Rising demand for components justifies local manufacturing

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Electronics manufacturing without a components base is like making a tall building without any foundation. Sadly, components manufacturing in India has not taken off in a big way, and till date, a significant percentage of components are being imported, even though many multinational companies have set up manufacturing units for electronics products in the country.

By Uma Bansal

Monday, September 12, 2011: Says Vinod Sharma, managing director, Deki Electronics, “The scenario is worse than we think. In the 1980s, about 40 per cent of the components required in India for electronics manufacturing were manufactured in India. In 1995, this figure fell down to 20 per cent. Then it came down to 10 per cent. Today, it’s less than 5 per cent. That means 95 per cent of the components are being imported.”

Over the last four years, telecommunications has been the biggest driver of growth in the electronics domain. But what are the components that we supply for manufacturing cellphones or switching equipment? Almost nothing. Components that India has been making are largely for consumer electronics (TV sets to start with), including picture tubes, speakers, flyback transformers, capacitors, resistors, some electromechanical components, but definitely no ICs or chips.

“Most of the manufacturing is restricted to components that are difficult to import due to logistics. Bulky and large components like CRTs are manufactured in India. Another category that has considerable local manufacturing is low technology products and custom built items like wound components and wire harnesses, because of specific user requirements,” adds Pankaj Gulati, executive vice president and chief operating officer, Continental Device India Limited (CDIL).

So basically, when the industry moved from consumer electronics and started doing much better in the telecom, industrial, lighting, medical and defence sectors, component manufacturing did not keep pace. Very few new investments have actually come into components business in the last

10 years in India. Investments are coming in at the equipment level, not at the components level.

Why less manufacturing?

There are a few factors that make components manufacturing a little difficult. First, it is a capital intensive business. To make 1000 million capacitors, you probably need an investment of Rs 500-1000 million, depending on the type of the capacitor you are making. There is also more value addition required in components—as high as 50-60 per cent—but at the same time, capital intensity is equally high. Besides, very high skills are necessary.

Second, components manufacturing is a long gestation business. It is not a business where you make money in one or two years. That is, the breakeven point of a component unit is typically above 50-60 per cent. If you have made an investment for a manufacturing capacity of 100 units, unless you sell at least 50-60 per cent of that capacity, you do not make any profit. Also, it is a technology intensive business. Not everybody has the technology at hand.

Third, there are three disadvantages Indian manufacturers face—cost of finance, logistics and transactions, and power. In India, a small and medium enterprise (SME) that makes components may take a loan from the bank at 13-14 per cent interest, while in China, this cost is only 3-4 per cent. The total impact of these three costs is very high in India.

This is true for everything we manufacture. Then why are we talking about components only? “In components, high value addition is required. If I am assembling a TV, my total value addition is 10-20 per cent, and hence the cost of these three factors might be 5 per cent of my total turnover. Compared to 5 per cent, it might be 2 per cent for a Chinese competitor. So the cost difference is only 2-3 per cent. But for components, the difference between these three costs for an Indian and a Chinese supplier is about 9 per cent. So if I am making a profit of 8-9 per cent, my Chinese counterpart will make a profit of 16-18 per cent. Hence, there is a huge price gap on account of these three factors,” explains Vinod Sharma.

Components manufacturing also needs a good ecosystem. “If I make a capacitor, the film is made somewhere, metallisation is done somewhere else, cans are made by a third party, and so on. If they are all made in one area, it becomes cheaper. But none of these are made in India. I have to buy everything from China, Korea or Japan,” he adds.

Main constraints

Also, since there is no duty on importing components, there are more traders than manufacturers in India. Component manufacturers have also not received due importance from the government, complains Raj Kapur, chief operating officer, JCT Electronics, a colour picture tube manufacturer. “Components are neither visible consumer durables, nor high profile electronics softwares. Although components are the heart of any product, its manufacturers never get the importance they deserve.”

In the 1970s, the government took some initiatives to set up manufacturing in the public sector for basic components like diodes, resistors and transistors, when technology was already advanced and ICs had just started to emerge in the West. However, this was very shortlived, as the industry could not achieve high accuracies and tolerances required for many of the electronics equipment and hence even these components started getting imported, informs V Srinivasan, president, strategy and diversification, Hical Technologies.

