What is the best way of facilitating a robust ecosystem of manufacturing components in India? How can you, as an electronic product company, play a critical role? More importantly, what’s the benefit for you if India gets successful in facilitating this ecosystem?
The journey from “Make in India” to “Made in India” is one that requires constructing a bridge called ‘components manufacturing’. Without the same, neither will the entrepreneurs and the bigger established organizations be able to truly “Make in India”, nor will the end consumers, B2B or B2C, will be able to consume products “Made in India”. Another way to curb India’s dependency on electronic products and components imports, as every economist would agree, is to increase the number of exports we do higher than what we import. This way, interestingly, also goes through the same bridge of components manufacturing. In other words, higher local value addition in the country!
In absolute numbers, we in FY2021, imported electronic products and components worth more than Rs 3.7 trillion. Compared to FY2011, India’s dependency on importing electronic products & components has constantly increased. In 2011 we imported electronic components & products worth over Rs Rs 1,272 billion. These figures in FY2016 stood at around Rs 2,620 billion, and in FY2020 at around Rs 3,718 billion (Statista).
India, when it comes to exports of electronics, exported products worth over Rs 829 billion, in 2016 these figures were over Rs 389 billion, whereas in FY2011 the figures stood at around Rs 384 billion. The gap between the import & exports is significant enough to go unnoticed. China, which has a higher export bill than import bill, accounted for over 35 per cent of electronic products & components shipped to India.
Why is component manufacturing important
Before we dive into ways to increase local value addition and enable a better ecosystem of manufacturing components, it is important to understand the role an established ecosystem can play, and there’s nothing better a point to start then intellectual property. When we import a component, the IP of the product remains in the country of origin, which straightway leaves no room for local value addition. The bigger organizations importing components in massive numbers end up paying not just the costs of the components but several duties mandated by the government of India. First and foremost, enabling a better ecosystem of manufacturing of components would mean cuts in overall expenditure as there would be no import duties on any of these. For instance, someone wanting to import chip on film, printed circuit board assembly and cell (glass board/substrate) used in LCD or LED panels has to pay five percent customs duty in addition to the cost of the components. Enabling a better ecosystem of component manufacturing would mean a five percent cut in customs duty that might just not benefit the company importing, but its end consumers as well!
Another striking fact about components is how much the startup ecosystem of a country depends on it. The better the ecosystem, the better will be the growth of the startups operating in the Electronics System Design and Manufacturing space (ESDM). This is because startups usually require components in much lesser quantities than established organizations, and there are only a few international players who entertain requests from startups on a real-time basis.
“Components contribute 40 per cent towards the bill of materials (BoM) of any electronic product or system. If you look at the global component industry, you will find that it is a cyclic industry. Sometimes it has surplus capacity and sometimes it faces shortage of components. The big companies always get priority from component makers and suppliers. Hence, when it comes to startups and MSMEs, they might find it difficult to get components at the right time, and at the right price,” says Sanjeev Keskar, founder and CEO of Arvind Consultancy.
The lead time for a component that a startup or a MSME needs today has to be close to 30 to 45 days. This simply means that if a startup needs a component delivered today, it should have placed an order at least 30 days in advance, and this order to be placed also needs a payment made in advance.
The benefits of a local component manufacturing ecosystem
1. Supply chain costs: Lower logistic costs, nil customs or import duty, better information about the supply chain.
2. Increased control: As you deal with a local manufacturer and vendor, the transparency around delivery time increases.
3. Better quality: Collaborating with component manufacturers becomes easier leading to better R&D and hence superior quality products.
4. Revenue uptick: Lower costs than importing can add to your savings, hence revenue figures.
5. New opportunities: You can experiment around manufacturing new products as sourcing components required becomes easier, faster and cheaper.
6. Fast product launches: Lesser time required in sourcing components equals faster launch of products.
7. Environment friendly: Energy saved in logistics means less impact on the environment.
8. Waste management: You can easily sell the waste components back to the component ecosystem.
Box Item Ends
Why there’s no ecosystem in India
“The base thing that is missing in the whole process of enabling a robust ecosystem of component manufacturing in India is the design requirement. We really need to have a huge R&D infrastructure for necessary applications. Motor control electronics is the new found focus of the world and we need to start developing a robust ecosystem within India for the same. Without the requirement of design, there is no point in starting the R&D process. I think that is the key ingredient that is missing,” explains Omer, CEO & Co-founder of Virtual Forest.
