India has a good shot at slowly ascending global value chains | Mint

India has a good shot at slowly ascending global value chains

Shipments of mobile phones assembled in India have increased by more than ten times over the past six years. (Mint)
Shipments of mobile phones assembled in India have increased by more than ten times over the past six years. (Mint)

Summary

India's success story in mobile phone exports needs to be viewed as the first step in acquiring a deeper supply chain ecosystem, rather than mere assembly. Densification of supply chains needs to be promoted through easing domestic constraints on manufacturing, rather than trade barriers.

The splendid increase in mobile phone exports in recent years has been a success story for the Indian economy. Shipments of mobile phones assembled in India have increased by more than ten times over the past six years. And they have tripled over the past three years. Such assembly depends on imported inputs that flow across national borders with minimal tariff barriers. Some of these inputs require sophisticated technology. Assembly is just putting together inputs that others have produced. Hence the worry that there is very little value addition in the Indian factories that are now part of the sprawling supply chains of global consumer electronics majors such as Apple and Samsung.

Such criticism fails to consider that entire supply chains will not move into India in one dramatic swoop. It will be a gradual process. There will necessarily be two stages—first, the assembly of the finished product from imported inputs, followed by the domestic production of intermediate goods that go into a mobile phone. In that sense, what has been achieved recently is an important first step. The “densification" of supply chains for mobile phones still lies in the uncertain future.

In 2005, three business school professors decided to look inside the latest iPod from Apple. Kenneth L. Kraemer, Greg Linden and Jason Dedrick were trying to figure out how the value in the then-iconic gizmo was being distributed across various points of the supply chain. They found that almost half of the value went to Apple, for its design, branding and intellectual property. The rest was distributed among various input suppliers. The assembly of the iPod was done in China, which captured barely 5% of the total value of the music player.

Fast forward to the year 2009. The iPhone has been launched with the tag line “Designed in California, Assembled in China" famously embossed on the phone. China is already the base for the assembly of iPhones sold across the world. Firms operating in China capture only a sliver of the value added in every iPhone 3G, both in terms of the cost of production as well as the retail price. China continues to play a big role in terms of final output, but a very minor role in terms of value addition.

Does that change in subsequent years? The answer to this question is important for India at this early stage of our mobile phone exports story. In 2019, Yuqing Xing, an economist at the National Graduate Institute for Policy Studies in Tokyo, investigated the entrails of the latest iPhone X to see how value was now generated in the supply chain. He found clear evidence that China had begun to move up the iPhone value chain.

China was now accounting for a quarter of the cost of manufacturing the iPhone X and a tenth of the retail price. This was six and eight times higher than the comparable numbers for the iPhone 3G in 2009. Yuqing reported in a research paper that ten Chinese companies were now involved in the manufacture of key iPhone X components such as the battery pack, printed circuit boards, glass cover, camera module and parts of the touchscreen module. It was no longer just an assembly operation by Foxconn in China.

There is now a fair bit of research on how China has used an initial entry into a global supply chain as an opportunity to build forward and backward linkages within the country. Moving from the assembly of final consumer goods to the domestic production of intermediate goods is a key task. Such densification of supply chains has enabled China to move up the global value chain, create a strategic advantage, and make it much more difficult to move supply chains out of the country. Also, moving up the value chain enables a country to increase the share of exports in its GDP even at the same level of aggregate exports. There are lessons for India here in the years ahead.

How much of this is because of the natural process of technology spillovers and how much because of explicit industrial policy run by the government will always be a matter of debate. It is not just about gizmos rolled out by Apple. Another article published in 2019 against the backdrop of an escalating trade war between the US and China was written by Hiau Looi Kee of the World Bank and Heiwai Tang of Hong Kong University, and it showed that China is moving up global value chains in a range of industries. Their big policy conclusion is that trade liberalization as well as foreign direct investment are key to increasing the domestic value added in the exports of any country.

None of this is easy. However, there are two big lessons here.

First, the initial success in mobile phone exports need not be dismissed as mere assembly using screwdriver technology. It can be the first step in acquiring a deeper supply chain ecosystem.

Second, densification of supply chains needs to be promoted through the easing of domestic constraints on manufacturing, rather than through trade barriers, something that, in an older context, Jagdish Bhagwati and V.K. Ramaswami had shown in a landmark paper way back in 1963.

Niranjan Rajadhyaksha is CEO and senior fellow at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.

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