The central government scheme also partly addresses the “disability gap” that India has against other manufacturing destinations from where goods are imported, say experts who track manufacturing companies.
Computers to lightbulbs, air conditioners to washing machines, phones to medicines, factories in India don’t make the whole product across several categories. What goes for manufacturing is mostly assembly of imported components. In devices where the parts’ ecosystem has developed, the component that makes them smart is imported — like in bulbs or phones. Now, a combination of factors is converging to change that.
First, demand is rising in products such as mobile phones and TVs, justifying local manufacturing over imports. Second, Covid is pushing global companies to de-risk supply chains and production that have become overly dependent on China in the past few decades. Third, India’s path to a $5 trillion gross domestic product by 2025 has to pass through factories; all major economies are or have been manufacturing powerhouses. Fourth, the government has increased import tariffs on over 100 components, forcing that demand to local manufacturing. And, finally, an aggressive production-linked incentive (PLI) scheme promises to pump in Rs 1.97 lakh crore — as promised in the budget — over the next five years in to 13 sectors to propel manufacturing.
It is no secret that India has been late in encouraging manufacturing. Old niggles like time taken to set up factories and infrastructure bottlenecks have been concerns. Besides, labour issues, like the violence seen at the Wistron plant in Karnataka in 2020, can stymie manufacturing. The government had in 2014 launched the Make in India initiative to make the country a global design and manufacturing hub. Make in India aims to raise the contribution of manufacturing in GDP from 16-17% in 2014 to 25% by 2025, and create 100 million jobs. In that context, the PLI scheme aims to up the game by giving companies incentives on incremental sales from products manufactured in domestic units. It encourages more investment in factories.
“Our manufacturing growth matches GDP growth rate or is below that, but never very high,” says Karthikeyan Natarajan, president & COO of Hyderabad-based Cyient. “So this is a once-in-a-lifetime opportunity. India has to build up its manufacturing base in 10-12 years.” The PLI scheme aims to be a magnet for the forces that would build factories at scale. The scheme is output oriented and gives out incentives based on performance and not promises. So, according to analysts, if a manufacturer makes $1 million of incremental sales of goods under the PLI scheme, he will get $50,000 as cashback. Industry experts like Satya Gupta, chairman, India Electronics and Semiconductor Association, point out that the profit margin in manufacturing is only around 10%. Even if manufacturers get a complete tax break, the benefit will be 1.5%, if the tax bracket is 15%. The PLI, on the other hand, gives more.
“India can do better in ease of doing business, acquiring land and setting up factories. This can happen at a faster pace if we remove the bottlenecks”
-Anil Rai Gupta, CMD, Havells India
The central government scheme also partly addresses the “disability gap” that India has against other manufacturing destinations from where goods are imported, say experts who track manufacturing companies. Suvarna Joshi, research analyst at Axis Securities, says, “The disability gap is 8-11%. The government is trying to bridge the gap by 4-6% with PLI. The balance is expected to be compensated as manufacturers become competitive with large-scale facilities to serve international markets.” Goldman Sachs says the contribution of manufacturing in GDP could rise from around 17% now to 25% in a few years and create millions of jobs. And, of course, make India atmanirbhar or self-reliant. The government is taking initiative in this regard. George Paul, CEO of the Manufacturers Association of Information Technology, says, “Earlier, industry was running after the government for sops. Now, the government sets up meetings with industry bodies and even engages with individual companies to establish or expand factories.”
The results are slowly becoming visible. Companies are ramping up production and evaluating ways to locally make the parts they import. Cyient, for example, makes electro-mechanical products, printed circuit boards and precision measuring devices at its manufacturing units in Mysuru, Hyderabad and Bengaluru. Half the components needed in the products it makes are imported.
Now, the digital engineering and technology company has started getting these made in India. Even foreign manufacturers are eyeing PLI opportunities. On February 26, Chinese smartphone maker Xiaomi announced plans to open two new mobile manufacturing plants and a TV plant in India. The devices will be made by contract manufacturers DBG Technology and BYD India. With this, Xiaomi would have eight exclusive manufacturing units with Foxconn, Flex, BYD, DBG, Dixon Technologies and Radiant. Even telecom equipment providers like Nokia are already making a range of equipment locally for the domestic and global markets. A ripple effect of this localisation wave is job creation.
According to India Electronics and Semiconductor Association, 1.1 million direct jobs would be created in 5 years in technologyrelated areas alone. Hiring firms are already seeing increased demand for factory workers and managers. Rituparna Chakraborty, executive VP of staffing company TeamLease Services, says, “Because of the PLI scheme, manufacturing has moved up the pecking order. And companies want skilled staff rather than casual labour.” Since Budget 2021, demand for blue and white-collared workers in factories has gone up several notches. Earlier, hiring in this sector was behind information technology, telecom, banking and financial services and others.
While PLI makes it attractive to make in India, China, the world’s factory, still has the advantage of economies of scale. However, this problem is not insurmountable. Anil Rai Gupta, chairman and managing director of Havells India, says a strong brand and differentiated offering can give a product a premium tag and keep it a step ahead of a similar Chinese product. “Companies need to have control on both design and manufacturing capabilities. Also, give a differentiated product to the customer and not something that any of the, say, 20 importers are buying from China and elsewhere and selling here.”
