The government, while announcing the production linked incentive (PLI) scheme for IT hardware manufacture, did not shy away from admitting that the IT hardware manufacturing capability and capacity in the country has progressively declined and many units have either ceased operation or are operating at low capacity. It now aims to encourage the ‘champions’ to set shop in India. But is this new Opex based PLI scheme good enough?
Come coronavirus and it was immediately clear that the world will not be the same for a long time. People started working from home, which led to an immediate spike in the demand for products like laptops, tablets, and personal computers. The increased demand for these products, clubbed with more and more people working from home, meant increased load on servers, and hence came a spike in the demand for these as well.
International Data Corporation (IDC), in one of its reports, notes that the market size for laptops in India was approximately 75 lakh (7.5 million) units in 2019-20 valued at 33,950 crore rupees, which amounts to approximately US$4.52 billion @ 1US$=`75. Similarly, the market size for tablets was around 24 lakh (2.4 million) units, valued at 3,500 crore rupees (US$0.47 billion), and the server market stood at 2 lakh (0.2 million) units valued at 9,100 crore rupees (US$1.21 billion).
The government of India, seeing a big opportunity here, started working on a production linked incentive (PLI) scheme to encourage manufacture of these products in the country.
While rumours around the government launching this scheme started doing rounds of various newspapers in January 2021 itself, the official policy explanation was released by the government at the end of March 2021. The government, at any point, did not shy away from admitting that the IT hardware manufacturing capability and capacity in the country has progressively declined and many units have either ceased operation or were operating at low capacities. It also admitted that the laptop and tablet demand in India was largely met through imports valued at US$4.21 billion and US$0.41 billion, respectively, in 2019-20. However, the government is clear about boosting domestic manufacture of IT hardware and attracting large investments in the value chain.
One of the statements released by the government reads, “The IT hardware manufacturing sector faces the lack of a level playing field vis-à-vis competing nations. As per industry estimates, the electronics manufacturing sector suffers from a disability of around 8.5 percent to 11 percent on account of lack of adequate infrastructure, domestic supply chain, and logistics; high cost of finance; inadequate availability of quality power; limited design capabilities and focus on R&D by the industry; and inadequacies in skill development. There is a need for a mechanism to compensate for the manufacturing disabilities vis-à-vis other major manufacturing economies.”
The PLI scheme for IT hardware comes right after the other PLI schemes around smartphones, telecom equipment, batteries, and more have been announced. It looks like the best field of business to be in, at the moment, is electronics which includes IT hardware. The newly announced PLI scheme for IT hardware promises incentives on an incremental basis, and an outlay of 7,350 crore rupees (nearly one billion US dollars) divided over four years has been allocated for the same.
“PLI for IT hardware products will be a game-changer for the electronics manufacturing industry. The scheme will help in generating more value addition in the country and exports too. We hope to see a strong electronic components chain also developing alongside with the help of these schemes,” noted Manish Sharma, Chair, FICCI Electronics & White Goods Manufacturing Committee. Sharma is also president and CEO of Panasonic India.
“The government is trying to build a robust ecosystem for the sunrise sectors. This is an attempt to build up India’s manufacturing capabilities. With Covid-19, the world got very alert about China. A lot of companies that were overdependent on China were badly affected. There existed Chinese vendors who stopped selling components to several companies and told them to buy finished products. India has great potential to be a competitor of China. This is where the game of volumes can help us and PLI for IT hardware will enable us to do the same. This is one of the best schemes to have surfaced during the entire history of India,” feels Nitin Kunkolienker, president of manufacturers’ association for IT, MAIT.
The current market and challenges
The market of laptops, servers, tablets, and many other products falling under the IT hardware category is led by brands originating outside India. The top five brands Dell, HP, Lenovo, Acer, and Asus accounted for over 85 percent share of the total PC computers sold in India during 2020-21 (IDC). Similarly, the top five players Dell, Lenovo, Super Micro, HP, and Cisco had more than 60 percent share in the server market during fourth quarter of year 2020. On average, these five companies have been commanding over 60 percent presence in the market since the last five quarters.
It is to be noted here that none of these companies makes laptops or servers in India. The government of India has already said that the demand for laptops and tablets in the country is largely met through imports. As per estimates by Stastita, revenue in the laptops segment is projected to reach US$5,502.58 million in 2021. These numbers define a big business opportunity. As a matter of fact, in terms of PC shipments, the third quarter of 2020 was the biggest quarter during the last seven years.
