IAMAI reports that India exported just 18mn handsets in FY19 for $1.4bn or around a seventh of the target; for some reason, India’s export data shows a number of $2.7bn but that could include some components as well.
If prime minister Narendra Modi doesn’t take corrective action fast, his plan to reduce import-dependence in electronics—mobile phones, in particular—will go the way of the oil sector where, despite the ambitious targets to raise self-sufficiency, this has fallen in the last five years. Indeed, in a business-as-usual scenario, mobile phones alone could become India’s second-largest imports in another 5-6 years.
The problem is the phased-manufacturing-program (PMP) Modi came up with to push domestic manufacturing simply didn’t work. PMP put an import duty on mobile phones, but reduced this to zero on various components to push domestic value addition; so, in the first phase, import duties were zero on chargers/adapters and then this was extended to battery packs and then headphones etc. Yet, domestic value addition is just 15-18% and, in fact, the 2019 phase of PMP had to be put on hold as the domestic industry wasn’t ready.
A possible reason for low value addition, according to Internet and Mobile Association of India (IAMAI) is that, in response to higher import duties, Chinese component-makers lowered prices so as to keep the post-import-duty component price the same; since Chinese phone firms in India have captured most of the market, the margins they sacrifice on components exported to India are made up by the margins on the phones they sell here.
As a result (see graphic), even as phone production rose 3.8 times from 6 crore units in FY15 to 22.5 crore in FY18, imports continued to rise, from $11.2bn in FY14 to $17.9bn in FY19; imports were a higher $21.9bn in FY18, but there was some change in classification that meant FY19 imports looked lower.
One result of the PMP was the mushrooming of small assemblers, and the government mistook this for a boom in local manufacturing. In its 2017-18 report, the ministry of electronics and information technology said there were 120 units making mobiles and components; in February 2019, the National Policy on Electronics (NPE 2019) said there were 268 units for mobile handsets and components that had been set up in the last 3-4 years. It turned out, FE found, that while there were indeed 268 unique units assembling mobiles/components, around half had shut shop.
While on data, interestingly, the National Policy on Electronics (NPE) in 2012 hoped to create an overall demand for electronics—including mobile phones—of $400bn by 2020, the Digital India policy gave the same projection in 2015 and, more recently, NPE 2019 is also aiming for $400bn, though by 2025! Not surprisingly, given PMP’s inherent flaws, India has been way behind the targets. IAMAI reports that India exported just 18mn handsets in FY19 for $1.4bn or around a seventh of the target; for some reason, India’s export data shows a number of $2.7bn but that could include some components as well.
Ideally, instead of focusing on a policy that is aimed at, essentially, smaller players, the government must woo big players looking at shifting production from China due to its problems with the US and, in the process, could move their vendor eco-system as well. Just look at how, thanks to Suzuki first and later Hyundai, India has become a hub for small car production in the world. Indeed, MAIT and ICEA, the two industry associations dealing with mobile phones, have asked the government to review PMP as it is not delivering—MAIT talks of how component imports have shot up despite PMP, and ICEA also talks of how the duty protection is easily circumvented via the Asean FTA, apart from the fact that India’s duty regime is itself being challenged at the WTO; it could violate the WTO’s ITA-1 agreement.
The Indian market is too small for global giants—75% of the global smartphone market is shared by Apple, Samsung, Huawei, Oppo/Vivo and Xiaomi— to want to move their entire production eco-system here, but if the global exports market of around $300bn is added, the addressable market gets attractive. Right now, around 60% of exports are made out of China, but Vietnam is also becoming a big player and accounts for around 10% of exports; several big players wanting to diversify from China are looking at Vietnam.
It offers very attractive corporate tax rates for firms wanting to relocate—zero in the first 4-5 years, 5% for the next decade and around 10% for the next two decades! Not surprisingly, Vietnamese production of mobile phones is up from 38mn in 2010 to around 250mn today. Add to the dramatically lower tax levels, much better infrastructure, cheaper land and electricity costs, faster clearances etc, and it is clear big players aren’t going to shift to India unless the government really sweetens the deal for them. While a committee has been set up under Niti Aayog CEO Amitabh Kant to figure out how to attract these firms and estimate India’s ‘disability’—jargon for higher costs—this is likely to be around 9-12% relative to Vietnam and 18-20% vis-à-vis China. The government may baulk at giving large concessions—suit-boot-ki-sarkaar—but if it doesn’t, not only will it miss a big export opportunity, it will end up with at least an $85bn import bill in just the next 5-6 years.