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Looking Beyond Assembly: India poised to become a manufacturing hub for low-priced handsets

September 08, 2016
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Driven by the strong government push and opportunities arising from an evolving 3G/4G ecosystem and growing rural telecom appetite, the handset manufacturing space in India is buzzing with activity. According to the Indian Cellular Association, India currently has an annual mobile phone production capacity of around 250 million units, up from 100 million in 2015 and 68 million in 2014. Further, as per a recent report by the Associated Chambers of Commerce of India and consulting firm KPMG, the handset manufacturing space saw a year-on-year growth of 83 per cent in volume and 186 per cent in value between 2014-15 and 2015-16. Riding on this manufacturing momentum, the government expects the country to reach a capacity of 500 million phones, mostly in the low-end category, by 2018. The government, in fact, expects India to become a major export hub for the supply of low-end phones to several nations in Africa, Latin America and Asia.

At the heart of this growth and expectations lies the government’s ambitious Make in India initiative that has set the momentum for manufacturing in the  handset industry. Though the industry still has a long way to go in end-to-end manufacturing of phones in India, the regular updates about Indian and foreign players establishing/planning to set up their assembling units is encouraging. Since the launch of Make in India  initiative in September 2014, around three dozen new handset assembling units have been established in India.

Further, the overall changing dynamics of the telecom sector augur well for the development of a device ecosystem in the country. 3G/4G is no longer a high-end urban phenomenon, with users in Tier II and Tier III cities showing a growing appetite for affordable smartphones. The m-commerce wave has taken the country by storm and has become the key growth factor driving up smartphone sales. The telecom landscape in rural areas is also improving significantly. Mobile phones are acting as the primary platform to access a plethora of services such as healthcare, education, governance and banking for the rural population. This makes a compelling case for international players to consider local manufacturing of handsets in India to bring in cost efficiencies.

The timing cannot be more right. China, the global hub for handset manufacturing, is gradually losing its low-cost advantage due to rising labour costs. For mobile manufacturers, who are struggling to maintain their margins, India can emerge as an attractive alternative. India offers favourable labour costs, a shorter time-to-market, low shipping charges and a burgeoning domestic demand. Growth in  volumes can justify setting up manufacturing facilities in India, and these units can even cater to the growing demand from markets in South Asia in the long run. Thus, it does not come as a surprise that several Chinese vendors figure in the list of companies planning to set up manufacturing operations in India in the near future.

Government initiatives such as Digital India and Skill India are also expected to add strength to handset manufacturing in the country. Digital India calls for a robust internet infrastructure to connect every individual, which in turn would drive the demand for affordable smartphones. Similarly, Skill India aims to establish a strong manpower base of about 400 million skilled individuals by 2022, which will directly benefit handset manufacturers.

With all the growth drivers in place, the journey for India to become a manufacturing hub has just begun. It will be a long  time before India sheds its assembling tag to jump on the end-to-end manufacturing bandwagon. India currently lacks a component manufacturing base. It does not have fabrication plants to manufacture chip sets locally. Further, much remains to be done to address issues such as limited physical infrastructure support, supply chain limitations, high cost of finance and unavailability of power and water supply, which are crucial for manufacturing, especially electronics. More clarity is required regarding the taxation structure and various other duties levied on imports and production. The announcement of new local sourcing norms as well as the goods and service tax (GST) regime will also have a significant impact on   manufacturing activity.

These issues, however, can be ironed out with relevant government support. The handset manufacturing ecosystem in India is evolving significantly and favourably. Several players have shared their plans and commitments to assemble and manufacture products, either independently or through third-party contracts in the country. 

Changing dynamics – moving up the value chain

Currently, mobile phone manufacturing in India is limited to assembling semi-knocked-down mobile phones rather than end-to-end manufacturing. The phones are typically imported as semi-knocked-down kits with most components already soldered to the main circuit board of the handset. These kits are then simply assembled into devices. At least 25 smartphone vendors are currently engaged in assembling of mobile phones in India.

Some companies have started importing completely-knocked-down kits, wherein the local value addition goes up to 7-10 per cent as this requires more labour and a proper assembly line. In the initial phase, Samsung and some Indian vendors had started local assembly to take advantage of time-to-market and quality control. According to a report by the International Data Corporation, more than two-thirds of the smartphones shipped in the first quarter of 2016 were assembled within the country and some of the companies, which are currently assembling mobile phones locally, are likely to start manufacturing components and accessories like batteries, chargers and data cables.

Several Chinese players have entered the space and are focusing on producing high-volume products in India, as manufacturing them fully in India is economically viable. Local manufacturing of low-end phones helps companies in cutting costs of production, as it significantly brings down both import costs and  time-to-market. For imported phones, there is typically four to five weeks of lead time to order the goods, which gets reduced to just two weeks when manufactured locally. Affordability is the key driver for mobile phone sales, typically in rural areas, and local manufacturing allows non-Indian players to achieve this.

Further, contract manufacturing has come up in a big way and is helping young companies and new entrants to establish themselves in an extremely competitive market. The entry of the world’s largest contract manufacturer, Taiwan-based Foxconn and its Chinese counterparts like Water World Technology and Dixon Technologies also underlines the opportunity offered by India. Foxconn began building devices for Nokia and later expanded to contract manufacturing for China-based vendors, giving these new entrants an alternative to avoid high import duties. Xiaomi, together with Foxconn, is assembling phones locally in Chittoor, Andhra Pradesh.

