India is undergoing a technological revolution, with a strategic focus on domestic production of electronic goods. This has led to a surge in demand for electronic components as well. The domestic market for components is expected to increase from $21 bn in 2019-20 to reach $119 bn by 2025-26. Although the domestic production of electronic components has been on the rise, more than 70% of the market demand is still met through imports. The total electronic component imports in FY 2019-20 were valued at $15.4 bn, out of which ~37% were from China.
While domestic production of electronic items has grown ~2.5 times over the last 5 years, the local value addition is only around 7-8%, as most of the critical components are imported. Although India is making headways into passive component manufacturing, we need to build capabilities in producing active components. Around 85-90% of demand for active components such as diodes, transistors, ICs, display panels, etc., is currently met through imports. This calls for the Indian electronics ecosystem to penetrate deeper in the supply chain- move from assembling to component manufacturing and achieve the vision of ‘Atmanirbhar Bharat’ in its truest sense.
The global electronic components market, currently valued at $370 bn is dominated by players from China acquiring a market share of 32.9%, closely followed by Taiwan, Hong Kong, and the USA.
However, in recent times, the global players have been looking beyond China due to rising labour costs and the risks associated with the US-China trade war. A renewed focus to reduce import dependence in the face of supply chain disruptions during COVID has led to more inward-looking policies across the globe. A Gartner survey of 260 companies found that 33% have moved their manufacturing out of China or are planning to do so by 2022-23. We must leverage this opportunity to attract the global supply chains to shift their manufacturing base to India.
Challenges In Component Industry
Some of the major issues that component manufacturers in India face are:
1. Zero Duty Imports
Most inputs are allowed for import at zero or minimal duty. This policy while encouraging low value-added assembling has hampered global investments in component manufacturing. This has lately been addressed by increasing basic custom duty on PCBAs used for mobile phones from 10% to 20%. Tariff structure of TV, Set-Top Box, LED Lights and mobile phones have also been rationalized under Phased Manufacturing Programs to increase domestic value addition.
2. High Domestic Production Costs
The electronics manufacturing industry in India presently faces disability to the tune of 8 - 10%, compared to competing economies across the value chain. Various structural reforms like the introduction of Goods and Service Tax, Single Window Clearance Systems and automatic FDI approvals have reduced the cost of doing business in India. Similarly, setting up of plug and play infrastructure and strategically located Electronic Manufacturing Clusters have reduced logistics costs for the companies.
3. Technological Competence
Indian component manufacturers mostly rely on technology transfers and IP sharing from global companies. There is a need for increased R & D expenditure as well as transparent IPR laws to facilitate technology transfers with greater ease. While government R & D expenditure has tripled over the last decade, there is scope for greater private investments in the sector.
Case Study: Vietnam’s Growth Story
Vietnam started its journey with light manufacturing in the electronics sector after the Doi Moi Reforms of the 1980s. But over the last decade, Vietnam has positioned itself as one of the major component manufacturers. In 2019, Vietnam ranked as the 4th largest exporter of electrical goods and components to the US.
One of the major factors of Vietnam’s success was its ability to attract companies like Samsung, Intel to set up manufacturing in the country. Subsequently, companies in the lower end of the supply chain were prompted to shift their manufacturing base to harness the economies of scale.
Policy Led Approach to Growth
Taking a cue from successful models, the Indian government is pro-actively working to promote component manufacturing in India. The Government of India is incentivizing every stage of the value chain from components to final products through various Production Linked Incentive Schemes. PLI incentivizes the manufacturing of finished goods such as IT Hardware products, White Goods, Mobiles, as well as electronic components. Round 2 of PLI for Large Scale Electronics Manufacturing was solely focused on supporting component players to increase domestic production.
The Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) is aimed at offsetting the disability for domestic manufacturing of components by providing a financial incentive of 25% of capital expenditure on manufacturing.
Besides financial incentives and tax sops, demand push by public procurement of domestically manufactured goods can ensure sustained market, encouraging companies to localize their production. Under the Public Procurement (Preference to Make in India) Order issued by DPIIT in 2017, government offices are mandated to give preference to domestically manufactured electronic products.
Moving forward, the government is focussing more on creating globally competent national champions in the component ecosystem. JV partnerships between global and domestic companies must be encouraged to promote the advancement of indigenous technology.
The future of the Indian electronic component ecosystem looks bright in sight of major investments by global and domestic giants such as Foxconn, Wistron, Samsung, Lava, Micromax, etc. Aided by rampant policy reforms and fiscal benefits, these investments will pave way for self-reliance across the entire electronics value chain in the coming few years. A well-developed component manufacturing sector will set the foundation to build domestic fab ecosystem and achieve the aim of making India a global hub for electronic manufacturing.
This blog has been co-authored by Shivangi Sinha and Rishi Raj Singh.