Can India’s EMS Sector Turn Adversity Into An Opportunity?

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The Indian electronics industry is facing unique challenges. Local manufacturing is limited and overly dependent on Chinese imports, and the pandemic has only made matters worse. But this could be the moment for giving a huge push to the industry’s manufacturing priorities, and wooing investors and companies.

By Nijhum Rudra

In 1977, when the California based firm Solectron began operations to service a large OEM in the solar energy space, the global electronics manufacturing services (EMS) industry was born. In those days, the large scale manufacturing of electronics was done in-house by the big OEMs themselves. The arrival of EMS providers reduced the intricacies of human resource issues for the OEMs and also offered greater flexibility for SMBs doing limited production. The business model of EMS companies was to specialise in large scale production, enabling cost-cutting through the economies of scale, raw materials procurement and pooling together of resources, apart from also offering industrial design competence, and valued added services such as warranty and repairs.

This enabled OEM customers to avoid holding huge inventories. In the same way, the Indian electronics industry also started witnessing growth and demand in the late 70s and early 80s, which ultimately led to the development of the domestic EMS sector. India is now one of the largest electronics markets in the world, with as yet untapped potential in rural areas, a growing middle class, rising disposable incomes, a favourable duty structure, the ongoing digitisation trend, etc.

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According to the research firm India Brand Equity Foundation (IBEF), the electronics industry in India is expected to reach US$ 400 billion by the end of 2020 as it is now one of the fastest growing sectors in the country. The government of India is trying to push an export-oriented policy for electronic products. The basic aim of this policy is to promote greater exports of electronics and drive larger investments by setting up port-based electronics manufacturing clusters.

Upasana Joshi, associate research manager, IDC, in an exclusive talk with Electronics Bazaar, said, “There has been an explosion in local manufacturing in the past few years with a majority of the large brands either establishing their own factory setup or opting for contract manufacturing with giants like Foxconn, Flextronics, etc. But this trend is limited to the top few brands, who together make up for 80 per cent of the smartphone market, leaving the small vulnerable players behind. The latter struggle with low volumes and hence are unable to benefit from the economies of scale, as it is expensive to set up one’s own facility or find niches for small volumes in high end contract manufacturing plants.”

Growth of EMS in India
To boost the EMS and ESDM clusters in India the Centre has launched a range of initiatives and schemes. Many of them, such as MSIPS, proved to be successful, but the torchbearer among all the policies is the revised National Policy on Electronics (NPE) 2019, which has targeted a turnover of US$ 400 billion by 2025 from domestic manufacturing. This is to be achieved by setting up clusters for the entire value chain, and employing over 10 million people directly or indirectly, to achieve a growth rate of 32 per cent over this period.

In the EMS domain, this policy targets the local production of one billion mobile handsets by 2025, valued at US$ 190 billion, including the export of 600 million mobile handsets valued at US$ 110 billion. There are around 270 mobile and component factories in India at present, employing about 500,000 people directly or indirectly. Additionally, there is also a significant demand for high-end consumer electronics. The consumer electronics and appliances sector is predicted to grow at a CAGR of 13.4 per cent to touch US$ 20.6 billion by the end of 2020.

Dr Satya Gupta, chairman, IESA, says, “Overall, the EMS sector has done very well in the last five years, especially in mobile phone manufacturing by global players. With the recent incentives announced for this sector, it is expected that it will continue to grow at a CAGR of over 20 per cent. There are some concerns about the scaling of domestic EMS companies. These are mostly medium- to small-sized companies that are finding it difficult to grow.”

What’s actually driving the growth of the EMS sector in India is the massive demand for mobile phones, telecom products as well as consumer and smart electronic devices. The growth is also strong in lighting, power electronics, automotive and strategic electronics such as defence, aerospace and the railways. The OEMs in the defence and aerospace sector are now largely depending on EMS providers, so that the latter can address the risk management, logistics and after-market service needs. EMS providers, with their top-notch technologies and reliable supply chain management, are the best placed to meet these needs. According to the government of India, the ESDM sector is estimated to reach US$ 228 billion by the end of 2020, growing at 16-23 per cent annually. The government also predicts a 17 per cent growth in the local manufacturing of electronic products and at least a 24 per cent growth in electronic manufacturing services over the next five years.

A couple of months back, an exclusive report by electronicsb2b.com stated that the demand for green and energy-efficient devices and components offers new opportunities for growth. To cater to this demand, OEMs are developing strategic partnerships with service providers in order to control manufacturing costs. The service providers offer product design, development, and manufacturing services to OEMs, helping the latter save on development costs. This allows the EMS players to develop green manufacturing facilities and energy-efficient products that support global sustainability goals.

