India must emerge as a global EMS hub

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In spite of an increase in domestic production, the import of electronics into India continues unabated. EMS providers, therefore, must grab the opportunity to manufacture for the local market by nurturing long-term relationships with OEMs.

By the ComConnect Consulting research team

Imported electronics has grown to become the second largest contributor to India’s increasing current account deficit (CAD), after crude oil, accounting for 11.4 per cent of the country’s imports. Of late, growth in imports has accelerated alarmingly, shooting up by 23.4 per cent in FY18 to reach US$ 52.9 billion from US$ 42.8 billion in FY17. Interestingly, the trade deficit in electronics has shot up in the last five years (Figure 1). As per a report by Deloitte Touché Tohmatsu, India’s electronics imports could surpass the country’s oil imports by 2020, if the situation continues in the same way.

Figure 1 Comparing YoY growth in the trade deficit for gold and electronics

This surge in imports clearly indicates a huge gap between demand and domestic supply (Figure 2) and urgently calls for local manufacturing to step up. Favourable government policies to boost the domestic manufacture of electronics have undoubtedly played their part, particularly in facilitating the setting up of production facilities for smartphones, set-top boxes, televisions and other appliances. But there is still a lot of ground to be covered.
This offers immense opportunities for the Indian electronics manufacturing services (EMS) sector. Over the next five years, accelerated local manufacturing of electronics products to cater to growing domestic demand will drive the market for the EMS sector in India.

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The local companies are expected to step up production under the ‘Make in India’ initiative. And with mounting labour costs in China, global manufacturers are looking to relocate their manufacturing bases to alternate locations such as India, Vietnam and Indonesia. Thus, India has the potential to emerge as a global electronics manufacturing services hub.

An overview of the Indian electronics market
According to a ResearchAndMarkets study, the Indian EMS market is expected to grow at a CAGR of 38.1 per cent till FY23, from an approximate Rs 560 billion in 2018. India can emerge as a hotspot for electronics manufacturing among the South Asian nations due to low operating costs. This provides ample opportunities for OEMs and EMS providers across different verticals.

The ever increasing demand for mobile phones, telecom products as well as consumer and smart electronic devices is driving the growth of the EMS market (Table 1). Manufacturing partnerships in these segments have been growing steadily, as the demand for the products is very high and OEMs are striving to cut costs to maintain their competitive advantage in the face of rapidly changing market conditions, technology advances and global competition.

Figure 2 Demand-supply (domestic manufacturing) gap in the Indian electronics system design and manufacturing (ESDM) sector

There are opportunities for EMS providers outside these segments too, namely, in lighting, power electronics, automotive and strategic electronics (including aerospace, defence and also railways). With the quickening pace in the transition from electrical systems to electronics in the energy sector, power electronics is emerging as one of the most exciting areas in the industry today. Aerospace and defence (A&D) OEMs have been increasingly depending on EMS providers, in order to address risk management, logistics and after-market service needs. EMS companies with a global supply chain and advanced tech capabilities are the best positioned to exploit this trend.

Rapidly evolving devices such as smartphones and tablets account for the forging of unique collaborations and partnerships between service providers and original equipment manufacturers (OEMs). This, in turn, directs EMS market players to deploy efficient manufacturing machines and service delivery facilities that fuel the industry’s development.  Additionally, increasing investments in outsourcing activities by OEMs for logistics, manufacturing and testing, widen the opportunities for new entrants into the field.

The recent demand for green and energy-efficient devices and components offers new opportunities for growth. To cater to these demands, OEMs are developing strategic partnerships with service providers, which help in controlling manufacturing costs. The service providers offer product design, development, and manufacturing as services to OEMs, helping the latter save on development costs. This allows the EMS market players to develop green manufacturing facilities and energy-efficient products that support global sustainability goals.
Indian EMS providers traditionally tend to prefer the HVLM model as it ensures economies of scale, higher productivity due to minimum changeover time and optimum machine utilisation.

Considering the low margins and highly competitive price scenario, optimising supply chain costs is crucial to succeed with this model.

However, recent industry trends show a shift towards a HMLV model, where the focus is on customisation and quality.

