Countries across the world are grappling with the Covid-19 pandemic. Within a short span of time, this epidemic has engulfed the entire world, spreading from country to country and causing disruption industry by industry. The telecom handset industry too is feeling the effects of this disruption. The onset of the coronavirus outbreak has hit both the supply and demand sides of the handset industry adversely. While supply chains globally stand disrupted, the demand for mobile phones is also expected to stay low in the near term as it does not figure in the “necessity goods” category.
A fall in demand and reduced supply have led to a unique situation wherein an equilibrium of sorts has been achieved but not due to the invisible hand principle, as Adam Smith would propagate, but rather because of an unfavourable external factor.
This sort of disruption in the working of the demand and supply forces has far reaching implications for the handset industry. The production value of the industry is going down, a fall in the overall turnover of the sector is expected and the possibility of large-scale layoffs looms ahead.
Having said that, recovery from the Covid-19 era would call for an overhaul of the current business practices. While the Indian government has come out with some incentives for the handset original equipment manufacturers (OEMs), the companies will have to alter their strategies for manufacturing in order to effectively leverage these benefits. A look at how the Indian mobile handset industry is coping with the coronavirus outbreak, its impact and the way forward….
Disruption in production
Countries across the globe have announced nationwide lockdown to contain the spread of the deadly coronavirus. This has halted the production and manufacturing of handsets globally. In India too, handset manufacturers have temporarily shut down operations following the government’s mandate. For instance, Foxconn and Wistron Corporation had suspended their production in India until April 14, 2020. This also includes the assembly of some Apple Inc. iPhone models. The move came as the companies decided to comply with the 21 days nationwide lockdown ordered on March 24, 2020, in India. Given that Foxconn, Flex and Wistron contribute the maximum to the overall number of smartphones sold in India, a suspension of their operations in the country will adversely impact the production output.
Likewise, handset manufacturers, Xiaomi, Lenovo-Motorola and Lava had temporarily shut down their handset factories in various parts of the country, beginning March 24, 2020. While Xiaomi halted production at four factories in Tamil Nadu and Noida, Lava had shut down its manufacturing facility in Noida, which has a manufacturing capacity of 3 million units per month and contributes 2 million units for export every year. Meanwhile, Oppo, Vivo and Samsung also temporarily suspended production at their Greater Noida facilities respectively.
Besides suspension of their production capacities, the future plans of capacity expansion of these companies have also got jeopardised now. For instance, Oppo and Vivo were expected to double their manufacturing capacity in India to 100 million and 50 million units respectively this year. Also, Xiaomi had announced plans to construct its seventh factory in India, which would help the handset manufacturer boost its total production to 60 million units in 2020. However, under the prevailing circumstances, it seems unlikely that these initiatives will see the light of the day any time soon.
With the production of handsets coming to a standstill across the country, the inventory of handset manufacturers is gradually depleting. Further, in adherence to WHO guidelines, India and various other countries have sealed their international and national borders and banned any kind of movement of people or goods. Thus, low stocks, coupled with severed transport lines is set to cause a fall in the smartphone shipments. According to Counterpoint Research, smartphone shipments are expected to fall from 158 million units in 2019 to 153 million units in 2020, recording a 3 per cent decline year on year.
Suspension of new launches
Handset manufacturers across the board have suspended the launch of new products. Apple has already cancelled the iPhone 9 unveiling as it did not have enough mobile phones to sell. Likewise, Xiaomi has postponed the launch of its upcoming flagship phone Mi10. Further, the company has postponed the first sale of its Redmi Note 9 Pro Max in India. Meanwhile, Realme has also suspended all its upcoming launches including Realme-Narzo series, which was scheduled for an online launch on March 26, 2020. Similarly, Vivo has also postponed the launch of its flagship V19. Meanwhile, all the phones that have made their debut in early March are already at a minimum stock level.
In addition to the hiccups expected in the supply chain, the demand for handsets is also predicted to witness a downward trend. The outbreak of the Covid-19 pandemic globally has created the prospects of an unstable global economy. As life across the commercial centres of the world comes to a standstill, the possibility of large-scale layoffs, constrained budgets and minimalistic spending loom ahead. In such a scenario, spending money on buying a new smartphone may be expensive and may seem like a luxury for many. As such, demand for smartphones will be adversely impacted as consumers focus more on saving money and spending only on necessary goods.
International Data Corporation (IDC) believes that it will take at least two quarters for the demand to revive. Moreover, even after things are back to normal, whenever that happens, demand will only start reviving post a couple of months. Industry analysts predict that unless the situation stabilises by mid-2020, customers might refrain from making any new purchases until the festive season.
