Electronics - Leveraging Recent Policy Tailwinds to Build the Core of India’s Manufacturing
Electronics - Leveraging Recent Policy Tailwinds to Build the Core of India’s Manufacturing
Electronics has a key role to play in strengthening India’s Manufacturing might. Recent policy support and sectoral catalysts, present several opportunities to gain traction.
COVID-19, and the subsequent economic fallout has brought an erstwhile discussion on India’s Manufacturing strengths and weaknesses back to the front burner. The lingering question - How can India ideally position itself to capitalize on any tailwinds in the manufacturing sector, which could subsequently advance the nation’s might as a Manufacturing powerhouse?
The emerging narrative revolves around grabbing the opportunities arising from a partial exodus of manufacturing away from China. Tech giant Apple appears to be upping the ante on Indian manufacturing by moving part of its mobile phone manufacturing and assembly here. Mobile phone manufacturer Lava has already announced its Indian production ramp up plans. There are numerous other stories – some concrete and some speculative grapevines, pointing towards the possibility that India can indeed present itself as an alternative to China. While these are undeniably positive signs for Indian manufacturing, there are significantly more considerations to account for. Building manufacturing might is a complicated, layered, and nuanced process, one with several economic ramifications and policy considerations. Labour laws, tax laws, judicial efficiency, supply chain logistics, infrastructure quality, economic viability and cost effectiveness are all critical and inter-linked factors that go into such decision making.
In our view, the focus should be towards building a long-term sustainable manufacturing ecosystem and not deploying short-term flashy tactics. With that context, focusing on a sector that has meaningful macro tailwinds and demand levers, should drive robust initial traction and momentum.
Indian manufacturing is still largely a “show-me” story and setting the right measures and focused policies in such times can transform it into a “here you go” story. Electronics is perhaps the ideal starting point!
“Shift from China” Hypothesis
As the world begins to ease restrictions and get its economic engines roaring again, there has been quite a lot of noise on the possibility of a substantial share of “manufacturing” shifting from China to India. The hypothesis largely takes a two-pronged narrative, both of which are at least partially COVID-19 driven.
First, global companies reliant on China for their manufacturing requirements are perhaps better off diversifying some (if not all) of their manufacturing exposure to other economically viable geographies. India presumably presents one such option.
Second, a burgeoning anti-Sino sentiment across the world, again largely due to the Chinese handling of the pandemic, is prompting companies to move away from China to more “information friendly” regimes.
Both the narratives depend on a partial exodus of manufacturing away from China.
However, shifting manufacturing bases is a complicated, layered, and nuanced process, one with several economic ramifications and policy considerations. Labour laws, tax laws, judicial efficiency, supply chain logistics, infrastructure quality, economic viability and cost effectiveness are all critical and inter-linked factors that go into such decision making. Furthermore, a positive manufacturing environment “at the moment” would not suffice. It must be sustained over the long-term as manufacturing is highly capital intensive, not as agile as other sectors, and without a doubt warrants a long-term commitment.
From an Indian standpoint, the focus should not be on nudging Companies into moving manufacturing from China to India. Focus should be on strengthening domestic manufacturing and betting on that fact that such benefits would naturally flow through. In that context, the policy push towards long-term sustainable growth in domestic manufacturing should be the focus. Furthermore, within manufacturing, focusing on a sector that has meaningful macro tailwinds can perhaps drive robust initial traction and momentum. Electronics is perhaps the ideal starting point.
Electronics - macro tailwinds and impressive policy support!
Within the larger umbrella of Manufacturing, Electronics is one of the largest and fastest growing segments globally with overall production estimated at US$2.9tn in 2018 and growing at mid-single digit CAGR. India’s domestic production in the segment was c.US$65.5bn (INR 4.58LCr) in 2018-2019 while contributing c.3.0% to global electronics manufacturing.
