Virtual Forest, one of India’s first companies specialising in manufacturing energy efficient consumer electronics and EMS. Omer Basith, Co- founder and CEO of Virtual Forest shares his viewpoints on India’s Electronics industry, key challenges and Virtual Forest unique services and products which meets the next decade of intense demand of Indian ecosystem.
Please give a brief background of Virtual Forest.
Virtual Forest was established in November 2019, however the co-founders are all veterans of the electronics, development, and consumer electronics appliance industries.
We started off this company with a particular insight in mind. We identified the gaps that exist in the Indian electronics development ecosystem with a particular view of applying our insights to areas like consumer appliances, etc. So our key findings revealed that the reason why research and development hasn’t really taken off in India is because, first of all, Indian companies lack proper understanding of design requirements, so that means they aren’t able to properly develop design requirement documents to kick off, research and development process. And to do this, they require domain expertise and a full-fledged R&D department.
The second major issue that we identified was, what I like to call the scale conundrum. If you don’t already have a large scale of raw materials procurement, your end product pricing becomes prohibitively high, and you can’t reach that scale of procurement unless you already have sales. So this is kind of a chicken and egg situation. And finally, the kind of lead times that are required to develop electronic solutions, almost make them prohibitive. There is a kind of dissuaded piece weighted on Indian companies and this is now a big challenge because we’re about to enter the decade of consumption; for the first time the aggregated demand in India is going to be large enough for there to be a real case for electronics manufacturing development in the country.
Our immediate mission is to really try and bring down, or maybe even eliminate imports of electronics for the sectors that we are focusing on. Our company thesis is to work on technologies which help reduce emissions and the application that we have identified is motor control. These are key electronics for home appliances, and that’s where we are focusing at the moment because we feel like the timing is especially good for our company, considering the fact that reducing imports is now an absolute priority area for the government – owing to the schemes like PLI production linked incentive scheme which incentivizes the local manufacturer of electronic solutions.
Another scheme called PMP phase Manufacturing Program, which is a phased manner in which import duties for certain identified subsystems are increased year on year to incentivize input. And finally the implementation of local Quality Control orders. So this means that a lot of the appliances that will be sold in India, moving forward will have to be approved by the Bureau of Indian standards through physical audits as well as product certifications. Therefore, we are trying to address India’s lack of R&D investment, lack of R&D capability, and we’re trying to address this by introducing a completely new category of service. We believe the old way is not going to work in the Indian ecosystem, and it’s already too late for companies to start from scratch if they intend to make the most of what is the next decade of intense demand in our ecosystem. So we have identified a particular way in which we will be delivering research and development and electronics manufacturing services to the Indian ecosystem. And over the last two years we’ve been working to successfully prove this thesis and have had success in the segments that we work in.
What is the research you are doing, especially in your lab? What is your employee strength like and which are the partners you are working with?
We have identified a couple of product platforms that we’re doing work on. In the first phase of our research and development we’ve developed platforms such as inverter air conditioners and BLDC ceiling fans. So these are two platforms which are already in production. We are working with some of India’s largest OEMs for both of these platforms and have entered into mass manufacturing. The next platform that we have identified is inverter washing machines and inverter pumps or solar pump controllers, essentially. And both of these products are in the final stages of research and development. In our third phase, which is kicking off in Q4 this year, we will be developing platforms for inverter refrigerators and electric vehicle controllers. So our key focus in terms of what I would describe as our technology strength is motor control, and human interface electronics. This is somewhat of a niche area but, we’ve identified this as a real growth area, certainly for the next decade and much longer. The key trends that we’re trying to address are energy efficiency in rotating machinery. 65% of India’s residential demand of electricity is for rotating machinery, which includes air conditioners, fans, washing machines, pumps, etc, and we are working on technologies to make these applications more energy efficient. The other major trend that we are doing work on is electrification of transport with EVs. Our focus will be on two wheelers’ and three wheelers’ controllers, And we will be one of the first companies in India to be developing controllers that meet international automotive standards. These are SL standards. So that’s a project that will kick off in Q4 this year.