Vertical 2014-15
(in ₹ billion)
2015-16
(in ₹ billion)
2016-17
(in ₹ billion)
2017-18
(in ₹ billion)
2018-19
(in ₹ billion)
Consumer electronics 558.06 557.65 647.42 735.24 770.00
Industrial electronics 393.74 450.83 622.14 690.57 808.50
Computer hardware 186.91 198.85 203.82 214.01 211.80
Mobile phones 189.00 540.00 90,000 132,0.00 1700.00
Strategic electronics 157.00 180.55 207.60 235.62 282.70
Light emitting diodes (LED) 21.72 50.92 71.34 96.30 130.00
Note: The above data has been provided by the respective industry associations like CEAMA,  ELCINA, MAIT and ICEA

Table 1: Growth in domestic electronics manufacturing across diverse sectors (Source: MeitY Annual Report, 2018-19)

Innovative services in demand
In response to the growing competition in the industry, EMS providers continuously adopt innovative strategies. These include gaining a better understanding of their customers’ needs and their business models, ensuring the use of effective communication tools, creating global footprints, focusing on core competencies and offering value added services. Moreover, considering the intense competition, EMS providers need to enhance their value proposition by offering integrated, end-to-end solutions and other innovative services.

  • One-stop shop services: Turnkey manufacturing services are the need of the hour to fulfil the increasing demand for ‘one-stop shops’ in the EMS domain.  However, turnkey projects need a high degree of technical skill that can be customised according to the specific requirements of the OEMs. Only a few Indian EMS providers offer turnkey solutions for PCBAs, utilising Chip-on-Board (CoB), surface mount (SMT) and through-hole technologies. They also provide complete assemblies, including plastic mouldings, metal-die castings and sheet metal fabrication, apart from finishing, painting and printing. In short, they deliver fully assembled products. This opens up vast business expansion opportunities for Indian EMS companies.
  • Original design manufacturing: Electronic products need constant design revision, as the end users expect creativity and continuous innovation. Therefore, consumer electronics product design and development is often outsourced to ODMs (original design manufacturers). In such cases, the sooner an OEM engages the contract manufacturer for product design and development services, the better—particularly when the product being designed moves into the high-volume, production phases. Moreover, ODMs can ensure unique products based on the needs of the Indian market, combining ‘Designed in India’ with ‘Make in India’. Hence, ODM services become a very important and cost-effective solution for the customer.
  • Reverse logistics: Considering the importance of electronics waste management as well as after sales services, including repair and maintenance, reverse logistics has become an important activity. Global OEMs also prefer to outsource reverse logistics. Services related to repair/reworking and refurbishment not only help EMS firms get additional business from the OEMs but also enable them to play a role in e-waste management.
Categorising EMS companies on the basis of:
Revenue

  • Tier 1: >US$ 5 billion
  • Tier 2: US$ 500 million to US$ 5 billion
  • Tier 3: US$ 100 to 500 million
  • Tier 4:< US$ 100 million

Operational models

1. High-volume, low-mix model (HVLM): This refers to a contract manufacturing setup where only a few assemblies are produced in large quantities. Such a production arrangement may last for weeks or even months, using the same setup. This technique allows changeovers to be kept to a minimum, while equipment utilisation rates are quite high. Contract manufacturers have proven to be more efficient when running at high volumes, which require minimal engineering changes. The HVLM model is applicable when manufacturing computers and peripherals, consumer electronics devices, telecommunication equipment, storage devices, etc.

2. High-mix, low-volume model (HMLV): This type of contract manufacturing places importance on quality and customisation as per the clients’ requirements. Considering that this model ensures high margins because it caters to a niche market, major changes in market dynamics often do not heavily impact such a production process. OEMs that prefer such solutions are willing to pay a higher price in order not to compromise on quality. Recent industry trends show a shift towards this model of production, but the success of this model depends on controlling and improving supply chain efficiencies. The HMLV model is applicable in the industrial, medical, aerospace and defence sectors.

*Mix refers to different models of the PCB assembly. Volume refers to the number of units built. For consumer electronics products, this number will be on the high side (HVLM), while for prototypes, medical electronics or machinery, the numbers will be much lower (HMLV).

Very few EMS companies operate with both HMLV and HVLM models simultaneously.


Moving
forward

The ever increasing end user demands and fast-paced technology developments compel OEMs to continuously introduce new and innovative products in the electronics market. Consequently, OEMs have to increasingly depend on EMS providers who offer significant benefits such as cost savings, reduced time-to-market, reduced time-to-volume, quality and flexibility.

EMS companies operate as strategic partners to OEMs by providing them with a full range of services, which include contract design services, prototyping, final system assembly, configuration, order fulfilment, and even after-market services, including repair. By using the services of EMS providers, OEMs can concentrate on their core competencies such as research and product development, brand building, as well as sales and marketing.

Outsourcing production to EMS providers also ensures that an OEM’s products are manufactured using the latest equipment, process knowledge and manufacturing knowhow without the OEM itself having to make substantial capital investments, as the risks are converted into variable costs. A strategic partnership with OEMs can enable the EMS providers as well as the OEMs to contribute effectively to the success of the end product. This, in turn, helps both parties to achieve high profitability and a good market share.

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