Inside the plan to mobile-make in India
9 min read 28 Oct 2020, 08:20 PM ISTOn paper, the new PLI scheme could give a big push to electronics exports. What could be the sticking points?Much of its success depends on how efficiently incentives are disbursed. A lot depends on how the manufacturers execute, too. Smaller companies now need to find global buyers
PremiumNEW DELHI : Early in 2019, the central government began designing a new policy with a lofty goal: take Indian mobile phone manufacturing to the next level and scale up assembly operations by multiple notches. An executive from a large manufacturer got involved.
Over the next year, he met up with government officials at least once a month. However, by early 2020, his company’s interest in the policy, called the Production Linked Incentive Scheme for Large Scale Electronics Manufacturing (PLI), started to fizzle out. The targets seem too stiff.
“By March, covid-19 had hit every major market and I wasn’t sure of the demand for phones in a post-pandemic world," the executive who didn’t want to be identified said. “The government was unwilling to budge when we requested that the targets be relaxed. We pulled out," he added.
The PLI scheme was finally notified in October 2020. It offers 6-4% incentive for five years on incremental sales of manufactured handsets over 2019-20. High-end multinational mobile phone makers, or those producing handsets worth over $200 or ₹15,000, have to sell goods worth ₹4,000 crore in 2020-21 to claim the prize.
Some 16 companies, a mix of multinationals and Indian firms, were approved. Considering that many of them, particularly contract manufacturers, would take a month or two to get their plants, machinery and customer contracts ready, they have four months to crack first year’s targets. “The only way I could have overcome the shortened period is by increasing manpower. But I can’t do that now. There are social distancing norms. At best, you have 70-75% of your workforce in the factory," the executive reasoned.
While there are murmurs of discomfort among some in the group of 16, most companies are putting up a brave front. Indian contract manufacturers such as Dixon Technologies (India) Ltd. and mobile makers like Lava International Ltd., whose applications were approved, told Mint that they can meet the targets— ₹500 crore in 2020-21 for domestic companies.
And, if these firms can see through the first difficult year, the policy appears rather seductive for the next four. The government is promising to pump $5.5 billion or about ₹41,000 crore during the scheme’s five-year tenure.
The business of mobile phone assembly is a rare Make-in-India success story. India had two mobile manufacturing units in 2014. By 2019, there were over 200. The number of mobile handsets produced shot up from 60 to 290 million in the same period; the value of handsets produced jumped 10 times to $30 billion. India, thus far, resorted to a strategy of import substitution with mobile phone assemblers largely catering to the low-end domestic market. That market may be saturating. To grow, Indian phone makers need an export nudge. “No matter what we say about the Indian market, our GDP is less than 4% of the world. India’s consumption of mobile phones is 4.5% of the world in terms of value and 15% in volume," Hari Om Rai, chairman and managing director of Lava International Ltd. said. “Import substitution is not a good model for India because it is a small market. We can grow by exporting to the world," he added.
The government’s thinking: the PLI scheme, along with two other smaller schemes around the manufacturing of components (Scheme for Promotion of Manufacturing of Components and Semiconductors) and infrastructure (Electronics Manufacturing Cluster Scheme), could shore up exports of both high-end and mid-range phones.
In a recent report, Neelkanth Mishra, the co-head of Equity Strategy, Asia Pacific, for Credit Suisse wrote that if the PLI targets are met, additional handset manufacturing of nearly 10% of the global market by value and volume could move to India by 2023-24; India’s trade deficit could improve by $24 billion. He peppered the report with a dose of caution. “These plans may see some delays: the coronavirus could push out timelines, as would perception of policy uncertainty (including at the state level) among global manufacturers."
Besides, there are clear concerns around disbursement of the incentive, which is expected to be a direct bank transfer after claims for disbursement are submitted. The claims would be verified by a project management agency and needs the approval of an empowered committee comprising the secretaries of key central ministries and departments.
“We are happy with the design of the scheme. We are only hoping that the disbursement is as promised," Bipin Sapra, a partner at Ernst & Young (EY) and a former Indian Revenue Service bureaucrat, said. “Once the central government starts disbursing the money, we will get clarity as to the budgets they have. Budgets are stressed for all incentives right now," he added.
To a large extent, the success of the scheme depends on how efficiently the disbursement process is handled.
A creative design
India will face China and Vietnam—two large mobile phone exporters—as it fires up its export dreams. China exported phones worth over $100 billion in 2019; Vietnam over $35 billion. India exported less than $3 billion in 2018-19.
Indian manufacturers are at a disadvantage on different counts. Industry conversations are replete with the word “disability". They range from poor logistics to unreliable power supply. A study by Ernst & Young and the India Cellular and Electronics Association (ICEA), ‘Mobile manufacturing in a post Covid-19 world’ compared manufacturing costs across the three countries. Assuming that $100 is the cost of producing a phone without subsidies, China can make it at $80 after factoring in the incentives the country provides. Similarly, the cost of manufacturing a phone in Vietnam is $89.
The PLI scheme bridges some of India’s deficit. The manufacturing cost, after factoring in PLI and other subsidies, totals $92-$93.
