21 min read

Electronics Manufacturing Services (EMS) industry in India – An Industry Review

(Area of focus: Consumer Electronics )

Crude oil has long been considered the Achilles heel for the Indian economy as it is the biggest contributor to India's increasing current account deficit (CAD).

What might come as a surprise to many is that crude imports are closely followed by the import of electronics at the second spot in value terms. Electronic imports account for 11.4% of the total import value for the country and to make matters worse it has jumped from 23.4% to $52.9 billion in FY18, from $42.8 billion in FY17.

This surge in imports is driven purely by demand and notably, it is independent of crude oil prices; among the top import items as shown in the figure below, electronic goods are the only import component that has seen a year-on-year growth over the last three years.1

As per a report by Deloitte Touché Tohmatsu, India's electronics imports could surpass the country's oil imports by 2020.2

Interestingly in the short to medium term, even though India cannot reduce crude oil imports meaningfully (considering it's a natural resource and the search for sustainable alternatives is still going on) but it can surely produce its own electronics and bring the imports down. Thereby, helping lower the country's CAD burden, promote the 'Make in India' campaign and at the same time help generate much-needed employment in the country.

The process seems to have already begun at the ground level as this report illustrates.

What is EMS ?

Electronics manufacturing services (EMS) is a term used for companies that design, manufacture, test, distribute, and provide return/repair services for electronic components and assemblies for OEMs. The concept is also referred to aselectronics contract manufacturing (ECM)

The EMS industry came into being in the late 1970s when Solectron, world's first EMS provider, was established. At the time, most electronics manufacturing for large-scale production was handled by an in-house assembly. These new companies offered flexibility and eased human resource issues for smaller companies doing limited runs.

The business model for the EMS industry is to specialize in large economies of scale in manufacturing, raw materials procurement and pooling together resources, industrial design expertise as well as create added value services such as warranty and repairs. This frees up the customer who does not need to manufacture and keep huge inventories of products. Therefore they can respond to sudden spikes in demand more quickly and efficiently. At the same time, EMS industry also creates value for the big 'innovator' companies of the world as they don't like to get burdened by the whole process of manufacturing and prefer select EMS companies to take care of the manufacturing process on their behalf.

The EMS industry is commonly divided into Tiers by their revenue:

  • Tier 1: >$5 Billion
  • Tier 2: $500M to $5B
  • Tier 3: $100M to $500M
  • Tier 4: <$100M

Micro Tier (<$50M) and "Tier Mega" referring to the Big 2, Foxconn and Flex.3

Why can't OEMs do their own manufacturing viz what makes EMS providers relevant?

– EMS provide value to OEMs by providing a full range of services:

  • Contract design service
  • Prototyping
  • Final system assembly
  • Configuration
  • Order fulfilment
  • Aftermarket services (Reverse Logistics)

– By using EMS providers, OEMs can concentrate on their core competencies such as research and product development, brand building, and sales and marketing.

A classic example of this is Apple Inc. which is known for its innovation, it uses Foxconn (Taiwan based EMS provider) for manufacturing its products. By leveraging Foxconn's manufacturing expertise, Apple has been able to focus completely on the product innovation, design and sales which has catapulted it to a trillion dollar company.

– Via EMS providers, OEMs can gain access to the latest equipment, process knowledge and manufacturing know-how without having to make substantial capital investments, as the risks are converted into variable costs. Also with the frequent introduction of new products in the market, EMS providers help in cost saving, reduced time-to-market, reduced time-to-volume, quality and flexibility.

Mainly there are two broad models in which an EMS provider can operate:

  1. HIGH-VOLUME, LOW-MIX (HVLM)
  2. HIGH-MIX, LOW-VOLUME (HMLV)

(*Very few companies operate both models simultaneously)

Mix refers generally to the complexity or different models of the PCB assembly. Volume refers to the number of units built, with products like consumer electronics on the high end and prototype, medical electronics or machinery on the low end.

  • Lower Tiers EMS provide HMLV

(Industrial, Medical, Aerospace & Defence)

  • Higher Tiers provide HVLM

(Computers and peripherals, Consumer device, Telecommunication, Storage devices).

