India has potential to become EMS outsourcing hub

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Electronics hardware manufacturing is growing rapidly in India. Multinationals are making extensive investment in different sectors to capitalise on the country’s progressive economy and vast talent base. This has opened new avenues for electronics manufacturing services (EMS) as they play an important role in delivering electronic products in the market faster and cheaper.

By Himanshu Yadav

Monday, May 15, 2010: Subhash Goyal, managing director, Digital Circuits Pvt Ltd, says, “The present demand for EMS services is around $2 billion in India, which is expected to grow at a CAGR of more than 20 per cent per annum for the next 10 years.” This growth is attributed to factors such as rapid growth in telecommunication sector, growth in consumer, medical, strategic and automotive electronics segments, availability of talented English speaking workforce for design and engineering services, rising labour costs in developed countries, saturation in the Chinese market and improvement in India’s logistics, infrastructure and supply chain.

EK Surendran, managing director, operations, SRV Telecom India Pvt Ltd, says, “Telecom is a significant contributor to the EMS industry’s growth and it might be contributing around $1 billion to the sector.”

Consumer electronics constitutes more than 60 per cent of the electronics market in India. According to a Gartner report, electronics production in India is bound to reach $32 billion by 2011, compared to $14 billion in 2006—registering a CAGR of 18 per cent.

With the Indian economy growing at an average rate of 8.8 per cent per annum and India being the third largest economy in terms of spending capacity, EMS companies have a great growth potential in the country.

Realising the business opportunities, already eight of the top 10 EMS companies including Foxconn Technology Group, Solectron Corporation, Flextronics International Ltd, Elcoteq SE and Jabil Circuit have set up their base in India. Thus, a healthy competition is on amongst EMS players who are trying to woo customers through various innovative services.

“Demand for EMS in India is growing fast. However, the success of EMS providers depends on agility and flexibility of manufacturing services, which need a paradigm shift in the execution planning,” shares Kalpana Naagraj, director, Micron EMS.

What are EMS services?

EMS are specialised services including designing, testing, manufacturing, distribution and maintenance of electronic components and assemblies for original equipment manufacturers (OEMs). The EMS industry is driven by large economies of scale in manufacturing, raw materials procurement and pooling together of resources. EMS companies offer industrial design expertise and create value added services such as warranty and repairs. They use state-of-the art facilities to offer turnkey solutions for product testing and mass production of various electronic products including consumer, industrial and medical electronics as well as instrumentation products.

Majority of OEMs now outsource their manufacturing operations ranging from concept, design, selection, manufacturing, testing, assembly and distribution of electronic products to EMS companies. Thus, EMS also involves electronic contract manufacturing (ECM) services. These services include large scale production of electronic products on contract basis by EMS companies at low cost locations.

Also, increasing number of engineering and design activities are being outsourced to EMS companies turning them into original design manufacturers (ODMs). The firms also provide final system integration and logistical support.

Benefits of using EMS

EMS provider frees up OEMs who do not need to manufacture and keep huge inventories of products. They can, therefore, respond to sudden spikes in demand more quickly and efficiently. An EMS company operates as a strategic partner to OEMs and ODMs, enabling them to focus on their core competencies such as R&D, brand building and marketing. As Goyal puts it, “EMS companies offer low cost solutions to their clients, letting them expand their product portfolio without investing in manufacturing. EMS companies take the onus of flexible production and ensure efficient use of capital and competitive sourcing of components.”

Also, EMS providers enable OEMs to offer the latest technology, equipment, process knowledge and manufacturing knowhow without any additional investment. Thomas John, CEO, SFO Technologies, states, “EMS firms take care of the material sourcing and manufacturing at a very competitive rate as per the quality requirements of the customer. This benefits OEMs in terms of cost.” Adds Naagraj, “An EMS company is a one stop shop for OEMs. It offers faster cycle time from concept to market.”

According to Amit Gupta, CEO, Polygenta Technologies, OEMs utilising the services of EMS companies get the benefit of government subsidies, lower conversion costs, logistic advantage and capacity.”

