The electronics industry is facing unprecedented changes worldwide. Innovation and agility are leading to a competitive advantage for an organisation, irrespective of its size. The Indian electronics industry will also be following the same trend.
As we are about to enter 2020, innovation and agility will be essential competitive ingredients for any organisation, regardless of industry. The Indian electronics system design and manufacturing (ESDM) industry companies need to take even greater advantage of emerging technological tools to accelerate experimentation, facilitate innovation, boost agility and power organisations’ journey in the era of digital disruption.
Technologies to drive
Today, new technologies are penetrating the market within a fraction of the time it took older technologies to do so. Disruptors are capitalising on existing infrastructure and leaping ahead in the market share. Many electronics companies have already taken advantage of the changes in the market by enhancing their capabilities. They are becoming more sophisticated in their approach to capital markets, in developing deep consumer insights, in building technical capabilities and in developing pricing strategies.
The electronics value chain is under intense pricing pressure as customers push to lower end-market prices and manufacturers aim to increase market penetration. However, material, labour and other operating costs continue to rise.
How can the Indian electronics companies thrive in such an increasingly automated, smart and constantly-changing market? Incumbents face the challenge of agile transformation and the threat of disruption, while startups face immense challenges trying to achieve a significant market share. To survive, companies have to rethink how they operate.
Business model innovation is necessary for the survival of electronics companies at key inflection points in their evolutionary curve.
For example, with their core business generating slimmer margins, many original design manufacturers (ODMs) and component manufacturers are in search of new platforms to achieve growth targets. To create long-term value, companies need to strike the right balance between core business performance and innovation at scale, while considering consumer demand trends. Consumers are demanding faster connectivity, greater interoperability and ever more innovative products and solutions.
Successful companies continually innovate through product and service development, omni-channel customer engagement and by creating agile supply chains. They also strengthen such core disciplines as capital allocation, productivity and pricing by leveraging the latest technologies while riding the wave of disruption.
A release from McKinsey Global Institute (MGI) indicates that new technologies are unfolding relentlessly on many fronts. Almost every advance is billed as a breakthrough, and the list of the next big things keeps growing longer. Not every emerging technology will alter the business or social landscape, but some truly do have the potential to disrupt the status quo and alter the way people live and work.
MGI also shared insights into the upcoming wave of twelve technological developments, termed as the Disruptive Dozen, which will have the greatest impact on the way we live now and have the highest potential to recast the business landscape in the coming decade. The Disruptive Dozen includes mobile Internet, automation of knowledge work, the Internet of Things (IoT), cloud technology, advanced robotics, autonomous and near-autonomous vehicles, next-generation genomics, energy storage, 3D printing, advanced materials, advanced oil and gas exploration and recovery, and renewable energy.
These technologies are to add between US$ 500 billion and US$ 1 trillion to India’s economy, and will significantly improve the lives of people. Therefore the Indian ESDM industry should strengthen the capabilities to leverage the benefits of these disruptive technologies.
India, being one of the largest electronics markets in the world, is anticipated to reach US$ 400 billion by 2025. The consumer electronics and appliances industry in the country is also expected to become the fifth largest in the world by 2025. In addition to that, FDI allowance up to 49 per cent of electronics items for defence under automatic route and beyond 49 per cent through the government approval, and 100 per cent FDI allowance under the automatic route for all other electronics items, help attract investments in this sector.
The Indian ESDM sector is driven by such macro-economic factors as growing middle-class population and rising disposable income. In addition, declining electronics prices and adoption of high-end technology devices are leading to an uptick in consumption of electronic devices.
Further, technology transitions such as the rollout of 5G networks and the IoT are driving accelerated adoption of electronics products. Initiatives such as Digital India and Smart City projects have raised the demand for the IoT in the market. Similarly, the digital banking sector like wallet players and payment banks will raise demand for point-of-sale (POS) and very small aperture terminal (VSAT)-enabled mobile ATMs, which will further give a fillip to the growing industry.