We are five co-founders – all of us are technically strong in particular areas. We have a CTO, who’s the overall technology head and is also the key person in terms of manufacturing of our products. We also have a motor control head, we have embedded firmware and software head. I am techno commercial but more involved in business development and overall strategy, and we have the CFO, COO, Mr Sandeep Kejriwal who has recently come on board and has a great CV, being the Global Head of Dell EMC research and development as well.
We have a couple of partnerships which are already in place. First of all, we have a manufacturing partnership with a company called Napino Auto & Electronics. Napino is one of India’s largest and premier EMS companies. They are based in Manesar and have eight manufacturing facilities that are in India. Napino also has a small equity stake in Virtual Forest. They have 15% stake in VF as our manufacturing partners. We have jointly set up lines for this particular application. Moving forward, we are also discussing captive units with some of our large OEM customers to take advantage of the newly announced PLI scheme for air conditioners. We will be participating in the PLI Scheme in air conditioners along with our partner Napino, and this will be in the form of captive units for some of our end customers as well. We will be announcing this hopefully in the coming month. It’s a very exciting step for our company, moving forward. On the technology side, we have a partnership with Infineon Technologies, the microprocessor controller. Virtual Forest is Infineon’s preferred design house for large home appliances for the Asia Pacific region. So our designs are their key designs for this region specifically for large home appliances like washing machine air conditioner and refrigerator.
Apart from that we have a distribution partnership with a company called Rabyte. Rabyte is one of India’s premier electronic component distributors. They have an extremely large sales and support footprint around India and Southeast Asia, and we are jointly promoting our products that’s the BLDC ceiling fan, air conditioner, washing machine controllers, etc, through their network of customers. And so now we have partnerships on the technology on the manufacturing and now most recently on the distribution side as well.
How many overall manufacturing units and R&D centres do you have in India?
Along with our partners and Napino, we have eight manufacturing units around India. And we have our key appliance R&D unit here in Bangalore. We have a test lab at the Napino facility, which is located in Manser.
What are expansion plans for Virtual Forest?
We are in the process of planning our Series A fundraise and now one of our key objectives for this is to create a state of the R&D infrastructure that will have the necessary facilities for us to be able to test all aspects of the air conditioning, washing machine and moving forward, even EV controllers. This is going to require significant investment in terms of specialized application test equipment, and this is something that we’re doing. Apart from that, we are expanding our team, from around 21 people at the moment. It is our target to be at least 50 R&D engineers by the end of the next quarter and we’re well on track.
As I mentioned earlier, we are in the process of firming up captive manufacturing units with some of our large OEM customers where, in order to take advantage of the PLI announcement for air conditioners, we’ll be setting up units close to the manufacturing units of our end customers to service them in a much better way. So these are the expansion plans that we will be putting into effect over the next year.
How will you compare your brand with the global competitors which are already in India.
Well, interestingly, our offerings are a little unique compared to some of the competitors that we deal with. First of all our competitors in the Indian market particularly, largely, over 90% are Chinese companies. These Chinese companies have, I suppose, a first mover advantage and also the kind of scale that they have being the dominant players in the India market but however, there’s a massive gap and it is the fact that they are just vendors to the large Indian companies. The Indian companies have been so dependent on them that they just have not been able to create any in-house capability for these particular applications and in the medium term, which is now and certainly in the long term, this is ending up hurting the industry overall.
I think a perfect example of this is what we are seeing happen in the TV industry, where everyone is buying from the same, that there is absolutely zero, local value add. Everyone is buying everything from China and everyone is essentially buying and selling functionally identical products and it’s just been a situation of rise to the bottom. Margins have contracted so much because there is no local IP or manufacturing capability. This is putting local manufacturers in huge trouble. This is a trend that is slowly unfolding in AC space as well. Everyone has been buying, rebranding and selling essentially the same product. Some of the large OEMs have identified this as a massive challenge and invested in R&D with us. We are playing a partner role for the industry. We are not only supplying them with the product but also helping them take control of their product roadmap and giving them some visibility into a solution which on average takes up 30% material cost on average. Up until now it’s been a complete blackout in terms of functionality, capability, feature set, cost etc. We are trying to help the industry to move away from this situation and become more self-sufficient.