Moreover, while factors like discounts had been driving demand until now by bringing down the effective price for the consumers, this might not be the case in the near future. On the contrary, prices of smartphones might increase from what they were in the pre-lockdown period, as handset manufacturers could pass on their cost of manufacturing burden to consumers. According to IDC, smartphone brands are most likely to increase prices in India once the lockdown ends, due to supply shortages of components and currency fluctuation.
As per industry analysts, offering discounts in the near term would be challenging for OEMs because of the 6 per cent GST hike on mobile phones. In fact, Realme and Samsung have already communicated that the rate hike will be passed on to consumers. Realme estimates that phone prices could go up by 12-15 per cent. Thus, withdrawal of discounts and a surge in smartphone prices will also discourage customers from buying new phones.
Low supply, low demand – catastrophic financial implication
Supply chains across the world have got disrupted, causing a shortage in the number of phones available in the market. Meanwhile, unfavourable economic conditions are also leading to a fall in the demand for these products. The two factors – stunted supply and dwindling demand – are bad news for the overall handset industry, with far reaching financial implications.
According to Counterpoint Research, this halt in production can significantly reduce India’s share in the global production value, taking it to levels seen four years back. The research firm highlighted that India’s contribution to the global smartphone production had increased from 9 per cent in 2016 to 16 per cent in 2019, on the back of various incentives and policy measures announced by the government to boost the local production. However, as factory operations remain suspended for some time now, this can roll back to 9 per cent for 2020. As such the research agency has cut India’s 2020 smartphone production forecast by 7-8 per cent from 300 million units predicted earlier.
Further, as per the India Cellular and Electronics Association (ICEA), mobile phone manufacturers can expect to see an impact on the production value to the tune of Rs 60 billion during the months of March and April. The impact is expected to be more on the Indian brands and second-tier sub-assembly component manufacturers.
ICEA also pointed out that the Indian handset industry currently has a turnover of Rs 5 billion to Rs 7 billion per day, and a shut down for three weeks would essentially translate into a loss ranging between Rs 100 billion and Rs 150 billion.
A ray of hope – recent government initiatives
The government on its part has announced various key measures to aid the handset industry in these difficult times.
The government has notified three schemes envisaging total incentives of around Rs 480 billion in order to boost local electronics manufacturing. These schemes were approved by the union cabinet in March 2020. The three schemes include production linked incentive scheme (PLI) for large-scale electronics manufacturing, the scheme for promotion of manufacturing of electronic components and semiconductors (SPECS), and the modified electronics manufacturing clusters (EMC 2.0) scheme. With these schemes, the government expects to attract around Rs 1 trillion investment in the sector and generate manufacturing revenue potential worth about Rs 10 trillion by 2025.
Of the three schemes, the PLI scheme has been awarded a major chunk of Rs 410 billion financial package. This scheme, which will be applicable from August 1, 2020, proposes a financial incentive to boost the domestic manufacturing and attract large investments in the electronics value chain, including electronic components and semiconductor packaging. Under the PLI scheme, electronic manufacturing companies will be provided an incentive of 4-6 per cent on incremental sales (over base year) of goods manufactured in India and covered under target segments to eligible companies over a period of the next five years. These target segments include mobile phones and some specific electronic components.
Thus, when companies resume production after the lockdown ends, hopefully by August, the benefits that will accrue on their produce will more or less compensate for the losses that they have incurred during the lockdown.
Through the PLI scheme, the government expects the domestic value addition for mobile phones to increase from the current 20-25 per cent to 35-40 per cent by 2025 and generate additional 800,000 jobs, both direct and indirect.
Localisation is the best way forward
The best way out of the present crisis for the handset manufacturers would be to leverage the incentives offered by the government and boost their domestic production. Ramping up localisation efforts is the path to go forward. Companies should focus on manufacturing the components within the country, rather than just assembling imported equipments at their local facilities.
Further, having been left without supplies of key components during Covid-19, handset manufacturers should now move towards diversifying their supply chain. One way to do this would be to not depend solely on their global partners but rather adopt a multi-partner approach with majority of the partners coming from the local ecosystem. Having a local supply chain would enable these companies to better address the challenges related to product planning, fast-track the time-to-market of new products and ease out the financial burden of handset companies, especially when they are working on thin margins.
As per Counterpoint Research, at present, India sources only 12 per cent of mobile components locally, while 88 per cent of components are still imported mostly from China and other countries like Vietnam, Korea, Taiwan and Japan. Going forward, this will have to change. Building a local supply chain and boosting domestic production would provide a safeguard to handset companies against any future global crisis, or even trade wars. It will also help manufacturers tide over the uncertainties or roadblocks typically encountered within a global partner ecosystem such as regulatory issues and exchange rates.
By Diksha Sharma