As we embark on a new year, innovation and agility will be the essential ingredients for any organisation, regardless of industry, to stay competitive. Indian companies in the electronics system design and manufacturing (ESDM) industry need to take even greater advantage of emerging tech tools to accelerate experimentation, facilitate innovation, boost agility and power their journey in this era of digital disruption.
By the ComConnect Consulting research team
While releasing the latest version of the National Policy on Electronics—NPE 2019 —at a conference, a spokesperson from the Ministry of Electronics and Information Technology (MeitY) stated that electronics has now become the world’s largest industry, with newer applications for it emerging in all sectors of the economy. It is now considered to be the most important pillar of both the ‘Digital India’ and ‘Make in India’ initiatives and hence, the government is now prioritising electronics hardware manufacturing. Apart from the economic importance of domestic electronics hardware manufacturing up to the integrated circuit and chip levels, there are also security concerns associated with importing all our telecommunications equipment from abroad. Therefore, the ESDM sector is of strategic importance as well.
Although the ESDM industry is growing exponentially, most of the country’s demand is still being met through imports, especially the raw materials required to make the finished products. According to IESA, the government predicts that the demand for electronics will increase to US$ 400 billion by 2020, while local production will only amount to around US$ 100 billion by that time. The major challenges of the ESDM sector include lack of adequate infrastructure, an under-developed domestic supply chain, poor logistics support, poor availability of quality power, an inadequate components manufacturing base, limited design capabilities and lack of focus on R&D by the industry.
Technologies to drive the sector forward
Today, new technologies are penetrating the market in a fraction of the time it took older technologies to do so. Disruptors are capitalising on existing infrastructure and leaping ahead in gaining market share. Many electronics companies have already taken advantage of the changes in the market by enhancing their capabilities. They are becoming more sophisticated in their approach to capital markets, by developing deep consumer insights, building technical capabilities and developing pricing strategies.
The electronics value chain is under intense pricing pressure as customers push to lower end-market prices and manufacturers aim to increase market penetration. However, material, labour and other operating costs continue to rise.
How can Indian electronics companies thrive in such an increasingly automated, smart and constantly-changing market? Incumbents face the challenge of agile transformation and the threat of disruption, while startups face immense challenges trying to achieve a significant market share. To survive, companies have to rethink how they operate. Business model innovation is necessary for the survival of electronics companies at key inflection points in their evolutionary curve.
For example, with their core business generating slimmer margins, many original design manufacturers (ODMs) and component manufacturers are in search of new platforms to achieve growth targets. To create long-term value, companies need to strike the right balance between core business performance and innovation at scale, while considering consumer demand trends. Consumers are demanding faster connectivity, greater interoperability and ever more innovative products and solutions.
Successful companies continually innovate through product and service development, omni-channel customer engagement and by creating agile supply chains. They also strengthen such core disciplines such as capital allocation, productivity and pricing by leveraging the latest technologies, while riding the wave of disruption.
A release from McKinsey Global Institute (MGI) indicates that new technologies are unfolding relentlessly on many fronts. Almost every advance is billed as a breakthrough, and the list of the ‘next big thing’ keeps growing longer. Not every emerging technology will alter the business or social landscape, but some truly do have the potential to disrupt the status quo and alter the way people live and work.
MGI also shared insights into 12 upcoming technological developments, termed as the Disruptive Dozen, which will have the greatest impact on the way we live now and have the highest potential to recast the business landscape in the coming decade. The Disruptive Dozen includes the mobile Internet, the automation of knowledge work, the Internet of Things (IoT), cloud technology, advanced robotics, autonomous and near-autonomous vehicles, next-generation genomics, energy storage, 3D printing, advanced materials, advanced oil and gas exploration and recovery, and renewable energy.
These technologies are to add between US$ 500 billion and US$ 1 trillion to India’s economy, and will significantly improve the lives of people. Therefore the Indian ESDM industry should strengthen capabilities in these 12 domains and leverage their benefits.
India’s advantages
India, being one of the largest electronics markets in the world, is targeted to reach total production of US$ 400 billion by 2025. The consumer electronics and appliances industry in the country is also expected to become the fifth largest in the world by 2025. In addition to that, allowing up to 49 per cent FDI for the manufacture of electronic items for defence under the automatic route and beyond 49 per cent with government approval, and permitting 100 per cent FDI under the automatic route for all other electronics items, will help attract investments in this sector.
The Indian ESDM sector is driven by such macro-economic factors as a growing middle-class population and rising disposable incomes. In addition, the declining cost of electronics and the higher adoption of high-end technology devices are leading to a continuous growth in the consumption of electronic devices.
Further, technology transitions such as the rollout of 5G networks and the IoT are accelerating the adoption of electronic products. Initiatives such as Digital India and Smart City projects have raised the demand for IoT based products in the market. Similarly, in the digital banking sector, services like e-wallet and payment banks will raise the demand for point-of-sale (POS) and very small aperture terminal (VSAT)-enabled mobile ATMs, which will further give a fillip to this growing industry.
