The Indian electronic components manufacturing industry: Sunny days ahead

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The growth of the electronic components manufacturing industry is crucial for the Make in India programme. The more developed the domestic EMS industry becomes, the faster and easier it will be for large original equipment manufacturers (OEMs) to set up operations here. Let’s take a look at where this industry is headed.

By the ComConnect Consulting research team

The Indian electronic systems design and manufacturing (ESDM) industry is on its way to achieving its full potential in terms of both production and design capabilities. For the first time, India’s domestic electronics production exceeded imports in 2016-17. According to government sources, the domestic production of electronic goods for 2016–17 stood at US$ 49.5 billion, higher than the US$ 43 billion spent on imports. This indicates that the ‘Make in India’ initiative is beginning to have a positive impact on domestic manufacturing. Favourable business policies for the domestic electronics sector have undoubtedly played their part, particularly in facilitating the setting up of manufacturing facilities for smartphones, set-top boxes, televisions and other appliances. This presents an opportunity to the electronic components manufacturing industry of the country. Over the next five years, accelerated local manufacturing of electronic products to cater to growing domestic demand will drive the market for electronic components in India.

Market scenario
According to Global Industry Analyst Inc., the global market for electronic components is expected to reach US$ 191.8 billion by 2022, by when Asia Pacific will have the dominant share of the pie. Following this global trend, the Indian electronic components market is also poised to grow significantly. This growth will be driven by rising local demand and growing disposable incomes. Moreover, adoption of high-end technology devices, technology driven transformations such as the roll out of 4G/LTE networks and the Internet of Things (IoT), policy and incentive boosts from the government, initiatives like ‘Digital India’, ‘Smart Cities’, wider broadband connectivity and e-governance programmes are all driving the accelerated use of electronic products. The growth of the electronic products industry has started driving the expansion of the electronic components industry as well. According to Electronic Industries Association of India (ELCINA), the market size of the Indian electronic components manufacturing industry increased from ₹ 520.99 billion in FY 2016-17 to ₹ 594.97 billion in FY 2017-18, with a year-on-year growth rate of around 15 per cent (Figure 1).

The different categories of the electronic components market
The electronic components market can be broadly categorised as follows:

  1. Passive components–Capacitors, resistors, wound components and crystals
  2. Active components – Diodes, transistors, ICs and LEDs
  3. Electromechanical components – PCBs, switches, relays, cables and connectors
  4. Associate components – Optical disks, magnets, RF tuners, heat-sinks, magnetrons, magnetic tapes, etc
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However, a significant share (about 70 per cent) of the electronic components is imported, leaving only about 30 per cent from indigenous production ( Figure 2), which is used in local equipment production. Rapid growth in domestic manufacturing of electronic components is vital, and is the only way in which overall electronics manufacturing will grow to cater to the projected demand of US$ 280 billion by 2020 and US$ 400 billion by 2022 for electronic goods in the country. Without establishing a strong electronic components manufacturing sector, the Indian electronics industry cannot hope to get even close to these figures.

According to industry sources, 95 per cent of active components, 50-60 per cent of passive components and 30-40 per cent of electromechanical components and printed circuit boards (PCBs) are imported at present. The countries from which these are imported include China, Taiwan, South Korea, Japan and a few European countries. The share of imports is higher for specialised and precision components like ICs, chip components, PCBs, LEDs, etc. For components that do not require sophistication, India has established near self-reliance. These components include cables, speakers, CRTs, etc.India has also been exporting these components to other countries.

The value addition in electronic components is, however, extremely limited as most of the raw materials are either imported or are purchased at high cost. The value addition in the electronic components industry does not exceed 40 per cent.

Policy impact
The electronic components segment is likely to see bright days in the near future and exports of components are expected to grow as the government has increased the MEIS (Merchandise Exports from India Scheme) benefits for this industry. Also, the recent rise in the custom duties on LED lights, STBs, energy meters, flat panel TVs, mobile phones, microwave ovens, etc, will push up the demand for the components used in these products. With manufacturing costs in China rising and the industry growing in India, exports are bound to grow. The focus of programmes such as Make in India and Digital India is also shifting towards the ESDM sector.