Manufacturing India is still a challenge for many of the manufacturers so any comment on or any support you would like to see from the govt. side.
I think the PLI scheme announcement has been very positive. But again the PLI scheme, and maybe justifiably so is something which is only going to be benefiting very large companies. The small and medium manufacturing ecosystem will in many cases not even be able to qualify for the PLI scheme, because you have to have particular revenue and certain other aspects like that which are completely skewed towards large industries. The second point is that this is going to unfortunately further increase the gap between the larger companies and smaller companies because the larger companies are now going to be able to access a pretty significant incentive basis for the investment they can make. So that is going to be a challenge moving forward. Apart from that, there are standard problems that have existed such as capital availability, skilled workforce and all these challenges, but I feel that it’s better now than it’s ever been. There’s reasonably good capital availability of skilled manpower still a problem but it is something which can be addressed. So, it’s a good time to manufacture but certainly there are challenges and I’m just a little bit concerned by the growth of very large companies in India, whether the small and medium industry specifically in the EMS sector will have a hard time too, moving forward.
How will you look at the future of the EMS industry ?
The future of the industry in India is extremely bright. There have been a huge amount of calls for localization of a lot of electronics as they account for India’s third largest import after gold and oil. It’s obvious that the value addition from manufacturing electronics in India would greatly benefit the local economy. The reality is that this has not been easily possible because, while the overall demand is high, the demand for specific products and certain special product lines has not been large enough to justify large investments for these but that’s no longer the case. Mobile phones were the first example of a very successful PLI scheme, since we have large and aggregated demand now. And now, with IT hardware that’s also going to happen and now the air conditioners as the first home appliance. Therefore, the future’s bright. The logic is that the sectors that have low penetration, but have high growth potential like in case of ACs – only 5% of Indian homes have air conditioners. It’s estimated that by 2030, this number will be close to 30%. So this represents almost upto 150 million units or 5 lakh crores of retail value. And I think it would make a lot of sense and it would be very good for the country if as much of that retail value generated stays within our country. ACs unfortunately still account for import components of 75% almost and this is largely because of controllers, and also components like compressors, but now with this PLI scheme, hopefully there will be investments in these subsystems in India, reducing the overall dependence on imports.
Also, India does not have a base component infrastructure in our country – we don’t make any microprocessors, we certainly don’t make a large number of passive components and other electronic components and this remains a challenge as we are strategically very dependent on China, like some other countries. With a difficult geo-political situation and also the kind of shortages we’re facing because of the COVID crisis, this is certainly straining local manufacturers in India. I don’t think that there’s an easy answer for this, it’s unlikely that we’ll be able to build a large enough component ecosystem in India to completely eliminate this but some work in this direction is also going to help.
Any comment on your market growth outlook in recent years in the coming years.
We have a couple of different business models and a couple of different revenue streams. One of our key revenue streams is basically research and development contracts for end customers where we do the R&D design, and take the product from design all the way to commercialization.
We either do a technology transfer to the end company, or we provide a turnkey where we also manufacture and supply the product. So we currently have two very large contracts of this nature, which are ongoing for the next one year, and we are hoping to capture another one as well, in the near future.
The next thing is that in the case of two other designs that we have made for end clients – we are also doing the manufacturing. This is another business model and the third business model is where we are selling our end products to our customers. So we’re seeing a huge amount of growth potential for research and development contacts that we have in place, and, and also now considering the fact that we are expecting a bounce back in air conditioning demand over Q3 and Q4 of this year. We’re expecting significant growth in this period as well.
