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Connecting The Dots: India Could Become Smartphone Sourcing Point For Global Markets, Says Tech Analyst

As electronics manufacturers shift their focus from India to China, what will it mean for the future of India’s electronics industry and the economy as a whole? Govind Ethiraj speaks to Neil Shah, vice president of research at Counterpoint Technology Market Research.

By Govindraj Ethiraj
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Connecting The Dots: India Could Become Smartphone Sourcing Point For Global Markets, Says Tech Analyst

In the first episode of Connecting the Dots, Govind Ehtiraj, the founder of The Core, spoke with Neil Shah, vice president of research at Counterpoint Technology Market Research. They delve into the growth of electronic manufacturing in India and its economic implications.

Shah highlighted that the increasing investments in India were because of the challenges manufacturers face in China — especially in the smartphone industry.

They also discussed India's capacity for manufacturing, the role of major players like Apple, and the potential for future growth.

Here are edited excerpts from this week’s Connect The Dots:

Govindraj Ethiraj: Hi and welcome to "Connect the Dots." A Wall Street Journal report says that Denmark's Vestas, a large wind turbine maker, built two new factories in Sriperumbudur, which is in Chennai, in 2021. Another company, Vestas, has also expanded in wind turbine production. So that's a lot of manufacturing activity happening in this country at this time. One reason, of course, is China or "China plus one," as they call it. But the interesting thing is that it's not just electronics, which are seeing substantial investments, most notably from Apple. India has gone from being 9% of the world's smartphone handset manufacturer to a projected 19% this year, according to Counterpoint Technology Market Research. Now, the interesting thing is that substantial numbers of investments are coming into this space, electronic manufacturing. A lot of this is happening because it's being driven out of China. But the question is, what can this lead to? Can it extend to the larger electronics ecosystem? What does the electronics ecosystem mean? And, most importantly, what does this mean for the economy as a whole in terms of the jobs created and the kinds of jobs created, potentially in the future? And of course, what could be the threats? To talk about all of this, I'm joined by Neil Shah, vice president of research at Counterpoint Technology Market Research, the one that was quoted in that Wall Street Journal article I just referred to. Let me first ask you about where we stand, and now we're going to be talking about electronics, if that's the general descriptor. And, of course, we will come to Apple and others in a moment. But what is the capacity, the potential today for India, where we stand?

Neil Shah: So, since the "Make in India" movement started in 2015-16, with the new government pushing for it, we have seen 99% of smartphones, which contribute to the majority of consumer electronics in India, being manufactured here. Initially, it started with just high-level assembly, which used to be called SKD assembly, where components were assembled for about 20 minutes, and then it moved to completely knocked-down (CKD) assembly. Now, even the bare printed circuit boards (PCBs) are being manufactured, and we are moving towards high-level manufacturing, which requires advanced machining and everything. As a result, we are witnessing the development of a huge ecosystem with different suppliers coming from Taiwan, China, and even some homegrown EMS players. It's mostly due to the government's push through the "Make in India" movement and various policies. It started with import duties and then moved to more of the PLI (Production-Linked Incentive) schemes, enabling manufacturers to expand their capacity beyond what they were doing before.

Govindraj Ethiraj: If we were to trace that supply chain back to around 2017 when Apple started scaling up, what would have come first and then what would have come later? We've seen in the automotive industry, which is also closely connected to Sriperumbudur, where a lot of electronic manufacturing is happening. So, you started with CKD and then moved to SKD. And then, of course, as the government pushed, you increased the levels of localization. And increasing levels of localization means all that manufacturing has to happen somewhere around you. So, tell us about the path here.

Neil Shah: The path is, if you go back to around 2007-2009 when Nokia was at its peak, India was predominantly an assembly hub. It was just screwdriver assembly, where the entire device was imported from China, Taiwan, or Korea. And India used to assemble them by screwing them together, putting some packaging, and that's about it. That's how India started, and that's how the whole ecosystem started. And then Nokia, from 2009-2012, faced a lot of troubles. And India faced a lot of challenges as well. And then, Samsung came in, and a lot of other Chinese OEMs like Micromax, Lava, and all started coming in. But nothing major happened because we were still dependent on imports. But in 2014-2015, when the new government came in with the "Make in India" movement, that's when Apple was looking to expand beyond China. They were getting all the device assembly done from Foxconn. And Foxconn, in 2015, started doing some rudimentary assembly here in India. So, Apple was the first one to start exploring and doing some SKD assembly in India.

