Mobile Manufacturing in India

India’s mobile production crosses 100 million units and is set to reach 500 million units with new plants being set up in coming next 2 years. Here is an overview of the investments and upcoming developments in Indian mobile manufacturing conduit.

Thanks to Make in India initiative, India has manufactured mobile phone worth Rs 54,000 crore in FY 2015-16, showing a growth rate of 186 percent. In FY 2015-16, the number of mobile phone units manufactured was 110 million vis-a-vis 60 million in FY 2014-15. Feature phones contributed majority i.e. 60 million and smartphones contributed 50 million. In Rupee term, India manufactured feature phones worth Rs 5,000 crore and Rs 49,000 crore worth smartphones. In FY 2014-15, India manufactured 17 million feature phones and 43 million smartphones. In Rupee term, India manufactured mobile phone worth Rs 18,900 crore and of this Rs 1,400 crore worth domestic production was from feature phones and Rs 17,500 crore from smartphones. According to Industry experts, India’s mobile phone manufacturing will reach more than 220 million units in 2015-16 showing a growth rate of 50 percent. Even number of manufacturing units planned is going to increase from present 20 in FY2015-16.

The recent budget recommendation on duty differentials in three components – battery, charger and headsets will also lead to additional employment generation in mobile handset manufacturing in the country as all these companies are planning to set up manufacturing facilities in India. All these initiatives will give a big boost to Make in India. Mobile phone production in India has reached 100 million with leading companies setting up their manufacturing base in the country, Telecom Minister Ravi Shankar Prasad said at Global Business Summit. He added “I am happy to announce that in December, Rs 1.14 lakh crore investments have come in electronic manufacturing in India. We have attracted around 15 new mobile plants. “The entire major companies in the world namely Panasonic, Mitsubishi, Nidec, Samsung, Bosch, Jabil, Flextronics, Continental are in India besides all the top Indian companies who are already here,” Prasad said. Indian Cellular Association founder and President Pankaj Mohindroo said that in terms of value, mobile phone production in the country has increased by 95 per cent in the ongoing financial year as compared to the previous fiscal. “Government has made sincere efforts to boost mobile phone production in the country. The new investment has created 30,000 new jobs in the country and state governments have shown keen interest in attracting these investments,” Mohindroo said. “Going by the encouraging response of Chinese companies and definitive joint collaboration talks between the Indian and Chinese mobile and handset manufacturers, Chinese investment of $2-$3 billion (roughly Rs. 13,360 crores – Rs. 20,040 crores) over the next two years looks like a real possibility along with employment for one-two lakh people”, said Pankaj Mohindroo, national president, Indian Cellular Association (ICA).

Companies already manufacturing in India

For instance, Samsung, the country’s largest phone seller, has been manufacturing in India since 2006. This year, it has spent more than Rs 500 crore to add capacity at its plant in Noida where it makes many models, including the Tizen-powered Z1, Galaxy S6 and S6 Edge. Micromax, India’s second-largest phone maker, has started a plant at Rudrapur in Uttarakhand and is planning investments in Telangana, Rajasthan and Maharashtra. Lava has so far invested Rs 50 crore to build a facility in Noida to assemble one million units a month. The plant employs 400 people and assembles two models – X8 and Xolo. A second unit, with an investment of Rs 1,200 crore and a capacity of 10 million units a month, is on the drawing board. Celkon Mobiles has a 30,000 sq ft. plant in Hyderabad with a capacity to build 3,500 phones a day. Similarly, Spice Mobility is investing Rs 500 crore in Noida to build a facility it says will be up and running by the next quarter. Karbonn is investing Rs 200 crore in two plants, in Noida and Bangalore. “We will start production this month (June 2015). Overall, 10 lines will be up and running, which means a combined capacity of 40,000 units in one shift a day,” says Karbonn Chairman Sudhir Hasija. Chinese phone maker Gionee plans to invest Rs 300 crore over the next three years. “We announced our Make in India initiative in early April and plan a full-fledged factory over the next three years. We will firm up local assembly plans within six months,” says country CEO and MD Arvind Vohra. “The brand will initially go for contract manufacturing and look to set up independent manufacturing over the next 18 to 24 months,” he says. Tom Lu, the CEO of another Chinese handset maker, OPPO Mobiles, says the company will soon announce plans to make in India. And the big daddy of electronics manufacturing, Taiwan’s Foxconn, is planning to build no less than seven-eight units.

