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A joint study from IIM Bangalore & Counterpoint Researchers makes a strong case for industry and government to put efforts to drive the true local value addition of components from current 6% to more than 30% level in next five years. This will help India pivot into a global manufacturing hub with advanced local manufacturing and move towards the goal of maximizing local sourcing of components

New Delhi, 21st November 2016: A joint study from IIM Bangalore and Counterpoint Researchers, released here today, analyzes the current state of mobile phone manufacturing in India and provides detailed recommendations on the future steps for a phased manufacturing approach.

The report makes a first attempt at documenting this path forward with the hope that ‘Make in India’, in conjunction with Innovate, Design, and Skill India will kick-start the economy into a zone of technological leadership rather than continuing to play the laggard in a digital global economy.

Next Phase of ‘Make in India’ Beckons as India to Consume US$80 Billion worth Total Mobile Phone Components Over Next Five Years

India surpassed the USA to become the second largest global smartphone market in terms of users in early 2016 and on track to cross half a billion smartphone users mark within the next five years. In this five-year period, close to a billion smartphones, together with almost half a billion feature phones, that will be sold in India, will consume more than US$80 billion worth of components. This offers a huge opportunity just from the domestic demand perspective to manufacturing mobile phones in India and increasingly source components locally, thus, reducing the dependency on imports.

Releasing the report, Aruna Sundararajan, Secretary, Ministry of Electronics & IT, Government of India, commended IIM Bangalore and Counterpoint Researchers for working on what she described “a very important and timely” study. Pointing out that there was plenty of work ahead on fronts such as tariff regime, skill development, design knowledge and the creation of strong infrastructure to aid the formation of electronics manufacturing clusters, she said the government would have to work with local industry and several partners to achieve this. “India can potentially be the world leader in mobile phone manufacturing ecosystem and this has to be done in a phased manner,” she added.

She also announced that the government was sending close to a 100 design engineers to Taiwan to learn important facets of aligning product design and customer needs from their Taiwanese counterparts.

Ajay Kumar, Additional Secretary, DeITY, said: “I am happy to note that a study has been conducted by IIM Bangalore on ‘Maximizing Local Value Addition in Indian Mobile Phone Manufacturing’. The mobile phone is the single largest electronic item in the basket of electronics goods imported into the country. During the last 18 months, 40 new mobile phone assembly units and 12 new component/ accessory manufacturing units have started in the country as part of Digital India initiatives. But mobile phones itself have the potential to create electronic manufacturing to the tune of over USD 250 billion industry. Research efforts like the IIMB study are welcome because they contribute to the understanding and sustaining the momentum of growth in the sector.”

Based on the proposed plan and recommendations in the study, IIM Bangalore’s Professor Chirantan Chatterjee, from the Corporate Strategy and Policy Area, who is the lead author of the study, says: “The Government’s role in driving the right policy reforms, such as effective duties on key components along with attractive incentive structures, can drive key suppliers to India. In addition, funding engineering institutions and corporations to develop future research (e.g. 5G, automated manufacturing robotics, software, etc.) to build domestic intellectual property (IP) and a strong pool of highly skilled professionals. These will help to make India an R&D hub for this critical industry sector. Technological independence in today’s mobile-first economy is critical for an emerging market like India.

“Under the proposed plan, we estimate that more than $15 billion worth components will be sourced locally over the period of five years through 2020, realizing not only significant savings in foreign exchange, reducing the level of imports but also assisting the creation of over million direct and indirect jobs. While India is the second largest country in consumption of mobile phones globally, this plan can transform India into a global manufacturing exports hub adding further to the country’s GDP and balance of trade. Dependence on foreign manufacturing ecosystems will reduce thus, security and belief in smartphone transactions could potentially increase, and in fact, local manufacturers can leapfrog into becoming innovators and explorers from being purely imitators and exploitators while generating high-end job opportunities at the same time,” Prof. Chatterjee added.

