To compete with China, India might need to open up to it
3 min read
15 Nov 2022, 07:27 PM IST
Inviting in Chinese companies would help India scale up electronics manufacturing, despite geopolitical tensions.
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India doesn’t see eye to eye with China on several issues, especially ones related to their border. But the South Asian nation might be coming to realize that to become an electronics manufacturing hub, it may need the support of its sometimes hostile neighbor.
Earlier this month, the National Council of Applied Economic Research, or NCAER, a think tank, prepared a report for industry body the Confederation of Indian Industry that recommended that India soften rules on allowing investment from China if it wants to reach the state’s lofty goal of becoming a $300 billion industry by the financial year ending in March 2026.
In 2020, the Department for Promotion of Industry and Internal Trade made prior government approval mandatory for foreign direct investment from countries sharing a land border with India, irrespective of sectoral caps. That was aimed at preventing predatory foreign investment during the pandemic. Over the past year, India has also cracked down on Chinese smartphone makers for allegedly evading taxes.
But the Indian industry body’s latest recommendations highlight the importance of China in the global supply chain, even as companies look to diversify away from it, many with a “China-plus-one" policy for sourcing. Over the last two decades, electronics manufacturers have built deep supply chains in China. The technical know-how and competence to make electronic components at scale may be hard to replicate by homegrown manufacturers, especially since India remains resource constrained. There are few substantial businesses engaged in large-scale component manufacturing in India.
According to data provided by Counterpoint research, locally sourced components in the Indian smartphone ecosystem stand at about 14% to 15%, with the rest being imported and about four-fifths of the total imported components coming from China.
To be sure, India has made tremendous progress in the past few years. With China’s frosty relationship with Washington and the pandemic highlighting the risks of concentrated supply chains, India has found success helped not only by government incentives but also cheap labor availability, a large population of English-speaking talent and an enormous domestic market.
In recent years, electronics manufacturing in India has shifted from “semi-knocked-down kits," which are partly assembled before arriving in India for completion, to completely knockdown kits. Currently, the country is capable of producing components like chargers, cables, battery modules and other subassemblies for testing and packaging. However, India still has a long way to go to produce higher value components like high quality displays and semiconductors at scale.
According to NCAER data, domestic production of electronic goods in India has increased from $37 billion in the year ended March 2016 to $74.7 billion in fiscal 2021. It is also now the second-largest maker of smartphones after China, with backerslike Apple, Samsung and Xiaomi. The final goal would be to transition from being a producer for domestic consumption to serving global demand, not just for phones but laptops, tablets and other devices.
Navkendar Singh, analyst at tech researcher IDC, believes that India must leverage Chinese original design manufacturers to fast track India’s arrival on the global stage as an end-to-end manufacturing hub. Sanyam Chaurasia, analyst at research firm Canalys, says that India should also encourage other foreign players in the supply chain ecosystem from different markets, such as Taiwan, South Korea and Vietnam, to diversify investment in this sector. Quoting sources, a news story in the Economic Times reported that the government may allow Chinese firms entry into the high-tech electronics sector if they set up manufacturing units in the country in partnership with local companies.
A healthy components ecosystem would be at the heart of electronics manufacturing if India wants to compete with China and Vietnam. Geopolitical tensions with China may be hindering India’s path to become a global force in electronics manufacturing, which at present remains centered around mobile phone assembling. It may be a trade-off worth considering.