J Narayan Kumar, partner, Sanjay Technologies, which offers PCB assembly or kitted assembly, says, “Companies who use electronic circuits in their products, but are not mainstay electronics companies, can get their sub-assemblies built as per IPC standards. Moreover, our daily volumes help OEMs reduce the cost of assemblies, while increasing quality and reliability of their products.”

Demand churning sectors for EMS

EMS providers offer services to a variety of industries such as information technology, defence, automobile, security, power, aerospace and telecommunication. However Naagraj says, “The maximum demand comes from power distribution sector, power conditioning sector, biomedical sector, LED lighting sector, security surveillance sector, aviation and solar sectors.”

Agreeing to Naagraj, Surendran shares, “Our maximum demand comes from telecom and power sector and our next target is to tap automotive, health and aerospace sectors.”

According to Yogesh Sarin, supply chain manager, Elcoteq Electronics India Pvt Ltd, emerging markets like mobile phones, lighting products, home connectivity systems, flat screen game consoles, infrastructure and industrial products, voice communication systems, portable media players and gaming, digital imaging and navigation, wireless, etc, contribute significantly to the growth of EMS industry in India.

Demand for services

The demand for services comes from big OEMs as well as small players. Multinationals like LG, Samsung, Nokia, Philips, Haier have their own manufacturing facility in India, but they require manufacturing services to meet the market demand at low costs. Also, with the growing number of design houses opting for various services, EMS companies have a diverse clientèle ranging from multinationals to small manufacturers and design firms. As Surendran puts it, “A company manufacturing television may not want to manufacture remote controls, so it may outsource it to EMS providers. Similarly, a mobile handset maker may procure chargers sourced by an EMS provider.”

Narayan shares, “Our customers are big OEMs as well as small scale manufacturers. Usually, we put in additional effort to provide services to small scale customers as they do not have work procedures and standards in place. But we offer them quality services as they have the potential to become a big customer in future.”

“We have separate lines to handle small volumes and high volumes to cater to both types of customers. We even have a dedicated team to take care of prototypes,” shares Goyal.

Cost of outsourcing EMS

The cost involved in outsourcing of any manufacturing related activity depends on factors like product, design, application, clients, etc. Surendran says, “Cost varies from client to client and product to product. For bigger companies having huge production requirement, the cost is higher as compared to the medium or small scale firms. Usually, the cost is calculated in terms of labour cost (8 per cent) and in turnkey project 15 to 18 per cent (based on volume).”

Agreeing to Surendran, Goyal says, “It is difficult to calculate a fixed cost as there are many factors involved, however, usually the cost is calculated around 10 to 12 per cent value addition on bill of material cost.” Narayan shares, “A company saves a lot of money by outsourcing. Average cost of outsourcing varies from industry to industry. The cost of assemblies from automotive and consumer industry are very low compared to per PCB cost for medical and industrial products.”

How to choose an EMS provider

There are a large number of contract manufacturers or EMS providers in India. Thus, it becomes imperative for companies to assess their services before outsourcing their requirements to them. Criteria for assessing an EMS provider include quality systems, ISO accreditations, effective procurement and materials management, on time delivery, design technology capabilities, etc.

Goyal explains, “Customers expect EMS providers to handle their product efficiently, both technically and commercially. For this, they analyse them against parameters like level of infrastructure, systems adopted, procedures followed, quality control, extent of documentation, maintenance of records, statutory compliance, quality of manpower, production capacity, reputation of company and financial strength.”

Technical competence (process/sourcing and project management), financial position (procurement management and receivable management), background of key personnel’s exposure to EMS industry, agility of the group to respond to changes in production planning, commitment to delivery schedules and integrity of the EMS supplier are some of the other factors that customers need to check before opting for an EMS provider.

Most customers look only for criteria like timely delivery and very low rejection rates. However, infrastructure capability, proven delivery record and certification are also important criteria for choosing an EMS provider.