  1. HVLM : A contract manufacturing setup where only a few assemblies are produced in large quantities. Such a production arrangement may last for weeks or even months using the same setup. This technique allows changeovers to be kept at minimum levels and equipment utilisation rates to be significantly high.

Contract manufacturers have proven to be more efficient when running at high volumes, which requires minimal engineering changes.

  1. HMLV : This type of contract manufacturing puts a high focus on quality and customisation as per customer requirements. Considering high margins and niche market scenarios, even major changes in market dynamics often do not heavily impact such a production process. OEMs that prefer such solutions are willing to pay a higher price without compromising on quality. The recent industry trends show a shift towards this model of production but success of this model depends on controlling and improving supply chain efficiencies.

Global Tier-1 EMS players are increasing their focus towards HMLV electronics manufacturing as the demand is growing and it also helps mitigate client concentration risk which is generally seen in the HVLM space.

Also, larger EMS players have a global presence with a wide product portfolio and end-to-end solution. Their centralized procurement helps them to procure in bulk and thus pass on the benefits to the buyers giving these Tier-1 players a competitive advantage. The global presence of tier 1 EMS players makes it viable to manufacture HMLV products in the regions having high labour rates as the HMLV manufacturing is labour intensive.

Higher profit margins compared to HVLM makes sense for the larger tier players to enter the space. As these HMLV products are customized, they also give suppliers bargaining power. But HMLV production comes at a cost as it needs additional accreditations, facilities, skill levels which translates into more overheads.

Key ingredients for attracting OEM contracts and making EMS business a success:

1. One-stop shop

  • PCBAs, utilizing chip-on-board, surface mount and through-hole technologies.
  • Complete assemblies including plastic mouldings, metal-die castings and sheet metal fabrications, apart from finishing, painting and printing – in short, deliver the final assembly of completed units.
  • Original Design Manufacturing: Electronic products need constant design revisions as end users expect creativity and continuous innovation. Therefore consumer electronics product design and development are often outsourced to original design manufacturers (ODMs). If an EMS provider can give this service in-house, it helps OEM minimise costly design iterations, help bring the product to market sooner. Hence, original design manufacturer services become very important and cost-effective solutions for customers making Design the best value-added services that an EMS company can provide.
  • Reverse Logistics : After-sales services including repair and maintenance are quite important for the Indian consumer as the use-and-throw concept is still not acceptable here even in footwear let alone electronic products. EMS companies having an additional ability to provide reverse logistics will get more business from OEMs at the same time they would be playing a significant role in e-waste management which is a big concern globally.

Focused E-waste management companies in themselves make for a good investment opportunity considering the sheer volumes of e-waste generated daily throughout the world.

Considering the complexity of the reverse logistics processes, significant expertise is required before an EMS provider can enter this space.

2. Effective supply chain management

3. Maintaining scalable business solutions

4. Better knowledge of customer needs, customer-centric business models and ease of working

In a nutshell, more an EMS company adds these ingredients to its mix more likely it is to become a favoured destination for the major OEMs of the world .

Profitability of an EMS business

The goal for any manufacturing enterprise or any business for that matter is high profitability . In the EMS industry, there are three requirements to ensure that a firm is profitable. There are:

  1. Low input cost,
  2. Cost-effective manufacturing, and,
  3. Fair product price.

Input cost , itself, is a function of cost-effective manufacturing as well as low logistics and inventory costs. An important way in which the latter, i.e. low logistics and inventory costs, can be addressed is by the establishment of a local supplier ecosystem. In the case of original equipment manufacturers (OEMs) / electronics manufacturing systems (EMS) companies, this essentially means the establishment of a component ecosystem.

A further enabler of this entire ecosystem, from OEMs to component manufacturers, in reducing input cost is by the development of dedicated manufacturing clusters as well as a robust logistics infrastructure. In fact, the development of these two key enablers also augments the business case for an enterprise by providing readily available resources including land, power, skilled workforce etc.

Technology can play an important role, as another enabler, to ensure that the manufacturing process per se is cost-effective, timely and without waste. This applies to the entire electronics industry ecosystem, from OEMs to component manufacturers.