From an Indian standpoint local production meets only about a third of our homegrown demand for electronics, leaving a significant dependence on imports notwithstanding a sharp 25% CAGR growth in domestic manufacturing over the last four years. A growing market which is reliant on imports points towards a possible sweet spot for local players to extract value from.
Bulk of the growth in domestic electronics manufacturing has been largely driven by assembly of imported finished products from electronic components (China being a key exporter).
The focus needs to be on elevating domestic ‘value addition’ and in that context it is critical that policy support is “investment and value addition” centric that elevates the entire supply chain ecosystem.
Here’s what India’s electronics manufacturing current profile looked like:
Electronics Manufacturing Sales Profile from 2014-2019 (Source: RBI)
Electronics manufacturing constitutes less than 3% of India’s overall GDP notwithstanding sharp recent growth. Unsurprisingly, bulk of the growth in the sector has been carried by domestic manufacturing of Mobile Phones, accounting for more than a third of all electronics manufacturing:
Electronics Manufacturing Sales Breakdown for 2019 (Source: RBI)
The large growth runway has prompted meaningful policy measures to lift India’s footprint in the segment. Consequently, strengthening of electronics manufacturing is a key focus area for the Government of India and this well evidenced by the cabinet’s approval of several policy measures and incentive programmes in the last few weeks and months.
1. Production Incentive Scheme (PLI) for Large Scale Electronics Manufacturing.
Stated Objective: “The Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing proposes a financial incentive to boost domestic manufacturing and attract large investments in the electronics value chain including electronic components and semiconductor packaging”.
The PLI Scheme is a $6.37bn (48,000cr) package to boost domestic electronics manufacturing via a series of incentives for large scale electronic manufacturers.
The scheme covers two sets of electronic items: i) Specified Electronic Components (SEC) and ii) Mobile Phones. These two sets have different eligibility criteria and incentives with a common intention of driving an uptick in domestic manufacturing in the sector.
Set 1: Specified Electronics Components or SEC includes the below list of items
SMT Components (Surface Mount Technology)
Discrete semiconductor devices including transistors, diodes, thyristors, etc
Passive components including resistors, capacitors, etc for electronic applications
Printed Circuit Boards (PCB), PCB laminates, prepregs, photopolymer films, PCB printing inks
Sensors, transducers, actuators, crystals for electronic applications
System in Package (SIP)
Micro/Nan-electronic components such as Micro Electromechanical Systems (MEMS) and Nano Electromechanical Systems (NEMS)
Assembly, Testing, Marking and Packaging (ATMP) unit
Incentive: Companies involved in the manufacturing of items in the above list will get financial incentives of 4%-6% on incremental sales (over base year which is identified as 2019-2020) of goods manufactured for a period of five years provide they meet a set of requirements.
Requirements:1) Companies manufacturing items in Set 1 must cumulatively invest INR 100cr over four years from the base year. 2) Companies must meet an incremental sales threshold criterion every year for the next five years. These incremental sales thresholds are INR 100cr, 200cr, 300cr, 450cr and 600cr from the base year.
Source: Ministry of Electronics & Information Technology, GOI
Potential Cash Benefit: A total investment of INR 100cr over five years can drive a substantial INR 31cr in incentives alone. This is obviously additive to the much more pronounced benefits of operating in a high growth vertical.
Set 2: Mobile Phones
Incentive Structure: Companies involved in the manufacturing Mobile Phones will get financial incentives of 4%-6% on incremental sales (over base year which is identified as 2019-2020) of goods manufactured for a period of five years provide them meet a set of requirements.
Requirements: 1) Companies manufacturing Mobile Phones must cumulatively invest INR 200cr over four years from the base year. 2) Companies must meet an incremental sales threshold criterion every year for the next five years. These incremental sales thresholds are 500cr, 1000cr, 2000cr, 3500cr and 5000cr from the base year.
Source: Ministry of Electronics & Information Technology, GOI
Potential Cash Benefit: A total investment of INR 200cr over five years can drive a substantial INR 245cr in incentives alone. This is obviously additive to the much more pronounced benefits of operating in a high growth vertical.
