With PLI scheme, India seeks to wean some investments from China

Representative image

The Indian government’s production linked incentive (PLI) scheme, which offers incentives to companies engaged in manufacturing mobile phones and specified electronic components in India, has drawn huge interest from global and local original equipment manufacturers (OEMs). If that interest translates into action, it will help India attract investments that would otherwise have gone to China.

India is now the second-largest mobile phone manufacturer in the world after China and about 300 million phones were assembled here in 2019 alone. The number of mobile phone manufacturing/assembling plants in the country has increased from just two in 2014 to around 100 in 2019. Now, with manufacturing companies looking to have another unit outside China, India could well be one of the beneficiaries.

“Global OEM and component manufacturers are increasingly choosing to set up or extend their base in the country. Domestic brands have also got a boost. The large number of applicants for the PLI scheme says it all,” Jaideep Ghosh, Chief Operating Officer, Shardul Amarchand Mangaldas & Co. told Moneycontrol.

Notified on April 1, the PLI scheme aims to boost domestic manufacturing and attract large investments in mobile phone manufacturing and electronic components, including assembly, testing, marking and packaging (ATMP) units.

It offers incentives of 4-6 percent over five years, with FY20 as the base year, to companies that manufacture in India. The incentives are applicable with effect from August 1, 2020.

ALSO READ: The absolute dominance of China in India’s smartphone marketMaking a beeline for India

Global players such as Wistron, Pegatron, Foxconn and Hon Hai from Taiwan, Samsung from South Korea, as well as companies from Germany and Austria have applied for benefits under the PLI scheme so far.

Foxconn Hon Hai, Wistron and Pegatron are contract manufacturers for Apple’s iPhones.

Indian companies such as Lava, Dixon, Micromax, Padget Electronics, Sojo, UTL and Optiemus have also applied for benefits under the PLI scheme.

Industry body India Cellular and Electronics Association (ICEA), which represents top mobile phone makers, including Apple, Foxconn, Wistron and Lava, anticipates mobile phone companies will increase device production in the country to around Rs 27.5 lakh crore under the PLI scheme, well above the government's expectation of over Rs 11 lakh crore.

The government is wooing companies to manufacture products here through its ‘Make in India’ programme. Samsung, Apple, Oppo and Vivo are some companies looking to expand their presence in India.

According to Counterpoint Research, smartphone shipments in June bounced back after weak April/May sales and the anti-China sentiment has led to a massive surge in sales of Samsung phones.

Counterpoint estimates that Samsung captured 27 percent market share in Q2 (calendar year), given the lack of non-Chinese alternatives (81 percent of shipments in Q1 were from Chinese brands).

A clear China alternative

Nangia Andersen LLP believes that the timing of these guidelines is significant as it can act as a catalyst in the government’s efforts to promote India as an alternative to China in becoming a global manufacturing hub for electronics manufacturing.

“These schemes shall also provide immense support to the Prime Minister’s appeal to structure economic revival in India by making the economy self-reliant, i.e., Atmanirbhar. The schemes would also provide a fillip to sagging investment sentiment in the wake of the ongoing Covid-19 pandemic. These schemes focus on the entire supply chain not limited to electronics component/mobile phone manufacturers and bring plastics and other metal component players within its ambit,” said Nangia Andersen LLP.

The PLI scheme comes at a time when global supply chains are being redrawn, giving a small window of opportunity to reshape the supply of manufactured goods to the world.

“We have a deep gap in manufacturing capacity for higher tech goods, but that gap can be narrowed through concerted policy initiatives such as PLI. We must have patience with the journey though and welcome opportunities for assembly shops for global manufacturers till the associated supply capacity builds up over time. All manufacturing economies have taken similar steps: the pathway to excellence in deep-tech and sector expertise starts with what I call the ‘screw-driver economy’ where low-cost assembly shops pave the path for scale and hence economies of scale over time,” Utkarsh Sinha, Managing Director, Bexley Advisors, a boutique investment bank firm told Moneycontrol.

According to Sinha, the PLI scheme is a particularly effective policy initiative, which gives a direct, cost-based incentive to manufacturers to relocate to India.

“This needs to be coupled with innovative sops on component import and product export duties to truly lower the barriers for manufacturing. Further, policymakers have to focus on implementation and fast-track dispute resolution to ensure beneficiaries of such an initiative do not get tangled in red-tape,” Sinha added.

Smartphone manufacturing opportunity for India

India is the second-largest smartphone market globally with 150 million smartphone shipments in 2019 (11 percent of total global smartphone shipments).

The country still has about 350 million feature phone users, who eventually may upgrade to a smartphone given that the handset replacement cycle for Indian smartphones is less than two years. This would likely keep the demand for smartphones in India high.

Intense competition among smartphone players has led to a consolidation in the last three-four years. The dominant entity is Xiaomi, with 30 percent market share in Q1, followed by Vivo with 17 percent and Samsung at 16 percent.

Chinese players controlled about 81 percent of the smartphone market as of Q1. Local Indian handset players are almost non-existent with about two-three percent of market share. Even Apple has a small presence in India with just a 2 percent share.

ALSO READ: India’s biggest smartphone company is Chinese

According to BofA Global Research, the average selling price (ASP) of smartphones in India was $160 in 2019 up 2.5 percent from $156 in 2018. It expects the ASP to come down in 2020 in part because of the Covid impact.