Cost-effective manufacturing, ultimately, has to be ensured by economies of scale . A prerequisite for this is optimum capacity utilization. This, in turn, is driven by consistent demand for manufactured products. In the case of electronics manufacturing, this is especially the case with component manufacturers. In fact, it is one of the grievances of the component manufacturers that the buyers (OEMs /EMS) do not commit to steady demand. They also face threat from imports and the buyers usually take decisions based on the most cost-effective input, whether domestically manufactured or imported.

One of the issues which face the entire industry – especially component manufacturers and the EMS companies – is that of long capital investment cycles. It takes a long time, as compared to other manufacturing industries, to realize a return on invested capital. This also acts as a barrier to entry for a newer player and the capital intensive nature of the industry makes it hard for the smaller players to achieve scale.

*(Understanding the difference between OEM, ODM, EMS & CEM can be challenging. Click the link for details)

A Global Perspective

Manufacturing plays an integral role in the economic development of a country. The transformation of China after becoming the manufacturing hub of the world is an example of that. It has pushed China from 1 trillion economy in 1998 to 14 trillion is 2018 whereas India clocked 2.85 trillion in 2018.4

The total global electronics hardware industry is about US$ 2 Trillion, out of which, India's Production was about US$ 47 billion during the year 2016-17. The number is dismally low for the 6th largest economy of the world but it also represents a huge opportunity for growth in this sector.5

The electronics industry to GDP ratio is 15.5% for Taiwan, 15.1% in South Korea and 12.7% in China whereas it is 1.7% for India, reflecting on the size of the opportunity going ahead.6

In comparison to the global electronics design and manufacturing services (ESDM) industry that exhibits below 5% year-on-year growth trends, the Indian ESDM industry is expected to have one of the highest growth rates, representing a CAGR of 17.5% from 2014 to 2020 .7

The global consumer electronics market alone is predicted to surpass USD$ 1.5 Trillion by 2024 according to a research report by Global Market Insights, Inc. Asia Pacific region is anticipated to witness high growth in the consumer electronics market due to large number of household appliances and smartphone users. The growth is mainly driven by the presence of high population and growing disposable income in economies such as China, India, Japan and South Korea. Due to the expansion of mobile device industries in densely populated countries, the region is expected to dominate the overall consumer electronics market.8

Source: gminsights.com

Companies in the consumer electronics market include Samsung Electronics, Apple, General Electric, Huawei, LG Electronics, Sony Corporation, Bose, Sonos, Sennheiser, AB Electrolux, Haier, Canon, Nikon, GoPro, etc. The industry is highly fragmented in nature due to the presence of a large number of well-established and recognized players in the marketplace.

Furthermore, the players are increasingly investing in R&D and exhibiting mergers, acquisitions and partnerships as key growth strategies to gain competitive advantage.  The strong presence of established players in the marketplace poses high entry barriers for new players entering the consumer electronics market.9

Despite the high competition between major MNCs in the space, the overall growth of the consumer electronics industry bodes well for the EMS players which are into contract manufacturing for these major Original equipment manufacturers (OEMs). Foxconn's astronomical success illustrates the importance of this quite well.10

Certain distinct advantages give India an upper hand over China in the electronics manufacturing space going ahead :

  • The economy is on a growth trajectory and has already taken over China in terms of GDP growth.
  • Huge electronics demand locally and inadequate penetration compared to other major economies of the world.
  • Superior design capabilities and workforce at approximately 150% lower wages than China.
  • Regulatory framework getting more investment and business friendly to attract investment through foreign and domestic investors.

With manufacturing becoming highly robotic, manufacturing will no longer remain a lost cause for the developed countries. In order to maintain its growth rate going ahead, China will have to rely equally on innovation and manufacturing.

Similarly, Indian companies that can create an ecosystem which is a fine mix of advanced manufacturing capabilities along with an active R&D division, are likely to have a long runway of growth ahead of them.

