Wooing Electronics Manufacturers, India plays Catch-up

In addition to mobile phones, telecom equipment makers such as Nokia, Ericsson and domestic players such as Tejas and HFCL have also set up factories in the country

By Voice&Data team (with inputs from Jose JN)

When Finnish mobile phone manufacturer Nokia decided to shut down its Sriperumbudur factory in 2014 due to a dispute with tax authorities, it was widely thought to be the end of India’s dreams of becoming an electronics manufacturing hub. Seven years later, Nokia’s telecom equipment manufacturing unit in Chennai, set up in 2008, has become one of the largest Nokia-owned manufacturing facilities in the world. The facility with best-in-class infrastructure spread over 140,000 square meters and with a capital investment of over Rs 600 crores, manufactures and ships the complete gamut of telecom products for domestic and global markets, exporting over 50 percent of manufactured equipment to more than 100 countries. To date, the site has delivered close to 6 million units for global telecom needs. The factory was the first to deploy India’s first ‘real-world’ application of Industry 4.0 including AR/VR, automation, and analytics, to enhance operational efficiency and productivity.

Nokia’s story is an example of how India’s attempt to become a global manufacturing hub is now starting to see some results. In the mobile phone manufacturing segment, India is now the second-largest manufacturer in the world after China. From just two factories in 2014, India now has over 200 units.

Production has gone up from 6 crore mobile phones in 2014-15 to about 30 crore mobile phones in 2020-21. At its peak in 2011, India produced 155 million handsets, of which it exported 105 million. This was driven to a large extent by Nokia’s manufacturing operations in India. Over the years, India’s mobile manufacturing sector deteriorated rapidly, producing only 58 million handsets in 2014 while exports were nil. The subsequent closure of the Nokia plant due to tax disputes, and a failure to attract other mobile manufacturers led to this collapse. From 2015 onwards the government has been pushing various schemes and incentives under the Make in India programme. Thanks to these schemes, India is set to manufacture around 1,250 million handsets by 2025.

According to the Ministry of Electronics & Information Technology (MeITY), India aims to become a $400 billion electronics manufacturing industry by 2025. The domestic electronics production in 2014-2015 was $29 billion. It has grown to $70 billion in 2019-2020. Export of electronic goods has also increased from $6.4 billion in 2016-17 to $8.8 billion in 2018-19.

“India’s ambition is an ‘Electronics’ ambition. The government is expeditiously working on curating structured policy support toward making the Semiconductor and Display manufacturing strategy a success (see our Semicon story in this issue).

With an aggressive focus on adopting an ‘ecosystem-led’ approach, the objective is not only to facilitate final electronics goods manufacturing but to also enable domestic viability of components/assemblies manufacturing; distribution, testing and packaging; and designing activities,” Saurabh Gaur, Joint Secretary, Ministry of Electronics & Information Technology told Voice&Data.

The schemes have also benefited Indian players like Lava which are now catering to the export market as well. Lava’s manufacturing facility and repair factory in Noida, Uttar Pradesh is spread over an area of approximately 1,65,000 sq. ft. The manufacturing plants have a capacity of manufacturing 40 million phones per annum. “Government policies like PLI and Rodtep (Remission of Duties and Taxes on Export Products) will help in bridging the cost gap between India and China. There are still a lot of components being manufactured in China. The policies will help in balancing the scales and establishment of the component supply chain in India,” said Sanjeev Agarwal Chief Manufacturing Officer, Lava International Ltd.

“Government policies like PLI and Rodtep (Remission of Duties and Taxes on Export Products) will help in bridging the cost gap between India and China.”

Sanjeev Agarwal, Chief Manufacturing Officer, Lava International Ltd

In addition to mobile phones, telecom equipment makers such as Nokia, Ericsson and domestic players such as Tejas and HFCL have also set up factories in the country. “We have participated in the government’s PLI scheme for the telecom sector and the additional investments that we are making under this scheme will help us scale our Pune facility. We stay committed to India and look forward to the opportunity of helping Indian service providers seamlessly evolve their networks from 4G to 5G” said Nitin Bansal Managing Director, India Head-Networks, Market Area South East Asia, Oceania, and India at Ericsson.

