India is now the third-largest defence spender in the world and many global producers are now interested to sell to India; so as per the argument above, defence production should spur the next set of manufacturing jobs in the country.
One of the pillars of Digital India is promoting electronics’ manufacturing with an ambitious target of net zero imports by 2020. In this context, it would have been welcome news for policy-makers that Xiaomi has set up three new smartphone manufacturing units in India. Under Digital India, the government wants to provide for economies of scale, eliminate cost disadvantage and encourage R&D. The huge domestic demand for mobiles ensures that any firm can achieve economies of scale when it caters to the domestic as well as overseas market from India. To eliminate cost disadvantage, the government has chipped in with financial incentives to set up manufacturing units, electronic manufacturing clusters, and the phased manufacturing programme.
To discourage imports, the Budget levied 10% import duty on some key smartphone components including printed circuit boards (PCB), which account for 50% of a phone’s cost; domestic production will imply significant value addition. According to reports, Samsung has been producing PCBs in India, now followed by Xiaomi. There are unconfirmed reports that companies such as Vivo and Oppo are also in the process to start manufacture of PCBs in India. This indicates favourable outcomes for the policy initiatives taken by the government. There are at least three policy points that these outcomes have transmitted.
* To push manufacturing, choose the right market: The global smartphones market has become highly competitive. Apple is clinging on to its premium brand image, while new entrants like Xiaomi follow a strategy where the features of their phones match the best but their prices are substantially lower. All smartphone manufacturers are now chasing ambitious growth numbers that only India can provide, which is set to become the second-largest smartphone market in the world. No wonder, there has been a huge amount of interest in India among smartphone manufacturers.
India being a cost-conscious market, the Chinese and South Koreans have shown more agility in setting up manufacturing facilities than Apple, which came visiting last year in the hope of an incentive but is yet to concretise its investment plans. Thus, the choice of the smartphone market to affect policy changes was indeed a smart one. The take home is that with respect to setting up domestic manufacturing units, policy-makers can make more impact in sectors where we are the largest markets in the world. This has happened with cars, and is now being repeated with phones.
* Time policy changes well: Timing of the policy change is critical. The policy change has to be announced/implemented only when our domestic market is critical in the industry’s global plans. This, though not very apparent in the passenger cars case, is clear in the smartphones case. The battle for market share has moved to the Indian market, hence it is our time to state the rules of the game. Announcement of increase in tariffs for imports of mobile components into India signalled the firms in the market to get their manufacturing act together. It can be argued that for this market the timing of the tariff increase coupled with the implementation of the phased manufacturing programme was excellent and had its intended effect.
* Large market implies R&D investment to understand local sensibility: Most foreign firms in passenger cars or smartphone market with a manufacturing base in India have established their R&D centres to understand and fine-tune their products to adapt to local conditions. This implies that sectors where we are among the biggest consumers naturally align to domestic R&D activity. This advantage needs to be exploited by R&D policy for increased investments.
India is now the third-largest defence spender in the world and many global producers are now interested to sell to India; so as per the argument above, defence production should spur the next set of manufacturing jobs in the country. To reap maximum benefits, we need to understand the dynamics and priorities of the global defence industry, and time our policy changes just when we become important in the global plans of defence manufacturers. Can we do that?
By: Chidambaran G Iyer
Senior Fellow, Pahle India Foundation