Moreover, India failed to keep up with the fast pace of development and the trends in the global components industry, which has developed components much smaller in size with very high accuracies and tolerances. “Our industry certainly could not afford the huge funding to the order of a billion rupees, or more, that’s required for the development and manufacture of smaller and more efficient components. Added to this, the consumption levels in the local market did not justify the huge investment. The high end technology needed to establish this industry was also lacking within the country,” adds Srinivasan.

Picture tube manufacturing was one of the biggest investments made in this country. Glass manufacturing has also started. Hence, colour TVs are affordable today as the components are indigenised. But the kind of support that has to be given to the components sector even at this level, never came from the government.

Says Raj Kapur, “Initially, there were four picture tube manufacturers, but today only two companies exist—Samtel and JCT are still around, while Hotline and BPL have closed. I wouldn’t totally blame the government. Of course, there were wrong business decisions that each of us took. But as an industry, imports flourished despite attempts to control them. Illegal imports also continued.”

Although LCD TVs are being manufactured in India, they are mostly being assembled. Nobody is investing in LCD TVs. “People claim to be manufacturing these TVs, but they just get the cell from abroad, put the front panel and call it an LCD TV made in India. On the basis of this, they take huge subsidies from the government,” adds Raj Kapur.

For electromagnetic component manufacturers like GSP Electronics, the lack of availability of raw materials in India is the biggest constraint. “We manufacture wire wound components like magnetics, transformers, coils, EMI chokes, telecom transformers, etc. But basic copper wire and bobbin manufacturing is not done in India. That’s our main constraint. We have to import it from Singapore, Korea or China. One or two companies manufacture these in India, but their focus is electrical products like motors,” says Satish Gupta, director, GSP Electronics.

In ferrite core manufacturing, too, there are only three companies, but they do not make products for TV applications. And if a manufacturer does make ferrite cores for TV applications, the price will be high compared to a Chinese product. For basic raw material manufacturing, one needs higher investments and a large quantity.

How local manufacturing will benefit

Now, since demand in the local market is increasing significantly, component manufacturing in India makes sense. Says KU Subbaiah, managing director, Tyco Electronics, India, “Local manufacturing will provide shorter lead times in supplying to the customers and also pass on some price benefits because of reduced freight costs.”

But for that to happen, there is a lot to be done. “Component manufacturing needs to be declared a strategic sector. We need to start with low volume, high value add, custom built components. The government needs to encourage ‘complete’ manufacturing by MNCs. A phased indigenisation plan needs to be in position. The government also needs to build ecosystems around these plants,” suggests Gulati.

Opines Raj Kapur, “The public-private partnership model has to be fortified. Also, components manufacturing should be treated like infrastructure. Another step required is university-industry interaction. Components manufacturing can be a sunshine industry for many years to come. It can provide employment to a lot of people, especially well qualified engineers. We have dozens of engineering institutes coming up every year, but if you check the employability of these engineering graduates, it’s pathetic. Each of them has to undergo some training or retraining after graduation. Instead of importing material, we should import technology and education skills from abroad.”

Primary hurdles and some suggestions

Primary hurdles

  • Lack of clear government policies on electronics manufacturing and incentive schemes.
  • Lack of any multinational large scale electronics manufacturing organisation, except in the telecommunications sector
  • Lack of necessary natural raw material manufacturers
  • Zero import duty on component imports
  • The role government can play
  • Create large scale electronics component manufacturing zones and declare tax holidays
  • Create a level playing field in the import of raw materials, not components
  • Through open FDI, can attract multinational companies into emerging states to set up manufacturing plants for components like ICs
  • Once manufacturing facilities are established, the import strategies can be re-looked at to protect and nurture local manufacturing activities
  • Give incentives for exports from these zones

—Himanshu Dalvi, vice president, electronics division, Havells India

Indian Electronics Components Market

Component

Value in million US$

Indian manufacturers

Imports

Connectors

607

42%

58%

Cables

373

42%

58%

Resistors

81

20%

80%

Diodes

108

20%

80%

Colour picture tubes

789

80%

20%

Wound components

1413

30%

70%

PCBs

400

30%

70%

Switches

379

60%

40%

Speakers

214

90%

10%

Magnets

111

10%

90%

 

4475

30%

41%

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

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