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Switch on: If played well, electronics sector could grow by leaps and bounds

The Central Electricity Authority has estimated that the demand for electricity will surge by 7.1 per cent compound annual growth rate (CAGR) between FY2017 and FY2022, while the domestic sector will become the largest consumer segment in the next 10 years. This will mean that the demand for electronic devices is likely to increase exponentially. A European consulting company, Mair+Vidorno (M+V), had released a market research report on the electrical sector in India in June. The research states that the demand for electronic devices is expected to rise from $80 billion in 2012 to $400 billion in 2020. Already brands such as Syska, Havells, Finolex, Anchor and Polycab have become a part of every household in the country. With government pushing initiatives like Saubhagya Yojana and Deen Dayal Upadhyay Grameen Jyoti Yojana to connect rural areas with electricity, India is indeed poised for electrifying changes.

 

According to an industrial report published by SKPGroup, in FY 2015, the market size for electronics hardware in India was approximately $64 billion. Nearly 42 per cent of this market was met by domestic production. The electronics sector consists of consumer and industrial electronics, computers, communication and broadcasting equipment, strategic electronics and electronic components. The consumer electronics and durables industry is currently poised at about Rs 340 billion. The top 10 products contributing to about 70 per cent of industry revenue are cell phones, flat panel TVs, notebooks, desktops, digital cameras, inverters, uninterruptible power supply (UPS), memory cards and USB drivers, 4W EMS, LCD monitors and servers. Electronic items are among the top three imports by value in India. India imported products due to the current demand for electronic system design and manufacturing (ESDM) products. Nearly 58 per cent of the demand is being met by imports.

 

Seeing the immense opportunities and economic growth in the sector, government has given high priority to manufacturing of electrical hardware. To support it, FDI has been permitted with lot of benefits like no industrial licence requirement, payment of technical know-how fees and royalty of technology transfer. A few of the government initiatives, like GST, higher import duties on finished goods and relaxation in duties of capital goods to manufacture locally, SME loans and promoting startups through PPP models, have granted small players a field to do business.

 

Vashi Electricals has been in the business as distributors for many brands for several decades and have seen and gone through many transition since. Its CEO Madan Dodeja says that the GST has proved to be a reform despite its slow impact on business, “GST has been really helpful especially for small business owners. In fact, it has facilitated so many new organised players in the market and now competition is also growing further. For us, we have seen a huge growth since the inception of the reform and this year we have seen 30 per cent jump in our clientele, out of which at least 10 per cent are the new clients.”

 

Besides GST, Make in India, LED distribution scheme, Digital India and different loan schemes have given a chance to businesses to set up their manufacturing operations. Government is also enabling states like Jharkhand for investors, where it is inviting IOT startups and giving good investment opportunities with single window clearances. This has also given established players a thrust to protect their market share as now new domestic and international entrants, especially in mobile devices segment, are coming up aggressively. E-commerce platforms are also lending a helping hand to build brands and increase the sales.

 

LEDfy which manufactures LED lighting solutions for both commercial and residential uses have its manufacturing unit in Noida. Its founder and CEO Amir Muzaffar says, “Lot of international companies are signing MOU with different states in India to start local manufacturing of components for mobile phones. The Indian government is doing a lot to attract global investors and the same is quite visible.”

 

Yet, there still is a huge gap when it comes to making India an export hub for electrical components.This is mainly due to heavy leaning on import. Right now, 60 to 70 per cent demand is met by imports. Domestic production is way behind. Electronic hardware production in India has grown to approximately $33 billion in FY 2015-16 while, simultaneously, imports have increased considerably to $37 billion, according to study on electronics sector in India done by SKP Group, a consulting firm. India only represents 1.5 per cent of the world’s electronic hardware production.

 

That more than half of the demand is met by the imported products is telling on how far we have to reach to make India an electronic hub. Even in the domestically manufactured electronic items, local value is low. Amir Muzaffar of LEDfy agrees that escalation in imports is doing no good to local manufacturing. “The domestic demand for electronic products is projected to be $400 billion by 2020 whereas domestic manufacturing is expected to grow to only $104 billion by 2020. Unless the ‘Make in India’ programme gets some form of a major boost there will still remain a gap between demand and local manufacturing, which will have to be met through imports. So the government has to come up with schemes to aid the growth of MSMEs,” says Muzaffar.