“The disability stack runs deep in the economy. For example, the taxes on fuel. Second, electricity is not subsumed under GST (goods and services tax). So how do you become competitive?" Pankaj Mohindroo, chairman of industry body ICEA asked. “While the PLI policy had to strike at some of these disabilities, it also had to be World Trade Organization (WTO) complaint," he added.
Export subsidies aren’t allowed by the WTO and thereby, a more creative structure had to be designed, which is the production-based one.
Third, the policy largely sought to attract high-end phone makers but couldn’t ignore the mid-range or low-end producers either. Besides Dixon and Lava, domestic manufacturers approved for the scheme include Micromax, Padget Electronics, Neolyncs and Optiemus Electronics. In the $200 and above category, companies whose proposals have been approved include Samsung, Foxconn Hon Hai, Wistron and Pegatron.
About 300,000 direct jobs are expected to be generated by the scheme. An advisor to the government estimated the annual wage bill for all companies participating in the scheme to be about ₹6,000 crore. In five years, the wage bill is expected to rise to ₹30,000 crore.
Considering that the government’s incentive outlay for five years is ₹41,000 crore, it is effectively subsidising the wage bill. PLI is also subsidising the capital expenditure. Companies approved under the scheme would invest about ₹11,000 crore to meet their sales targets.
The scheme is also a massive discount on India’s current value-add, the advisor mentioned above explained. Manufacturers in India import most of the components and the assembly value ranges between 8% and 15%.
“If 15% is the assembly price, an incentive of 6% is almost a 50% discount," he said.
Apple pie
The EY report quoted earlier stated that more than 80% of the mobile phone revenues are split between five companies—Samsung, Apple, Huawei, Oppo and Vivo. To participate meaningfully in the exports market and global supply-chains, tapping these firms to increase local production is crucial.
Samsung started assembling phones in India in 2007 and has recently set up a smartphone display manufacturing unit. Chinese companies such as Vivo have ramped up local assembly operations over the last few years but are no longer the flavour of the season because of geopolitical tussles.
The Apple ecosystem was a gnawing gap—Apple, one of the world’s largest companies by market cap, does manufacture locally but the volumes are rather low. The company began manufacturing in 2017 with the first generation of iPhone SE. Its made-in-India portfolio subsequently included iPhone 6s and iPhone 7 in 2018, iPhone XR in 2019 and iPhone 11 and the new iPhone SE in 2020. Apple’s contract manufacturers and suppliers produce these phones from eight locations in India; in China, the company’s suppliers manufacture from over 350 locations.
The Indian government and representatives from Apple have been negotiating incentives at least since 2016. The wooing has clearly increased over the last 15 months. “There are special groups within the central government that have shortlisted the top 50 global manufacturers and they are reaching out to each one of them individually," an executive from a multinational who didn’t want to be named said.
If there is a pull, there is a push factor, too. Apple is keen to diversify its global supply-chain. In June 2019, Nikkei Asian Review reported that Apple wanted suppliers to evaluate the cost implications of shifting upto 30% of their production capacity out of China. “However, it is not easy to move manufacturing to India. Transitions like that take years," a former employee of Apple told Mint.
PLI seems like a good start towards that transition. Three of the four companies approved in the $200 phone and above category—Foxconn Hon Hai, Wistron and Pegatron—are Apple suppliers.
Scale talk
A rising tide lifts all boats. Indian manufacturers have started talking of scale and are planning for it.
“Indian companies and multinationals are competing in a different space. It gives us room to emerge stronger over a period of time," Sunil Vachani, executive chairman of Dixon, said.
Dixon can manufacture 30 million phones in a year. Over the next few months, it plans to nearly triple capacity to 80 million and employ an additional 4,000 workers over five years. The firm is expanding in Nodia and a new facility would be ready by January 2021.
“The threshold under PLI is an investment of ₹200 crore over four years for domestic companies but we would make an investment of at least ₹350 crore," Vachani said.
Meanwhile, Indian companies appear hopeful they can leverage the supply-chain multinationals set-up. Large contract manufacturers typically push their suppliers to set up domestic shops as they shrink cycle times.
Hari Om Rai of Lava thinks the scale PLI demands would help develop the component ecosystem in the country. And local manufacturing of PCBs, displays, batteries, camera modules, and speakers would help build skills. “Our per capita income is about $2000 as compared to China’s $10,000 or Korea’s $32,000. The moment we acquire skills, at a lower per capita, our production output is going to be highly competitive. Foreign companies who come in will get the advantage of India; domestic companies even more so," he said.
Rai added that the benefits of a sprawling mobile phone ecosystem would benefit other electronics categories as well since a smart phone is at the heart of every electronics, be it displays or the batteries.
PLI, therefore, is full of possibilities and looks sound on paper. But like we mention earlier, much of its success depends on how efficiently the incentives are disbursed.
A lot depends on how the manufacturers execute, too—scaling up production is one piece of the equation. Smaller companies who catered to domestic consumers now need to find global buyers. In a pandemic-battered world, that may not be easy.