In order to deliver the right services and fulfill their customers’ requirements most EMS firms have deployed ERP solutions to fine tune their business models and effectively look into the customers’ requirements. As Goyal puts it, “We have a proper system for planning, procurement, inspection and storage of material using ERP. All the processes and procedures are stabilised, fine tuned and documented as per ISO practice to achieve the desired quality levels. Quality is controlled and evaluated at every stage of production in addition to the final testing.”

Gupta also shares, “We work on an ERP system and our systems and processes are aligned to large OEMs requirements.”

“We use an ERP system which has built-in MRP and centralised data access for efficient management as well QMS,” says Surendran. As per Narayan, his company has an ISO9001 certified quality assurance system in place the company is in the process of implementing the ERP software.

Challenges faced by EMS industry

India has the potential to become an EMS outsourcing hub. However, it is essential to note that low manufacturing cost alone cannot attract investments in India. It is equally important to optimise the logistics and supply chain network for overall performance of the EMS industry. Firms are facing tough challenges like lack of availability of active components with short lead time, price competition, poor infrastructure, high percentage of imports and low R&D. As Narayan shares, “India is not promoting electronics manufacturing like Japan, Korea, Taiwan and China. Electronics manufacturing in these countries is a significant contributor to the economic growth, but we are still lagging behind.”

Speaking on the challenges, Goyal says, “Commoditisation of services is resulting into the decline of operating margins of EMS companies. Component base is very weak in India and EMS companies are heavily dependent on imports. Inadequate infrastructure in India leads to inefficiency of EMS providers and adds to the cost of production. Other challenges include complex tax structure, cumbersome procedures and legislations, high financial cost and low level of investment.”

Surendran also shares, “Issues such as higher manufacturing costs, government policies, lack of domestic component supply and customer demand for uniform pricing for high and low volumes are affecting the growth of EMS in the country.”

India needs to be competent to catch up with China and other developing nations in order to become a preferred destination for EMS players globally. Thus, improvement in supply chain and manufacturing eco-system is required to make India a successful manufacturing destination.

Sarin suggests, “To improve the performance of EMS, it is essential to incentivise local manufacturing, make tax structure suitable for local manufacturing, build and improve infrastructure, improve power situation, modernise and increase the capacity of air and sea ports, focus on tier 2 and 3 cities and smaller towns, develop an efficient supply chain ecosystem and focus on semiconductor industry. The cost of finance also needs to be checked and reviewed to make it more flexible.”

Different types of electronics manufacturing services

EMS offer several manufacturing processes and technologies. Many EMS companies provide basic PCB assembly services or connect populated boards into larger assemblies. Some vendors are capable of working with flexible PCBs, while others handle only rigid boards. Similarly, some EMS providers may specialise in optoelectronics. Various types of electronic manufacturing services being offered by some companies are as under:

  • SFO Technologies offers design, engineering, software development, manufacturing of electronic products, cable and wire harness, sheet metal fabrication, plastic molding, fibre optic products, transformers and inductors, all under one roof
  • Digital Circuits Pvt Ltd offers one stop solution to all types of electronic manufacturing requirements including through hole technology, mixed technology and surface mounted technology
  • Micron EMS offers product design services, product re-engineering services, indigenisation of a product in phases, consulting on design for manufacturability (DFM) and design for field service (DFS), inhouse PCB design services, box build design and output for computer aided manufacturing (CAM) and tooled components manufacturing, prototyping with extremely short lead times, medium and high volume EMS with or without RoHS and inhouse mounted on a metal core PCB (MCPCB) fabrication (EMS for power LED lighting industry)
  • SRV Telecom offers PCBA, box build, testing, proto run, injection moulding, sheet metal, wire harnessing, optic fibre, product service, leaded as well lead free soldering assemblies, engineering support and QA validation
  • Sanjay Technologies offers PCB assembly or kitted assembly (100 per cent customer supplied parts), semi kitted assembly (90 per cent customer supplied parts) and contract manufacturing services (purchase and assemble parts) and complete manufacturing services (design, purchase and assembling of complete product)

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

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