And around that time, you would have seen that Apple started getting its iPhones assembled here and started ramping up. They had ambitions to capture 5-10% of the market. They started moving from the assembly of iPhones to assembling older models, and then slowly started moving to the latest models, like the iPhone SE. They started with SKD assembly, and then within a year or two, they started moving towards the CKD assembly. And then, over time, with the government's push, they started localizing more and more of the components. And finally, in 2020-2021, Apple started manufacturing printed circuit boards (PCBs), and not just the device assembly. They started doing more than just final assembly.

That's been the journey of Apple in India, and that's how it started. And of course, Apple started with the government's push, and now you see Apple investing in India more and more, like with the latest announcement of assembling and manufacturing iPads in India as well.

Govindraj Ethiraj: So, before I go on to the next question, which is about the ecosystem, just to clear things up, in terms of what Apple produces here, is it only for the Indian market? Or are we looking at the company's supply chain, which then feeds the rest of the world as well? How does that work?

Neil Shah: That's a great question. Initially, when Apple started assembling here in India, it was just for the Indian market, because they were looking at the Indian market and they were thinking that India could be the next China. India could be the next growth engine. India could be the next big thing. And they had seen that their sales were not growing as fast as they would have liked in China. They were facing some pressure and challenges in China due to different factors. So, they were looking for the next growth engine.

So, India was mostly for the Indian market. But gradually, as the local supply chain developed, as the ecosystem evolved, as the government was pushing for more local sourcing and manufacturing, Apple started exporting iPhones made in India to Europe and even to the US, where they were sold as "made in India" iPhones. So, India started supplying iPhones to the rest of the world, not just for the Indian market. And that's a great thing because, with more scale, with more cost optimization, the products become more competitive, and it becomes a good sourcing point for iPhones to be shipped to the rest of the world.

Govindraj Ethiraj: That's really interesting. Because we know that companies like BMW, for example, with their plant in Chennai, produce cars for the local market, but they also export. But with Apple, I wasn't sure if they were going to be looking at just the Indian market. But obviously, that's a function of the volumes they are looking at and how India assembles them. So, they can export them.

Neil Shah: Absolutely. And Apple is exporting from India to the rest of the world. And the volumes, of course, initially, were small. But as the volumes increase, it becomes more and more competitive. It becomes more cost-effective. And if you look at India's inherent advantages in terms of labour cost, in terms of scale, and also in terms of the kind of ecosystem that is being built, it becomes a good sourcing point.

And that's why not just Apple, but if you look at other OEMs like Samsung, they have started exporting mobile phones made in India to Europe as well. And it's not just the Indian market that is being catered to. And that's the idea, that India should become a sourcing point, not just for the Indian market, but also for the global market. And that's why it's so important to build a good ecosystem and enable more local sourcing, more local manufacturing, and more value addition within the country.

Govindraj Ethiraj: Right. So, let's talk about that ecosystem. Now, the Wall Street Journal report mentions Vestas, which is a wind turbine manufacturer. And Vestas has two factories now in Sriperumbudur, near Chennai. They have set up these factories in 2021, just two years ago. And it also says that other companies are also expanding in wind turbine production. So, we've talked about smartphones, but what about other segments of electronics? Is the ecosystem developing there as well? And if so, where do we stand?

Neil Shah: That's a great point. We have seen that initially, the focus was on smartphones because that's a huge market. And smartphones were driving the majority of electronics and consumer electronics. But now, we are seeing that not just smartphones, but other electronics segments are also seeing a lot of interest and investment in India. One is, of course, laptops. You have seen that Apple started assembling and manufacturing laptops here in India. And that's one thing.

The second thing is components like printed circuit boards (PCBs). We are seeing that not just Apple, but a lot of other OEMs and EMS players are also starting to manufacture PCBs in India. And that's an essential part of the electronics ecosystem because PCBs are like the heart of the electronics device. And if you can manufacture PCBs locally, that brings a lot of value addition and cost optimization. So, PCBs is another area.

And then you have other segments like wearables, accessories, IoT devices, and even electric vehicles (EVs). We are seeing a lot of interest and investment in these areas as well. And that's why I mentioned that the entire electronics ecosystem is starting to develop, and not just limited to smartphones. Because initially, smartphones were the main focus, but now we are seeing other segments also coming up and developing, which is great for the overall electronics manufacturing ecosystem in India.

Govindraj Ethiraj: Right. And what about capacity? Because when we talk about manufacturing, there's always a capacity constraint. And it's important to understand what the capacity is and where it needs to go. Can you give us a sense of where India stands today in terms of capacity for electronics manufacturing? And also, what are the future targets?

