culture of use of such equipment and of course, our desire to buy everything at the lowest cost possible. A combination of this customized requirement at large scale and affordable prices, not only for India but for the global south makes the case for such design viable.
A good example is a robust tablet that serves as the key tool for inclusive, best in class education and information in several vernacular languages. Anyone who gets this right can be assured of a constant demand of several million sets per annuum. At the right price, this could be the next freebie forming a part of election manifestos in India and beyond. Our industry leader Mr. Ajai Chowdhry’s EPIC will soon be launching such a tablet.
Designed in India, for India will also trigger the demand for components made in India. Value chains tend to be racist, with the Japanese preferring Japanese suppliers and the Koreans preferring their own. This may sound politically incorrect, but this is the business reality, whether it’s the automotive industry or electronics.
The fourth leg of our relay race requires the emergence of global scale “Indian champions”. We will not achieve our potential of at least a 15% share ( proportionate to our population) in global electronics, unless we have our very own “Sony Electronics, Panasonic, Samsung Electronics and Midea Group” of the world.
We have achieved significant growth, a CAGR of 23%, in electronics manufacturing during the past few years. The current 100 Bn $ is now poised to triple to 300 Bn$ by 2026. Those who doubt this number may be well reminded that this ambitious target will get us merely to an approximate 200$ per capita, well behind the world’s current average electronics consumption of 300$ per capita.
300 Bn $ of electronics production will require a minimum of 150 Bn $ of electronics components. The component requirement based on the product mix that constitutes the current manufacturing of 100Bn $ of electronic products is 51.7%. Industry estimates suggest that semiconductors form 60% of this component requirement. The bold policy measures formulated to attract semiconductor fabs and assembly units to India will aim at serving a part of this 90bn$ demand.
The other 60 Bn $ of components, the non semi conductor components are described by the Components Task Force (CTF) at ELCINA as PEPCAMS = PCBs, Electromechanical components, Passives (Capacitors, Resistors, Inductors), Connectors, Active (Discretes), Magnetics and Sensors.
The manufacturing of these components is highly capital intensive, with ratio of investments to turnover being 1:1 to 1:3. The value addition is a juicy 30-45%. This high value add also means that the impact of disabilities, in direct proportion to the value add, is high. Hence the incentive policy framed to attract such manufacturing will have to be higher than that offered for assembly of mobile phones, wherein the value add is estimated at 10-15%.
This (envisaged) incentive will certainly be money well spent/ invested. Each Rs 1 Crore of turnover for an electronic component manufacturing facility creates 5 direct jobs. These are medium to high skill jobs leading to a sustainable long term career for the incumbents. Aiming at indigenous manufacturing of just half the required PEPCAMS components will mean 1.2 Million such jobs.
Failure to establish adequate manufacturing of these components will result in overdependence on imports for this demand of 60 Bn $. Lack of locally manufactured components may also result in the erosion of the scale of assembly that we have painstakingly achieved. On the other hand, manufacturing at global scale will open the doors for a large export opportunity.
Given the nature of components manufacturing, a set of policy measures that mitigate the impact of disabilities (in proportion to the value added), subsidize the large investment required (30-40% SPECS), encourage large scale job creation (employee linked) and enable technology transfers are urgently required.
In addition to these components, there are a few low hanging fruits such as parts and sub assemblies for mobile phones. A quick set of policy measures to attract the assembly of battery packs, camera modules and displays will bring in quick results.
The good news is that Indian entrepreneurs and a few multi national companies have been making these components in India for the last four to five decades. A large number of SMEs during the early 80s lined up for manufacturing licenses at the then Department of Electronics (DoE) resulting in an almost “Atmanirbhar” consumer electronics industry. Audio systems, TVs and VCRs were designed and assembled in India using almost all indigenously manufactured electronic components.
ITA-1, WTO brought the import duties on almost all components to zero by 1995, delivering a mighty blow to most existing manufacturers of electronic products and components, converting many of them into traders.
The few who survived, have during the last few years begun to expand and in some cases, diversify. They have been well supported by policy measures such as MSIPS, EMCs and SPECS. This entrepreneurial spirit, having survived a zero duty onslaught is now hungry to play at global scale. They are the ideal joint venture partners for any GVC member considering India.
No other manufacturing destination can offer the 1.2 Mn ++ work force required for such a shift. The labour is available in and around several industrial locations, at a cost much lower than most competing nations. The minimum wages in many Indian states are today, one fifth of Chinese wages. The productivity is certainly lower. But this is a work in process. Many companies have undertaken successful projects aimed at enhancing labour productivity. New clusters have begun providing in house worker hostels and training facilities.
Industrial land, though expensive is adequately available. Industrial parks and clusters also offer built up factory sheds and floors on lease at reasonable prices. Most states now offer available industrial plots on an app, offering transparency to the allotment process.
Green field townships and industrial corridors, alongside new expressways aim to offer world class industrial infrastructure.
This is certainly a work in process, but you would agree that there has been significant improvement during the last few years.
Indian talent has been the reason that a majority of fortune 500 companies have set up their design, R&D facilities in India. This talent has to now be nurtured and directed to serve product & component design and manufacturing for India.
Component manufacturing involves several technologies from fields as diverse as mechanical, chemical, thermal, pneumatics, electrical, software, automation and of course, electronics. This wide canvas is best served by the diverse talents and technologies that India has to offer, at scale.
Young India is hungry.
Manufacturing needs deep resolve. It needs ambition, very different for the one required to write codes for someone else or to advise investment bankers. The entrepreneurial energy available in India, not only in the metros, but also in tier 2 and 3 cities needs to be tapped to engage with GVCs as partners, suppliers and service providers.
DELTA is the difference that India offers.