Commenting on current state of manufacturing, Counterpoint Research’s Senior Analyst and co-author of the study Tarun Pathak, said: “The ‘Make in India’ initiative has been successful at driving some indigenization of assembly of mobile phones; the number of mobile phone and related components manufacturing facilities is estimated to exceed 50 units by the end of CY2016, up from just two units before the ‘Make in India’ program was announced. We estimate more than 180 million mobile phones will be assembled in India, out of the total 267 million phones to be sold in India in 2016.

“However, the overall ‘true localization rate of manufacturing and sourcing components will be just under 6% of the total value of US$11 billion worth components going into those 267 million phones in CY2016. Comparatively, other global manufacturing hubs such as China which has raced ahead to build a robust local manufacturing ecosystem is seeing localization rate of almost 70%. Other leading hubs such as South Korea and Taiwan, have crossed 50% localization of components. Whereas, the emerging hubs such as Vietnam and Brazil are seeing local value addition around 30% and sub-20% level respectively. Thus, to transform India into a global manufacturing hub, the “Make in India” program needs to propel to the next stage to maximize the true local value addition,” he explained.

Counterpoint Research’s Research Director and co-author of the study Neil Shah, citing the practical approach as highlighted in this study, said: “It is critical for the ‘Make in India’ to transform the current manual semi-knocked-down (SKD) level assembly and minimal amount of local component sourcing into a large-scale manufacturing ecosystem over the next few years. Currently, most of the components and sub-components are imported and assembled in a semi-knocked-down format. There is hardly any incentive or effort to meaningfully invest in research, design, development, advanced surface mount technology (SMT) led printed circuit-board (PCBA) manufacturing, or attempts to attract key component suppliers to form a robust local manufacturing ecosystem.

“With this study, we have identified and analyzed more than 60 components and sub-components going into a phone and the possibilities to drive localization of these components over the next five years. To begin with, this involves greater investment in industrial design, PCBA design, and surface-mount-technology (SMT) level assembly although many of the major silicon components will continue to be sourced from overseas. However, we believe manufacturing of major sub-components of chargers, batteries, and cameras can be accomplished locally. Sourcing and assembling these key high-value components & sub-components from local manufacturers will drive greater value addition. This will drive the true local value addition to more than 30% by 2020 and potentially to as much as 50% thereafter,” he added.

Key Findings:

  • The contribution of domestically manufactured mobile phones has increased from 14% in CY 2014 to 67% in CY 2016.This is further estimated to contributed 96% by CY 2020.
  • However, 67% of the handsets manufactured in India contributes to just 6% of the ‘true local value addition’ with most of the OEMs still importing Semi Knocked Down components (SKDs).
  • Out of 50 facilities from OEMs to ODMs to EMS to component suppliers involved in the manufacturing of mobile phones in India, almost three-fourth are Indian manufacturers, followed by Taiwanese with 10% and Chinese with 10%.
  • Under the phased local value addition plan, the components under Phase I plan (CY2016-CY 2018) like Battery, Chargers, Cables, Housing, Packaging and others can be localized completely, thus driving the ‘true local value addition’ from current 6% to 17% in just two years.
  • Components under Phase II plan (CY 2018-CY 2020) like Display, Camera, and their sub-components can further increase value addition from 18% to 32% by 2020.Phase III plan will include possibility of localizing the
  • Phase III plan will include possibility of localizing the semiconductor components post 2020 including setting up semiconductor fab and thus driving the ‘true local value addition’ beyond 33%

Exhibit 1.1: Detailed Steps Recommendations within the Phased Approach

Detailed Steps Recommendations within the Phased Approach

  • Under the proposed plan, we estimate that more than $15 billion worth components will be sourced locally over the period of five years through 2020 creating over a million direct and indirect jobs in India.

 Exhibit 1.2: Total Local Value Addition Forecast under Phased Plan

Detailed Steps Recommendations within the Phased Approach

Methodology:

A mix of primary and secondary research to help quantify, analyze the overall component and sub-component costs, supply chain structure, comparison of manufacturing operations in India with other global hubs, using the existing Counterpoint Research’s data on India mobile phone competitive landscape, market size and key component trends.