India is emerging as an attractive destination for international companies to invest

With several government schemes and incentives in place, it is the right time to invest in India

By Nitasha Chawla

Tuesday, March 12, 2013: According to a recent study on the Indian Electronic System Design and Manufacturing (ESDM) market, released by the India Semiconductor Association (ISA) in collaboration with Frost & Sullivan (F&S), the total electronics market is expected to grow from US$ 41.91 billion in 2011 to US$ 64.85 billion in 2015. Global companies are eyeing this potential market as the next manufacturing destination after China.

With the current market situation and the global economic downturn, India’s electronics manufacturing industry may not react very positively in the short term, but if the recent government policies are effectively executed, we could potentially expect an increased demand for India-made electronics in two to three years. However, there is a need to review the taxation policies (such as the import tax) in order to support the revival and growth of electronics manufacturing in India.

How important is the Indian market for global firms?
For global companies, the India market is as important as the rest of the Asian markets. Although electronics manufacturing activities and investments in India have been lagging behind countries such as China or those in Southeast Asia, India’s huge population as well as the growing middle class are expected to spur demand for electronic goods in the coming years. While China remains the biggest manufacturing base for now, the rapid increase in its labour costs as well as inflation are pushing manufacturers to explore alternatives and regionalise their operations. India is expected to benefit from this trend.

“India is an important region for us and it contributes to our company’s growth. India’s large population and growing middle class have resulted in a tremendous need for consumer and infrastructure electronics. This has created the opportunity for a thriving local manufacturing base, which, in turn, has created the opportunity for a world class electronics assembly materials supplier,” says Winston Chew, SMT sales manager for India and Singapore, Indium Corporation.

According to Prasenjit Datta, managing director, Brady Company India Pvt Ltd, as the Indian electronics market is in a state of evolution right now, the company considers it a good consumer base for identification and protection solutions, and hence, a key market for the growth of the company. “We look forward to seeing India as another important market in Asia, after China,” he says.

Six years back, when Brady started its operations in India, it hoped that the market would grow substantially. But due to the global recession in 2009-2010, a lot of investments in India have slowed down. “Now, with the demand-supply equation changing slowly, we hope to see manufacturing companies re-investing in India for two reasons. First, in China, which has been the largest manufacturing base for these companies, there is the threat of a price increase due to high labour costs and the high exchange rate. On the other hand, India is steadily emerging as a cost effective and economical manufacturing base for most companies. Second, the Indian consumer market is quite big, so you need to have the supply chain close to it, without which this market cannot flourish,” he adds.

Growing segments in India
There are several growing segments in the Indian electronics industry which offer immense opportunities for foreign companies to invest in. According to ASA & Associates, a market research company, India houses 50 electronics manufacturing services (EMS)/original design manufacturers (ODMs), ranging from global players like Sanmina, Jabil, Flextronics and Solectron to indigenous firms like Deltron, TVS Electronics and Sahasra. With India opening up to domestic manufacturing, the extent of EMS activity taking place in the country is also expected to go up. According to the ISA-F&S report, the EMS industry is expected to grow at a CAGR of 27.8 per cent from US$ 0.4 billion in 2011 to US$ 1 billion in 2015.

Another growing segment is the semiconductor industry, where continued innovation of semiconductor devices, coupled with their enhanced processing capability has led to increased consumption in mobile devices, and in the IT/OA, telecom, automotive and industrial sectors.

According to the ISA-F&S report, the total Indian semiconductor market was worth US$ 6.03 billion in 2011 and is expected to grow to US$ 9.66 billion by 2015. However, local demand and sourcing of semiconductors is limited in India—it was just US$ 2.94 billion in 2011 due to the import of electronic products and low domestic manufacturing. With the Indian government planning to start a semiconductor wafer fab, the industry will attract investments from global companies.

Shares Vincent Chiang, general manager, Eris Technology Corporation, a Taiwan-based original design manufacturer (ODM) of diodes, “The Indian government’s initiative to start semiconductor wafer fabs will give us an opportunity to penetrate the diode/rectifier market in India. India’s electronic equipment consumption, which was estimated at around US$ 110 billion in 2010, is expected to reach US$ 363 billion by 2015—which is the most attractive factor. We wish to have our presence in India through tie-ups or partners, but now that the government is taking initiatives for an open door policy, we hope our products will get a good response.”

New opportunities for the test and measurement segment in India have also been created by the awarding of the TD-LTE broadband wireless access licences and the increased presence of major R&D facilities. All these developments make this the perfect time for global players to increase their footprint in India.

India has a huge potential for security products as well. Daniel Chung, sales manager, GeoVision Inc, a Taiwan-based manufacturer of security products, believes that it is the right time to establish a presence in India through tie-ups or partnerships as the Government of India is investing heavily in security surveillance due to the string of terrorist bombings and attacks all over India in the past few years. “Moreover, India’s transport infrastructure is developing at a fast pace with a healthy demand for security surveillance equipment,” he says.

Light emitting diodes (LED) is another segment which has a bright future in India. The market is still at an emerging stage in India. However, the booming real estate market, investments in green buildings, mandatory energy efficiency regulations for new buildings and facilities, government incentives for energy efficient projects, and significant LED street lighting projects will definitely trigger a significant growth in this market. According to a report by McKinsey & Company on the global LED market, LED constituted 9 per cent of the total Indian lighting market in 2012 and is expected to reach 35 per cent by 2016.