The Rs 9,429 crore maker of electrical and electronic products plans to double capacity in each of its product categories in 2-3 years. Mechanical components are sourced from India but electronics are imported. In air conditioning, for example, the industry imports compressors, condensers and blower motors which together comprise 55% of a machine’s cost. Air conditioner penetration, at just around 6% of households, did not make it viable to make these products here. Gupta says this penetration will balloon to at least 40% in less than a decade — a 7x increase. “When more consumption happens, more production will.
“Our manufacturing growth matches that of the GDP or is below that, but never very high. So it is a once-in a-lifetime opportunity.India has to build up its manufacturing base in 10-12 years”
-Karthikeyan Natarajan, President & COO, Cyient
There is an opportunity for India to become a hub for air conditioner manufacturing,” he adds. But the local market has to justify the investments. Havells, for example, stopping import of water heaters and starting to making them here when the product generated Rs 150 crore annual sales. Such an environment exists in mobile phones. With around 150 million units being sold a year in India — a $25 billion market — it has become an attractive segment. In recent months, the Ministry of Electronics and IT approved applications of Pegatron, Foxconn/Hon Hai, Rising Star and Wistron to make mobile phones.
Domestic makers such as Lava, Micromax and Optiemus Electronics have also joined the PLI scheme. The scheme has compelled companies like Panasonic to look at India as a bigger manufacturing hub. The Japanese consumer electronics heavyweight does Rs 10,000 crore of business in India but its “manufacturing here is essentially assembly,” says Manish Sharma, president & CEO, Panasonic India & SA.
“The biggest issue is stability of demand expansion and predictability of policy"
-Manish Sharma, President& CEO, Panasonic India & SA
The company looks at duty structures, government policies, economies of scale before deciding to set up a factory. Sharma says before PLI was announced, government measures primarily addressed the supply side — like increasing import duties. Now, “at least companies will start to invest in factories,” he adds. Sharma points to compressors as an example. The current capacity for compressors in India is 1.5 million units, while demand is 8 million, growing at 16-18% a year.
By the end of this year, he says, compressor capacity will double to 3 million units and India can soon become self-reliant in this segment. Consultancy PwC sees at least Rs 30 lakh crore worth of additional manufacturing in India in the next five to seven years because of PLI. There could be some big opportunities now as global majors are shifting part of their business from China to de-risk in the post-Covid business environment. Almost 35% of this has gone to Vietnam and just 10% to India. Now, the incentive scheme could sweeten the deal for big players to come here. “You can’t beat China by just optimising costs,” says Natarajan of Cyient, pointing out that China does around $3 trillion worth of manufacturing compared with India’s $300 billion. “But if we take the costs and risks together, India has a role to play.” It will help a lot in the long run if the country can also get “smart”, says Nikhil Rajpal, CEO, Hero Electronix, which makes smart devices under the brand Qubo. “Every product is getting smarter, hardware is driven by software. We are in the connected electronics era.
Along with manufacturing, we must strengthen our capabilities in software also.” Products are being re-imagined — for example, household appliances sync with user behaviour. So building local software and cloud is as important as manufacturing if India is to be truly self-reliant, Rajpal insists. “Intelligence layers must be built in India.” Besides, sectors like electronics are very dynamic and see reinvention continuously, unlike steel or plastics. Manufacturers must have the capability to switch assembly lines quickly to cater to changing customer preferences — like mobile handset makers who launch products every few months with new features. “Shorter technology lifecycles is a big challenge,” says Anku Jain, MD, MediaTek India.
“This can be addressed by adopting measures that accelerate product development and reduce time-to-market.” Even as changing technology keeps manufacturers on the toes, some things don’t change that fast, sadly. Gupta of Havells says, “India can do better in ease of doing business, acquiring land, setting up factories.” Thailand and even Hungary give approvals to set up businesses in 30 days or less, while it could take 3-6 six months in India, he points out. Sharma of Panasonic says, “A biggest issue to watch is stability of demand expansion and predictability of policy.” Companies don’t have control on either but it hasn’t stopped them from thinking big. Like AgniKul Cosmos, the IIT-Madras incubated startup that makes launch vehicles for satellites. The company is aspiring to build rockets in India as a customisable solution for global clients. Such ambitions can lift Indian manufacturing to a higher orbit.
Hunger for Chips
India must focus on making semiconductors, key in smart devices, for strategic interests
Over the past two decades, India has tried unsuccessfully to attract semiconductor fabs or chip makers. The importance of these chips can hardly be overstated — they make everything smart and go into all kinds of appliances, smart speakers, phones, telecom gear and cars, to name a few. The chips are the heart of a smart, connected life. According to MAIT, 40-60% of the product cost is due to various chips.
Semiconductors are expensive to make. Cutting-edge chip-making factories can cost at least $2.5 billion. While Apple, AMD, Nvidia, Qualcomm and others design chips in India and elsewhere, they are mostly made in China and other Asian countries, but not in India. This is a gap that should be filled. But India does not need such an expensive fab, says Satya Gupta, chairman of India Electronics and Semiconductor Association. A better strategy will be to go for application specific fabs — say, power electronics or TV panels. The former is used in all kinds of devices, including electric vehicles. The factories to make these are more affordable, $300-500 million against logic fabs that can cost $2.5 billion.
According to sources, a dozen companies have shown interest in setting up the power electronic fabs in India but only three firms for logic fabs. “India could import the wafer, which is super-expensive to make, and customise it to specific needs,” says Vivek Tyagi, founder of ProVT Consulting.
Such units are test & assembly facilities and cost around $200 million. “We don’t need to follow the herd or compete with China, Taiwan. So we may not want to make the most advanced chip in the world. But we must become self-reliant,” says Gupta.