*(In order to appreciate where China has been over the last 40 years and where we are headed, this video [link] is helpful. Also, this research paper [link] explains the evolution of Chinese industrial policy electronics in relation to electronics manufacturing in detail)

Indian Electronics Industry & EMS:

India, an agrarian economy in the past, a service economy at present and transitioning towards a manufacturing hub . India is poised to become a manufacturing economy in the future. The Indian government intends to increase the contribution of manufacturing sector to GDP to 25% by 2025 from the current 16%, 11with its import substitution and export friendly policies and initiatives to boost the manufacturing sector.

The electronics industry in India has, over the years, emerged as one of the most significant growth contributors to the Indian economy. However, it currently accounts for less than 2% of India's GDP. Much of India's domestic consumption is met through imports. Further, India contributes less than 2% to the global electronics industry. The industry in India is confined to the low-end value chain and the value addition, currently, is as low as 5-10%.11

As per a 2016 study by IIM-Bangalore and Counterpoint Research, the contribution of locally sourced (or Made in India) components and sub-components accounted for just 6% of total value of components that go into a phone, a fact that the study calls it "economically unfortunate" . For instance, in 2015, the total value of mobile phones sold in India was around $11.5 billion. Out of that, the true local value addition generated in local component sourcing and local assembly will be close to $650 million. 2 The value addition is 70% in China, above 50% in Taiwan & South Korea and just under 20% in Brazil .6

Considering the contribution of an industry to GDP depends both on quantity produced as well as the percentage of value addition done, the low-value addition by Indian manufacturing units is another pain point for the economy as most of the components, in that case, need to be imported from abroad.

The Indian market for electronic products is poised for significant growth in the coming years. While the demand for electronic products in India is expected to grow at a CAGR (compound annual growth rate) of 41 per cent to reach USD 400 billion by 2020, domestic production is growing at a CAGR of 27 per cent as compared to a CAGR of 9.6% during 2010-2016.

Although there is a huge leap in the projected production figures for 2020, the domestic production is projected to meet only 26% of the domestic demand leaving a huge gap of USD 300 billion to be filled by imports by the year 2020.11

As per the Ministry annual report 2017-18 , the Electronics Manufacturing Services (EMS) industry in India is growing rapidly and key global players, as well as a number of domestic companies, are operational in the country. This segment needs very high efficiency of operations to stay profitable. Availability of components and an effective supply chain is vital for EMS companies for their growth. Domestic companies have generally followed the business model of staying in low-volume and high-mix business segments, where the margins are better. However, the EMS players need to operate in high-volume and low-margin segments to compete with the global players.5

At present the Electronics industry is classified into six major categories:

Source: NEC-ASSOCHAM Report

As per the graphic above, Appliance and consumer electronics (ACE) (31%) and electronic components (22%) cumulatively make up 50% of the electronics market in India. This share is likely to go up as growth is projected to be the highest in these two sectors going ahead creating opportunities for the EMS companies involved in their manufacturing.7

India is home to a growing middle-class population. With increasing disposable income, consumer demand for electronic products – especially advanced TVs, mobile phones and computers – has grown significantly. Going ahead, the rise in the middle and emerging middle class will further fuel this growth.

The growth is evident in the latest industry figures as well, the total production of all the verticals of electronics sector in India is estimated to be about 3, 87,525 crores in 2017-18, compared to 3, 17,331 crores in 2016-17, exhibiting a growth of about 22%.5

From the statistics above, it is evident that the EMS players to watch out for in future would be the ones involved in the manufacturing of:

  1. LED products especially lighting solutions.
  2. Mobile phones
  3. Consumer electronics.

The LED lighting market in India is projected to grow at a CAGR of over 32% by 2020. With relatively low LED light penetration and huge untapped opportunity, India has become an attractive market for both domestic as well as international LED players.5

The value share of mobile handsets industry in the total electronics segment in India is estimated to be nearly 35%, which makes mobile handsets industry the largest electronics vertical.5

As market demand for these segments is very high, these three segments have seen significant year on year increase in production value. So will the EMS players involved in their production.

With the population size comparable to that of China, the penetration of appliance and consumer electronics is India is far less. This potentially creates a long runway for growth for the EMS companies involved in the manufacturing of these products . Besides increasing the number of units produced in India, companies also need to focus on the value addition part if Indian Government is to achieve the target turnover of USD 400 Billion by 2025 and make India electronics import free.12

As the graphic above illustrates, we are far below the global averages when it comes to ACE products penetration in India. Also, value addition is least in the largest segments of consumer electronics namely televisions (25%) and mobile phones (7%). Another upcoming segment and least penetrated so far is air conditioning , here also 70% components need to be imported for manufacturing them.