Another growing sector is the solar industry. The increase in the cost of conventional power, which has been driven by fuel shortages, has made the use of solar energy a viable option in India, with the demand growing each year. A report by KPMG on the solar sector in India reveals that the cost of rooftop solar power will see grid parity faster than expected. The report says that the solar lease model could become a game changer. According to the report, India’s solar capacity has grown from less than 20 MW to more than 1,000 MW in the last two years.

The Germany-based ASYS Group, a manufacturer of SMT machines, opened its office in India in 2011. Shailendra Mathur, general manager, India, ASYS Group, feels that India today is a market with a high demand for electronics across different verticals. The company sees a lot of business possibilities, not only for PCBA (PCB handling, marking, de-panelling, testing and screen printing) but also for solar, final assembly for electronics, tray and transfer handling, specially designed automation, process and clean room technology, dry storage and other storage systems.

Advantages India offers
Cost benefits of operating in India: According to ASA & Associates, one of the main advantages India offers is its low labour costs. The report says that the labour costs for electronics manufacturing in India are between 30 to 40 per cent less than in the US or in Western Europe.

An Electronics Bazaar report titled ‘Now you can manufacture in India with 30 per cent ROI’, in the January 2013 issue, suggests that when the several government incentives to boost domestic manufacturing are put together, a company can manufacture in India at a cost that’s on par with China.

So far, China enjoyed a cost advantage over India. However, with the announcement of a 16 per cent rise in labour wages last year in China, India now stands out as a more cost-effective option for manufacturing.

Availability of professionals and a skilled workforce: India has a vast pool of innovative and well-qualified human resources, which is one of its biggest strengths. According to the data available with Department of Electronics and Information Technology (DeitY), India produces over 0.2 million engineers every year, and the department has proposed to enhance the number of post-graduates and PhDs in electronics so that abundant manpower is available for the electronics industry to grow and flourish.

DeitY has also formed an Electronics Sector Skills Council (ESSC) for imparting key skills to ensure that adequately trained and skilled manpower is available to the ESDM sector. The council will work closely with the private sector, universities and other institutions of learning to design programmes to develop industry-ready talents.

Current government initiatives and policies: In October 2012, the Government of India announced the National Policy on Electronics which envisages that building up the electronics sector to generate a turnover of US$ 400 billion will create employment for two million people. The policy aims to create an ecosystem for a globally competitive ESDM sector by providing fiscal incentives for investment, the setting up of electronics manufacturing clusters, offering preferential market access to domestically manufactured electronic products, setting up semiconductor wafer fabrication facilities, and putting in place an industry-friendly and stable tax regime. The policy will also encourage exports and human resource development.

As a part of the National Policy on Electronics, DeitY has also come out with detailed guidelines of the Modified Special Incentive Package Scheme (M-SIPS), which aims to boost domestic and global investments in the electronics manufacturing sector by cutting down transaction costs; removing other obstacles that the manufacturing sector faces; boosting the manufacture of semiconductors, components and electronic products; and reducing the dependence on imports when procuring semiconductor wafers, components, equipment, etc. With incentives of Rs 100 billion, M-SIPS has the potential to create employment for nearly 0.5 million people.

Challenges faced in India

Operating in a foreign country throws up its own set of challenges such as fluctuation in the exchange rates, logistic issues, complicated export procedures, etc. Shares Stephen Hire, general manager, Aeroflex Asia, a manufacturer of microelectronic and test and measurement (T&M) products, “The time taken to import or export equipment in India is a major issue. It generally takes 1-2 weeks to clear any equipment, which means that we need to look at different models for post-sales support compared to other countries. To overcome this, we have made a larger investment in local repair/calibration facilities and spare parts so that we can offer competitive turnaround times on a majority of products.”

Another major challenge faced by global manufacturers is the volatile nature of its currency. As Daniel Liu, marketing head, Nuvoton Technology, a manufacturer of microcontrollers, puts it, “The rupee has fallen more than 26 per cent in the past year, which causes our distributors problems when quoting prices to customers in India.”

Also, for some of the international companies, the quality of components available in India is a cause of concern. Says Joyce Leong, “A majority of the Indian franchises are more of brokers. They order semiconductor components from foreign countries and then supply them here. Most of the goods routed from China are not of good quality. Hence, for long term business partners, we look for electronic component companies or manufacturers who are concerned about quality.”

Sirena Cheng, sales manager, AirLive, one of Taiwan’s pioneering tech firms in the telecom space, says, “Currently, the primary challenge in India is its rapid shift towards more complex electronics assembly. Our tech support team helps address this challenge by providing training seminars on process optimisation and miniaturisation.”

The personalities quoted in this article have given these statements in their respective exclusive interviews to EFY publications

Foreign investment policy

The Government of India is keen on getting investors into the electronics and IT sector. It is, therefore, striving to bring about greater transparency in policies and procedures to provide an investor-friendly environment.

A foreign firm can start operations in India by registering the company under the Indian Companies Act 1956. Foreign equity in such Indian companies can be up to 100 per cent. At the time of registration, it is necessary to provide all the details about the project, local partner (if any), the management structure of the company, and its shareholding pattern.

A joint venture entails the advantages of established local contacts, financial support and the distribution/marketing network of the Indian partner. Approval of foreign investments is through either the automatic route or through government approval.

The Government of India facilitates Foreign Direct Investment (FDI) and investments from non-resident Indians (NRIs), including overseas corporate bodies (OCBs) predominantly owned by them, to complement and supplement domestic investment. Foreign technology induction is encouraged both through FDI and through a foreign technology collaboration agreement. Foreign Direct Investment and Foreign Technology Collaboration agreements can be approved either through the automatic route under powers delegated to the Reserve Bank of India (RBI) or by the government.

For details, visit http://deity.gov.in/content/foreign-investment-policy

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine