The Revolution Brewing Within India's Electronics Manufacturing Industry

India's Electronics Manufacturing Industry

India's Electronics Manufacturing Industry

In the early twenty-first century, foreign investment and government incentives spurred remarkable growth in India's electronics industry. The semiconductor sector, being crucial and resource-intensive, saw substantial gains due to surging domestic demand. Various industries, from telecommunications to automotive and healthcare, heavily relied on semiconductors. However, by 2015, this progress was under threat due to a talent gap, with the Indian market heavily reliant on imports.

Fast forward to today, India is poised to emerge as a formidable electronics manufacturing hub in the coming decade, fueled by rising domestic demand and enhanced export competitiveness. Domestic production has nearly doubled between FY17 and FY22 and is projected to grow at a compounded annual growth rate (CAGR) of 24% from FY22 to FY27.

A cornerstone of this growth is electronics manufacturing services (EMS), encompassing a range of activities like design, manufacturing, testing, distribution, and servicing of electronic components and assemblies for OEMs. This sector is pivotal to the expansion and sophistication of India's electronics manufacturing landscape.

Government Initiatives to Boost Electronics Production

To boost overall growth and create over 28 million job opportunities, the Indian government has implemented initiatives to reduce the electronics import bill. This strategy aligns with the Make in India and Digital India campaigns, alongside Startup India and Skill India initiatives, fostering an environment conducive to foreign direct investment (FDI) inflow.

The Indian government has implemented several schemes in recent years to incentivise electronics manufacturing. One notable initiative is the Production Linked Incentive (PLI) Scheme, which addresses challenges related to the high cost of capital in India. This scheme offers a 4% to 6% incentive on incremental sales of goods manufactured in India and specifically targets key sectors within the country's electronics industry.

Some other key measures include:

  • Increased liberalisation of Foreign Direct Investment (FDI) with 100% FDI through automatic routes.

  • Tariff relaxations.

  • Establishment of Electronic Hardware Technology Parks (EHTPs) and Special Economic Zones (SEZs).

  • Implementation of Preferential Market Access (PMA).

  • Imposition of basic customs duties on items outside the IT free trade agreement framework.

  • Exemption of import-dependent inputs/components for PC manufacturing from Special Additional Duty (SAD).

  • Incentivising electronics goods export under the Focus Products scheme.

  • Funding 3000 PhD students in electronics and IT at Indian universities.

  • Imposition of an education cess on imported electronic products.

  • Modified Special Incentive Package Scheme (MSIPS) for electronics manufacturing entities.

  • Encouragement of Electronic Manufacturing Clusters (EMCs) under the EMC scheme.

  • Proposal for a ten-year tax holiday for firms investing $1 billion or more and creating 20,000 jobs.

  • Pursuit of export-oriented policies and strategic re-evaluation of Free Trade Agreement (FTA) approaches.

Additionally, the government recently launched Digital India futureLABS to drive research and development in automotive, computer, communication, industrial electronics, strategic electronics, and IoT sectors. This initiative, funded by the Ministry of Electronics and Information Technology's R&D budget, will be spearheaded by the Centre for Development of Advanced Computing (C-DAC) to set strategies, SOPs, and guidelines for new businesses and private enterprises in these fields.

Key Drivers of Electronics Manufacturing Services (EMS) in India

The growth of domestic electronics production is primarily fueled by increased technology adoption, growing affordability, and a focus on sustainability.

The rise of Industry 4.0 is driving the demand for electronics as industries integrate advanced digital technologies like artificial intelligence, automation, and data analytics to optimise processes, improve efficiency, and boost productivity.

Greater affordability and widespread mobile penetration have created a robust market for electronic devices ranging from smartphones to household appliances.

Moreover, a heightened focus on sustainability is another significant driver, particularly in the automotive sector, which is undergoing transformation. For instance, the production of electric vehicles (EVs) has led to increased demand for electronics such as battery management systems (BMS).

