The new phase of the Indian mobile manufacturing industry

Here’s a sneak peek into the current state of the Indian mobile manufacturing industry.

By the ComConnect Consulting research team

The Indian mobile handset manufacturing industry, which includes smartphones and feature phones, is on a roll. According to data shared by the Indian Cellular Association (ICA), India is now the second largest mobile phone producer in the world by volume, after China. The annual production of mobile phones in India increased from three million units in 2014 to 11 million units in 2017. As more and more devices are manufactured locally, this improves employment opportunities in India and helps reduce the import bill.

The booming mobile handset market in India presents an attractive opportunity to manufacturers. Major global firms are looking at India as a regional hub for manufacturing and sales – to cater not only to the Indian market, but to the SAARC, the Middle East and African markets as well.  The government of India’s recent notification on the Phased Manufacturing Programme (PMP) to promote the indigenous manufacture of cellular handsets has provided a fresh impetus to this sector.

India’s large domestic market is also an attractive proposition for global manufacturers looking at new avenues for growth. In China, the widespread design and manufacture of low-end electronics seems to be slowing down, as the cost of engineering and labour is steadily rising. On the other hand, India has a high availability of skilled manpower at much lower wages.

However, industry members need to analyse the current shake-out in the mobile manufacturing market, before making additional investments.

Changing market dynamics
According to the latest research from Counterpoint’s Market Monitor service, India’s overall mobile phone shipments grew 48 per cent YoY in Q1 2018. The market was driven by the feature phone segment, which doubled in Q1 2018 due to strong shipments of Reliance JioPhone, while growth in the smartphone market remained flat, YoY.

The first quarter of 2018 kicked off with some brands sitting on a pile of inventory post the festive season in Q4 2017 – a situation that continued throughout the quarter as the industry moved to a full-view display portfolio. This quarter was also marked by fewer-than-usual smartphone launches as only some brands refreshed their portfolios. However, Counterpoint expects demand to pick up from early Q2 2018 onwards, driven by faster replacement rates of existing 2G and 3G smartphones by users upgrading to 4G mobile phones.

Currently, the top five smartphone brands account for more than 70 per cent of the market Q1 2018, which could accelerate the exit of small players as well as lead to mergers and acquisitions. Data shared by Singapore-based research firm, Canalys, has showed that the top five — Xiaomi, Samsung, Oppo, Vivo and Lenovo — accounted for about 77 per cent of the smartphone market in the January to March quarter of 2018, and Micromax, Intex and Lava, the three Indian players in the ‘Top 5’ list in 2015, were eased out.  The fast-changing dynamics and fierce competition in the Indian smartphone market may lead to consolidation in the market.

In recent times, the market has seen more exits than entries. The smaller players are struggling to set up local manufacturing facilities, especially after the 10 per cent duty on printed circuit board assemblies (PCBA), since they don’t have enough volumes to justify large investments. Due to the competition, they cannot even increase prices.

Industry experts indicate that the dominant players are not going to loosen their grip on the market share they’ve gained anytime soon. Therefore, competition in the low price (sub-₹ 10,000) segment – where most new players enter – has become tougher. Besides, new players need to bear the burden of marketing, sales and distribution costs, which puts further pressure on slim margins.

Boost for phased manufacturing
The Ministry of Electronics and Information Technology (MeitY) recently notified the Phased Manufacturing Programme (PMP) with the objective of substantially increasing domestic value addition by establishing a strong mobile handset design and manufacturing ecosystem in India.

A Fast Track Task Force (FTTF) on mobile manufacturing has been set up under MeitY. This task force has set a local production target of 500 million mobile handsets by 2019, with the establishment of a sizable components industry worth US$ 8 billion that will generate 1.5 million jobs.

The PMP has been rolled out in a phased manner, aided by the appropriate fiscal and financial incentives to promote indigenous production of phones and various sub-assemblies. This is likely to provide an impetus to the related sub-assembly and components industry.
The PMP aims to make India the mobile manufacturing hub of the world, with domestic value addition (which includes local sourcing, assembly, etc) increasing from 6 per cent to more than 30 per cent over the next few years. This scheme will also provide tax relief and other incentives on the locally made components and accessories used for the devices.
In FY 2017-18, the PMP had covered the domestic manufacture of components related to mechanics, die-cut parts, microphones and receivers, keypads and USB cables. In the current financial year (FY 2018-19), it is likely to cover printed circuit board assemblies (PCBAs), camera modules and connectors, while in FY 2019-20, it is planned to provide incentives for local production of display assemblies, touch panels/cover glass assemblies, and vibrator motors or ringers.

