Spurred by Prime Minister Narendra Modi’s call to ‘Make in India’, most Indian mobile phone ‘manufacturers’, who make the bulk of their phones in China, as well as their multinational rivals, have been talking about moving their assembly lines to India.
Micromax subsidiary Yu Televentures has announced that the next batch of its phones will be made in India, while Lava’s Xolo has announced a new sub-brand called Black, to be made at their facilities here. Even bigger players like Samsung have joined in — the Korean major has announced that its flagship Galaxy S6 phones would soon be assembled in India. The Chinese companies have not been left behind — Oppo has announced it is setting up a manufacturing facility in India. And newer players like Coolpad and Phicomm are talking about Make in India.
Why the rush to Make in India? Is it patriotism, at least for the Indian companies? But some sound economics is involved as well.
The primary attempt is to benefit from a duty structure that is favourable to those manufacturing or assembling in India. Anshul Gupta, Research Director at the US research and advisory firm Gartner Inc., says there are massive differences in duties when these companies import a finished product, rather than merely a component. While a smartphone attracts a duty of around 12.5 per cent, its components can be imported at just 1 per cent. Mobile manufacturing companies, according to Gupta, are trying to take advantage of this massive skew in the duty structure — “it makes sense for them to assemble in India”.
Apart from the difference in duty, India is still in a growth phase, and will offer the volumes that are able to justify investment in a manufacturing or assembly unit here. According to Pankaj Mohindroo, National President, Indian Cellular Association (ICA), in value terms, the handset industry grew to Rs 75,000 crore by the end of 2014, registering a compound annual growth rate, or CAGR, of 28 per cent.
This figure could touch Rs 1,00,000 crore by the end of his fiscal. Out of this, the smartphone market is 25 per cent in volume, but three times that in value. The potential for growth is huge — plus, the companies are looking at India as the base to feed the growing demand from the rest of South Asia.
There are other advantages attached to the government’s manufacturing push. According to Mohindroo, there are incentives like cashback on investments in this sector, and tax exemptions along with preference for domestically manufactured electronics products for government procurements. All good enough for the companies to be more than interested.
However, there are still many obstacles like the high VAT rate on mobile handsets and accessories in various jurisdictions, and the lack of export benefits. Plus, the ecosystem of semiconductor fabs, component suppliers and design houses is still missing, and till that happens, the companies will be just assembling components that they ship in paying lower duties. Gupta sees the near future in this sector as a mix of imports from China and locally procured components.
A concern manufacturers have is about the potential surge in demand for a product manufactured in India, as they will not be able to scale up as they would with plants in China.
“We will always have our Chinese facilities on standby for an eventuality like this,” said Vishal Sehgal, co-founder, LAVA International. But Phicomm CEO Zheng Min says he has seen things improve over the past couple years, and the company now has a vision of setting up an end-to-end ecosystem in India, though without a specific timeframe. “We think it is possible if the supply chain environment and labour policies are good,” Zheng has said.
So, of course, behind the rush to Make in India lies a clear advantage for manufacturers. But it remains to be seen if this will be beneficial to Indian customers. The difference in duties will bring in some cost advantages which, if passed on to buyers, could make the phones cheaper.