Electronics Manufacturing Landscape in India

The growth drivers propelling India's Electronics Manufacturing Services (EMS) market include increased outsourcing to EMS players, adoption of the "China plus one" strategy, and the development of the domestic electronics ecosystem.

Over the next five years, the EMS market in India is poised to reach $80 billion, presenting significant growth prospects for strategic and financial investors. This expansion will primarily be driven by mobiles, consumer electronics, and appliances, with notable growth also expected in lighting, automotive, and other sectors.

Alongside rising domestic demand, many global electronics manufacturers are relocating their outsourced manufacturing operations from countries like China to India to ensure uninterrupted supply chains. Factors such as escalating manufacturing costs in China, trade disputes, and the Indian government's efforts to attract foreign investment in the electronics sector are all contributing to the favourable conditions for India's EMS sector.

Transition from Traditional Manufacturing to ODM Services

Several original equipment manufacturers (OEMs) in India are increasingly outsourcing a greater portion of their manufacturing operations to domestic Electronics Manufacturing Services (EMS) providers, driven by factors such as the growing complexity of electronic products, cost reduction imperatives, and a strategic focus on core competencies.

The industry's focus is transitioning from traditional contract manufacturing to Original Design Manufacturers (ODMs).

In response to shifting demands, the EMS landscape is swiftly evolving, marked by a significant move from conventional contract manufacturing to ODM services. These two approaches cater distinctly to OEM requirements.

Contract manufacturing, historically predominant, involves EMS providers sourcing components, manufacturing, assembling, and delivering finished products to OEMs based on the latter's specifications. In contrast, the ODM model is more comprehensive. ODM companies not only offer contract manufacturing but also take on product design responsibilities according to OEM specifications. This includes product conceptualisation, prototyping, and iterative design processes, all conducted in close collaboration with the OEM. Additionally, ODMs provide logistics and after-sales support, offering a comprehensive solution to OEMs.

Large global multinational corporations (MNCs) and major Indian firms seek ODM services because they demand greater product innovation, customisation, and end-to-end support. ODMs empower OEMs to swiftly and efficiently bring unique products to market, often leveraging the latest technological advancements and market trends.

Furthermore, the printed circuit board assembly (PCBA) market in India is poised for substantial growth opportunities, projected to expand at a Compound Annual Growth Rate (CAGR) of 30% over the next five years, fueled by supply to both in-house OEMs and EMS players.

Growing Opportunities in the Printed Circuit Board Assembly (PCBA) Market

The growth drivers for electronics production in India are strongly tied to the country's electronic component market, which currently relies heavily on imports, particularly from China.

India predominantly sources electronic components such as semiconductor devices, printed circuit boards (PCBs), and others from China, South Korea, Vietnam, and various East and Southeast Asian countries.

To establish India as a leading global hub for Electronics Manufacturing Services (EMS), the Indian government has approved a modified program dedicated to semiconductor and display fab ecosystems. This initiative, backed by a substantial outlay of US$10 billion and accompanied by several incentives, aims to foster the development of semiconductor and display manufacturing capabilities within India.

Future Outlook: EMS Players' Strategic Shift & Value Creation

The next steps for Electronics Manufacturing Services (EMS) players in India involve a strategic shift within the value chain, moving away from traditional box build towards focusing on design and printed circuit board (PCB) assembly. While segments like mobiles and consumer electronics boast significant scale, many EMS players are diversifying into low-volume, high-margin segments such as industrial, medical, and automotive electronics.

Additionally, as EMS players seek to maximise value creation, they must address the opportunity and performance gap to fully unlock the potential of their businesses. This entails optimising operational efficiency, enhancing innovation, and leveraging expertise to capitalise on emerging market demands and technological advancements. By bridging this gap, EMS players can position themselves for sustained growth and competitiveness in India's evolving electronics manufacturing landscape.

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