The Phased Manufacturing Programme (PMP), coupled with the imposition of higher import duties, has incentivised local assembly and made the import of the products that have been brought under this programme, unviable. Companies that have been designing their products and assemblies are better placed to take advantage of the PMP policy.

Under the PMP, the initial plan was to make chargers and batteries in India, then move on to keypads, USB cables, earphones and some mechanics – which means the metal and plastic parts. As a result, value addition in India in the mobile phone space has improved gradually from around 5 per cent in 2014 to about 10 per cent in 2017. With the customs duty imposed on PCB assemblies for mobile chargers and now on those for mobiles, huge electronics manufacturing services (EMS) opportunities have emerged. This can increase the demand for components and increase value addition to the range of 15-20 per cent. A strong focus on PCBs and incentivising investments in the PCB manufacturing ecosystem will greatly improve the country’s chances of becoming cost-competitive and enhance its design and manufacturing capabilities.

Trends in value addition
The mobile manufacturing industry’s growth statistics need to be taken with a pinch of salt, however, as the level of maturity in manufacturing realised till date is restricted to manual semi-knocked-down (SKD) level assemblies. In 2016, true local value addition in manufacturing and sourcing components was less than 6 per cent of the total  US$ 11 billion worth of components used in making approximately 267 million phones. This figure is far below that of other countries. To transform India into a global manufacturing hub, the industry needs to move to the next level of manufacturing (beyond assembly) in a phased manner.

According to Counterpoint, almost 96 per cent of the smartphones in the Indian market are now assembled or manufactured locally due to the increased focus on the Make in India programme and rising import duties. As the Indian government has increased duties on completely built units (CBUs) and PCBAs this quarter, going forward, the market will shift from semi-knocked down (SKD) to completely knocked down (CKD) level manufacturing.
High domestic consumption and policy reforms, such as effective duties on key components, along with attractive incentive structures, will drive domestic value addition through local component sourcing. This will also create a demand for electronics manufacturing services in India. The IIM-B and Counterpoint joint study estimates that more than US$ 15 billion worth of components will be sourced locally over a period of five years through 2020. This will result not only in significant savings in foreign exchange and in creating over a million direct and indirect jobs, but will also boost the entire ESDM ecosystem.

According to the study, in the next five years, local sourcing of Level A components and sub-components, as well as the localisation of assembling/manufacturing services, will result in greater value-addition – more than 30 per cent by 2020, with a potential for this to grow to as much as 50 per cent thereafter (Figure 1). Greater investments in industrial design, PCB design and SMT line assembly will help drive this growth, although many of the major silicon components will continue to be sourced from overseas. However, complete localisation of the major sub-components of chargers, batteries and cameras can be accomplished soon.
From a technology perspective, true value addition will need to keep pace with emerging trends, such as:

• Advanced devices enabled with 5G, Internet of Things (IoT) and augmented reality
• Automated manufacturing processes utilising real-time analytics and robotics
• Digital product design and advanced production using innovative casing materials through 3D printing
• These trends have the potential to take the Indian market to the next level.

Moving forward
One of the pitfalls of the PMP is that the benefits could be unrelated to the value addition the manufacturer is doing. Thus a graded approach is recommended, wherein the incentive that the manufacturer earns is linked to domestic value addition. India has limited policy options as it is a signatory to ITA-1, which precludes the imposition of customs duties on 217 tariff lines that constitute the lion’s share of imported electronics. Local components manufacturing has been the biggest casualty of ITA-1, which has restricted India’s options to create a strong value chain and ensure high value addition in the ESDM sector. If the industry can adhere to the PMP route for the next four to five years, it will be able to gain enough momentum to smoothen the road ahead for India to truly become a global manufacturing hub.

The mobile manufacturing sector suffers from a host of problems, including stringent labour laws, poor infrastructure and an inadequate supply chain. These factors are hindering the growth of this sector, and leading to sub-optimal profit levels for local manufacturers. Favourable government intervention may help remove some of these hindrances. The industry, too, needs to focus on research and development as well as intellectual property (IP) creation in sync with emerging technology trends, to help manufacturers become innovators and explorers rather than imitators and assemblers.