Catching up with China and South Korea

Lloyd Mathias | Updated on September 14, 2021

The electronics potential   -  /iStockphoto

To make India a global hub for electronics manufacturing, the government must come up more short-term incentives

The National Policy on Electronics 2019 is an overarching document that envisions India as a global hub for Electronics System Design and Manufacturing. It drives capabilities for developing core components, including chipsets, and creating an enabling environment for the industry to compete globally.

Between 2015 and 2020, domestic electronics production jumped from $29 billion to $81.5 billion, a 23 per cent Compounded Annual Growth Rate (CAGR). The country’s share of global electronics manufacturing trebled from 1.3 per cent in 2012 to 3.6 per cent in 2019 and now electronics manufacturing makes up 2.7 per cent of India’s GDP.

Export of electronic goods grew 34 per cent from to $8.8 billion in 2018-19 to $11.7 billion in 2019-20, and made up as much as 3.74 per cent of total exports, for the same period. However, electronics imports fell only four per cent from $57.4 billion in 2018-19 to $54.4 billion in 2019-20. Domestic demand for electronics hardware is expected to increase to around $400 billion by 2025. Even 10 per cent of this manufactured domestically would lead to significant revenue or employment being generated.

India is now the second largest manufacturer of mobile phones, though most of the components are imported. Domestic value addition is still low at 10-30 per cent. This is due to the lack of ecosystems to manufacture electronic components, semiconductors and display manufacturing.

Major growth of domestic electronics manufacturing has occurred on account of assembly of finished products from imported electronic components or sub-assemblies or parts, mainly catering to domestic demand. The challenge is that manufacturing of critical components like displays and semiconductors are capital intensive and the technology is constantly evolving.

The component factor

Components are at the heart of electronic products. For instance, displays make up 25 per cent of smartphone production costs and as much as 70 per cent for TVs and other larger screens.

Globally, setting up of such facilities has been possible only with substantial government support. Countries like China and South Korea understood the strategic importance of electronics manufacturing many decades ago and invested heavily in building the ecosystem from R&D to logistics and skilling. These countries now control around 48 per cent of the electronics manufacturing market in the world.

The Chinese government, for instance, provided investment and grants of up to 60 per cent of project cost, preferential lending rates of up to zero and even 50 per cent subsidies in R&D costs apart from preferential tax rates, free land, import duty exemptions on equipment and components sourcing and adjustments of import-export tariff rates.

Similarly, the South Korean government provided financial support to specific clusters in the form of support fund for SME businesses, fund for building plants, special outlays for critical components worth millions of dollars as well as tax incentives, exemptions and rebates on property tax, composite land tax, materials, parts and equipment. South Korean companies were also given low-interest loans and duty-free import of select capital goods.

India, on the other hand, after moderate success of M-SIPS and PMP policies, has come out with the SPECS policy that aims to provide financial incentive of 25 per cent on capital expenditure for the identified list of electronic goods like key electronic components, semiconductor and display fabrication units.

Additionally, the PLI scheme provides a 4-6 per cent incentive on incremental sales of goods manufactured in India and covered under target segments, to eligible companies, for five years only. While the government’s focus and efforts on electronics manufacturing are commendable, they are still inadequate to take on China, Taiwan and South Korea in this fiercely competitive sector.

Industry estimates show that India’s electronics manufacturing sector suffers from a disability of around 15-18 per cent due to inadequate infrastructure, domestic supply chain and logistics challenges; high cost of finance; inadequate availability of quality power; limited design capabilities and focus on R&D by the industry; and inadequacies in skill development.

If India wants to become the next electronics manufacturing hub of the world, the government needs to give some serious incentive to provide aggressive support to the FAB ecosystem, for both semiconductors and displays. Just one display FAB unit could lead to billions of dollars in tax revenue, forex savings, increased domestic value addition and lakhs of jobs generated due to the creation of an entire upstream and downstream ecosystem for electronics manufacturing.

In a few years, India could potentially completely replace the need for imports and its dependence on China. If we truly want to attain the vision of the NPE, we have to be willing to provide a lot more support in the short term, for the windfalls of the future.

The writer is an Angel Investor and Business Strategist

Published on September 14, 2021

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