India ^v/_S  China

India today has a capacity to assemble 270 million phones a year, according to data from the Indian Cellular Association. The figure for China is 1.1 billion. Because of economies of scale, and the presence of a full-fledged ecosystem, production cost in China is the lowest in the world. The question, therefore, is – why should anyone make in India, especially when there are too many gaps in the country’s ecosystem? For one, there is no component base here. This means high freight costs. And the cost of finance, power and water – key to electronic manufacturing – is lower in many other Asian countries. In 2011, KPMG compared India and China’s competitiveness in handset manufacturing. The landed cost of materials, it assumed, would be 10 per cent lower for the Chinese. While an Indian manufacturer would have to import 80 per cent components, the figure for a Chinese company would be only five per cent. Chinese labor, according to KPMG, was 1.8 times more productive. Power costs were 20 to 30 per cent lower while water was 30 to 35 per cent cheaper in China. These ensured that a mid-sized Chinese manufacturer with a capacity to make 20 million units a year would have a profit margin of nine per cent. For the Indian company, the figure would be 2.6 per cent.

However, since 2011, rising labor costs and currency movements may have eroded some of China’s advantages. In the past three to four years, labor costs in China have risen 20 per cent. The rupee has weakened while the yuan has strengthened against the dollar. A weak currency aids exports. China’s competitiveness has been hit and handset manufacturers are struggling to maintain margins. Many companies from developed countries are looking at shifting production to Southeast Asia and India.

On China’s east coast, starting salaries in the mobile manufacturing industry are equivalent to Rs 25,000 a month. In India, they are Rs 7,000 to Rs 8,000. Availability of manpower is also an issue. There are not enough people in China willing to do manual low-paying jobs as the country has moved up the value chain. “When an economy grows, there are enough opportunities. Nobody wants to work as a laborer,” says Hari Om Rai, Chairman and Managing Director, Lava International. “I can see that manufacturing will shift out of China. India has huge human capital.”

China also does not want to make basic phones due to limited local demand. “The Chinese can buy more expensive phones. In China, operators subsidies phones but in India, they don’t,” says Spice Mobility Chairman Dilip Modi. “In China, low-end phones have stopped selling.”

India, too, is taking to smartphones, but has a long way to go. According to IDC, a market research firm, smartphones accounted for 35 per cent mobile business in the fourth quarter of 2014, up from 13 per cent in the same quarter a year ago. The country, therefore, has an opportunity to move into the entry-level market, just like in automobiles. Modi thinks India has an opportunity to lead in $50 (Rs 3,000) smartphones. “The cost of components is falling. China has seen the emergence of chipset companies. They have significantly brought down the cost of 3G chipsets. You can now give someone a 3G smartphone for less than Rs 3,000,” he says.

Few Ground Realities

It is fashionable to talk about a “China+1” de-risking strategy. Can India become an alternative? Sanjay Kapoor, Chairman, Micromax Informatics, believes so. “I think one of the most important ingredients for making manufacturing viable is domestic demand. India is a large market. If the world has to choose an alternative and have a de-risking strategy, India will be the most potent destination,” he says. But it will be a stiff climb up the hill for India given that Vietnam has done a good job of wooing the industry. Vietnam produced mobiles worth over Rs 2.5 lakh crore in 2014/15. This is 12 times more than what India produced. China makes phones worth 60 times more than what India clocks. Under the government’s ‘Make in India’ campaign, phone sellers were nudged to go for local manufacturing. Micromax saw it coming before anyone else. Early in 2014, Vikas Jain, co-founder of Micromax, said, the move to start making phones in India was aimed at managing risks. As we talk of our huge trade deficit with China, we foresee that in times to come there could be some trade embargo or anti-dumping duty. We thought it would be prudent to have local manufacturing. Also, taxation issues remain a major one. The 2015/16 Budget had an 11 per cent excise duty differential between local and imported phones. This was a step up from the earlier figure of five per cent, designed to create a pull for local manufacturing. But a recent Supreme Court order, in a case related to SRF and ITC, implies that if there is no duty on domestic goods, there can’t be a countervailing duty (CVD) on imports either. In an order dated March 26, the court held that SRF and ITC were entitled to exemption from payment of CVD. SRF, for instance, had imported nylon filament yarn and claimed nil rate of additional duty of customs. The customs department had held the company was not entitled for CVD exemption, but the court ruled in the company’s favor.