To attract more investments into the electronic components, semiconductors and mobile segments, and to fight the slump in manufacturing caused by the COVID-19 pandemic, the government has recently launched a US$ 6.37 billion scheme. Under this scheme, incentives will increase from 4 per cent to 6 per cent on incremental sales of the electronic items that are produced in the country, and that are covered under the target segments. This incentive is being given to eligible companies for a minimum period of five years. According to the Electronic Industries Association of India (ELCINA), the electronic components market in India increased from ₹ 683.42 billion in 2015-16 to ₹ 1.32 trillion in 2018-19.

Dr Gupta adds, “Although overall manufacturing has grown very well in India, but in most of the cases, domestic value addition is in the range of just 15-17 per cent or lower. To move up the value chain, it is very important for India to prioritise increasing domestic value addition to 30-40 per cent. This is very crucial for India’s march towards self-reliance.”

How COVID-19 has impacted India’s EMS sector
Faisal Kawoosa, founder and chief analyst at techARC

India has witnessed robust growth of the electronics industry, primarily driven by huge domestic demand. But the COVID-19 pandemic has changed the entire economic landscape of the electronics industry in India and around the world. This is what the experts say.
The biggest challenge for the EMS providers is in how to resume operations successfully. This is for two reasons. One is whether we are able to have adequate social distancing and other safety norms in place; and the second is how do we populate the factories when the workforce, which is primarily migrant, has moved to their hometowns. The other big challenge is of the supply of consumables drying up, as is the case with components and other parts. The supply chain isn’t back in order completely. The costs of transportation have gone up, and the rupee’s depreciation is also a worry. Effectively, the costs are going up and there are challenges like finding labour and components to fulfil orders. This will lead to further challenges as demand could weaken in some months due to the broader negative economic outlook.

Dr Satya Gupta, chairman, IESA

The current COVID-19 situation has exposed the weaknesses of the electronics supply chain in India. Most of the manufacturers of mobile phones depend on a supply chain that is routed through China and with the changing geo-political equations, things are certainly going to be challenging. India should leverage its relationship with USA, Japan and the European countries to mitigate this challenge. The pandemic has certainly opened a window of opportunity to relook at the overall electronics and semiconductor sector from a fresh perspective. The demand in India will continue to grow after a short-term dip. With the changing landscape of the electronics and semiconductor industry worldwide, India has to work on creating large domestic product companies and also align with USA, Japan and European nations to create sustainable trade relationships.
—Dr Satya Gupta, chairman, IESA

Upasana Joshi, associate research manager, IDC

Owing to our heavy dependence on imported components from China, and restrictions on movement owing to the lockdown in India, there have been supply chain disruptions in the past few months. Further, since the factories were shut through the last weeks of March and entire April, along with the labour force migrating back to their home towns, the non-availability of finished devices has become more acute. With factories re-opening in May, though with limited production capacities, the supply chain is expected to normalise by the end of Q3 2020 (back with 90-95 per cent production capacities).
—Upasana Joshi, associate research manager, IDC


India’s EMS obstacles

Even though the falling prices of electronic goods and the success of government initiatives and schemes have led to immense growth in the hardware and electronic products space, India’s manufacturing base is still fragile and is not able to respond to escalating demand, thus leading to a trade deficit with many countries. Around 50-60 per cent of electronic products and 70-80 per cent of components are still being imported from China and other countries. But, after the coronavirus pandemic, many of the component makers and global electronics firms are now planning to set up their manufacturing bases in India soon.

Rising import duties have acted as a catalyst to attract investments into mobile phone manufacturing. The country has come a long way, graduating from the CBU (completely built up) type of imports to SKD (semi-knocked down) type of manufacturing, and now to CKD/SMT lines being set up locally. However, the fact remains that we still depend on importing PCBs from outside India, which accounts for 50 per cent of the cost of manufacturing a device. We are still a long way from locally manufacturing these products owing to the many challenges mentioned earlier.

An IDC report states that in spite of the several opportunities and growth potential, there are many tough challenges too in the Indian EMS space, which need to be tackled soon, if we are to ever make the country a global hub for electronics. Listed below are some long-term solutions.

  • Build a value-added manufacturing process instead of only setting up assembly lines. Currently, with the SMT (surface mount technology) type manufacturing, brands are still sourcing the PCB (unmounted) from China, which makes up more than 50 per cent of the cost of the device. This means that even now products are being assembled, with most essentials getting sourced from China.
  • Greater investments in sourcing parts like lithium-ion batteries, touch panels, screens, etc, are required for long term sustainability. Alongside government subsidies, collaboration with the ecosystem partners to promote R&D is critical.
  • There’s a scarcity of essential resources like water and electricity, which are a hindrance to manufacturing units, thus reducing the potential for EMS players to match market demand.
  • An improvement in logistics is required to support both imports and exports, and this involves developing ports, transportation networks, insurance services, banking facilities, etc.
  • Skilled manpower is still scarce and must be trained.
  • Co-working hubs that promote production with shared resources must be developed.
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