He adds, “Scale Conundrum” is another aspect that is hampering the growth of the component manufacturing ecosystem. He explains the term as an event where the manufacturer of a component would not be able to make a project economically viable unless he is manufacturing on a large scale, and is not dependent on just a handful of companies buying from him. Smartphones, which have been the limelight of India’s electronic industry, is a perfect example of the same. Despite India being one of the biggest markets for smartphones, practically no critical component manufacturing takes place here. Majority of the smartphones, shipped in and outside of the country, are assembled.
It is worth mentioning here that the electronics industry and the players in it largely depend on the scale and quality in order to sustain themselves. The bigger the scale and the better the quality, the better are the chances of sustaining and also making profits. Moreover, a lot of companies find it easier to import components than investing in R&D processes here. This, as per Omer, is simply because more often than not the products Made in India become technologically dated due to the slow R&D, and hence the chances of getting them imported to international markets reduces drastically.
“If you look at the LED TVs sold in India, you will find that almost everyone is importing & selling the same stuff. This is a dangerous trend and the Indian AC industry, and a lot of other verticals, are on the verge of following the same path,” he adds. Estimates made by the Electronics and Computer Software Export Promotion Council (ESC) forecast that electronics exports from India may potentially hit $180 billion by 2025 from just $11.28 billion in 2019-20.
India Brand Equity Foundation suggests that the TV penetration in India (FY2020) stood at 69 per cent, and as of October 2020, television manufacturers such as Samsung, LG and Sony have been granted licenses by the government to import finished TV sets into India. Around 60 per cent of the total installed ACs in India, have been installed in last few years which suggests that the opportunity in AC manufacturing has also come knocking on Indian doors. The story of most other consumer electronic verticals, as well as smartphones, is also similar which in turn dictates that the opportunity for companies supplying components and machines to these manufacturers is also huge. Demand for electronics hardware in India is expected to reach US$ 400 billion by FY24. However, the possibility of Indian companies importing and assembling products also increases with this increase in opportunities.
“It is important to understand and act upon what kind of local value addition Indian manufactures are doin. Are they just importing completely-knocked-down units (CKD) units and assembling them here?,” asks Sanjeev.
He adds “This practice only ensures that only a small part of localisation is taking place in India. It is critical to remember that the CKD route cannot ensure more than 10 per cent local value addition. This means for every $100 phone we export or sell in the country, India gets to keep only $10, the rest of the amount goes back to the country of origin of the product, IP and components.”
Local weds local
The easiest, and probably the most economical way to address the problem of building a robust component manufacturing ecosystem in India, is by incorporating local components into the product designing stage. For example, a China-based manufacturer of ceiling fans supplying to India would never incorporate capacitors or even wires made in India as a component into his products. Neither the costs, nor the profits involved will entice him to do so. An Indian manufacturer of ceiling fans, on the contrary, can easily incorporate components made in India into his line of products. The similarity also holds true for almost all the verticals of electronics.
“Designing products in India has enabled us to include a large share of components sourced from within India. We have been able to include a lot of components like inductors, capacitors, heat sinks and bare PCBS in our product range simply by designing in India,” shares Omer.
Bringing in the local component manufacturers into the picture right from the design stage is what has enabled Virtual Forest to source many of their components locally. Omer is of the view that if other manufacturers follow suit, the same will increase the rate at which components are being manufactured in the country. Virtual Forest, today, sourced around 35 percent of components (in value terms) locally from India. He is of the view that if more companies can achieve this feat then manufacturing of essential components like semiconductors will also increase in the country.
“Now that semiconductor consumption is on the increase in India because of PCB design, research and development in India. It’s only logical that the component manufacturing ecosystem will follow. This is the model that has happened everywhere. First you create the demand and the supply follows. It doesn’t make economic sense for the supply to come before demand,” he explains.
Please note that the majority of ceiling fan brands in India still import more than 70 per cent of their electronic components from outside the country. This is despite the fact that Energy efficient ceiling fans are one of the largest potential consumer electronics categories in the country. It seems as if only a few players are making efforts to localize design, development and manufacturing here, and many of these have found good business in terms of truly made in India products.
Design, manufacture and assemble in India
“Design, manufacture and assemble products in India, and everything else will come. This is not rocket science. This is what has happened everywhere” is what Omer believes.