Following are some segment specific drivers that will fuel their growth in the years to come.

The opportunities that lie ahead of the Indian EMS industry are evident from the graphic below, courtesy Frost and Sullivan industry report.7

The companies that are focused on the manufacturing of the following products are likely to find themselves in green pastures going ahead.

Government Initiatives to promote the Electronics manufacturing industry

1.Sector-specific government Policy Initiatives

A. National Policy of Electronics – 2018 12

  • Achieve a turnover of USD 400 Billion by 2025
  • Skill development
  • Improve ease of doing business
  • Develop core competencies in all the sub- sectors of electronics
  • Become a global leader in the Electronics Manufacturing Services (EMS) segment by promoting progressively higher value addition in the manufacturing of electronic products.

– Specific to EMS industry —- Promote the following key activities under EMS, for creation of the requisite component manufacturing ecosystem in the country:

  • Engineering and design of PCBs
  • PCB assembly, including sub-assemblies.
  • Functional testing
  • Maintenance services such as warranty, repair services etc.
  • Product and component design

*( This video [link] is not only  helpful in providing an insight into why producing PCBs is technically challenging, capital intensive but also why they must be made in India considering they are the backbone of any electronic equipment – Hence, much-needed Government's focus on the same evident by their mention in the NPE-18)

B. Modified Special Incentive Package Scheme (M-SIPS) : This scheme will help ease the capital burden on the electronics manufacturers in setting up new projects as well as expanding projects. Salient features include:

  • The scheme provides a capital subsidy of 20% in SEZ (25% in non-SEZ) for electronic manufacturing units.
  • It also provides reimbursements of CVD/excise for capital equipment in non-SEZ units.
  • For high capital investment projects like fabrication plants, it provides reimbusment of central taxes and duties. The incentives are available for 10 years from the date of approval.
  • In August 2015, the scheme was amended with a term extension of terms up to 2020 and as well as encompasiing more verticals and simplifying the approval process.

As per the latest update by Govt. of India, as on 30 September 2018, 265 applications with proposed investment of Rs.61, 925/- crore have been received under M-SIPS, out of which 188 applications with proposed investment of Rs.40, 922/- crore have been approved. So far, the investment of Rs.8, 335/- crore has been made by 139 applicants.12

*(Note that the first edition of the policy came into effect in 2012)

C. Electronics Manufacturing Clusters (EMCs) & Information Technology Investment Regions (ITIRs) : The improved supply chain, consolidation of suppliers and reduced time to market that this initiative is likely to achieve will strengthen the whole ecosystem of the electronics sector.

Such aggregation of various players in one geography aids in the creation of entrepreneurial environment driving innovation and propelling economic growth of the region through employment and tax revenue. The city of Shenzhen in China is a live example of this phenomenon playing out.14

EMCs

To make India an electronics manufacturing hub, the government is promoting the development of electronic manufacturing clusters throughout the country to provide world class infrastructure and attract investment. The grant assistance offered are as:

# For Greenfield EMCs, grant of 50% of project cost is provided subject to a ceiling of INR 500 million for every 100 acres of land. As on date, around 13 Green EMCs have been approved.

# For Brownfield EMCs, grant of 75% of project cost is provided subject to a ceiling of INR 500 million. As on date, around 2 Brownfield EMCs have been final approved.11

Source: Ministry of electronics and IT, Annual report 2017-18 5

ITIRs: To boost investment in electronic hardware manufacturing (EHM) the government has released a policy, whereby a minimum area of 40 sq. km should be demarcated for Information Technology Investment Regions (ITIRs). The ITIRs would be designed to be a self-contained integrated township to accelerate the growth of EHM industry. ITIRs are set up near Hyderabad and Bengaluru.11

D. Setting up of semiconductor wafer fabrication: One of the major pain points for Indian Electronics manufacturing industry is the domestic non-availability basic components such as semiconductor wafers and printed circuit boards. Acquisition of this capability domestically would help stimulate the creation of an entire ecosystem.