For both the sets of products, government expects incentives of INR 40,951cr via the PLI scheme staggered over the next five years as laid out below:
Source: Ministry of Electronics & Information Technology, GOI
It is clear that the incentives via PLI are fairly attractive and offer meaningful cost advantage to domestic manufacturers. Is a 4-6% direct cost advantage resulting in margin improvement of equivalent magnitude, enough of a sweetener to nudge investments in the SEC and Mobile Phones verticals? In a favourable industry it perhaps is! Lava, is textbook case of a mobile manufacturer shifting production bases to India from China recently.
2. Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS)
Stated Objective: “The scheme will help offset the disability for domestic manufacturing of components and semiconductors in order to strengthen the electronics manufacturing ecosystem in the country.”
The scheme is designed to incentivize capital expenditures/investments that go towards manufacturing of select goods and products. Capital expenditure will include expenditure in plant, machinery, equipment, associated utilities and technology, including Research & Development (R&D).
Incentive: 25% of capital expenditure for the manufacture of good as identified in the table above will be offered as incentive on a reimbursement basis. The incentive can be used for growth capex in new units as well as expansion of capacity/ modernization and diversification of existing units.
Requirements:1) There is minimum investment threshold depending on the item as identified in the table. 2) Total value of refurbished plant, machinery and equipment, R&D whether imported or domestically procured, must not exceed 20% of the total eligible plant, machinery and equipment, R&D.
Source: Ministry of Electronics & Information Technology, GOI
PLI and SPECS are two fairly robust policy driven incentive schemes that underline clear intent towards strengthening the domestic electronics manufacturing footprint. Furthermore, there are other policies that are aimed at the upliftment of the entire value chain and collectively they can be seen as a strong endorsement from the Government towards advancing the electronics sector.
3. Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme
EMC 2.0 is an upgrade on a previous scheme and the focus is on creating “Electronics Manufacturing Clusters” The idea is that this would in turn create a robust ecosystem for attracting investment in electronics manufacturing. “Lack of infrastructure” is fairly often cited problem with Indian manufacturing ecosystem, and this is somewhat aimed at solving that via rapid industrialization and sophistication of existing infrastructure.
4. Electronic Development Fund (EDF)
EDF is professionally managed Fund of Funds via a series of Daughter Funds. The objective is to provide risk capital to companies developing new technologies in the wider electronics and IT segments. The targeted corpus is c. INR 2300cr via these funds. In a capital-intensive sector which warrants heightened level of R&D, access to risk capital is a key consideration.
5. Atma Nirbhar Bharat: Government Local Tenders
As per the Atma Nirbhar Bharat narrative, sub INR 200Cr tenders for government procurement are now being reserved only for domestic tenders. As such the move is aimed towards discouraging global companies for such tenders which in turn should benefit local companies. Hardware products, telecom and electronic equipment could often amount to less than INR 200Cr and opens up some possible doors.
Long Road Ahead
Policy support around investments is critical for the electronics industry to thrive and grow. However, for a long-term sustainable manufacturing ecosystem to be put in place, there are several other considerations that need to be accounted for. Inadequate infrastructure, choppy labour laws, weak domestic supply chain networks, high cost of finance, inadequate availability of quality power, inadequate skill development are just a few such concerns.
However, pushing the electronics ecosystem with financial incentives for investing in the sector is perhaps a great catalyst at this point of time. Is it enough? Time will tell!
This email is prepared by Arkvega Advisory (or “AA”), the Institutional Advisory practice of Arkvega Partners LLP (https://arkvega.com) – an independent New Delhi based advisory and investment management firm.
We are open to explore synergies with professionals, corporates, investors, and relevant service providers at-large, from the perspective of advisory partnership and lead origination. Feel free to reach us out at:
Nikhil Arora | nikhil@arkvega.com | @Nikhil26A
Sharath Toopran | sharath@arkvega.com | @SharathToopran