The Indian ESDM industry: The outlook for 2019

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Zero electronics imports by 2020 seem a distant dream, with imports still forming a large part of the Indian electronics manufacturing ecosystem. With manufacturing technology changing tirelessly, the Indian government and the ESDM industry have a lot to do to keep up with it, and to ‘make in India’ a lot more.

By: The ComConnect Consulting research team

As we approach the end of this decade with the target of ‘zero electronics imports by 2020’ looming large, the Indian electronic systems design and manufacturing (ESDM) industry needs to do much more than it has so far if it has to come anywhere near the target. Strong domestic consumer demand due to India’s rising disposable incomes and the ongoing process of digitalisation is spurring the need to develop indigenous electronics production capacities. However, till date, almost 75 per cent of this demand is still serviced through imports (Figure 1). Consequently, the ESDM industry offers immense prospects for investors and stakeholders. However, it is important to understand the market trends, the growth drivers and challenges, to get a competitive edge in this industry.

The electronics sector has been the focus of attention for the last decade and is widely recognised as one of the driving forces in a vibrant and modern economy. ESDM is commonly referred to as a ‘meta resource’ which cuts across sectors and drives efficiency, affordability, sustainability, delivery of services and inclusive growth. There is no short term solution to this sector’s problems. It requires a 10-15 year vision and strategy to overcome its chronic weaknesses and address the factors that are holding back investments and growth.

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Growth through new technologies
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. So companies need to take greater advantage of new and emerging technologies.

New technologies are today 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 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 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.

Figure 1: Demand-supply gap in the Indian electronics industry

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 creating agile supply chains. They also strengthen core disciplines such 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.

The MGI shared insights into the upcoming wave of 12 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, the 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, strengthening the capabilities of the Indian electronics industry to leverage the benefits of these disruptive technologies is the need of the hour.

The emergence of the new ‘OEM-EMS’ dynamics
The electronics manufacturing industry depends a lot on dynamic business relationships between original equipment manufacturers (OEMs) and electronics manufacturing services (EMS) providers.

The emerging OEM-EMS relationship includes product design outsourcing, end to end manufacturing integration, and strategic partnerships through technology deployment.
Competition and product complexities require OEMs to advance their in-house R&D and design competencies further or, alternatively, collaborate with EMS partners to fulfil these needs. To reduce overall expenditure and shift from fixed costs to variable costs, OEMs are increasingly moving product design and development processes to EMS partners.

At the same time, EMS companies are offering more design services for sub-assemblies and finished products. These include both product design and end-to-end manufacturing solutions, starting from conceptualisation, product planning and engineering, to industrial design and mass production.

The end-to-end integration of manufacturing solutions is in demand as OEMs are looking for cross-industry horizontally-integrated service providers. This trend is most noticeable across the electronics, plastics and metal industries. Driven mainly by the end application market and engineering synergies, this business model will become a major strategic goal of leading component manufacturers, EMS service providers and OEMs. Small-to-medium sized OEMs are especially appreciative of the benefits manufacturing integration services offer.

In some cases, OEMs completely outsource the entire product design role to EMS partners. EMS companies manufacture and deliver the final products by working directly with the approved vendors of the OEM. In this way, the EMS providers streamline technical and logistics communications across all manufacturing parties, thus streamlining the entire manufacturing process. Moreover, there is a growing trend of creating a ‘one-stop shop’ offering design, engineering and manufacturing services.

With the advent of digital technology enabled services and connectivity tools, manufacturing partners can work more closely, sharing insights about the production scenario, inventory and order status. In order to achieve this, both OEMs and EMS providers need to focus on developing cloud based technology platforms and new operating models that enable connected services to integrate multiple stakeholders, including customers.

Growth drivers at a glance

  • Telecom equipment (including mobile devices), consumer appliances, automotive, industrial and strategic electronics applications will continue as the growth drivers for the Indian ESDM industry (Figure 2).
  • Another driver is the significant growth achieved in the production of mobile handsets, accessories, LED TVs, LED lights and even some growth in component manufacturing.
  • Hectic activity by MeitY with industry consultations to devise an effective policy to promote electronics exports will also drive growth. According to the Directorate General of Commercial Intelligence and Statistics (DGCIS), exports of computer hardware and peripherals and consumer electronics stood at US$ 198.04 million and US$ 234.19 million, respectively, between April and October 2018.
  • Electric vehicles and connected mobility related applications have already opened up huge opportunities for power electronics devices and components, including power management semiconductors, etc.
  • In the electric vehicle (EV) space, the desire for a longer driving range between charges, faster battery charging times, higher electronics integration for infotainment, safety and security, and other applications will drive tech advances, increasing the total electronics content of EVs.
  • The Internet of Things (IoT), 5G and artificial intelligence (AI) are emerging as new growth drivers.