The government is focused on setting up wafer fabrication on a commercial basis and has received the applications of two consortia (IBM, Jaypee Group, TowerJazz; ST Microelectronics, HSMC) to establish semiconductor wafer fabrication units in Gujarat and Noida with the aim of reaching a capacity of at aleast 40,000 wafer starts per month of at least 300m size.

*( This video [link] shows the complex process of wafer manufacturing. Until India doesn't develop wafer manufacturing facilities locally, becoming import free will remain a distant dream)

E. Preferential market access : PMA is a scheme launched to give preference to Domestically Manufactured Electronic Goods. Under the scheme, for government procurement across all ministries/departments (apart from defence) preference has to be given to electronic products that are manufactured by companies registered in India. This provides a reliable market to domestic manufacturers which motivate new players to enter the sector as it helps mitigate the risk of demand fluctuation and foreign competition.

In order to promote 'Make in India' initiative, Government of India has increased import duties on most of these electronic items which bode well for the domestic players.13On the other hand, India's electronics exports valued at USD 6 Billion form less than 1% share in the world markets presenting a significant size of the opportunity in the export arena as well.6

F. Merchandise Export from India Scheme: The scheme was launched under the foreign trade policy 2015-2020 to boost export of domestic products. Under this scheme, specific electronics products (e.g. AC Parts & Compressors, Colour TV etc.) when exported to specific countries are offered export subsidy starting at 2% and higher for items that have high domestic content and value addition. This would help improve exports and motivate more players to avail subsidy and make their products price competitive in the international market.

G. Electronics Development Fund (EDF): provide risk capital to companies adopting new technologies in the area of electronics. It helps attract venture capitalists and angel funds into the industry.

H. Multiple skill development programs: Shortage of skilled workers is a big concern for the multi-national manufacturing companies when it comes to setting up base in India. With multiple such skill development initiatives, India will be able to exploit its demographic advantage and along with low labour cost also provide high labour productivity making it an even more attractive investment destination.

2. General economic policies to boost demand

A. Nationwide programs initiated by the government such as 'Aakash tablet', UIDAI project, the National Knowledge Network (NKN) and the National Optic Fibre Network (NOFN) – make Government of India a major driver of this industry.

B. GST implementation : Manufacturing cost of electronic components will be significantly brought down due to the implementation of GST. The local manufacturers will be able to pass on the tax benefit to consumers in the form of price reduction.

C. Demonetization: bodes well for electronic payment devices and digital payment systems such as BHIM, Bharat QR. All these platforms will also generate demand for mobile phones.

D. With multiple Special Economic Zones coming along the coastline like China, export operations of manufacturers will be immensely benefitted.

The government has been putting efforts to fill up the gaps by increasing investment from Rs 11,000 crore in June 2014 to Rs 1, 27,880 crores in 2016. Programs and schemes such as Make In India, Digital India program, Start-up India, Smart Cities Program, National Solar Mission and National Electric Mobility Mission Program have created a huge excitement with their investment targets and invoked the entrepreneurial spirit.

Even as India takes centre stage as the world's fastest growing economy in 2018, a vibrant entrepreneurship ecosystem clubbed with the evolving support for electronics manufacturing will make 2018-22 the tipping for Indian electronics sector, as per the IESA newsletter-2018.15

FDI and Indian Electronics Industry

With the 'Make in India' campaign, global players have already started showing interest in investing in India. Hence, foreign direct investment (FDI) inflows are largely seen as a bright spot for India, the amount of money that has come into the electronics category is less than 1% of total inflow.

Source: Department of Industrial Policy and Promotion (DIPP); TechSci Research

In order to address the situation and encourage more foreign investments in the electronics sector, The Government of India has taken some key measures: 11

  • Allows 100% Foreign Direct Investment (FDI) through automatic route in Electronic System Design Manufacturing sector and Electrical Equipment sector.
  • Allows only 49% investment through automatic route for defence electronics and can be increased beyond that level through government route
  • Has amended its Modified Special Incentive Package Scheme (M-SIPS) with regard to electronics manufacturing. This will allow foreign investors to claim 25% subsidy on capital expenditure in the non-SEZ area and 20% in SEZ area.