“India is a strategic market for us and we have the largest employee workforce located in India across sales, manufacturing, R&D as well as Services. It is worth highlighting that 95 percent of the equipment that we sell to Telcos in India is manufactured here in India. As India prepares to roll out 5G, we are sure that the Indian telecom operators will continue to make fresh investments to scale up their telecom network for deploying a ubiquitous 5G connectivity across the nation. We look forward to the opportunity to enable our customers to seamlessly evolve their networks from 4G to 5G. In line with our vision of making in India for India and the world and aligning with the government’s ‘Make in India’ program, Ericsson is exporting its 5G radios from its state-of-the-art facility in Pune, Maharashtra to Australia and Southeast Asia” Mr. Bansal told Voice&Data.

In the case of Nokia, nearly all 4G radios for the domestic market are manufactured locally and Nokia aims to follow the same trend for 5G radios too. “We are also aiming to expand our manufacturing line up to add new products - fixed network OLT and IP optics- in addition to radio products. Upgrading our lines to the need of next-gen telecom products has been one of our key focus areas and we made substantial investments to upgrade the SMT (surface-mount technology) placement capacity up to 16 Billion components/year along with modular robotic automation cells to create capability for future telecom equipment manufacturing,” said Amit Marwah, Head of Marketing & Corporate Affairs, Nokia India.

India’s quest for self-reliance, Aatmanirbharta is picking up in the Electronics manufacturing sector with the Government announcing a production-linked or PLI incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components, including Assembly, Testing, Marking and Packaging (ATMP) units.

The scheme shall extend an incentive of 4% to 6% on incremental sales (over a base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five (5) years subsequent to the base year as defined. Under the second round of the scheme, incentives of 5% to 3% shall be extended on incremental sales (over base year i.e. 2019-20) of goods manufactured in India and covered under the target segment, to eligible companies, for a period of four (4) years. The government has so far cleared 16 proposals from domestic and international companies entailing an investment of Rs 11,000 crore.

“We stay committed to India and look forward to the opportunity of helping Indian service providers seamlessly evolve their networks from 4G to 5G.”

Nitin Bansal, Managing Director, India Head-Networks, Market Area South East Asia, Oceania and India at Ericsson

One of the big impetus for local manufacturing is because the post covid scenario is forcing countries to rethink their sole dependence on China, given the ongoing geopolitical ramifications. On March 3, 2022, Piyush Goyal, Minister of Commerce & Industry, Consumer Affairs, Food, and Public Distribution and Textiles, called for increasing India’s share in global trade to 10 per cent and taking our share of exports in GDP to about 25%. “These are ambitious targets, but I think doable,” Goyal said while addressing a webinar on ‘Make in India for the World.

“We made substantial investments to upgrade the SMT placement capacity up to 16 Billion components/year along with modular robotic automation cells to create capability for future telecom equipment manufacturing.”

Amit Marwah, Head of Marketing & Corporate Affairs, Nokia India

However, despite an increase in local manufacturing volumes the import bill of India has not come down significantly. China added $7.13 billion to its total contribution to India’s electronic trade deficit in 2021. According to data released by the Ministry of Commerce, China’s contribution to India’s electronic trade deficit has been rising since 2019.

As of November 2021, China contributes 59.11 percent to the electronic trade deficit compared to 51.88 percent in 2020. This comes even as India’s overall electronic trade deficit hits a three-year high at $44.3 billion.

Pareekh Jain, Founder, and Lead Analyst, EIIRTrend told Voice&Data, “Trade deficit is not reduced for three reasons: First, most of the mobile manufacturing in India is assembly. India’s manufacturing capabilities account for a 20 percent value addition in mobile phones, with the remaining 80 percent being imported in the form of components and then assembled in the country.

This means that the mobile phone is already 80 per cent made by the time Indian manufacturers commence working on it. There is some reduction based on assembly but it is not enough. The second reason is that local demand for smartphones has increased as work from home, online way of working is continuing. Especially in education, virtual classes are continuing. Even people from lower income are spending on multiple smartphones. Finally, supply issues because of the Covid second wave prevented manufacturers from making full use of it. This should smooth out going forward.”