The US-China global trade war has positive implications for handset manufacturing in India. According to Counterpoint, China lost assembly of about 200 million handset phones to India and Vietnam last year. Over time, it is expected that a part of handset manufacturing operations may further shift to India and Vietnam.

Here, an advantage India has over Vietnam is its huge domestic market, with a population of over 1.3 billion, and a growing number of data users. Besides, logistically, India is better placed to transport phones to African and other Middle Eastern countries.

In India, the increase in assembly of handsets has led to value addition in handset manufacturing increasing from 10 percent in 2017 to 17 percent in 2018. This is expected to increase to 25 percent in the coming years. According to Counterpoint, of the $14 billion worth of components used in mobile phones, roughly $1.4 billion were locally sourced in 2018.

“I have been a keen observer of the mobile phone manufacturing landscape in India over the past fifteen years, having been part of some of the industry initiatives. The pace at which this industry has grown in the past few years is unprecedented and encouraging,” said Ghosh of Shardul Amarchand Mangaldas & Co.

Foxconn, the world's largest contract electronics manufacturer now, going by its results on Thursday, said that China’s days as the ‘world’s factory’ are over and India will be part of its manufacturing ecosystem.

 Indian firms rush in to scale up

Hoping to ride the anti-China sentiment, which worked in Samsung’s favour in Q1, Indian firms, which do not have a big presence right now, are trying to leverage this opportunity and racing to scale up their investments.

Dixon Technologies—a contract manufacturer of lighting, televisions, mobile phones and home appliances for Xiaomi, Samsung, Voltas, LG, Flipkart and Foxconn, has submitted two applications under the PLI scheme for mobile phones and has signed a contract with a large brand. It is in discussions with another large brand for a manufacturing contract.

In July, the company delivered 2.5 million phones. It has also started manufacturing smartphones for Samsung.

The management expects manufacturing to start from FY21 if the PLI applications are approved on time. It would take about four months to launch the manufacturing facility.

“Under PLI, margins would be better than the current rate. Working capital requirements would be minimal and, in turn, RoCEs would also be better than the current run-rate,” said Emkay Research, in a note to its clients, with a buy rating on the Dixon Technologies stock. RoCE stands for return on capital employed.

Micromax eyes comeback; Lava looks at a revamp

Home-grown smartphone maker Micromax plans to invest Rs 500 crore on expanding local manufacturing and research and development (R&D) operations as it targets a comeback in India’s smartphone market. The PLI scheme will help Micromax compete better with Chinese rivals.

Lava International Limited, an Indian mobile phone manufacturer, was number one in the feature phone market in India until last quarter and is now planning to revamp its smartphone portfolio to increase market share. The company is in the process of finalising its business plans to make fresh investments and comply with the requirements of the PLI scheme.

“Our investment in manufacturing and design is Rs 200 crore till now. PLI will enable growth in the export business. It will help us in competing with products from other companies in the global market. Savings will be ultimately passed to the end customer,” Sanjeev Agarwal, Lava’s Chief Manufacturing Officer, told Moneycontrol.

“The current capacity of our manufacturing plant is 40 million phones per annum. During the scheme period we are planning to increase this by three times,” he added. Lava is working to establish the complete ecosystem for mobile manufacturing, including design, the supply chain and manufacturing. All Lava phones in the market are mostly designed in India.

“In the supply chain, the company's major focus is on localisation to increase local value addition, enable employment generation and contribute towards Atmanirbhar Bharat,” said Agarwal.

 China’s loss is not entirely India’s gain

In an effort to reduce their reliance on China, companies are going for a China-plus-one strategy and looking to set up shop in countries that can offer them good value propositions.

“Whether there will be a significant shift in electronics manufacturing from China to India is difficult to ascertain. While some shift in investments from China may happen considering the prevailing geopolitical situation, there are other contenders in South Asia,”said Ghosh of Shardul Amarchand Mangaldas & Co.

From that perspective, Vietnam is well placed, particularly since it has strong trade agreements with Korea and the European Union. India does not have similar agreements.

Vietnam has emerged as a manufacturing hub for smartphones. Samsung has been leveraging the country’s capabilities and more than 50 percent of the smartphones manufactured by Samsung in Vietnam are being exported. LG, Nokia and, recently, Apple, have moved their facilities to Vietnam. For India, the anchor companies are Samsung, Foxconn and Apple.

According to Ghosh, the PLI scheme is a clear differentiator in attracting investments in the electronics manufacturing sector and enhancing mobile device exports.

Made in India, for the world

India is a very attractive destination for players from China and Taiwan as India is trying to encourage companies to manufacture in India under the “Make in India” program. The duty differential has been a major factor in attracting companies to manufacture components in India.

India offers a huge domestic market opportunity. Samsung was able to make the most of the anti-China sentiment because there are currently not many alternatives to Chinese players. It has established high-capacity assembly lines, partly in anticipation of strong export demand. About 65 percent of its units are shipped to destinations such as the UAE, Russia, South Africa, etc. Even other players such as Apple and Xiaomi, are starting to export handsets.

All this has helped Samsung fulfil the huge demand during the pandemic. It was the first company to come back to 100 percent capacity in India.

(Piyush Pandey is a senior journalist based in Mumbai.)