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Looking Local: Phased move from handset assembly to high-value manufacturing

July 10, 2018

The past year has been very exciting for the handset space in India. The country overtook the US to become the second largest smartphone market in the world, next only to China. A surge in demand for smartphones, especially at the entry level, was witnessed in the semi-urban and rural areas. There was, moreover, a resurgence in the feature-phone segment with the launch of 4G-enabled feature phones.

Alongside this, the handset manufacturing ecosystem has also evolved significantly during the past few years. Mobile device and component manufacturers have grown from just two in 2014 to 123 as of end-2017. Further, several handset vendors have announced plans and commitments to assemble and manufacture products, either independently or through third-party contracts, in India (see box). The sector is anticipating investment commitments of over Rs 450 billion for handset manufacturing over the next few years.

Protectionist measures like hiking the import duty have yielded positive results with several manufacturers starting to source various parts locally. In monetary terms though, these localised parts are of low value; high-value components such as the main printed circuit board (PCB) are still imported.

For India to emerge as a mobile manufacturing hub, high local value addition across the value chain is needed. Both local and global handset vendors need to move beyond phone assembly in the country and scale up their game in the manufacturing ecosystem.

Current scenario

As per the Indian Cellular Association (ICA), the industry body for mobile device manufacturers, India is today the largest mobile phone manufacturer in the world after China. Of course, this largely pertains to assembly-programming-testing-packaging of imported semi-knocked-down units. All the “Made in India” smartphones, even from local vendors, are typically only assembled in India, with very little local value addition. The majority of the manufacturing facilities in India are involved in assembling components such as battery packs, chargers, wired headsets or keypads. These components together account for a small portion of the value of a phone, while the PCB, which is mostly imported, accounts for more than half of the total value.

As the government think tank, NITI Aayog, points out, original equipment manufacturers (OEMs)/original device manufacturers (ODMs) or component/ accessories suppliers are still in their infancy in India and most of them are confined to last-mile assembly.

Push for localisation

To discourage imports, the government successively increased the import duty on finished mobile phones and some low-value products from 10 per cent to 20 per cent over the past two years. However, several high-value and key components such as PCBs continued to have zero import duties.

As a result, imports of finished phones fell sharply, from 205 million in 2014 to 77 million in 2017. However, imports of components actually rose from $1.4 billion to $9.2 billion during the same period. In 2018, the imports of components are expected to go up further to around $11.4 billion. Clearly, the duty hike has helped in curbing the imports of finished products, but not in closing the gap between component assembly and comprehensive manufacturing.

In a bid to give a fresh fillip to localisation, the government, on April 2, 2018, imposed a 10 per cent basic customs duty on the import of high-value components such as camera modules and PCBs. PCB assembly accounts for more than half the value of a phone but, given the current technology levels in India, only 20-25 per cent of the value of PCB assembly can be captured locally.

The measure is in line with the government’s Phased Manufacturing Programme (PMP), which aims to promote indigenous manufacturing of mobile handsets and various sub-assemblies that go into it through appropriate incentives. The idea is to increase local value addition within the country in a phased manner. In 2017-18, the government focused on the local production of components such as mechanics, die-cut parts, microphones and receivers, keypads and USB cables, and this year, it is focusing on the indigenisation of PCBs, camera modules and connectors. In 2019-20, the focus is likely to shift to display assemblies, touch panels, vibrator motors and ringers.

The PMP, together with higher import duties, is expected to encourage manufacturers to move away from direct imports and scale up in the manufacturing value chain. Nokia, for instance, will be following a PMP approach from 2018 onwards in India. HMD Global, the exclusive licensee of the Nokia brand for phones and tablets, will progressively switch to manufacturing all components in India by 2022. It has plans to manufacture PCBs in the country with support from Foxconn. According to the ICA, the total capital investment by device and component players by end-2018 under the PMP is expected to touch Rs 57 billion from Rs 21 billion in 2017.

Limited R&D and innovation

A government impetus alone cannot drive the shift towards indigenous production. Promoting innovation and research and development (R&D) in design, for which local manufacturers still look outside India, is equally important. Most companies still import PCBs from their ODMs overseas. Hardware testing is also largely done outside India.  Lack of innovation has been a key reason for local mobile manufacturers ceding market share to international players in recent years. Local vendors continue to rely on the innovations and standards set by international players and organisations.

According to a report by the Broadband India Forum, one of the key challenges faced by the mobile manufacturing sector is the lack of clear information and guidelines on intellectual property rights.

Outlook

India, undoubtedly, has developed a reliable assembly-driven mobile parts ecosystem. And now, handset manufacturers have also started producing some components such as batteries, chargers and accessories locally. According to ICA’s research, the production (manufacturing and assembly) of mobile phones in the country has increased from 3 million in 2014 to about 11 million devices in 2017. Further, as per government figures, around 225 million mobile phones, with a value of Rs 1.32 trillion, have been produced in the country as of 2017. Locally manufactured/assembled phones accounted for 74 per cent of the total phone sales in the country in 2017, up from 19 per cent in 2014. This figure is likely to go up to 90 per cent by end-2018.

However, the current level of local value addition in mobile phones is clearly not enough to achieve the larger objective of Make in India. For the country to feature on the global handset manufacturing map, strengthening the component supply chain is critical. Further, government support through investor-friendly state policies for creating manufacturing hubs will help spur local production. Greater investments in design and R&D can, moreover, prove to be a veritable game-changer for the industry.

This is, no doubt, an opportune time for manufacturers to set up shop in the country. The demand for smartphones is at an all-time high; the government is committed to enhancing localisation; and China, India’s biggest rival in this space, is losing its attractiveness as a manufacturing hub. With all these growth drivers in place, it is time for the sector to shift gears and move beyond handset assembling to end-to-end manufacturing.

Akanksha Mahajan Marwah


 
 

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