However, in a bid to move up the manufacturing value chain, strengthening of the component supply chain is extremely critical. Currently, there is a dearth of component manufacturers in the country. While high-end components like cameras, chip sets and  memory modules, are still being imported, some players have started manufacturing components such as batteries, earphones and chargers in India. In July 2016, Karbonn announced that it will venture into production of accessories and batteries in September 2016. It is setting up a new facility in Tirupati, state which will have surface-mounted technology production and assembly lines, along with charger and battery units for the supplies.

Progress so far in 2016

The handset space has been vibrant with new announcements and plans by vendors during the past six months. Some of these announcements are as follows:

• Micromax has launched its manufacturing facility in Hyderabad, with a  capacity of 1 million devices per month. Micromax has invested Rs 1 billion in the project in the first phase. This is the company’s second manufacturing facility in the country, after the first one in Uttarakhand with a capacity to produce 1.6 million devices per month.

• Further, Karbonn Mobiles has set up a handset manufacturing plant in Haryana. It has 22 assembly lines that can manufacture 30 million mobile units per year. The company currently manufactures 1.5 million units in a month which could increase to 2.5 million by end-2016.

• Lava International is in the process of setting up a second assembly unit in Greater Noida. The company currently has an assembly unit in Noida with a capacity of 1 million units per month. With the new unit in place, the total plant production will increase to 2.5 million units.

• Besides the two assembly units, the company also has plans to set up two greenfield manufacturing projects, one near the Yamuna Expressway and the other at Tirupati, Andhra Pradesh.

• China-based Oppo is planning to set up a manufacturing unit in India with an investment of Rs 1 billion. Oppo has announced that it will set up a manufacturing unit in India by December 2016, most likely at Noida. The company plans to invest Rs 1 billion in this project to produce about 0.2 million phones. It aims to sell 0.1 million units in the Indian market while the rest will be exported to Bangladesh, Sri Lanka, Pakistan (via Dubai) and Nepal.

• Hyderabad-based handset manufacturer Celkon has partnered with Million Club Manufacturing (MCM), a joint venture between the promoters of Karbonn Mobile and China-based Water World Technology, to manufacture 200,000 smartphones. The devices will be produced at MCM’s manufacturing facility located in Noida. This order is MCM’s first manufacturing contract in India.

• Noida-based Dixon Technologies has signed an agreement with Chinese manufacturer Gionee to manufacture its smartphones in India. Dixon is manufacturing the Gionee P and F series smartphones at its Noida facility. Dixon will initially dedicate three production lines at its Noida facility for the smartphones, which may be scaled up to six lines in the near future. At present, Taiwan-based contract manufacturer Foxconn manufactures Gionee’s smartphones at its manufacturing unit located in Andhra Pradesh. While Foxconn will account for 50-60 per cent of Gionee’s local smartphone production, the rest will be catered to by Dixon.

• Meanwhile, Nokia has restarted producing handsets, through its partnership with Foxconn. The company is currently producing feature phones from Foxconn’s Sri City facility in Chittoor.

• ZTE Corporation has plans to set up a manufacturing plant in India. The company is also intending to introduce voice over long term evolution-enabled smartphones in the country under its Blade and Axon handset portfolios.

• Asus has plans to increase its domestic manufacturing capacity from 300,000 per year to 600,000 per year. The company’s smartphones are manufactured by contract manufacturer Foxconn at the latter’s facility located in Andhra Pradesh.  This is in line with the company’s strategy to make India its home market.

• Lava International is likely to complete setting up new manufacturing plants by 2018, while its design centre is likely to be commissioned by the end of 2017.

Seeking clarity – the GST impact

While the government push has been instrumental in encouraging handset manufacturers, some recent developments in the form of new local sourcing norms and  the GST have attracted mixed feelings from the industry.

Broadly, the introduction of the GST is a welcome move for the industry. A manufacturing entity can stand to benefit from a uniform tax regime as it will simplify the business process. However, a uniform tax regime would also mean that all the existing concessions currently offered by different states will come to an end. Further, analysts caution that an end to the existing incentive structure may also bring companies manufacturing phones in India at par with resellers, discouraging local production. Vendors are expected to request the government to maintain the differential between domestic manufacturing and imports and to continue with the benefits given by states. They will ask for continuation of incentives under Make in India even after implementation of the GST regime, given that many companies have already made substantial investments in setting up their base in India.

The GST, however, is expected to give a significant push to online sales of mobile phones, which have slowed down in the past few months on account of additional taxes levied by certain states. This has hit hard the business of several Chinese vendors who use online platforms as their main retail channel. For instance, Coolpad has reduced its sales target for 2016 from 4 million to 2.5-3 million units, after its online sales slowed down on account of additional taxes by certain states.

The new Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods Rules, 2016 were introduced in the 2016-17 budget to streamline the procedure for the import of goods for further manufacture. Handset makers have stated that the change in customs rule has led to an increase in transaction and compliance costs. The amendment to replace bank guarantee with surety is not a welcome move as the industry typically falls back on guarantees owing to lack of resources for surety, especially in the case of companies with foreign direct investment. Vendors have also sought extension in the utilisation period of imported goods from three months to six months so that manufacturers can take advantage of bulk buying.

Road to manufacturing

Although the road to becoming a global handset manufacturing hub is long and fraught with challenges, the Indian market is gearing up. The country has already attracted several new handset players in the past few years, many of whom are assembling the phones locally. The next logical step is to undertake partial production and subsequently, enter end-to-end manufacturing. There is already a growing interest from component makers to set up their facilities in India. A strong component manufacturing base will be the key to help India move beyond assembly in the long run.

 
 
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