The growth of the electronics manufacturing services (EMS) industry is crucial for kick-starting the ‘Make in India’ programme. The more developed the domestic EMS industry is, the faster and easier it will be for large original equipment manufacturers (OEMs) to set up operations here. Here is a sneak peek into the Indian EMS industry.
By the ComConnect Consulting research team
The Indian electronics system design and manufacturing (ESDM) industry is on track to achieve its full potential in terms of manufacturing and design capabilities. One significant milestone in establishing India as a global manufacturing hub was that for the first time, India’s domestic electronics production exceeded imports in 2016-17. According to government sources, the domestic production of electronic goods for 2016–17 stood at US$ 49.5 billion, higher than the US$ 43 billion spent on imports. This indicates that the ‘Make in India’ initiative is beginning to have a positive impact on domestic manufacturing. Favourable business policies for the domestic electronics sector have undoubtedly played their part, particularly in facilitating the setting up of manufacturing facilities for smartphones, set-top boxes, televisions and other appliances.
There are many local brands operating under the ‘Make in India’ initiative as well as global manufacturers looking to relocate their manufacturing bases from China (due to mounting labour costs in that country) to alternate locations such as India, Vietnam and Indonesia. So both global as well as domestic electronics manufacturers are showing renewed interest in India, now viewing it as a manufacturing destination.
The research methodology adopted to collate quantitative and qualitative information about the electronics manufacturing services (EMS) sector in India began with secondary research. The findings were then analysed and have been verified through primary research by conducting extensive interviews with a few key industry experts. This sample group is a microcosmic representation of India’s EMS industry ecosystem. These senior professionals shared their insights on:
This offers enormous opportunities for the Indian EMS sector. Over the next five years, accelerated local manufacturing of electronic products to cater to the growing domestic demand will drive the EMS sector in India.
The EMS market in India will be highly dynamic in the coming year. The country is all set to emerge as a hotspot for electronics manufacturing among the South Asian nations, owing to advantages such as low operating costs.
Survey participants indicate that the top three growth-driving application sectors (Figure 1) that will need EMS providers will be:
- Consumer electronics
- Telecom and mobile devices
- LED lighting
The manufacturing partnerships in these three segments have been growing steadily, as the demand for products is very high and OEMs are striving to cut costs to maintain their competitive advantage in the face of rapidly changing conditions, such as technological advances and global competition.
There are opportunities for EMS providers outside these three segments too, namely, in the power electronics and strategic electronics sectors (including aerospace, defence and railways). With the increasing need for the electrical-to-electronics transition in the energy segment, power electronics is emerging as one of the most exciting areas in the industry today. Aerospace and defence (A&D) OEMs have been increasingly depending on EMS providers to address risk management, logistics and after-market service needs. EMS companies with global supply chains and advanced technological capabilities are in the best position to exploit this trend.
|‘Low-mix, high-volume’ or ‘high-mix, low-volume’?
Indian EMS providers tend to have an affinity towards a low-mix, high-volume model, which is a contract manufacturing setup in which there are a few number of assemblies produced in large quantities. Such a production arrangement may last for weeks or even months, using the same setup. The benefits of this technique are that changeovers can be kept to a minimum and equipment utilisation rates are significantly higher. Contract manufacturers have proved to be more efficient when running at high volumes, which require minimal engineering changes. This low-mix, high-volume process ensures economies of scale, higher productivity due to minimum changeover time and optimum machine utilisation. Considering the low margins in the highly competitive, price-sensitive electronics market, optimisation of the supply chain costs is crucial for the success for this model.While the low-mix, high-volume method of production has been adopted by EMS companies catering to the mass manufacturing segment, recent industry trends show a shift towards a high-mix, low-volume production process, where the focus is on quality and customisation based on customer requirements. Considering the higher margins in the niche markets, even major changes in market dynamics often do not impact such a production process too much. This kind of production arrangement mostly caters to the strategic electronics sector, where the emphasis is on faster throughput and a high quality finished product. OEMs that prefer such solutions are willing to pay a higher price without compromising on quality. However, in this model too, success depends on controlling and improving the supply chain efficiently.
EMS companies operate as strategic partners to OEMs by providing them with a full range of services, which include contract design services, prototyping, final system assembly, configuration, order fulfilment, and even after-market services, including repair. By using the services of EMS providers, OEMs can concentrate on their core competencies such as research and product development, brand building, sales and marketing, etc. Outsourcing to EMS providers also enables OEMs to gain access to the latest equipment, process knowledge and manufacturing knowhow without having to make substantial capital investments, as the risks are converted into variable costs.
The ever increasing end user demands and fast-paced technological developments compel OEMs to continuously introduce new and innovative products into the electronics market. Consequently, OEMs opt for EMS providers that offer significant benefits such as cost savings, reduced time-to-market, reduced time-to-volume, quality and flexibility.
A strategic partnership with OEMs can enable the EMS providers as well as the OEMs to contribute effectively to the success of the end product. This helps both partners to achieve high profitability and a good market share.
Since OEMs are very selective in choosing their EMS partners, the latter need to focus on nurturing long-term relationships with the former through enhanced value added services, strategic partnerships and alliances, as well as through diversification.
