Govt digitisation plan opens up big opportunities for STB manufacturers

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As the deadline for the cable industry to go digital draws closer, there is a reported demand for 10 million set top boxes (STBs) in phase 1 of the government’s digitisation plan, which has to be met by June 2012. For an industry that relies mainly on imports and has an annual capacity of producing 24 million STBs, meeting the 10 million production mark through domestic production, and that too, within a few months, will not be possible. However, digitisation has opened up a bag of opportunities for domestic manufacturing to pick up.

Atul Lall, deputy managing director and CEO, Dixon Technologies (India) Pvt Ltd

By Nitasha Chawla

Wednesday, June 13, 2012: While India has been dependent on China for imports of STBs so far, the situation seems to have changed with the changing economic situation in China, the depreciating rupee and appreciating Chinese Renminbi (RMB), which had resulted in a rise in wage costs in China. This has created a space for the Indian STB industry to undertake domestic production on a larger scale.

“A great opportunity exists for us, thanks to the changes in the macro economic variables and various other parameters in the ecosystem in China. The wage difference between India and China ranges between 35-50 per cent. This is extremely significant and I think this labour arbitrage is going to do wonders for us. Due to this, the Chinese economy is shifting towards domestic consumption. That’s what happened with Japan, S Korea, and now in China,” said Atul Lall.

Benefits of local manufacturing

There are certain inherent advantages of locally produced STBs, which make it an industry difficult to be ignored at this stage. Local availability of STBs will bring down the cost operators incur to hold and store their inventory, significantly, and will provide huge flexibility in the system with regard to the supply chain and development. Besides, a rise in domestic manufacturing will create tremendous job opportunities in India in both direct and allied industries. It will also protect the industry from losing its profit margins due to exchange rate fluctuations and would help in saving the country valuable foreign exchange.

According to Atul Lall, at present, the gap between demand and capacity is about 30-40 million STBs per year, in India. This can be filled only if the manufacturers get the required support from the government and the operators, who are at the moment importing the STBs. “The operators still lack confidence in the manufacturers and hesitate to give them additional orders. This confidence will be built over time, when they see manufacturers producing more than their present capacity. Also, when you produce locally, the level of coordination between the manufacturers and the operators is much better, as there is no language barrier and other such obstacles that exist when STBs are imported. Moreover, India has a skill set for software and hardware development and we must exploit our potential to the fullest,” he added.

Challenges faced by industry

According to Atul Lall, to increase the domestic production of STBs, the industry needs a lot more than just a boost in manufacturing. “A complete package of design manufacturing and supply chain management will make the STB market self-sufficient. Also, some major players who are into manufacturing of STBs like Dixon Technologies, Videocon, Jabil, Ever, Kortek and Quad, are manufacturing around 20-25 million boxes, and to fill the existing gap in production and demand, heavy investments need to be made,” said Atul Lall.

The DTH industry and cable operators in India are under huge financial stress. They have suffered huge accumulated losses as they have been subjected to heavy taxation by the government with hardly any viable financial assistance. The industry pays multiple taxes such as service tax, entertainment tax, licence fee and VAT. However, the situation is not the same in countries like China or Korea. Today, the foreign suppliers in these countries are tied up with financial institutions like EXIM banks, which offer long term credit over three to five years, at an extremely low interest rate. No such financing is available in India as this is not treated as a capital goods industry.

“Sometimes, easy cash flow is more important than certain other inherent advantages in a country, even the cost advantage. I hope that the cable industry is declared as a capital goods industry. Another major issue that needs to be addressed is that Indian operators are not able to provide Form C, which hikes the cost of Indian STBs with an additional 12.5 per cent VAT,” he added. This happens because DTH and cable operators give out STBs on lease, which means that they are not making a sale and it is qualified as a right to use. Sales tax is a state government subject—some of the states qualify the right to use as a sale so they ask for VAT. Whereas, some states do not, in which case, the manufacturer is not paying VAT and hence cannot issue Form C. Therefore, when these firms import, no tax is paid. “So, these are some of the interventions that are required on the policy side. Over the next three years, the industry will grow to Rs 100-110 billion. And if these corrections happen, and associations like ELCINA and CEAMA intervene, this industry is going to take off,” said Atul Lall.

“I strongly feel that the STB industry requires some corrections at the policy level apart from a change of mindset. Only then can it take the electronics manufacturing sector in India to the next level. STB is a product that requires very close cooperation between the operator and the STB maker. So it requires high level of customer support as well. Also, at the national level, there are organisations like Bureau of Indian Standards (BIS), which are extremely important for implementing standardisation, so that what happened with the Foreign Trade Agreement (FTA) where cheap and low quality STBs arrived in India, does not reoccur,” he concluded.

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On February 17, 2012, ELCINA organised a seminar on ‘Facilitating High Value Added Manufacturing of Electronic Components and EMS’ at the EFY Expo 2012. This article is based on the presentation given by Atul Lall, deputy managing director and CEO, Dixon Technologies (India) Pvt Ltd, at this seminar.

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