Phones ‘Made in India’, cash registers ringing in China

Varun Aggarwal Mumbai | Updated on January 11, 2018 Published on May 12, 2017


With components largely imported from China, local value-add remains low

The ‘Make-in-India’ programme for mobile phones is perhaps helping China more. Nearly 95 per cent of revenues generated from selling locally assembled phones goes back to China from where components for the product come.

In the last two years, 40 new handset manufacturing units and 30 mobile components/accessory units started operations in India. Indigenous production of handsets has gone up from 11 crore units valued at ₹54,000 crore in 2015-16 to 17.5 crore units at ₹90,000 crore in 2016-17.

Local value-addition

The numbers are big, but the total local value-addition done is small — less than 6 per cent at as at end 2016.

Essentially, Indian companies continue to run screwdriver shops where in the name of manufacturing what happens is not very different from putting an IKEA chair together.

“The total value of mobile phones sold in India in 2016 was about $12 billion (cost to manufacturer) on a retail value of $16 billion. Of this, only $650 million worth of value-addition was done locally. That comes to 5.6 per cent. Vietnam has a value-addition of 35 per cent, Brazil 17 per cent while China has more than 70 per cent,” said Neil Shah, partner at Counterpoint Research.

Last year, to increase value-addition in India, the government enforced 12.5 per cent duty on imported batteries, chargers and headphones, pushing most manufacturers to source these components locally. However, while this seemed like good news, more than 50 per cent of the parts used to make these accessories, including battery cells and metallic casing, gets imported from China, defeating the purpose of local manufacturing all together. To be fair, the local value-addition has gone up from 3.6 per cent in 2014 to 5.6 per cent now. But that’s still nothing compared to a small country such as Vietnam, which was able to achieve 35 per cent local value-addition from nil in just five years.

Moreover, as India value-addition grew from $326 million in 2014 to about $650 million in 2016, the import bill of components quadrupled to $6.8 billion in 2016 from just $1.4 billion in 2014.

However, the mobile handset industry is happy with the progress, albeit slow in local value-addition. “It takes time to nurture the manufacturing ecosystem and develop it from the scratch. You can’t expect 100 per cent value-addition immediately. We have added one lakh jobs in the last one year. We are in talks with the government for a phased manufacturing plan wherein special incentives can be given to grow local value-addition in a phased manner,” said Pankaj Mahindroo, President of the Cellular Association of India.

Target-led approach

Experts believe that instead of going for a phased manufacturing approach, wherein the government will offer incentives to manufacture or source components locally, a targeted approach should be preferred wherein tax incentives are given to manufacturers based on the value they add locally.

“Within two years, we were able to put up 40 local factories after taxes were imposed on import of fully manufactured handsets. Similarly, if tax credits are given based on local value-addition, it will create competition among local players to add more value in order to get more tax benefits,” Shah said.

A recent EY report suggests that under the GST regime, a separate mechanism for incentivising handset-makers can be recommended wherein the manufacturers can be granted relief/incentive by way of refund/rebate, keeping it equivalent or more than the incentives available under the current regime.

“This would encourage manufacturers to increase the local value addition in India and create additional incentives for building a component ecosystem for mobile handset manufacturing in the country,” the report said.

Published on May 12, 2017

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