In response to the growing competition in the industry, EMS providers continuously adopt innovative strategies in their business models. These include better knowledge of customer needs, understanding the business models of customers/OEMs, effective communication tools, creating global footprints and focusing on core competencies. According to the survey participants, the top three business strategies (Figure 2) to gain a competitive advantage in the consumer electronics segment would be:
- Providing value added services
- Effective supply chain management
- Understanding the business models of customers (in this case, OEMs)
EMS providers should also focus on customer-centric models, penetration into niche markets and effective information technology tools.
Considering the intense competition, the EMS providers need to enhance their value proposition by offering integrated and end-to-end solutions.
Focus on turnkey manufacturing
Survey participants unanimously believe in the importance of turnkey manufacturing services as the need of the hour, since there is an increasing demand for ‘one-stop shops’ for EMS.
Sometimes, OEMs follow the consignment contract manufacturing model to maintain greater control over the material planning and acquisition processes. This also minimises the risks associated with a vendor-managed pipeline. However, in the case of consumer electronics, with its typical low-mix, high-volume production, OEMs prefer a partial or full turnkey model. In this model, the EMS provider controls the acquisition of materials. This helps OEMs in reducing costs and remaining agile enough to address rapidly changing markets.
A common best practice among OEMs is to have systems that can analyse the total acquisition cost and use it to evaluate EMS suppliers as well as other types of contract manufacturers. These systems assign a value to intangibles, such as the ease of working with a vendor. An OEM assessing a vendor or EMS provider must have a way to measure the other elements of the relationship that add to the cost.
Turnkey projects need a high degree of technical skill that can be customised according to the specific requirements of the OEMs. Only a few Indian EMS providers offer turnkey solutions for PCB assemblies, utilising Chip-on-Board (COB), surface mount (SMT) and through-hole technologies. They also provide complete assemblies, including plastic mouldings, metal-die castings and sheet metal fabrication, apart from finishing, painting and printing. In short, they deliver fully assembled complete units. This model opens up vast business expansion opportunities for Indian EMS companies.
Another model that integrates EMS companies within the electronics manufacturing ecosystem is when PCB manufacturing and EMS services are offered together. This enables the EMS company to provide better value added services to its OEM customers. The combined expertise streamlines work and helps EMS companies to be better integrated with the production value chain. This arrangement reduces the turnaround time for the OEMs as they have to deal with just a single vendor.
Scope for original design manufacturing
Electronic products need constant design revisions, as the end users expect creativity and continuous innovation. Therefore product design and development is often outsourced to ODMs (original design manufacturers). In such cases, the sooner an OEM engages the contract manufacturer for product design and development services, the better—particularly when the product being designed moves into the production and ramp-to-volume phases.
In instances where the ODM service is hired by the OEM for strategic reasons, the former is expected to have experience in designing and manufacturing similar products. This enables the OEM to minimise costly design iterations, helps bring the OEM product to market sooner and adds several other benefits to the contract manufacturing relationship.
Survey participants all agreed that ODM services are in demand. They feel that it is important to effectively control the overall manufacturing costs in the highly cost-competitive market. EMS providers can help customers to achieve this goal by offering turnkey solutions with additional services, and design is the best value addition that they can provide. Moreover, ODMs can ensure unique products catering to the Indian market’s needs, combining ‘Designed in India’ with ‘Make in India’. Hence, ODM services can become a very important and cost-effective solution for the customer.
However, 20 per cent of the survey participants (Figure 3) do not see any value of ODMs in the Indian market. According to them, most of the electronic products are already mature, having been well developed in China and other markets. Indian products need efficient manufacturing strategies rather than ODMs. They feel that currently, there is minimal ‘Making in India’ but more ‘Bolting in India’ in this space.
Reverse logistics gaining importance
India is still not a use-and-throw market for electronics products. Thus, after sales services, including repair and maintenance, are quite important to the Indian consumer. Moreover, with the advent of e-commerce, reverse logistics has become an important activity to handle rejects and also cater to the warrantee. Thus, such services are bound to grow as the volume of the online businesses grows. Global OEMs also prefer to outsource reverse logistics.
Echoing this view, 80 per cent (Figure 4) of survey participants said that additional scope for business lies in the area of reverse logistics. They feel that services related to repair/reworking and refurbishment work will not only help EMS firms get additional business from the OEMs but also enable them to play a role in e-waste management. According to them, the reverse logistics service is gaining importance. However, considering the complexity of the reverse logistics processes, only a few expert EMS providers in India can enter this space.
The way ahead
The success of Indian EMS players depends on several factors. The possible challenges that could derail the growth of this industry in the country are:
- Inefficient supply chain for the required electronic components
- High cost of finance
- Logistics inefficiencies and infrastructural bottlenecks, resulting in greater turnaround time and costs
- High infrastructure costs
- Shortage of skilled manpower
- Lack of technological advancement
Successfully resolving these issues through appropriate industry initiatives and government interventions will help this industry move ahead quickly.
|Major contributors to this report
Amit Bhargava, managing director, Asha Electronics
Subhash Goyal, managing director, Digital Circuits Pvt Ltd
Vijay Gujarathi, director, EOS Power
Sanjiv Narayan, chairman, SGS Tekniks Manufacturing Pvt Ltd
Ronak Sonthalia, director, Silizon Technologies LLP