The current domestic value addition in the mobile handset industry is heartening, but may not be sufficient to accomplish the extended objective of the ‘Make in India’ initiative. If the country is to put itself on the global handset manufacturing and exports map, it must strengthen the component supply chain.
Prime Minister Narendra Modi recently promoted the ‘Make in India’ campaign by inaugurating what is vaunted as the world’s largest mobile phone manufacturing plant in Noida, near Delhi. This is Samsung’s second factory (after Sriperumbudur, near Chennai) in India. With the Prime Minister’s thrust on industrialisation and presenting a phone manufacturing plant as the show-piece of success of the ‘Make in India’ initiative, the spotlight has fallen on the phone device manufacturing industry in the country, and this time for good reason. While the telecom network service industry has hogged the policy limelight over the years, the phone device manufacturing industry has not attracted as much public policy attention.
India is home to the world’s second highest number of mobile telecommunication subscribers (1,131.01 million) and internet subscribers (432 million), second only to China. However, in relative terms, teledensity in India stands at 88%, and over 38% are internet subscribers, thus lagging behind its neighbour and in global comparison. Also, the rural-urban digital divide is stark—urban teledensity (over 155%) is nearly three times rural teledensity (over 55%). While about 85% are internet users in urban India, such user base in rural areas is just about 16%. The telecom sector’s massive potential for growth has always been doubtless.
The draft National Digital Communications Policy 2018 re-emphasises the aim of previous national telecom policies in bridging India’s rural-urban digital divide and advancing the country’s digital trajectory. To make it so happen and optimally exploit the country’s teledensity potential, one of the basic and crucial factors is the phone device itself. To partake in the digital economy, individuals must have easy access to the mobile phone at affordable prices. Reports suggest the value of mobile phone imports in India in 2015 was $11.5 billion, with negligible exports. Over the years, with telecommunication experiencing exponential growth, India has witnessed increased demand for smartphones, particularly at the entry level, in semi-urban and rural areas. There was an upsurge in the feature-phone section with the introduction of 4G-enabled smartphones.
The recent report of the Indian Cellular Association (ICA) confirms that India is the second-largest mobile phone producer in the world, next only to China, after overtaking Vietnam in 2017. The report revealed that India accounted for 11% of worldwide mobile phone production in 2017, up from 3% in 2014. It also highlighted that imports of mobile devices have reduced to less than half in 2017-18, and the entire build-up units as the percentage of the domestic market have declined from 78% (2014-15) to 18% (2017-18).
Further, mobile device and component manufacturers increased from just two in 2014 to 123 in 2017. Reports suggest the industry is contemplating investments of over Rs 450 billion for handset manufacturing in the coming years. However, mobile phone making facilities in India are primarily involved in ‘assembly, programming, testing, packaging’ of imported semi-knocked-down units. India has certainly emerged as a reliable assembly-driven mobile parts ecosystem and now handset producers have also commenced manufacturing specified components such as chargers, batteries and accessories locally.
In addition, the ICA report suggests that manufacturing and assembly of mobile handset in India has grown from 3 million devices in 2014 to about 11 million in 2017. In 2017, locally-manufactured/assembled phones accounted for 74% of cumulative phone sales in India, up from 19% in 2014, and the figure is anticipated to increase to 90% by end-2018.
To encourage domestic manufacturing, hikes in import duties are regularly announced. The tax, which stood at 10% in July 2017, was increased to 15% in December 2017, and then raised to 20% in the 2018 Budget. The industry reacted affirmatively to the rise in import tariff, yielding positive results. The production of mobile handsets increased from 48 million in 2014 to 224 million in 2017, and is estimated to grow to 269 million by the year-end. However, localised parts are often of low value, whereas high-value parts such as the primary printed circuit board (PCB) are still imported. Under the ‘made in India’ label, domestic vendors are merely assembling mobile devices in the country, with little local value addition. Indian manufacturing facilities are mainly concerned with assembling components like battery packs, chargers, wired headsets or keypads. Such components collectively account for a small part of the phone cost, while the PCB, which is mostly imported, accounts for over half of the total phone cost. A report of NITI Aayog also recognises that Indian original equipment manufacturers (OEMs)/original device manufacturers (ODMs) or component/accessories suppliers are still in their nascent stage and confined to last-mile assembly. Clearly, if India is to emerge as a mobile phone manufacturing hub, high local value addition across the value chain is required. Indian handset vendors have to surpass phone assembly and upscale the manufacturing system.
Import tariffs levied on the industry are symbolic of the state of the industry. Although with the rise in import duties on mobile handsets, imports dropped from a high of 205 million in 2014 to 77 million in 2017, but the import bill—largely comprising imports of components—actually surged from $8.8 billion to $12.6 billion during the same period. In fact, in 2018, imports of phone parts are expected to increase to about $13.3 billion. The duty increase facilitated in restricting imports of the mobile handset, but not in bridging the gap between component assembly and overall manufacturing.
In April 2018, the government levied 10% basic customs duty on the import of high-value components such as camera modules and PCB, to give a boost to domestic manufacturing. PCB makes for over half the value of a handset, but given India’s technology level, only 20-25% of the cost of PCB assembly can be accomplished locally.
The measure is also supporting the government’s Phased Manufacturing Programme (PMP), which strives to encourage domestic manufacturing of mobile handsets and different sub-assemblies. The plan, going forward, is to expand internal value addition in indigenous manufacturing of components in a phased manner.
The PMP and higher import taxes are likely to assist manufacturers to upscale the manufacturing value chain. For instance, Nokia will be following a PMP strategy in India. HMD Global, the independent licensee of Nokia for phones and tablets, plans to switch to manufacturing of all components in India by 2022. It plans indigenous manufacturing of PCBs with backing from Taiwanese major Foxconn. According to the ICA, the capital investment by device and component manufacturers is estimated to increase from Rs 21 billion in 2017 to `57 billion by the end of 2018 under the PMP.
Meanwhile, the Fast Track Task Force (FTTF), under the ministry of electronics and information technology, targets production of 500 million mobile handsets in the country by 2019, valued at around $46 billion. The FTTF also envisions to create $8 billion component manufacturing to support growth in mobile device production, generate about 1.5 million direct and indirect jobs, and export 120 million mobile phone devices with an estimated value of $1.5 million by 2019.
The government incentive solely may not accelerate the shift towards domestic production. The key is to promote innovation and research and development (R&D) by design, for which domestic manufacturers currently look up to international players. Companies still import PCBs from their ODMs outside India.
Hardware testing, as of now, is primarily done overseas. Lack of innovation has been a big bottleneck for Indian manufacturers sharing the domestic market with global players. The Broadband India Forum identifies lack of precise information and guidelines on intellectual property rights as the crucial challenge for the industry.
The current domestic value addition in the mobile handset industry is heartening, but may not be sufficient to accomplish the extended objective of ‘Make in India’. If the country is to put itself on the global handset manufacturing exports map, it must strengthen the component supply chain.
The government backing through investor-friendly policies for establishing manufacturing hubs could drive indigenous production. Required investments in R&D may prove beneficial for the industry’s growth. In order to bridge the digital divide, the government must try to boost the phone device industry first, rather than simply fixating on telecom network service providers alone.
By Sitakanta Panda and Chavi Asrani. Sitakanta Panda is Assistant Professor of Economics at the Indian Institute of Management Amritsar. Chavi Asrani is a PhD student, IIT Delhi. Views are personal