The need to boost domestic value addition
Export led growth is perceived as a proven roadmap for success with precedents such as Japan, South Korea, Taiwan and China – countries that also had a large domestic market. This is in some ways an anomaly, because India, like China, has a large and growing market, which is being serviced by imports that domestic companies are unable to compete with – so this remains a chicken-and-egg situation.

Export driven growth however, offers an entirely new playing field for which domestic capabilities can be built to achieve economies of scale leading to cost and value competitiveness. It may well be the right strategy to break the vicious cycle of cheap imports, ITA-1, low volumes and low investments. The benefits of the MEIS (Merchandise Exports from India Scheme) are provided for, among other goods, a number of electronic components, assemblies and products.

Currently India exports ~US$ 6 billion worth of electronics annually and it has been proposed that on the back of an aggressive export promotion policy, it should target the aspirational figure of US$ 100 billion by 2022-23, i.e., a 15-fold growth in five years or a CAGR of 75 per cent! Such explosive growth is unrealistic and, as experienced with policies in the past, will result in disappointment.

Currently, our exports amount to 13 per cent of domestic production, which is hovering around US$ 45 billion. This production figure covers both high value and low value added manufacturing.

Figure 2: How different verticals share the revenues of the Indian electronics industry

It is worth mentioning that any proposed incentives need to be calibrated to the capacities of the industry to achieve optimal results, while excessive sops are likely to result in leakages and misappropriation of resources. Considering the country’s present state of growth, its infrastructure, the domestic investment capacity and our capability to absorb foreign investment and technology, a realistic target CAGR for domestic production could be about 25 per cent and export growth a bit higher at, say, 30 per cent, based on the proposed export incentives. This would enable the development of a self-sustaining ecosystem if we achieve an acceptable value addition level of say 30 per cent by 2022-23. This target would take the industry to over US$ 22 billion in exports and US$ 137 billion in domestic manufacturing in five years, creating many jobs in the process.

A recent positive development is the focus on promoting domestic value addition and manufacturing for the defence sector. The opening up of this sector to domestic companies and MSMEs has the potential to unleash and enhance capacities and technology upgradation within the ESDM sector. The Department of Defence Production released the draft Defence Production Policy 2018 (DProP 2018) with an ambitious vision of catapulting India into the ranks of the world’s top five defence producers and also to encourage domestic value addition in the sector. In order to boost foreign direct investment (FDI) in defence production, DProP 2018 proposes allowing 74 per cent FDI under the automatic route for ‘niche technology areas’.

The focus areas for defence equipment manufacturing include state-of-art technology products such as fighter aircraft, medium lift and utility helicopters, warships, land combat vehicles, autonomous weapon systems, missile systems, surveillance systems, electronic warfare (EW) systems, communication systems, and more. This will create huge opportunities for the Indian electronics industry.

Awaiting a policy push
While new and creative policies have been formulated to promote electronics manufacturing since the 1960s, it is only around 2009-10 that a focused and comprehensive effort was undertaken to address the challenges faced by this sector. The ESDM sector has faced continued sluggish progress vis-à-vis the growth in domestic demand, the global expansion of electronics manufacturing and the advances in technology. All this has resulted in an uncompetitive industry plagued with disabilities and a market dominated by imported goods.
The National Policy on Electronics 2012 (NPE 2012) addressed a range of challenges including investment promotion, infrastructure creation, skills development, promoting R&D, e-waste management, and more. Recently, it has been revamped and the NPE 2018 is expected to facilitate the following:

  • Enhanced value addition in manufacturing
  • An aggressive export promotion strategy for doubling exports every three years or earlier
  • Rapid expansion of the components ecosystem, including passive, electromechanical, interconnection and wound components; and PCBs
  • Strategic investments in semiconductor technology and manufacturing
  • More ‘making in India’ can become a reality only if the investor is reasonably assured of profitability and MSMEs are given due support to flourish.

Nurturing an ‘innovation economy’ to realise ‘Make in India’
Technological innovations have proven to be the key growth drivers all over the world. To be competitive in the global market, it is important for a country to nurture an ‘innovation economy’. In recent years, a wide spectrum of new programmes and opportunities to nurture innovation have been created by the Indian government across a number of sectors, including ESDM.

India took a big step forward through the ‘Start Up India’ initiative. This promotes entrepreneurship by mentoring, nurturing and facilitating startups throughout their life cycle. The initiative is well placed to complement the Make in India programme, which was designed to transform India into a global design and manufacturing hub. This has renewed confidence in India’s capabilities among potential partners abroad, within the business community in the country and citizens at large. This can help raise investments, foster innovation, develop skills, protect intellectual property and build a best-in-class manufacturing infrastructure.

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