Supply Chain Challenges: Distribution-The Vital Link For Electronics Manufacturing

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  • Distributors play a crucial role when it comes to just-in-time services for ODM as well as EMS players
  • ODMs and institutions face a plethora of problems due to illogical forecasts made by the design houses, leading to higher prices for all participants across the value chain 
  • Are the new incentive schemes good enough for creating new component manufacturers in India?
Industry Veterans Discussing Supply Channel Challenges During India Technology Week in a panel discussion moderated by Mr. PVG Menon of Vann Consulting

As Indian companies have restarted manufacturing operations post Covid-19 lockdown, the supply chain for electronics is under tremendous stress. The industry itself is going under structural changes, with the distribution partners bearing most of this stress. These have been trying to re-invent themselves as more and more value add activities are being pushed upon them. Lot of Mergers and Acquisitions (M&A) is taking place in the industry, with large distributors acquiring and absorbing Independent Design Houses into themselves.

Discussing the same, a panel moderated by Mr. PVG Menon, President & CEO, VANN Consulting Pvt. Ltd. tried to map the challenges and opportunities in the distribution vertical of electronics manufacturing. The panelists included Mr. Sanjeev Keskar, Managing Director India, Arrow Electronics; Mr. Sunil Hasija, MD, Elektronika Sales Pvt Ltd; Mr. Mukesh Gupta, Managing Director, Smile Electronics; and Mr. Rajoo Goel, Secretary-General, Electronic Industries Association of India (ELCINA).

” In the earlier (pre-Covid) times, multiple Just-in-Time deliveries were the norm. Today it seems to be moving to a “Just-in-Case” model. The As we talk about the new normal, we will also discuss the old problem that the electronics industry in India faces, which is, how to build integrity into the forecasts by customers. This needs to be resolved as India is acquiring the tag of a country where forecasts cannot be trusted,” was the statement that PVG Menon opened the panel discussion with.

Questions answered

1. What are the challenges that different stakeholders of the ESDM industry are facing?
2. How bad is the inventory and raw material situation in India?
3. Is looking at local (INR) purchase orders (after stocking locally) feasible and desirable?
4. Is the model of distributor companies acquiring design houses here to stay?
5. What is India’s future in terms of the country’s IDHs?
6. What are the ways local value-addition can be incentivised?
7. Are the new incentive schemes good enough for creating new component manufacturers in India?
8. Can policies help create markets and demand?
9. What is the possibility of additional component manufacturing taking place in India?
10. How do we build integrity into the forecast made by the customers and the challenges faced by both ODMs and Institutions

Points to ponder upon

1. Distributors play a crucial role when it comes to just-in-time services for ODM as well as EMS players.
2. Both ODMs and Distributors face a plethora of problems due to illogical forecasts made by the design houses.
3. Only 12 per cent of total PCBs required by Indian companies are being made in India.
4. The electronics consumption in India is high when it comes to verticals like smartphones, laptops, TVs, and other consumer electronics.
5. Logistics challenges ensure that shipping from Singapore to Delhi is much easier than transporting locally from Bangalore to Delhi.
6. India’s strength is embedded design. This has to be leveraged more to enable true “Design in India” for making products with more domestic value addition in India.
7. 50 to 60 per cent of the BOM includes semiconductors, display, and memory. All the three are not made in India. This adds to the problem of domestic value addition.

“The first thing is a big variance in drop in demand! That is the beginning of all the problems. There is a very sharp drop in domestic demand. Luckily, those who are exporting are having a better time as the foreign demand has not been varying so much. The money has been coming from the foreign markets,” noted Rajoo Goel of Elcina.

The immediate-to-address challenges

1. There is a big variance and drop in demand. The sharp decline in demand in the domestic sector is creating problems.
2. Cash flows are a big problem too. These added with fluctuating currency ratings add fuel to the fire. This is particularly acute for the MSME segment
3. As 70 to 80 per cent of components come from China, the current situations have drastically disrupted the supply chain.
4. The cost of logistics is going up. Even after paying 4x to 5x the normal freight rates, companies are not getting supplies in time. Adding to this is huge Demurrage charges collected by Customs for delayed pickup of shipments, caused by transportation problems on account of Lockdown.
5. ICs and semiconductors are being imported as there is no production in India. PCBs, ICs, and Semiconductors need the maximum focus now.
6. GST continues to be a big challenge for the entire industry as it affects the cost of movement of goods throughout India.