Figure 1: The size of the Indian electronic components manufacturing industry (Source: ELCINA)

Other measures like the Preferential Market Access (PMA) policy and the Phased Manufacturing Programme (PMP) for several electronic items will drive demand for indigenous components. The recent focus on electric vehicles (EV) is also going to drive demand, gradually, as this sector grows. It is well accepted now that demonetisation and the implementation of GST slowed down growth in the third and fourth quarters of 2017-18. However, the readjustment process is now nearing completion and will have a salutary impact on the Indian economy. GST had caused several complications such as inverted duties due to a high GST rate on components as well as delays in refunds, blocking crucial working capital.

Growth drivers
The emerging high growth areas for domestic manufacturing are LED lighting, automotive electronics, energy meters, solar energy, mobile phones and IT products such
as tablets. Local mobile phone makers are expected to drive demand for components such as die-cut parts, PCBAs, camera modules and connectors, which are all coming under the purview of the PMP this year.

Figure 2: Demand vs supply scenario in the Indian electronic components market (Source: ELCINA)

The Central government is considering extending the PMP to cover LED lights and set-top boxes. When that happens, demand for the associated components too will grow sharply. This growth will be in addition to what’s being witnessed in segments such as telecommunications, consumer electronics and industrial electronics. The Indian electronic components market continues to be dominated by electro-mechanical components (like printed circuit boards, connectors, etc) that have a 29 per cent share, and passive components (like wound components, capacitors, resistors, etc) that have a 24 per cent market share. Active components (like ICs, diodes, transistors, picture tubes, etc) and associate components (like optical disks, magnets, RF tuners, etc) constitute 18 per cent and 29 per cent, respectively, of the components market.

There has also been growth in niche markets, in which specialised EMS players in automotive, strategic and medical electronics are making a mark. Availability of components and an effective supply chain are vital for EMS companies to grow.

While the industry composition is not predicted to change substantially, there is a rapid decline in the manufacture of products such as cathode ray tubes and CD/DVDs, which had till recently constituted a significant share of the Indian manufacturing base and market.

Emerging tech trends
The electronics industry is going through an exciting phase. Demand for electronic products is on the rise, electronics is playing a major role in our lives, and innovations are happening with increased frequency. Manufacturers of electronic products need to focus on continuous improvement in order to stay ahead of the pack. A few tech trends that will impact the electronic components industry are listed below.

  • Convergence of technologies: Convergence allows a single device to use multiple technologies and provide varied services. It has become a reality in the last couple of years with the launch of products like smartphones, in which communication and computing have converged. Convergence is moving beyond mobile phones to several other electronic devices like music players, IPTVs, iPads, etc. This trend is expected to convert most electronic products into multi-utility devices, which require high-tech electronic components.
  • Miniaturisation: The dawn of convergence has led manufacturers to integrate multiple devices. At the same time, the demand from consumers to reduce the size of the products to make them easy to manage has led to these products becoming increasingly smaller in size. Miniaturisation results in a greater density of components, which is usually possible through VLSI designs. This also enables lower cost of production, resulting in a reduction in the overall product pricing. Miniaturisation is expected to increase and will impact the traditional components market, as most of these components will be replaced by chip components and integrated circuits.
  • Artificial intelligence: Consumers are becoming increasingly technology-conscious and are demanding products with built-in intelligence. So consumer electronic products are becoming ‘smarter’. For example, washing machines can now sense the load and decide the appropriate washing cycle. Intelligence has moved beyond consumer products and is also available in several medical electronics and industrial electronic products.
  • Going green: Manufacturers across the globe have started moving towards green electronics and sustainable development with the implementation of the RoHS (Restriction of Hazardous Substance) and WEEE (waste electrical and electronic equipment) regulations. The Indian government, too, has issued notifications to regulate the use of hazardous substances (lead, cadmium, and mercury) and the proper disposal of WEEE. Similarly, rules have been made with respect to energy efficiency norms and the labelling of most consumer electronics and durables. Traditional components will face stiff competition from the integrated circuits and products made using surface mount technology (SMT). Manufacturers will need to shift focus from discrete components to integrated components in order to benefit from the changing tech landscape in the country.

Moving forward
Industry experts predict that over the next ten years, India’s own electronic components production ecosystem will be in a position to compete globally. The Indian automotive sector, particularly automotive electronics, will witness a tremendous boost, propelled by free trade agreements and venture capital funds.

However, this will only be possible if the Indian electronic components industry can transform itself into the best-in-class manufacturing hub. For that to happen, the following challenges will need to be addressed:

  • High capital costs.
  • Inefficient supply chain for raw materials.
  • Non-availability of advanced manufacturing equipment.
  • Logistics inefficiencies and infrastructural bottlenecks.
  • Lack of skilled labour.
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