The electronics sector in India attracted foreign direct investment worth $ 1.6 billion between April 2000 and March 2016, which was 0.57% of the cumulative FDI equity flow worth $288 billion the country received in the same period.

As of February 2016, the government has received 156 proposals with investment commitments worth $ 16.8 billion in the previous 20 months as per Indian Electronics and Semi-conductor Association, an organisation that promotes local manufacture of computer hardware and electronics goods in India.16

Some of the key issues hurting the Indian EMS sector include:

  • The inefficient supply chain for required electronics components is a major concern. (EMS supported by a home-grown component manufacturing system is the way forward to start authentic manufacturing in India)
  • Low gross margins (greater vertical integration will help alleviate this problem)
  • The higher cost of infrastructure
  • Shortage of skilled manpower
  • Logistics inefficiencies and infrastructural bottlenecks, resulting in the greater turnaround time and costs.*
  • Unorganised nature of the sector puts cost pressures on quality service providers and creates issues in the entire value chain.
  • Irregular power supply, non-availability of continuous water supply are some of the major challenges leading to costly delays in the overall manufacturing process.
  • Long capital investment cycles.
  • The higher cost of capital in India leads to higher operational costs for domestic players. The cost of capital in India is 12-14% which is much higher than the global average of approx. 5-7%
  • Industry unprofessionalism
  • Trust deficit
  • Treat from imports
  • Demand fluctuations

While an EMS player can make do with 50-60% capacity utilization, anything less than 70% is death in case of component manufacturing. So obviously there has to be tie-up to demand or a long term contract – Vinod Sharma, Deki Electronics 6

*According to a report by the Institute for studies in industrial development, logistics costs as a percentage of total value of goods stood at 13-14%, compared with 7-8% in developed nations.

SWOT analysis of the Indian EDSM Industry

Porter's Five Forces analysis of the Indian EDSM Industry

Some of the top competing names in the Indian EMS industry are:

Major Players include:

Other companies include:

Kaynes Technology India Pvt Ltd, Elin Electronics Ltd, Centum Electronics Ltd, Amara Raja Electronics Ltd, SGS Tekniks Manufacturing Pvt Ltd, Hero Electronix, Amber Enterprises.

Notice that a lot of foreign MNCs have come into the Indian markets in a big way. The likes of Foxconn, Flextronics, Sanmina and Jabil have set up multiple manufacturing facilities across India which bodes well for the Indian electronics industry as a whole. No doubt the competition for the domestic players will intensify but it will also bring more business to the smaller component manufactures with a readily available taker for their products at home.

Over the years, electricity cost in China has become 57% more expensive than India and natural gas 138% more expensive than India.17 No wonder, Taiwan based manufacturer Foxconn plans to build up to 12 new factories in India, employing nearly one million workers, by 2020, according to media reports. Higher operational costs with expensive labour are forcing these manufacturers to expand globally in order to mitigate the risk of becoming non-competitive in terms of pricing in the global electronics market.10

In order to provide a reference for the scale at which these large global electronics & systems companies operate and to understand what they look for in the Electronics manufacturing ecosystem of a partnering country, following is an excerpt from the keynote address given by Jeff Purnell, Vice President and Chief Procurement Office (Global), Cisco at Electronics Manufacturing Summit – 2018 in New Delhi.6

" Cisco is about 50 billion US$ company with 6 billion US$ R&D expenditure. We invest heavily in R&D. We differentiate our product for customers and its takes really advance innovations. We have 19,000 patents out of which over a thousand of patents were developed by engineers here in India. So, a significant part of R&D investment and innovation comes out from India facility. Globally we have 73,000 employees out of which 10,000 employees are in R&D in Bangalore. We have 300,000 partners and channel partners delivering our products to the markets. First of all we are global. We operate on outsourced manufacturing pattern. We do not manufacture anything directly inside Cisco.

We do not manufacture anything directly inside Cisco. It is all through partners and our ecosystem from component suppliers to manufacturing partners to service to logistics. