The Production Linked Incentive (PLI) scheme for the mobile phone manufacturing industry has drawn sharp criticism from certain quarters with some leading economists claiming that the huge spurt in export numbers seen in recent times has masked an equally significant rise in imports of parts and accessories, which, they say, point to the fact that India has emerged as an assembling hub rather than a manufacturing powerhouse.

But there are others who counter this argument saying it is too early to pass judgment. 

Professor Yuking Xing belongs to the second camp. In an email interaction with businessline, Xing – who is Professor of Economics at the National Graduate Institute for Policy Studies, Tokyo, and the author of “Decoding China’s export miracle: A global value chain analysis “ – shared his views on a variety of subjects including the PLI scheme, India’s competitive advantage and its efforts to protect local manufacturers by erecting tariff barriers. Edited excerpts:   

Q

What do you make of India’s bid to emerge as a global mobile manufacturing hub in direct competition to China?

India has the potential to be a global mobile phone manufacturing hub. A smartphone has 1,500 to 2,000 parts. Only very skilful human hands can put them together. No robots can compete with humans in assembling mobile phones.

A global mobile phone manufacturing hub requires millions of cheap labourers to assemble billions of mobile phones for the world market. Millions of cheap labourers are the comparative advantage of India in competing for the assembling task of global mobile phone makers.

Having said that, India still has a lot of homework to do in order to compete with China in the mobile phone industry. India should abolish all tariffs levied on imported parts and components of mobile phones. Clearly, India cannot make most of the parts and components of mobile phones now.

The tariff imposed on the parts and components could erode all the benefits of assembling mobile phones in India for the global market. This definitely discourages foreign mobile phone makers to relocate assembly task to India.

China has imposed zero tariffs on parts and components required for manufacturing mobile phone for exports. This is one of the key factors that have helped China become the No. 1 mobile phone exporter in the world.  

Q

Thanks to the PLI scheme, mobile exports have doubled to ₹90,000 crore in FY23 from ₹45,000 crore the previous year and the forecast for this year is ₹1,20,000 crore. However, critics say the scheme has also led to huge imports. What’s your take given your own research on China’s ascendance in the mobile value chain?

Mobile phones are produced along global value chains and made of parts and components produced by various countries. It is impossible to have a mobile phone made of all Indian parts. It does not make any economic sense to do so.

If India wants its mobile phones to be globally competitive, it should allow its makers to use the best available technologies and parts. If India wants to be a global hub of mobile phone manufacturing, it should give foreign mobile phone makers the freedom to choose domestically made parts or imported parts.

When China started to assemble the iPhone 15 years ago, Chinese firms’ only contribution was labour-intensive task-assembly, about $6.5 per iPhone, which is 3.6 per cent of the total manufacturing value added. But, today, Chinese firms have captured about 25 per cent of the manufacturing value added of the iPhone by providing battery, camera filter, glass back-cover, stainless frame, printed circuit board assembly, and other parts, which are technology intensive and offer higher value added than pure assembly service.

Being an assembly centre of mobile phones is the first step for India to be a global mobile manufacturing hub. Gradually, foreign mobile phone part makers will come to India and local Indian firms will be able to learn how to make parts which are competitive and meet the highest standards. This is a dynamic upgrading process. Deliberately forcing import substitution before local producers are able to offer high quality and competitive parts would be counter-productive.

Q

India has also increased import duty on ICT products, a decision that has been challenged at WTO. Do you see merit in India’s approach given its objective of encouraging local manufacturing?

India signed the Information Technology Agreement of the WTO in 2000. According to the agreement, India should charge zero tariffs on information and communication technology. To encourage domestic manufacturing, the Indian government has imposed a 20 per cent tariff on ICT products, including mobile phones.

Well, this policy does motivate foreign mobile phone makers to relocate assembly facilities into India as they do not want to lose one of the largest mobile phone markets in the world. A global hub of mobile phone manufacturing produces mobile phones not only for the domestic market but also for international markets, which are much larger.

Imposing tariffs on imported parts and components definitely obstructs the operation of global mobile phone value chains and discourage leading mobile phone makers to use India as a new global manufacturing hub.  

Q

India has also floundered in its attempt to create global brands after a brief period of success with names like Micromax and Lava. This compares with the roaring success of Chinese brands like Xiaomi, Oppo and Realme. What is India missing in terms of strategy and execution?

With 1.4 billion people, India’s mobile phone market is big enough to accommodate homegrown brands.

To be successful in the global market, Micromax and Lava should be successful first in the Indian market. How to differentiate Indian brands from Xiaomi, OPPO, iPhone and Samsung is the key.

OPPO promotes itself as a camera phone, and Xiaomi claims that its phones offer the best technology with a price almost half of the iPhone. OPPO declares that its phones are “designed by OPPO assembled in China.” This is a copy of the iPhone’s statement “designed in California by Apple and assembled in China”. OPPO uses the message to tell its customers that it uses the best available technology in the world.

My research shows that Chinese part suppliers only added about 16 per cent value to the manufacturing process of their phones. If Micromax and Lava want their phone to be competitive in the global market, they should not think of import substitution when selecting parts and components. They should use the best available technologies to make their phones, regardless of the fact the technologies are made in India or not.

Q

Apple now makes about 7 per cent of its phone in India and this could go up to 25 per cent by 2025, according to some estimates. Do you see India throwing China off its perch in the near future?

Three factors are driving iPhone assembly from China to India. First is the growing demand of the Indian market; second is the lower assembly cost; and the last is the geopolitical tension between China and the US, which requires Apple to diversify its supply chains from China.

If India can seize the opportunity, it would be a new iPhone manufacturing hub. However, to replace China as the largest iPhone assembler, India has a long way to go. China remains the largest overseas market of the iPhone.

In 2022, about 28.7 million iPhones were sold in China, much larger than the 6 million iPhones sold in India. The size of the Chinese market and the well-established ecosystem of iPhone suppliers in China indicate that China will continue to be a major assembly hub of the iPhone.

In addition, iPhones are shipped to international markets from its assembly factories by air cargos. India should improve its air transportation infrastructure to facilitate the expansion of iPhone manufacturing.  

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