In June 2020, the government launched three major schemes to boost electronics manufacturing in the country. These are the production linked incentive (PLI) scheme for large-scale electronics manufacturing, the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors, and the Modified Electronics Manufacturing Clusters scheme. These schemes were approved by the union cabinet in March 2020. As per the government, these schemes are expected to attract substantial investments, increase the production of mobile phones and their components to around Rs 10 trillion by 2025, and generate around 500,000 direct and 1.5 million indirect jobs.
The PLI scheme in particular has garnered significant interest from manufacturing companies. The main objective behind launching the PLI scheme was to establish India as an export hub. The PLI scheme seeks to extend an incentive of 4-6 per cent on incremental sales over the base year of goods manufactured in India and covered under target segments to eligible companies, for a period of five years subsequent to the base year as defined. As per the government, incentives will be linked to incremental sales and capital investment of the companies under the PLI scheme.
To qualify, a firm must invest more than Rs 6 billion in the country over a four-year period and export goods worth Rs 10 billion-Rs 30 billion per annum. The PLI plan will promote local investments in mobile phone manufacturing and specified electronic components, including assembly, testing, marking and packaging units. The scheme is projected to help increase the domestic value addition for mobile phones to 35-40 per cent by 2025 from the current level of 20-25 per cent.
Promoting domestic manufacturing
India did not have a favourable regulatory ecosystem for handset manufacturers. The cost of seeking regulatory approvals along with the wide range of restrictions imposed on mobile manufacturers discouraged them to invest in India. As such, they preferred to set up their manufacturing hubs in other countries that had far more relaxed norms and offered cheaper options. Owing to cost factors, India has lost out to various cheaper markets like China and Vietnam. While global firms such as Ericsson, Huawei and Nokia do have facilities in India, the percentage of locally sourced material and components remains small. According to recent industry reports, global players such as Nokia and Ericsson that are manufacturing telecom equipment in India are contributing only around 40 per cent to local content addition. Further, even local players like VNL and Tejas Networks are importing some of the components.
The PLI scheme aims to reverse this trend of importing material for phones and encourage companies to set up their manufacturing hubs in India and export to other markets from here. India has been striving to establish itself as a manufacturing destination for years. To this end, the government has undertaken a slew of measures such as reducing corporate tax as part of its ambitious Make in India programme. All these initiatives are expected to help the government attract significant FDI in the country. In addition to providing an impetus to domestic mobile phone manufacturing, the PLI scheme will help boost the production of locally made telecom equipment. Telecom equipment vendors have expressed their concern that while it is possible to produce 100 per cent of the equipment locally, the telcos must also be mandated to deploy only domestically produced equipment. This would ensure that the enhanced production capacity of local vendors does not go waste. At present, only state-run BSNL has been mandated to follow the Make in India norms while private players are free to buy from anyone.
Security is yet another factor that has driven the Indian government to introduce the PLI scheme. As per some people in the government and the industry, if all the equipment is manufactured domestically then the possibility of spying or data theft by foreign actors would also reduce.
Globally, several countries have banned Chinese gear makers such as Huawei and ZTE from participating in the 5G market because of security concerns. India too is joining the league of such countries. The Indian government is reportedly in discussion over the country’s 5G roll-out plans and whether China-based telecom equipment giants Huawei and ZTE should be allowed to participate in the process. Owing to the escalating geopolitical tension between India and China, one would have to wait for the government’s stance on the participation of Chinese players in India’s upcoming 5G spectrum auctions.
Industry’s response to PLI scheme
As per industry sources, Apple’s contract manufacturers Foxconn and Wistron have applied for the centre’s Rs 410 billion PLI scheme. Foxconn is reported to have submitted two applications, one in the name of Hon Hai Precision Industry Co. and the second in the name of Rising Stars Mobile India Private Limited. In addition to the above-mentioned players, Samsung and Flextronics are also expected to submit their applications shortly. While Samsung is planning to invest $706 million to set up a smartphone display manufacturing plant in Uttar Pradesh, Apple is exploring the possibility of shifting nearly a fifth of its production capacity from China to India. Going forward, Apple plans to scale up its local manufacturing revenues to $40 billion through contract manufacturing partners over the next five years.
Meanwhile, among the local handset manufacturers, Karbonn, Lava and Dixon Technologies have applied for the scheme. Dixon Technologies is planning to invest Rs 2.5 billion under the PLI scheme and will hire 2,500 people over the next eight to nine months in an effort to expand operations. Lava has announced that it will invest $105 million over the next five years to scale up its mobile phone development and manufacturing operations in India.
The names of selected companies are expected to be announced by early August 2020. Initially, five global and five local companies will be selected under the scheme.
The way forward
The PLI scheme is definitely a step in the right direction and has been welcomed by industry players with much appreciation and enthusiasm. It is still very early to comment on the scheme, but it will perhaps start yielding visible results five to six years down the line.
Net, net, it is good news for handset and telecom equipment manufacturers as the scheme will play a significant role in driving the local production of this equipment, thereby helping establish India as a major export hub in the global handset and telecom equipment market.
By Diksha Sharma