The government of India has prioritised the ESDM sector under Make in India programme. Various policy initiatives, including National Policy of Electronics (NPE), aim to increase domestic production and export of electronics, and propel the growth of the ESDM industry. NPE 2019 aims to do the following:
- Promote domestic manufacturing and export promotion in the Indian ESDM industry value-chain to build a globally-competitive ecosystem
- Increase exports to sixty per cent of domestic production by 2025
- Develop the manufacturing base for strategic electronics within the country
- Offer structured incentives to support the manufacturing of core electronic components
- Incentivise mega projects that are extremely high-tech and entail huge investments, such as semiconductor facilities for display fabrication
- Promote R&D and innovation across all emerging technology sub-sectors of electronics, such as 5G, the loT, sensors, artificial intelligence (Al), machine learning, virtual reality (VR), drones, robotics, nano-based devices, etc
- Increase availability of skilled workforce, including re-skilling with appropriate incentives and support
- Develop such industries as fabless chip design, medical electronic devices, automotive electronics and power electronics for mobility and strategic electronics
- Promote development and acquisition of intellectual property rights or patents in the electronics sector to make them available to Indian entrepreneurs at a relatively low cost by creation of Special Sovereign Patent Fund (SPF)
Need of the hour
The Indian electronics manufacturing ecosystem is witnessing major changes from both regulatory and business points of view. However, these changes are not enough to materialise Make in India for the world.
According to a study by Deloitte, India is expected to be among the top five manufacturing nations by 2020. Interestingly, India’s manufacturing labour cost in 2015 stood at US$ 1.72 per hour compared to US$ 37.96 per hour for the US. Even China’s cost is almost double that of India.
The Indian government has set an aggressive target of increasing the manufacturing share to 25 per cent of GDP by 2025. However, till date, almost 75 per cent of the total electronics demand is still serviced through imports (Fig. 1). How should the Indian electronics manufacturing sector strategise to reach that place?
For the Indian electronics manufacturing sector, it could also be the start of Industrial Revolution 4.0. The convergence between digital and manufacturing has already begun with wide adoption of the IoT, sensors, robotics, AI, etc. The industry also needs to reduce the cost of production through real-time automation and with the help of innovative technologies like 3D printing and so on.
The phased manufacturing programme (PMP) is also a good move to transform electronics manufacturing from semi-knocked-down (SKD) to completely-knocked-down (CKD) phase. But moving from SKD to CKD alone is not enough. The scale of manufacturing also needs to be increased, but that cannot happen by catering to the domestic market alone.
Companies need to be able to tap global markets, for which India needs a strong policy that provides incentives for the export of electronics goods. This will create the scale that will attract FDI into the country from global electronics component manufacturers and create jobs. This is what happened in auto manufacturing as well.
Incentives for the export of electronic goods will also be helpful in this aspect. Globally, manufacturing competitive countries like China, the UK, Australia, etc offer incentives, tax credits and grants to facilitate electronics manufacturing. The Indian government can adopt best practices from these countries to improve India’s ranking on global manufacturing competitiveness (see table).
The ease of doing business could probably be the most important factor in establishing the country as a global hub for electronics manufacturing. In 2018, India moved to the 100th spot in World Bank’s Ease of Doing Business global rankings due to sustained business reforms. However, global investors do not invest just on the basis of the overall ranking. They look at each parameter and every state’s ranking on input parameters and do their own due diligence before investing.
The cost of logistics is also an important concern for investors. As per a World Bank report, cost of transporting one tonne of freight over one kilometre costs ₹ 2.28 by road, ₹ 1.41 by rail and ₹ 1.19 by water. Thus, efficient use of ports can help the country lower its logistics costs. This will, in turn, make domestic goods more competitive in global markets.
Other areas where the government could focus on is enforcing contracts. According to World Bank Ease of Doing Business survey, India now ranks 77; it jumped 23 positions in just one year.
If the Indian electronics sector wants to win this battle for global manufacturing supremacy, it has to focus on the above-mentioned areas. This will, in turn, drive innovation and cost competitiveness.
Sudeshna Das is director at ComConnect Consulting