“Anticipating a longer work from home possibility, enterprises are getting ready for a larger mobile workforce and keep reducing their dependency on desktops. Also, SMBs started showing more momentum and will be critical in sustaining the ongoing growth in the commercial segment. Unfortunately, shortages of some key components continue to be a challenge. Vendors that will be able to manage the supplies of these components will benefit from this opportunity more as there is still a lot of untapped demand for PCs in the country,” says Jaipal Singh, associate research manager, Client Devices, IDC India.
Singh, in IDC’s PC market report for the fourth quarter of 2020, had added, “2021 will give another opportunity to the vendors to leverage the missed prospects due to supply constraints in 2020. So far, consumer demand does not seem to be abating anytime soon, and enterprises also continue to place fresh orders. Additionally, many government education deals are under discussion, which can set a strong foundation for 2021.
However, if the current supply challenges continue for some more months, it can offset the ongoing demand to some extent. Availability of the devices will not only be critical for the category growth but will play an important role in the expansion of the market in the country.”
“Rupees 30,000 crore (US$4 billion) worth of laptops and rupees 3,000 crore (US$400 million) worth of tablets are currently sold in India. Of this, more than 80 percent is imported. As a result of the latest PLI, the government hopes to draw into India the top 5 global companies which control 50 percent of the international market. A total 32,600 crore rupees (US$4.35 billion) worth of production will be achieved, of which 75 percent will be made up by exports,” Telecom Minister Ravi Shankar Prasad had said while launching the scheme.
The Opex part
The manufacturers’ association MAIT feels that this is the first time an Opex based scheme for promoting manufacture of electronics has been announced in India. The basic difference between the Capex and Opex models lies in the long-term and short-term. Capital expenditures (Capex) are purchases of significant goods or services that will be used to improve a company’s performance in the future whereas operating expenses (Opex) are the costs a company incurs for running its day-to-day operations.
“We have had capex based schemes like M-SIPS. In such schemes, EMS companies were eligible for incentives on the basis of investments they made. For example, if a company invests more than 10 crore (US$1.33 million), and the threshold limit is 10 crore, the company becomes eligible to get incentive on the basis of investment above the amount, but that is usually the only incentive available in such schemes. There were never incentives based on how much a company is building its manufacturing capacity,” explains Nitin.
He adds, “The PLI for IT hardware, along with many other PLIs, is the first scheme that is promising incentives based on how much you produce. This is where the Opex and Capex parts get differentiated. There is also a cap on this PLI scheme, but that is a good thing as the government has ensured that things do not get out of the hand.”
Notably, the PLI for IT hardware is offering an incentive of four percent to two/one per cent on net incremental sales (over base year) of goods manufactured in India and covered under the target segment, to eligible companies, for a period of four years. The target segment under PLI includes laptops, tablets, all-in-one PCs, and servers. According to IDC, the market size for laptops in India was approximately 75 lakh (7.5 million) units in 2019-20 valued at 33,950 crore rupees (US$4.53 billion).
Similarly, the market size for tablets was around 24 lakh (2.4 million) units, valued at 3,500 crore rupees (US$0.47 billion). As per IDC, the global server market stood at 120 lakhs (12 million) units valued at 644,000 crore rupees (US$85.9 billion) in 2019-20.
During the same period, the Indian market stood at two lakhs (0.2 million) units valued at 9,100 crore rupees (US$1.21 billion) in 2019-20. MeitY, the Ministry of Electronics and Information Technology, explains that India’s personal computer (PC) penetration at 15 per 1,000 people is significantly lower compared to the United States (784 for 1,000 people) and China (41 per 1,000 people), and thus presents significant growth opportunities.
“Twenty times incentive on the basis of your investment is a very good incentive. Capex based incentives were not able to create wider based incentives. These were able to help a lot of companies import a lot of machines in the country. Companies were not getting benefited as they would have liked to. The current scheme would not only ensure production but would also help companies build a local ecosystem in India,” says Nitin.
The scheme has included PCB assembly, assembly of battery packs, assembly of power adapters, and assembly of cabinets under its aegis. For the PCB assembly part, the applicant, if finalised, will need to assemble these himself locally in India. The rest of the segments can be assembled locally by the company itself, or by one of its vendors. An incremental incentive of 3 percent will be on offer starting April 1, 2022 on local assembly of PCBs. Similarly, starting 1st April 2023, this incentive would be two percent on local assembly of PCBs and battery packs, and from 1st April 2024, the incremental incentive offered would either be two percent for local assembly of PCBs, battery packs, SMPS, and cabinets, or one percent on local assembly of PCBs, battery packs, and SMPS.