 

Dodeja of Vashi Electricals explains why electrical sector is more dependent on imports despite having 10 per cent of world’s bauxite reserves. “For several years countries like China has increased its aluminium production and metal market is volatile too due to the international prices of copper and aluminium. India has zero duty policy on the import while Chinese metal have duties in several countries thus it tries to dump its scrap here. And this scrap is going into our electrical components resulting in weak position of India in export.”

 

A paper published by Niti Ayog in 2016 highlights the reasons why India has not been so successful in penetrating the export market. The report says, India has less than 1 per cent share in the world at $6 billion. Imports of electronic goods account for more than half of the countries’ total consumption. “India is particularly large importer of telecom instruments. As a whole, Indian electronic industry does not present a picture of strength. With the skilled labour force that the country has, the industry should be a significant force in the world markets. But it has not done well in competing with imports even in its own home market. Imports accounted for as much as 58 per cent of the total consumption in 2014-15.”

 

The report further says that FDI inflow in electronics manufacturing industry from 2000 to 2015 was only $1.68 billion or 0.66 per cent which was very low when compared with the total FDI inflow of $258 billion in that period. Contribution of electronic sector to GDP is also not so significant when compared to other countries. For instance, India proportion is 1.7 per cent while Taiwan stands at 15.1 per cent, South Korea is 12.7 per cent, of which large contribution belongs to communication and consumer devices and electronics. Also, the report points out that original equipment manufacturers (OEM) or original design manufacturers and local component suppliers are still in infancy in India. Most of the OEM is confined to last mile assembly indicating that the industry remains in the early stages of development.

 

Other major challenges that face this sector are the infrastructure and the government tariff which makes domestic products way too expensive than imported goods. Reason may lie in capital cost which is required for manufacturing the components and also large number of raw materials are required which is again imported due to lack of availability. Consumers these days are quick to adopt new technology and, thus, if small businesses want to stay ahead in competition they need to be innovative with both hardware and software. Also, countries like China and Taiwan are major manufacturing hubs that provide cheap products.

 

According to Muzaffar, long credit cycle in channel sales, ease of import, rapid changes in product design, technology and pricing, slow down in real estate sector are few reason that are holding back the growth of the small businesses in this sector. "In my opinion, high capital costs, inefficient supply chain for raw materials, non availability of advanced equipment, unskilled labour and logistics inefficiencies are some of the challenges that need to be addressed urgently," says Muzaffar.

 

The country may have reached a rank of 100, jumping 30 spots in the World Bank ease of doing business ranking, thanks to various reforms. But electronic sector still needs a lot of hand holding. Muzaffar of LEDfy says: “Because of rapid electrification in rural areas, market size is bound to increase. Major growth in low end products will come in the next two years from newer markets like Bihar, Odissa, Gujarat and West Bengal, which would have EMCs (electronic manufacture clusters). India also has a strong foothold in the semiconductor design field with nearly 2,000 chips being designed per year and over 20,000 engineers engaged in this sector. With such proven self sufficiency in talent of R&D, India has potential to grow into ESDM powerhouse, provided the investments are resources are in place.” By 2020, the semiconductor design market in India is expected to increase with a CAGR of 29.4 per cent from $14.5 billion to $52.58 billion.

 

In the last few years, the government is also promoting rooftop solar power, where a lot of money can be saved, but there is a lot to be done yet, as it is a huge untapped market. “Ambitious solar target of India and investment in this sector has also given some boost to the electrical market which will need rigorous R&D and domestic production of critical components and raw material,” says Dodeja of Vashi Electricals.

 

There are many areas which needs specific actions. LED manufacturer Muzaffar puts forth a few demands: "Government should give special incentives to local manufacturing, reduction in GST rates, higher duty on imports of finished goods. They should promote brand India by promoting local products in government tenders. Other than these, ease of capital, BIS certification on drivers and other electrical components, setting up of well equipped testing labs are some ways that could improve local manufacturing.”

 

So far, government has invested heavily in this sector. Different state governments have come up with their own policies and incentives. Government has also received many investment proposals under M-SIPS, which is a scheme to promote large-scale manufacturing in the ESDM. E-commerce is also playing quite a part in becoming an essential part of supply chain for a manufacturer. Overall, electrical component demand is deemed to grow exponentially with deep penetration of IT, telecom and electricity. However, the country should leverage its manpower, market demand as well as strengthen policy and regulatory measures to grow by leaps and bounds.

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