Do “Make in India” = “Economic Make of Mobiles”?

Why the rush to Make in India? Is it patriotism, at least for the Indian companies? But some sound economics is involved as well. The primary attempt is to benefit from a duty structure that is favorable to those manufacturing or assembling in India. Anshul Gupta, Research Director at the US research and advisory firm Gartner Inc., says there are massive differences in duties when these companies import a finished product, rather than merely a component. While a Smartphone attracts a duty of around 12.5 per cent, its components can be imported at just 1 per cent. Mobile manufacturing companies, according to Gupta, are trying to take advantage of this massive skew in the duty structure — “it makes sense for them to assemble in India”. Apart from the difference in duty, India is still in a growth phase, and will offer the volumes that are able to justify investment in a manufacturing or assembly unit here. According to Pankaj Mohindroo, National President, Indian Cellular Association (ICA), in value terms, the handset industry grew to Rs 75,000 crore by the end of 2014, registering a compound annual growth rate, or CAGR, of 28 per cent. This figure could touch Rs 1,00,000 crore by the end of his fiscal. Out of this, the smart-phone market is 25 per cent in volume, but three times that in value. The potential for growth is huge — plus, the companies are looking at India as the base to feed the growing demand from the rest of South Asia. There are other advantages attached to the government’s manufacturing push. According to Mohindroo, there are incentives like cash back on investments in this sector, and tax exemptions along with preference for domestically manufactured electronics products for government procurements. However, there are still many obstacles like the high VAT rate on mobile handsets and accessories in various jurisdictions, and the lack of export benefits. Plus, the ecosystem of semiconductor fabs, component suppliers and design houses is still missing, and till that happens, the companies will be just assembling components that they ship in paying lower duties. Gupta sees the near future in this sector as a mix of imports from China and locally procured components. A concern manufacturers have is about the potential surge in demand for a product manufactured in India, as they will not be able to scale up as they would with plants in China. “We will always have our Chinese facilities on standby for an eventuality like this,” said Vishal Sehgal, co-founder, LAVA International. But Phicomm CEO Zheng Min says he has seen things improve over the past couple years, and the company now has a vision of setting up an end-to-end ecosystem in India, though without a specific timeframe. “We think it is possible if the supply chain environment and labor policies are good,” Zheng has said. So, of course, behind the rush to Make in India lies a clear advantage for manufacturers. But it remains to be seen if this will be beneficial to Indian customers. The difference in duties will bring in some cost advantages which, if passed on to buyers, could make the phones cheaper.

In words of Global Leaders

‘The cost of components is falling… You can now give someone a 3G Smartphone for less than Rs 3,000,’ says DILIP MODI, Chairman, Spice Mobility.

‘If the world has to choose an alternative, India will be the most potent destination,’ says SANJAY KAPOOR, Chairman, Micromax.

“With more and more Chinese companies may invest in plant and factories in India, not only for mobile phones but also for other accessories. For example, if we set up here assembly lines, others may set up plants for chargers, batteries, camera etc. This is will create more opportunities for the local India people.” Jerome Chen, DGM, Vivo Mobile

Ki Wan Kim, MD, LG, India said, “While the company has been evaluating the feasibility of making smartphones in India, there has been no concrete development yet. The company will launch 6-7 models which are customized for India to revive the smart-phone business. The business has been a poor performer due to poor product portfolio. We will revamp the portfolio from this month. Our products are superior to competition which we will focus through experiential marketing.”