When the government announced the Digital India initiative with the aim of driving social and economic change, mobile phone makers cheered. For them it directly translated into a surge in demand for mobile phones, especially smartphones, as mobile apps are the delivery vehicles of financial and digital inclusion services.
Meanwhile, the government viewed it as an opportunity to encourage both domestic and foreign mobile companies to manufacture their products in India under the Make in India initiative. It succeeded in getting mobile phone makers to assemble handsets under what is technically known as the assemble-programme-test-package model in India. In the previous quarter (July-September 2017), “three out of four smartphones sold in India were assembled in the country”, according to Navkendar Singh, associate research director, IDC, which publishes the Quarterly Mobile Phone Tracker. During the same period, a total of 39 million smartphones were shipped into the country.
According to the Indian Cellular Association (ICA), about 50 units spread across 14 states assemble knocked-down and semi-knocked-down kits. Another 54 units in 13 states subassemble or manufacture adapters, battery packs, wired headsets, USB cables and mechanical parts. However, local value addition stands at 6 per cent of the total component value according to the Internet and Mobile Association of India (IAMAI), as compared to 70 per cent in China and 35 per cent in Vietnam.
To achieve the target of making 500 million handsets in India by 2019-20, and a localisation rate of 25-30 per cent, a robust manufacturing ecosystem is needed. “The phased manufacturing programme (PMP), notified in April this year, stresses on increasing domestic value addition, ramping up the production of components and ultimately making India an export hub,” says Pankaj Mohindroo, president, ICA. The units making handset components will be offered financial incentives in a phased manner till 2019-20. “From a zero base we plan to export 120 million units by 2019-20. The industry has to be incentivised to set up shop here,” says Mohindroo.
For a thriving manufacturing ecosystem, the government and industry need to focus on design and research, making components locally, training the workforce and ensuring ease of doing business.
Taking strides towards Make in India
To fulfil its ambitious export target, India is competing directly with China, Vietnam and Indonesia. Currently, 82 per cent of the world’s mobile phones are manufactured in China.
While China is facing a saturation in domestic demand and rise in labour costs, India is emerging as one of the fastest growing smartphone markets in the world. Moreover, India’s demographic advantage can be leveraged by providing sector-relevant training under the Skill India mission.
However, the tax structure, supply chain and economies of scale are more favourable in China and Vietnam. In India, the processes of IGCR (import of goods at concessional rates) for the manufacture of excisable goods are cumbersome. Companies have furnished bank guarantees of around Rs 290 billion as assurance that the imported product will not be retailed but used only for manufacturing handsets in India. The total value of handsets manufactured in India in 2016-17 is estimated at Rs 940 billion.
Moreover, there is no clarity on the impact of the goods and services tax (GST) on domestic manufacturers and the status of pre-GST incentives. As per industry associations, the GST of 12 per cent will double the tax on mobile phones in 30 states and union territories, which in turn might negate the benefits available to domestic mobile manufacturers under the pre-GST regime.
According to N.K. Goyal, president, Telecom Equipment Manufacturers Association, “Incentives are needed to move from electronic manufacturing service to the surface-mounted technology model and to make components and subcomponents locally.”
The components that have the highest value of 58 per cent in a smartphone’s bill of materials are the main electronic assemblies – main board and sensor flex – and they are not made locally. Battery packs, displays and cameras make up another 30 per cent of the bill. As per the IAMAI report, while the possibility of locally sourcing the main electronic assemblies is low, the displays, cameras, battery packs and non-electronic parts have high to medium possibility of indigenous sourcing.
Under the PMP, subassembly of mechanics, die-cut parts, microphones and receivers, key pads and USB cable will attract a 10 per cent basic customs duty. Over the next two years, more components will be added and by 2019-20, PMP will extend to display assembly, touch panels and vibrator motors or ringers.
“The growth of India as a leading technology supplier will depend on the presence of local advanced semiconductor fabrication plants catering to both domestic electronics manufacturing demand and export demand,” says the IAMAI report.
Who is making cell phones in India?
Today the question is who is not making cell phones in India, feels Mohindroo. There are an estimated 250-300 million smartphone users in India. “The growth on this base is very encouraging. Between July and September 2017, India added 39 million smartphones, a growth of 21 per cent over the previous year,” says Singh.
Of the 50 mobile handset manufacturing units in the country, six to seven are captive units set up by companies such as Samsung, Cellkon Mobile, Karbonn, Lava International, Micromax and Intex Technologies. The remaining are contract manufacturing units for brands such as HMD Global, Xiaomi and Vivo.
Indian mobile companies, which have the maximum captive units, are facing tough competition from the Chinese. According to IDC, they are projected to hold a share of 14 per cent in the smartphone market, a sharp decline from 27 per cent in 2016. During July-September 2017, the top spot in smartphone shipments was held by Xiaomi and Samsung followed by Lenovo Motorola, Vivo and OPPO.
Indian companies are trying to get back into the game. Micromax, which has three manufacturing plants, has launched a smartphone priced at Rs 5,555. “The research and development (R&D) and design of the phone is done in India. The subsidies offered by the government and the competitive pricing of raw materials from China makes it attractive to manufacture here,” says Shubhodip Pal, chief marketing and commercial officer, Micromax.
According to IDC, Chinese companies will corner more than half of the market this year. “Micromax used to be a leader 12-18 months ago but lost market share when 4G was launched. The consumers wanted a 4G phone and the Chinese were quick to react to this demand,” says Singh.
“Currently the products offered to Indian consumers are made in India,” says Will Yang, brand director, OPPO India, which has an assembly factory in Noida that began production in July 2016, and is gearing up to set up the second manufacturing plant by early 2018.
Xiaomi, which generated Rs 1 billion revenue in India during 2016, outsources manufacturing of phones to Taiwanese giant Foxconn. As per ICA, Foxconn has six plants in India, where it reportedly makes (read assembles) phones for Xiaomi, Gionee and HMD Global, which has rights to the Nokia brand. It also manufactures television sets in India. Reports indicate that the Taiwanese company is looking to set up more plants as current lines are operating at full capacity.
Comio, which entered the Indian handset market in the middle of this year, says it will assemble in India through contract manufacturers V-Sun and Hipad Technology. The two facilities will manufacture around 1 million devices over the next six months and employ close to 600 people.
Taiwan-based Wistron assembles iPhone SE in India for Apple India. Apple India reportedly has plans to set up a production and manufacturing base in India to reduce costs and tap the growing demand for smartphones in the country. To commence the second phase of manufacturing, Apple had sought concessions such as duty exemption on manufacturing and repair units, components, capital equipment and consumables for smartphone manufacturing and service/repair for a period of 15 years. It also wanted relaxation in the mandated 30 per cent local sourcing of components and customs duties on completely knocked-down and semi-knocked-down kits that were to be assembled in the country. The government asked Apple to make some changes and revert with a formal proposal.
There are 440 million feature phone users in India and an equal number of people without phones, according to IDC. Given that telecom has been declared the backbone and nerve centre of the Digital India programme by the Ministry of Electronics and Information Technology, and transactions on mobile phones are increasing, smartphone companies are tapping into this segment. “The profile of the user changes at every Rs 500 differential. So we have smartphones ranging from Rs 2,500 to Rs 6,000, which a feature phone user can migrate to,” says Pal.
The key to tapping feature phone users is the price point. For prices to fall, the localisation rate has to improve and end-to-end manufacturing has to be undertaken in India.