ESDM Industry Primed for India’s Growing Electronics Market

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By Dezan Shira & Associates

Editor: Nishant Dixit

India’s hardware industry is not as strong as its world-beating software industry. Domestic manufacturing capacity is weak – as much as 65 percent of local demand in the electronics market is met by imports. Despite this, Prime Minister Narendra Modi has stated that he would like India to hit net zero imports in electronics by 2020. How can India achieve this ambitious goal?

India’s Huge Market

The Electronic System Design & Manufacturing (ESDM) industry consists of four key components: electronics products, electronics components, semiconductor design and electronics manufacturing services. In India, semiconductor design is the number one growth area among the components.

The government and industry bodies are attempting to increase the competitiveness of the ESDM industry as a whole to attract foreign investment and meet domestic demand. Beyond this, the Indian market presents an attractive opportunity for manufacturers.

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India’s electronics manufacturing industry is valued at US $94.2 billion; it grew at 9.68 percent year-on-year between 2011 and 2015. A rise in disposable incomes, strong consumer appetite and demand from the Indian government has largely driven this growth. The semiconductor design industry alone has generated above US $12 billion in revenues in 2014, and it has grown 18 percent since 2009.

Indian Electronics and Semiconductor Association (IESA) President M.N. Vidyashankar says that “many companies have realized the need to manufacture in India to tap its huge domestic market. The future holds promise, with very bright prospects, for the industry”.

Opportunities for Foreign Investors

Despite its growth in the last five years, local industry is unable to meet Indian consumers’ demand for electronics. India will need to import US $300 billion worth of electronics to meet the US $400 billion in demand projected between 2014 and 2020. This gap presents an opportunity for foreign investors looking to manufacture and sell in India.

India benefits from a large and cheap labor force at a time when wages are rising in the traditional manufacturing centers such as China. Meanwhile, there is no shortage of local partners for outside investors. Vidyashankar reports that “with established ecosystem of the design houses in India, which complement the industry, there is a huge scope for the foreign players to come manufacture in India”.

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Asian electronics manufacturers such as Taiwan’s Inventec and China’s Xiaomi are planning to set up production in India. In Digitimes, Xiaomi cofounder Lin Bin said that “the establishment of a production base in India will be instrumental to Xiaomi’s future growth as the India government is currently promoting the production of industrial products in India”.

Government Support

The ESDM industry in India has benefited from stable government support over the years. Previous governments enacted the Modified Special Incentive Package Scheme (M-SIPS) and Electronic Manufacturing Clusters (EMC) schemes to improve infrastructure for the industry. Modi’s government has been more successful in marketing these incentive schemes with its ‘Make in India’ and ‘Digital India’ investment promotion campaigns.

Vidyashankar says that the “Make in India mission is definitely adding buoyancy to the industry in a very significant way. Companies like Solectron, Flextronics, Jabil, Elcoteq, Bosch have invested in the Indian market, while giants like LG, Samsung, Sony, Cisco, Panasonic, to name just a few, have evinced interest in setting up their manufacturing facilities in India.”

Other government initiatives that may fall under the umbrella of Make in India include the approval of two large Semiconductor Fabricating Manufacturing Facilities, and increases in subsidies and tax reimbursement within M-SIPS. The government has also set up an Electronics Development Fund to support innovative start-ups in the industry. The government has also established partnerships with state governments, industry bodies, and foreign partners to develop a strong ESDM industrial base.

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Many state governments have taken a lead in developing infrastructure for the industry. Karnataka is developing manufacturing clusters in Electronics City, Bangalore and Mysore. The state wants to account for 10 percent of all Indian ESDM manufacturing by 2020. Maharashtra is also setting up manufacturing clusters in cities such as Pune, Aurangabad, and Nashik. Meanwhile, many states have created skills development schemes on their own or in partnership with the federal government to train the labor force required for the ESDM industry.

Looking Ahead

The US$ 300 billion demand shortfall projected by 2020 presents a huge opportunity for foreign investors. The government would like to attract US$ 100 billion in investments to the industry by 2020, but significant challenges exist.

The electronics industry is hamstrung by an inverted duty structure. It is currently cheaper to import personal computers and servers than to manufacture them locally. Manufacturers also face expensive borrowing costs with interest rates as high as 15 percent. Infrastructural problems include a poorly developed supply chain that makes procurement of parts and components difficult. The industry has to work with a power supply that is as expensive as it is unreliable.

These challenges will not be immediately resolved. However, there is commitment within the central government, state governments, and the industry to develop domestic manufacturing. Managing challenges such as infrastructure deficiencies and the cost of finance may prove to be a price worth paying for ESDM companies that want to access India’s electronics market.

 

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Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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