Neil Shah: If you look at capacity, we have seen that it has increased significantly over the past few years. And that's because of the government's push and the incentives that have been given. If you look at smartphones, for example, we have seen that the capacity has increased from just a few million units in 2014-2015 to over 300 million units in 2020-2021. So, we have seen a huge increase in capacity.

And if you look at the future targets, the government has set ambitious targets. They want to increase the manufacturing capacity to a billion units. And that's the target by 2025. So, they want to reach a capacity of a billion units in terms of smartphones and other electronic devices. And that's the vision that the government has set.

And if you look at other segments, like laptops, the capacity is also increasing. If you look at PCBs, it's also increasing. So, across different segments, we are seeing an increase in capacity, but there's still a long way to go because, if you compare it with China, China is still the manufacturing hub for the world. And China has a capacity of over 2 billion units for smartphones. So, we still have a long way to go, but the government is pushing for it. And with the right policies, with the right incentives, with the right ecosystem development, we can definitely reach those targets and become a significant manufacturing hub, not just for smartphones, but also for other segments of electronics.

Govindraj Ethiraj: Right. And that's an interesting point because when you talk about capacity, it's not just about the numbers. It's also about the capabilities, right? So, when you talk about manufacturing, it's not just assembly. It's also about the entire value chain, from components to design to everything else. So, where does India stand in terms of capabilities, not just in terms of numbers?

Neil Shah: Absolutely. And that's a great point because, as you mentioned, it's not just about assembly. It's about the entire value chain. And if you look at capabilities, we are still in the early stages. I would say we have made good progress in terms of assembly and even in terms of manufacturing some components like PCBs.

But if you look at the entire value chain, like you mentioned, from components to design to advanced manufacturing processes, we are still in the early stages. We are still dependent on imports for a lot of components, like displays, camera modules, and other critical components. And that's where we need to focus on developing the capabilities.

And the good thing is, as the volumes increase, as the scale increases, it becomes more and more viable to set up those capabilities locally. Because if you have the volumes, if you have the scale, it becomes cost-effective to set up those capabilities locally. And that's where we need to focus on developing the R&D capabilities, the design capabilities, and also the advanced manufacturing capabilities.

And if you look at other countries, like Taiwan, for example, they have done a great job in terms of developing those capabilities. They are not just dependent on assembly. They have the entire value chain. And that's where we need to focus on. We need to develop those capabilities, not just be dependent on assembly, but have the entire value chain within the country. And that's a long-term vision that we should work towards.

Govindraj Ethiraj: Absolutely. And just to bring in the point about the jobs, because that's an important aspect, right? When you talk about manufacturing, it's not just about the products. It's also about the jobs that are created. And when we talk about the electronics ecosystem, what kind of jobs are we talking about? Are we talking about high-skilled jobs, low-skilled jobs, a mix of both? And how significant can this be in terms of job creation?

Neil Shah: That's a great point. And when we talk about jobs, it's not just about the numbers, but it's also about the quality of jobs. And if you look at the electronics ecosystem, it has the potential to create a wide range of jobs, from high-skilled jobs to low-skilled jobs and everything in between.

If you look at the high-skilled jobs, we are talking about jobs in R&D, jobs in design, jobs in advanced manufacturing, jobs in software development, because electronics is not just about hardware. It's also about software. So, we are talking about high-skilled jobs in those areas.

And if you look at the low-skilled jobs, we are talking about jobs in assembly, jobs in testing, jobs in packaging. And these jobs, although they may be low-skilled, they are still important because they create employment opportunities for a wide range of people.

And if you look at the potential, it's significant. If you look at the smartphone segment alone, we have seen that it has created millions of jobs over the past few years. And with the government's focus on electronics manufacturing, with the investments that are coming in, we can expect that number to grow significantly in the future. And it's not just about quantity, but it's also about the quality of jobs, because if we can develop the capabilities, if we can develop the entire value chain, we can create high-skilled jobs, we can create jobs that are sustainable, and we can create jobs that have a positive impact on the economy as a whole.

Govindraj Ethiraj: Absolutely. And I think that's a great point to end this conversation on because, ultimately, when we talk about manufacturing, it's not just about the products. It's about the impact on the economy. It's about the impact on jobs. And it's about building a sustainable ecosystem. Thank you so much, Neil, for joining us and sharing your insights on this topic.

Neil Shah: Thank you, Govindraj. It was a pleasure to be here and discuss this important topic. Thank you for having me.

Govindraj Ethiraj: Thank you. And thank you all for watching. This is "Connect the Dots."