Rupees 720 crore (US$96 million) have been earmarked as the total incentive for the first year, 1,305 crore (US$174 million) for the second year, 1,820 crore (US$243 million) for the third year, and 3,480 crore (US$464 million) for the fourth year. Thus, the total amount of incentives for the four years is 7,325 crore rupees (US$977 million approximately).
“At the end of each year, any unappropriated incentive amount resulting from underperformance with respect to the prescribed annual ceiling on net incremental sales of eligible products, by any applicant(s) in any category, will be allocated to the remaining eligible applicants under such category who have achieved net incremental sales in excess of the annual ceiling,” reads the announcement made by MeitY.
For international brands, laptops with an invoice of or above 30,000 rupees (US$400) will be counted. Similarly, tablets of or above 15,000 rupees (US$200) will be counted. No such limit has been announced for all-in-one PCs and servers, and no such limit has been announced on any of these products for domestic companies.
The IT hardware manufacturing sector, as per MeitY, faces lack of a level playing field vis-à-vis competing nations. So, there is a need for a mechanism to compensate for the manufacturing disabilities vis-à-vis other major manufacturing economies.
“The multiplier effect of this scheme, in terms of the service sector, the software sector, and building a local ecosystem will be wider. Five to six times of the current employment will be created in the country. That is the power of an Opex based scheme. The Capex based schemes, on the other hand, do not usually have a multiplier effect,” according to Nitin.
He exclaims, “Yes, the biggest beneficiary will be the industry, but the second biggest beneficiary will be the government and the country. The kind of revenues, in the form of service tax and other taxes, the government will be able to generate from this scheme will be much higher than anything previously seen!”
Beyond international and domestic companies
MeitY, from the very first PLI scheme that was introduced in India in 2020, has been clear that it is looking to encourage global champions to set shop in the country and, at the same time, is also looking to create global champions from India. The PLI for IT hardware manufacturing, following suit, is looking to reward both international as well as national companies.
“It would not do justice if I take names of the brands or companies that would look forward to setting shop in India. Let me say that all the brands that set shop here would be flooded with volumes. Everyone will move to India to at least start the assembly operations,” feels Nitin.
A close look at any report of the top-selling brands of laptops, all-in-one PCs, servers, and tablets will be good enough to gauge which ‘champion’ brands will be encouraged to make in India. On the domestic part, there will be room for new companies to emerge as well.
“There are more than a hundred ways to cheat and earn incentives through schemes that promote tariffs on imports, but this PLI scheme is simple – you perform, that is, you manufacture and show your capability and you get rewards. Be it any brand, the playing field is equal for anyone and it is not based on the kind of money they have but the kind of investment and production they can showcase,” explains Nitin.
For clarification, domestic or national companies are defined as those which are owned by resident Indian citizens as defined in the FDI Policy Circular of 2017. A company is considered as ‘owned’ by resident Indian citizens if more than 50 percent of the capital in it is beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens.
“The international companies will have to shift their supply chain to India, or they will have to build one here in India, to be able to cater to the volumes,” adds Nitin. This is where the country will benefit the most from this PLI scheme. A lot of opportunities will be created for the MSMEs and start-ups to supply to these big domestic as well as international companies. Currently, most of the components used in these products are imported from countries like China and almost zero manufacturing of these takes place in India.
A recent report by India Cellular & Electronics Association and Ernst & Young notes that for the year ending March 2021, India’s import of laptops is estimated to have reached close to US$5 billion, of which those from China are expected to hit US$4.35 billion. Similarly, India’s import of tablets for the year is estimated to be in the range of US$0.35 billion, while exports are unlikely to cross even the US$0.02 billion mark.
“Mark my words, all the big brands will start chasing after manufacturing in India. This decade of 2021 to 2030 would be an era where a lot of electronics hardware start-ups will emerge in this country. The credit will go to the PLI schemes like this one. There will be inclusive growth,” feels Nitin.
He adds, “This is also an opportunity for MSMEs to grow beyond what they are. This scheme has the power to enable them to supply millions of components. That said, the government should also look towards building a financial support ecosystem for the MSMEs and electronics hardware start-ups. Big companies have big pockets but the MSMEs and start-ups usually function on the basis of small funds.”
