Towards a Golden Era: Prospects and Challenges for India's Electronics Manufacturing

The release of the report titled "Has India Really Become a Mobile Phone Manufacturing Giant?" authored by Rahul Chauhan, Rohit Lamba, and Raghuram Rajan has ignited a flurry of debates and discussions, evident from the fervent comments flooding news stories featuring Dr. Rajan's analysis.

The authors assert that while there has undeniably been a notable surge in exports in recent years, the crux of this growth lies primarily in assembly operations rather than actual domestic manufacturing. A substantial proportion of the components utilized in mobile phones manufactured within India are still imported, thereby limiting the value added within the country.

To anyone even remotely associated with the Indian electronics sector, the observations made by Dr. Rajan and his team ring true. The Electronics Manufacturing Services (EMS) sector in India, encompassing mobile phones and more, predominantly relies on job work, resulting in minimal value addition. India's reliance on imported electronic components remains a stark reality, with the authors asserting a significant net increase in electronics imports—an argument that holds weight.

While the aforementioned statements reflect the current state of affairs, the authors conclude (a sentiment I wholeheartedly concur with) that it is premature to render a final verdict on the Production Linked Incentive (PLI) scheme. With some necessary course corrections, the upcoming decade has the potential to become the golden age of the Indian electronics industry.

Is India a "Screwdriver" technology nation ?

 
Fig 1 Indian Electronics Landscape - Indian EMS Companies are stuck in a low margin job work rut

The resounding answer to the question is a resolute "Yes." According to the EMS Task Force Report by Electronic Industries Association of India-ELCINA (ELCINA), a comprehensive analysis of over 600 EMS companies in India reveals a clear categorization:

Job Workers: These companies solely provide assembly services, with the design and components supplied by the end customer. The net margin for these entities is a meager 2%. While this category primarily consists of Micro, Small, and Medium Enterprises (MSMEs), there are also a few large companies in this segment.
Customer Design Manufacturers (CDM): These entities handle design provided by the end customer along with component procurement and assembly. They achieve a slightly higher net margin ranging from 5% to 8%. This category includes a mix of large MSMEs as well as large and mid-sized EMS companies capable of managing the requisite working capital cycle.
Original Design Manufacturers (ODM): These are EMS companies that create designs based on application requirements, effectively managing the supply chain and assembly. With a net margin ranging from 10% to 15%, this category is occupied by only a select few large EMS companies.

The majority of EMS companies in India, both in terms of company count and manufacturing value, fall into the job worker category, with a paltry 2% net margin. The lion's share of the net margin (ranging from 8% to 13%) flows to the technology providers, mostly foreign firms, and the supply chain.

These findings underscore the stark reality of the Indian EMS landscape, where the value capture remains disproportionately low. Such dynamics necessitate a concerted effort to transform the industry's profitability and position Indian EMS companies on a more favorable trajectory.

Required course correction 

This value addition scenario is often one of the highlights of industry debates and thought pieces by industry veterans. Ajai Chowdhry the cofounder of HCL Enterprises in a recent interview with the The Economic Times and Sunil Vachani CMD, Dixon Technologies India Limited recently addressed this in a panel discussion at the News18 India Rising India Summit. 

Industry consensus points to the need to support the electronics design sector, creating original designs locally will significantly increase domestic value addition while helping Indian EMS companies evolve from job workers to ODM's.

The electronics manufacturing boom will need to be powered by startups and MSME's in the design space who will be need to either need successfully navigate the journey from job worker to ODM, or enable the evolution of existing companies through technology licensing models.

This will require government support either through Design Linked Schemes for embedded systems and electronics design or the deployment of funds towards R&D by way of grants. 

Situation on the ground 

In the realm of government intervention in technology, direct issuance of grants to industry players remains a relatively uncommon practice. Nonetheless, a handful of technology companies have managed to secure grants (including Virtual Forest as a notable recipient). However, when it comes to startups and Micro, Small, and Medium Enterprises (MSMEs), the accessibility to grant funding is severely limited. A recent conversation with an advisor to the Ministry of Electronics and Information Technology (MEITY) shed light on the alarmingly low awareness surrounding a recent grant funding program. As a result, the program witnessed a lackluster response with only a meager number of entries, and the submitted project proposals fell short in terms of quality. Both the issuing agencies and the companies themselves bear the responsibility of effectively driving growth in this funding avenue. 

The Indian semiconductor mission has implemented a successful Design Linked Incentive (DLI) program. This innovative initiative has garnered significant attention, with experts advocating for its replication within the electronics domain. Furthermore, there are growing calls to expand the program to include embedded systems, reflecting the ever-evolving landscape of technology. Notably, influential voices from the industry have voiced their suggestions to the responsible agencies, who are actively considering these proposals. As the deliberations continue, the anticipation mounts, and industry players eagerly await further updates on this progressive endeavour.

Conclusion

As the Indian electronics industry moves forward, there is a collective anticipation for the implementation of effective strategies, the cultivation of a robust design ecosystem, and increased investment in R&D. With the right course corrections and government support, India has the potential to unlock a new era of growth and establish itself as a true powerhouse in the global electronics market.