The best example of how design, manufacture and assemble enables a growth ecosystem for components manufacturing can be derived from the textile manufacturing sector. It continues to be one of the top employing sectors of the country. The sector today is moving towards modernization of not only supply chain tracking, but also modernization in manufacturing. This sector, about two decades back was seen as backdated, but today the same contributes to around five per cent of India’s GDP, and employs more than four crore individuals minus the number of people who open their own apparel showrooms. India, as a matter of fact, has always been among the top consumers of textiles in the world. The country, on similar grounds, is poised to become the top consumer of electronics!
“We are following what China was doing a few years ago. Large scale electronic assembly requires big investments. What we generally refer to as low-value high scale assembly is also moving out of China gradually. Low margin electronic assembly has moved out of China and now it’s India’s turn to grab the opportunity,” Omer adds.
The biggest example of electronic assembly moving out of China is evident in the form of smartphones. Many companies including the likes of Samsung and LG have already announced their exit from the country, while others like Apple are busy shifting their assembly operations in India. Serving this segment with assembly to begin with provided enough time for country to parallely create IPs and create value via local R&D. Assembly and IP creation, as per Omer, need to happen at the same time. The companies need to invest in IP creation if they want to move from mere assembling to creating products in the country.
“Although in India it has been the opposite. The assembly has begun but we have been late in creating IP. These two things need to happen and from there directly the component ecosystem will follow suit,” explains Omer.
It makes sense as a design company sitting outside India will only be interested in testing and incorporating components into their designs based on the turn-around-time provided to them by the component manufacturer. They will not want to waste time (logistics) in getting the components corrected or replaced. It is a known fact the time-to-market is of utmost relevance to any and every electronic company. Virtual Forest has compelled the semiconductor manufacturers and other component makers to work with them, as the company is designing products here in India. There is a strong possibility that these companies will want to open manufacturing, or atleast assembly plants in India, if more Indian brands worked with them, and incorporated them in the design stage itself.
Assemble to enable component manufacturing
A lot of us would get confused as to how assembling electronic products can lead to a better ecosystem of manufacturing components locally. Assembly, in the simplest of terms, stands for importing everything required and then creating a product by simply putting those pieces together. Most of the companies in India import completely knocked down units, put all the pieces together, and call it Make in India.
Assembling a large number of products, first, gives a logistic advantage to a component maker, as well the organizations buying from him. For instance somebody making resistors for smartphones, will want to put up a factory in a zone where most of the smartphone assembly is taking place. The same will help him reduce the logistic costs involved while shipping out components to smartphone brands and ODMs, and at the same time will make the latter happy as the Bill of Materials will reduce significantly owing to lower logistic costs.
“200 million pieces of mobile phones are being manufactured in India. I, as a component manufacturer, would want to be in India. I would want to be as close to the biggest product making company in India as I can be. This will help me become the lowest cost supplier. The proximity to such companies will automatically enable me to qualify for being included in their design stages. That is the reason why this is going to happen,” Omer says.
This is probably one of the reasons why the likes of Samsung have decided to start a display fab in the country. There are more than 100 brands of televisions operating in India, and all of them have been sourcing displays from countries like China and South Korea. Maybe the move by Samsung will enable it to supply bigger numbers to Indian TV brands. For the record the display fab, being setup in UP, has already started supplying smartphone displays in the country. The company also has plans to facilitate IT displays from the same factory. Samsung had confirmed to invest more than Rs 4,800 crore in this fab, the fab that has moved out from China to India.
“Think of it as an automotive market. When there is enough market for SUVs, all the SUV players come to India. They set up units to manufacture SUVs, and in the process they bring their entire ecosystem of supplies with them,” Omer explians. As a matter of fact, the Kia plant near Bangalore had bought with it around 20 more companies which are all suppliers to the brand!
The benefits for a brand
The benefits of helping enable a local ecosystem of component manufacturing pass through to electronic brands facing the B2B or the B2C market in the form of technology transfer, lowered bill of materials, control over supply chain, better time to market and a lot of other things. In most of the import cases, the brand selling to the end consumer does not usually have any control over the technology because the product as well as the components used were designed someplace else. In this case not only can the brand (investing in design) incorporate technology of its choice, but it can also make sure that the product life cycle is not dependent on any third party.
A Lower bill of materials is of course a byproduct of lower logistics costs and the proximity of the component maker to organization buying but the benefits also include passing on the lower bill of materials to end consumers. The same will enable local brands to compete effectively against others operating in the same market, and at the same time create an anti-dumping environment. Similarly,the local presence of component makers can also help organizations prepare better for product launches as well as their R&D activities. This would be enabled as the information and control around the supply-chain will be much easier than what is there when the components are imported. All of these in turn, will definitely facilitate better time to market!
