India’s growth in Electronic Manufacturing over the last few years has been remarkable. Since 2015, we have had a 15% annual growth in the Total Electronics and Electricals exports, with growth in Final Goods exports being a whopping 26%. However, in the global scenario, India is still behind by a huge margin. While China’s export in electronics is over 1 trillion and Vietnam’s exports cross $100 billion, India’s is only $20 billion. We currently capture only 0.4% of the Global Electronics and Electrical Market. The current geo-political scenario has resulted in a China plus one imperative, giving India another opportunity to become a sizable player in the global electronic manufacturing industry. But the question remains, what strengths can India capitalise on, and what weaknesses must we address to establish ourselves as a Global Electronics manufacturing hub?
Integrating into the Global Value Chain is Critical
The emergence of Global Value Chains (GVC) has played a huge role in fostering export-led growth in developing economies and helping them climb the technology ladder – moving from assembly to manufacturing, to design and engineering, and R&D. The tasks along a GVC vary in their degree of innovation and complexity, and the value addition at each step also vary substantially. Firms from developing countries generally start with low value-added tasks such as assembly and step by step go further up the value chains to high value-added tasks. This happens because developing country firms capitalise on the comparative advantage in low value-added tasks while building capacity on steps further up the value chain. Usually, in any Value Chain, lead firms set quality standards which supplier firms are obliged to follow, resulting in knowledge transfer over time.
China followed a similar path in the Smartphone GVC between 2005 and 2015 and shipped more than 1.03 billion mobile phones (around 87% of the year’s output) abroad at its peak in 2012. At that time, Chinese-brand mobile phones did not exist in international markets and most of the exported phones were sold under foreign brands, clearly indicating that the Chinese mobile phone industry was then functioning as the assembly centre of global mobile phone production. The main driver for China’s growth in the Electronics manufacturing sector was ensuring that they could leverage their comparative strengths and participate in value chains governed by leading global players by performing assembly tasks, while simultaneously benefitting from the spillover effects of innovation from them. More recently, Vietnam has displayed the same initial trajectory, after Samsung decided to set up export operations in Vietnam.
Similarly, to drive exports in the Electronic Manufacturing sector, India should capitalise on its comparative advantage – our labour pool. Within the Electronics GVC, the Assembly stage is the most labour-intensive, and therefore, it is the ideal sector for India to dominate currently and set the stage for upgrading along the GVC. The Economic Survey 2019-20 of India recognises that a much-needed channel for job creation in India is through growth in exports. The Survey stated that between 2001 and 2006, China managed to create about 70 million jobs through labour-intensive exports. It further states that India too can create 40 million jobs by integrating “Assemble in India for the world” into Make in India.
Growing Prospects for Electronics Manufacturing in India Are Growing, but Still a Long Way to Go
Apple began locally assembling smartphones in India in 2017, but until this year, it had used the manufacturing facilities in India to assemble older generation handsets. In a bid to diversify its supply chain away from China, the company has recently started assembling its latest iPhone 14 in India, through the company’s contract manufacturer Foxconn in Chennai. According to tech and business analysts, Apple intends to move about 5% of iPhone production and 25% of all Apple production including Mac, iPad, Apple Watch and Airpods, away from China towards India soon. Even Apple’s major supplier Foxconn has recently announced its collaboration with the Indian giant Vedanta to establish a semiconductor manufacturing unit in Gujarat. The Production Linked Incentive scheme (PLI) is further driving greater production in India. Within the electronics value chain, multiple international lead firms are setting up R&D facilities and Design infrastructure in India. Large international OEMs and EMS players are also entering the market intending to assemble in India.
As promising as these green shoots are, our business environment today, with multiple costs and ease of doing business disabilities, resembles a concrete parking lot, where green shoots will not be able to engender a flourishing ecosystem. We must actively tackle those disabilities across land, labour, logistics and environmental regulation to turn the business environment into a fertile ground where the promise and potential can result in a flourishing ecosystem.
To attract foreign firms to set up manufacturing plants in the country, and to enable Indian entrepreneurs to create an ecosystem around these plants, we need to focus on improving the environment for business. Compliance requirements and approvals from authorities in India are time-consuming processes. Our business environment consists of 1536 laws, 69,233 compliances and 6,618 annual filings, which further gets complicated due to the frequency of changes in compliance requirements. Logistics times and costs are well above international competitors. The logistics cost as a percentage of GDP in India is 19%, compared to 12.5% in China and 15.7% in Indonesia. Rail and road transport (90% of India’s freight traffic) is very costly (rail freight rates are 4 times that of China) and plagued with delays, causing long lead times. Industrial power cost in India is ~ Rs. 8/Kw compared to the average of competing nations being around Rs. 6/ Kw. Land procurement and construction activities continue to be time-consuming, inefficient and expensive because of regulatory lacunae. India does not provide plug-and-play manufacturing facilities unlike China, where regulatory compliances are undertaken by the government and readymade facilities are provided to the manufacturers.
Finally, one of India’s biggest advantages is its cost-effective labour, however, even though our labour cost is 1/3rd that of China’s, our productivity is also 1/3rd of China, making the cheap labour pointless. Also, labour regulations and rules that are supposedly labour friendly but prevent investment in labour-intensive industries reduce opportunities for labour and result in an overall decline in welfare. Substantially more efforts need to be made to address all of these issues.
One possible pathway is to focus on a few large zones – in the order of 200-300 sq. km. – and address these issues within these areas to enable an ecosystem to flourish there. At the central level, the proposed Development of Enterprise and Services Hubs (DESH) bill has the potential to create an enabling environment, but it must focus on providing flexibility to states on all the aforementioned issues, otherwise, we risk repeating the failure of the earlier SEZ policy in our attempts.
India also has very high import tariffs compared to China and Vietnam in the Electronics sector. Protectionism in this sector will not work since the majority of the components are not produced in India and will have to be imported for India to participate in the electronics GVC. The high tariffs will make firms reluctant to enter India because even though electronics has a large market in India, it is still very small in global terms. According to a report by the Indian Cellular and Electronics Association (ICEA), the import tariffs are even negating the support provided by the PLI schemes, whose main objective was to address the disabilities faced by Indian exporters.
India has immense potential to grow into a major player in the electronics space, and the present geopolitical system has also given us the right opportunity. The PLI scheme has planted the seeds, but we must create a fertile and globally competitive ecosystem in manufacturing for those seeds to give us the results we need.