Recognising the seriousness of the COVID-19 problem, the government of India has sent advisories to Indian missions abroad to scout for alternative sources of goods that Indian industry needs, to continue production for the domestic and export markets. Needless to say, the impact of this global pandemic will be felt across the Indian electronics industry for a considerable amount of time even after things crawl back to normal.
By Rajiv Batra
The repercussions of the pandemic caused by the coronavirus, now known as COVID-19, are more than what it was assumed in the initial stages. The virus has spread to more than 150 countries as of writing this, and the number of persons afflicted is increasing, as are the casualties. Almost all developed nations, including the US and countries in the European Union, are locked down. India is taking stringent precautionary action to minimise the impact of this virus across the country.
Cutting across geographies, there is a commitment to deal with this pandemic from various quarters— central governments, organisations like the UN and WHO, businesses, NGOs, etc. The heightened awareness can be leveraged to evolve a basic protocol of the do’s and don’ts for the entire manufacturing and services sectors. This can spell out, among many other things, what is expected of a responsible organisation, in the event of an epidemic, pandemic or a natural disaster.
India sources a wide range of raw materials, components and related goods from China, which mainly go to industries like electronics, automobiles, pharmaceuticals, chemicals, etc. Since the Chinese New Year holidays, most of the provinces in that country, from where India used to import these goods, are either closed or working with reduced capacities due to this pandemic. This has been going on for almost four months or so. The stocks with Indian manufacturers, particularly in the electronics and auto segments, are rapidly depleting since the industry practice is to hold inventory for just three to four months. At the same time, reports from China indicate that the expected time for restoring normalcy in production would be by June or so.
There were reliable reports doing the rounds that the government had shortlisted about 100 critical inputs that the country may need on an urgent basis. Not much has been heard about this since then. This is leading to great consternation among those across industry. It is also not known how such products are going to be sourced and at what rates. Additionally, manufacturers and distribution companies are exploring a few alternative locations for sourcing components like Thailand, Malaysia and Vietnam. But the options now include higher air freight costs to reduce lead times, which would inflate the cost of components and finished goods by 5-6 per cent, which consumers would have to pay.
Since electronic goods and auto components are the major items of India’s exports and, at the same time, these are intensely import dependent, the government should make immediate efforts to source such goods. It is all the more important since the COVID-19 virus has spread to many countries, impairing their ability to supply those placing new orders. In the given situation, domestic manufacturers should be encouraged to tap the sources on their own. Also, finance at concessional rates should be extended to them to overcome the difficult situation.
Admittedly, the entire chain in the industry, including manufacturers, suppliers, traders, shipping lines, air cargo fleets and local distribution chains stand to bear the burden. The losses are across the spectrum and not for manufacturers alone. There are a number of media reports highlighting how the electronics and automotive sectors are being affected by the pandemic, especially those who get their direct supplies from China.
One can expect that component prices internationally will go up soon. Will the manufacturers refrain from making a killing at that time? Consumer electronics companies plan to increase the prices of refrigerators, air-conditioners, microwave ovens and washing machines very soon, due to higher component prices amid short supplies. The Budget had increased the import duty on refrigerator and air-conditioner compressors from 10 per cent to 12.5 per cent. On the motors used in washing machines and some other products, the import tax has gone up from 7.5 per cent to 10 per cent. In the consumer electronics industry, all the key parts such as the compressors for ACs and refrigerators, washing machine motors and plastic parts are imported from China.
Considering the prevailing conditions across the globe, I guess that the worst is yet to come. Our manufacturers are expressing concerns about delayed deliveries and shut product lines, while suppliers struggle to keep factories in China staffed. The Chinese government is overwhelmed by this crisis and it could take weeks for factory production to start.
My worry is that even after manufacturing resumes in China, there will be further delays because companies will need to first supply pending orders. They will also face the obstacle of the non-availability of raw materials and peripheral services, even after the pandemic passes.
Transportation, cargo and customs will also face immense challenges to meet the demand, as they will be a sudden post-pandemic boom in manufacturing. Looking at the reports and updates available online, on an average, manufacturers surveyed by different stakeholder associations have been told to expect three-to-four week delays from their suppliers, but as per my opinion, the prevailing situation in the market suggests that average delays will be about eight weeks.
India’s US$ 30 billion smartphone market, currently the world’s second largest, will see major disruptions as it is heavily dependent on imports. The pandemic has the potential toaffect bilateral trade worth about US$ 87 billion. As per the analytics firm Dun & Bradstreet, at least 51,000 companies, including 163 from the Fortune 1000 list from around the world, have one or more direct (or Tier-1) suppliers in the impacted region, and at least five million companies have one or more Tier-2 suppliers in and around the epicentre of the outbreak.
The government should come up with a financial package for the electronics sector. Internationally, many countries are planning to pass bills to help the industries most affected by the pandemic. Many countries are directly helping the airlines and travel industries since the number of passengers has drastically come down in the last fortnight after travel restrictions were imposed. The time has come for us to understand that the impact of this pandemic is universal and affects many more industries than just the airlines and hospitality.
The author is the managing director of Rabyte Electronics Pvt Ltd