As US-China trade tensions escalate, several big manufacturers who have facilities in China are keen to relocate, and as many are looking at Vietnam, India is hoping to get a slice of that pie as well.
A committee headed by NITI Aayog CEO Amitabh Kant is expected to make its recommendations soon on how to jump-start India’s exports of mobile phones in particular and electronics in general. The committee was set up in the context of the failure of India’s phased-manufacturing-programme (PMP) for mobiles —while production of mobile handsets grew rapidly, so did imports.
As US-China trade tensions escalate, several big manufacturers who have facilities in China are keen to relocate, and as many are looking at Vietnam, India is hoping to get a slice of that pie as well. Kant’s committee has to come up with suggestions to reduce India’s ‘disability’ — or higher production costs — in comparison with China and Vietnam.
India had a head-start over Vietnam and, in 2010, it produced 140 million handsets compared with a mere 38 million in Vietnam, though India’s unit values were lower with mostly basic phones being produced at that point. In 2017, both countries produced a similar number of phones (see graphic).
However, Vietnam has left India way behind when it comes to exports. After the Nokia factory in Tamil Nadu shut down, India’s exports fell from a peak of $4 billion, but last year, they recovered to $2.7 billion. In the case of Vietnam, however, exports have zoomed, from $2.3 billion in 2010 to $49 billion in 2018. And this superior performance isn’t restricted to just mobile phones.
While India’s exports of electronics — leaving aside mobile phones — have remained more or less flat at around $5 billion since the beginning of the decade, Vietnam’s exports rose nearly 10 times, from $3.6 billion in 2010 to $34.5 billion in 2018.
Vietnam offers very attractive corporate tax rates for large firms wanting to relocate. As per PwC’s Vietnam Pocket Tax Book 2019, two common preferential corporate tax rates of 10% and 20% are applicable for eligible large manufacturing projects for 15 years and 10 years, respectively. Some high-tech companies are learnt to have got even better tax treatment — zero in the first 4-5 years, 5% for the next decade and around 10% for the next two decades. In contrast, large foreign companies in India have to pay as high as a 43.68% tax.
Though China still dominates and makes up for around 60% of the global phone exports, Vietnam is fast emerging as a key player and accounts for around 10% of such exports. No wonder, key players, including Samsung, have set up huge facilities there.
As per industry sources, the cost of mobile phone manufacturing in India is roughly 12-18% higher than in China and Vietnam. Though India’s labour cost is lower than China’s, that alone is unlikely to prompt big players to relocate their production eco-system — that is, their component suppliers — to India.
Electronics exports, including those of mobile phones, jumped over 38% year-on-year in FY19, but the growth has been on a low base, and massive electronics imports continue to drag down trade balance. As per the DGCIS data, while India’s electronics imports jumped close to 8% to $55.5 billion in FY19, its electronics exports stood at only $8.4 billion.
Local value addition still remains low (just about 15-18%), as most of the components are imported in completely or semi knocked-down conditions and are shipped out after assembly here, according to industry executives.
Counterpoint research associate director Tarun Pathak said, “Vietnam has a competitive edge over China in terms of labour and manufacturing costs, though China still dominates in terms of skill set, infrastructure and overall manufacturing efficiency.” It has also signed around a dozen free trade pacts with several countries, apart from the fact that it offers huge tax and other incentives, he added.
Vikramjit Singh Sahney, president of the International Chamber of Commerce, said: “Vietnam is a favourite hub for investors for companies in high-technology, manufacturing and communications technology, including Samsung, Nokia, LG etc. while the Prime Minister’s call for ‘Make in India’ is impressive, the facilities provided in India have to be in sync with the need of foreign investors so that they set up shop here. Once there is high-level of production, the govt should look into making exports smoother and India can become an export hub for supplies to Africa.”