According to Navkendar Singh, Research Director, Client Devices & IPDS, IDC India, “Govt of India has been taking several initiatives to give a fillip to the manufacturing of Electronics in India. While the policy encourages the manufacturing of various key components, it still lacks specific steps to attract high-value components like chipset, silicon parts for the longer term, etc. India is currently positioned favorably to attract such manufacturers away from China and Vietnam if some of these policies are done right and in a timely fashion.”

Rajesh Tuli, MD of Coral Telecom (CTL) says that though PLI is an excellent scheme giving a 6 percent incentive to foreign-designed products for manufacturing in India may upset the applecart especially if the incentives are given in sectors where domestic products are available. “Big companies already enjoy economies of scale and with incentives, price advantage to this category of players would make them more competitive and it will eradicate the domestic players. It is a double-edged sword that needs careful handling because big players will become even more competitive, and the scheme has no riders regarding domestic value addition or development of the downstream industry. PLI scheme awards have focused on large-scale manufacturing with no additional incentive covering domestic design/value addition. Export is also not a prerequisite for the disbursal of incentives. Enthusiasm for the PLI scheme to promote manufacturing by large corporations may kill our domestic manufacturers. Global payers have global supply chains and experience has shown that they have not shifted the supply chains to India at all and even the packing materials are imported,” Tuli told Voice&Data.

“It may be a good idea to incentivise 1% of the selling price for every 5% increase in domestic value addition done in India over the base of 40% DVA.”

K Krishna Moorthy, CEO & President, IESA

Tuli said that there is a need to incentivize the PLI scheme for domestic value addition. “It may be a good idea to incentives 1% of the selling price for every 5% increase in domestic value addition done in India over the base of 40% DVA. This will motivate domestic companies and build Indian products that will ensure Aatmanirbharta in the long run otherwise PLI companies may wind up in four years and shift location/base to another country offering higher incentives. If ancillary has to develop and downstream industries have to flourish then we must do everything required to incentivise Indian design efforts. The design-led incentive scheme is mandatory to get long-term sustained benefits for the country,” Tuli said.

IDC’s Navkendar believes that providing monetary incentives alone will not realise the full impact of the PLI scheme. “There should be specific departments or teams, both at center and states for quick approvals that will reduce the time from planning to set up to start of operations. There should also be infra supported as well,” he said.

According to Indian Cellular and Electronics Association, “For increasing the manufacturing of electronics in line with the targets of NPE 2019, India needs to build large-scale ESDMs (electronic system design and manufacturing), invest in technological up-gradation spurred by large global firms, and make a strong push for domestic capacity building. For this, an ecosystem involving both domestic and global firms will need to be nurtured, by providing incentives similar to those developed by other major exporting economies.”

The domestic electronics hardware manufacturing sector faces a lack of a level playing field vis-à-vis competing nations. The sector suffers disability of around 8.5% to 11% 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.

But despite these challenges, experts reckon that the vision of National Policy on Electronics 2019 (NPE 2019) to position India as a global hub for ESDM can be achieved. “Time is ripe for this and the next 5 years are going to be important when companies start looking at China + 1 or even full alternate destinations for manufacturing exports. India must leverage this by giving more friendlier policies,” said IDC’s Navkendar.

The setting up of facilities is a long process with cyclical demand patterns. It might happen that by the time we set everything up as a country we have a glut of capacity supply. Then we will see some consolidation.

According to Nokia’s Marwah, the PLI scheme offers a tremendous opportunity for boosting telecom and networking manufacturing in India. “With help from the PLI scheme, India’s telecom manufacturing sector can leapfrog and take its rightful place as a global manufacturing hub. Further, the government has come up with a consultation paper to address any shortcomings in the telecom PLI and improve its utility and effectiveness,” Marwah said.

The government is also mulling a range of financial physical and nonphysical incentives beyond PLI to accelerate networking and telecom equipment manufacturing. In the recent budget, the Government announced that it will allocate around Rs 4000 crore for the PLI to boost 5G design-led manufacturing.

With PLI schemes and favorable investor-friendly policies, can India effectively emerge as an alternative electronics manufacturing hub in the region? Ashutosh Sharma, VP and Research Director Forrester told Voice&Data, “With the right set of incentives and significant government push, yes it can. That is what seems to be happening. However, this is a long process with cyclical demand patterns. It might happen that by the time we set everything up as a country we have a glut of capacity supply. Then we may see some consolidation.”

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