In November 2013, the Centre launched a scheme that gave financial assistance to selected states for skills development in the ESDM sector. The scheme was aimed at enhancing the skilling capacities in the ESDM sector through the public and private sector, covering students and unemployed youth belonging to other disciplines. The initial objective of the scheme was to provide financial assistance to states to skill up to 90,000 persons every year, making them employable in the ESDM sector. Subsequently, in December 2014, the Centre enhanced the scope of the scheme (with minor variations in fund flow) to the rest of the country. The new scheme, envisaged as ‘Scheme for skill development in ESDM for Digital India’ aims to skill 328,000 candidates. Both the schemes will run concurrently and has a cumulative target of training 418,000 candidates (in the next four years) for the ESDM sector.
The government of India has prioritised the ESDM sector under the Make in India programme. Various policy initiatives, including the National Policy of Electronics (NPE), aim to increase domestic production and the export of electronics, and propel the growth of the ESDM industry. NPE 2019 aims to do the following:
- Promote domestic manufacturing and exports in the Indian ESDM industry value-chain to build a globally-competitive ecosystem.
- Increase exports to 60 per cent of domestic production by 2025.
- Develop the manufacturing base for strategic electronics within the country.
- Offer structured incentives to support the manufacturing of core electronic components.
- Incentivise mega projects that are extremely high-tech and entail huge investments, such as semiconductor facilities.
- Promote R&D and innovation across all emerging technology sub-sectors of electronics, such as 5G, the loT, sensors, artificial intelligence (Al), machine learning, virtual reality (VR), drones, robotics, nano-based devices, etc.
- Increase the availability of a skilled workforce, including re-skilling with appropriate incentives and support.
- Develop such industries as fabless chip design, medical electronic devices, automotive electronics and power electronics for mobility, and strategic electronics.
Promote the development and acquisition of intellectual property rights or patents in the electronics sector to make them available to Indian entrepreneurs at a relatively low cost by creating a Special Sovereign Patent Fund (SPF).
The need of the hour
The Indian electronics manufacturing ecosystem is witnessing major changes from both the regulatory and business standpoints. However, these changes are not enough to guarantee the quick success of the Make in India drive, for the rest of the world.
According to a study by Deloitte, India is expected to be among the top five manufacturing nations by 2020. Interestingly, India’s manufacturing labour costs in 2015 stood at US$ 1.72 per hour compared to US$ 37.96 per hour for the US. Even China’s cost is almost double that of India.
The Indian government has set an aggressive target of increasing the country’s manufacturing share to 25 per cent of GDP by 2025. However, till date, almost 75 per cent of the total electronics demand is still serviced through imports.
For the Indian electronics manufacturing sector, it could also be the start of the Industrial Revolution 4.0. The convergence between digital and manufacturing has already begun with the widespread adoption of the IoT, sensors, robotics, AI, etc. The industry also needs to reduce the cost of production through real-time automation and with the help of innovative technologies like 3D printing.
The Phased Manufacturing Programme (PMP) is also a good move to transition Indian electronics manufacturing from semi-knocked-down (SKD) to the completely-knocked-down (CKD) phase. But moving from SKD to CKD alone is not enough. The scale of manufacturing also needs to be increased, but that cannot happen by catering to the domestic market alone.
Companies need to be able to tap global markets, for which India needs a strong policy that provides incentives for the export of electronic goods. This will create the scale that will attract FDI into the country from global electronic component manufacturers and create jobs. This is what happened in auto manufacturing as well.
Manufacturing hubs like China, the UK, Australia, etc, that are globally competitive offer incentives, tax credits and grants to facilitate electronics manufacturing. The Indian government can adopt the best practices from these countries to improve India’s ranking on the global manufacturing competitiveness (see Table) scale.
The ease of doing business is probably one of the most important factors in establishing the country as a global hub for electronics manufacturing. In 2018, India was in the 77th spot in the World Bank’s Ease of Doing Business global rankings due to sustained business reforms, moving up 23 places from a ranking of 100 in the previous year. It has performed even better in 2019, jumping another 14 positions to the 63rd rank, as per the World Bank’s Ease of Doing Business survey released in October 2019. However, global investors do not invest just on the basis of this overall ranking. They look at each parameter and every state’s ranking on input parameters, and do their own due diligence before investing.
The cost of logistics is also an important concern for investors. As per a World Bank report, the cost of transporting one tonne of freight over one kilometre costs ₹ 2.28 by road, ₹ 1.41 by rail and ₹ 1.19 by water. Thus, efficient use of ports can help the country lower its logistics costs. This will, in turn, make domestic goods more competitive in global markets.
Another area where the government could focus on is enforcing contracts.
If the Indian electronics sector wants to win this battle for global manufacturing supremacy, it has to focus on the above-mentioned areas. This will, in turn, drive innovation and cost competitiveness.