“Because of the lockdowns and slowdowns, companies have changed their forecasts drastically downwards. In the supply chain, planning is done based on the forecasting given by the customers. We cannot cancel on our suppliers, but our customers are cancelling orders. Another challenger that a lot of distributors are facing are due to the cash flow problems faced by customers, as their customers are not paying them on time, which is leading to bigger disruptions,” pointed Sanjeev Keskar of Arrow Electronics.

Opportunity in adversity

1. Government projects on industrial electronics like smart energy meters, telecom projects (5G) are a big opportunity for the electronics industry.
2. Global, as well as domestic EMS companies, are playing a big role in creating world-class manufacturing facilities in India. As a result, big contracts will be coming in because of the Defence Offset clause, PLI schemes, and because of the Make in India drive.
3. Distribution companies have started seeing India as one of the biggest booming economies in the world. These have now started placing India on their strategic business maps.
4. While there Covid-19 has created immediate challenges for the entire EMS industry, robust growth in the consumer side of electronics is expected. Trends like work from home will drive this growth.
5. Many global players are discussing setting up kitting and logistics locally in India. However, GST remains a big challenge.
6. The government is trying to create a lot of activity in the mobile manufacturing space. The same might create demand for locally made components and CKDs.
7. A strong growth in the local manufacturing of passive components, ATMP, and semiconductors is expected.
8. A few companies from Taiwan and the US are wanting to come to India.

“Indian electronics industry is poised for a huge change. Electronic manufacturing companies are showing more and more signs of shifting operations to India. The Indian government is strongly promoting the make in India campaign. Key segments like EMS activities are improving. We are seeing new projects coming to Indian players. Make in India and Vocal for Local will further boost the sector,” noted Sunil Hasija of ElektronicaElectronica Sales.

What about the recently announced incentive schemes?

1. The scheme is not for small players. About three to four major global players might come to India. About two to three India-based players might be able to participate as well.
2. ELCINA is in talks with the government about lowering the investment required from local players to be eligible for the scheme.
3. Incentives of 4 to 6 per cent, of output, can push key players to invest in India. However, the minimum investment of Rs 100 crores might act as a block for domestic companies as it is too high for them.
4. SPECS is a remarkably interesting scheme. It might also push component manufacturing in India.
5. The two schemes (PLI and SPECS) cover a major part of the disability that local component manufacturers face in India.
6. It is especially important to push the growth of the PCB industry right now. The same needs a lot of funds and a strong ecosystem. Both the schemes are also supporting PCB manufacturing.
7. However, the three policies need to address the entire manufacturing ecosystem as the margins are low.

“I Think the policies of the government need to be more focussed. They are coming in bits and pieces. We need to ensure that the policies address the full ecosystem” said Mr Mukesh Gupta of Smile Electronics.

The next steps

1. To be able to compete in the world market, we should be able to stick to pricing that is not dependent on any external factors such as COVID 19 and Chinese product dumping.
2. The business for the end-user will be far better if the deals are done in INR. Companies will be able to predict and forecast in a better manner.
3. Domestic companies will also be able to manage their cash flows in a better way if local consolidation takes place.
4. More investment is needed in companies who design in India and the IP stays in India. Local value addition in terms of design is the need of the hour.
5. For small clients, the design fee model can be applied, while for big ones amortization models can be followed.
6. We need to revisit our FTA with countries like Vietnam and Thailand. These allow importing electronics at zero duty from these countries. Even if we add some duties to non-it electronics, the same can be easily imported from the countries mentioned, at zero duties.
7. Mergers and acquisitions will happen, and distributors must be ready to appreciate these changes.
8. We should look towards other components including PCBs, passive components, display LED, inductors, and transformers as these create significant value as well.
9. There needs to be a focus on the PCBs and storage industry as these are being imported on zero duties from various countries.

From how things have been going in the recent past, I see a positive attitude coming from every side. Though there are a lot of challenges faced by the industry, demands from within the country and world have also started coming in. Being able to meet the requirements will be a major thing to achieve,” explained Mukesh Gupta.

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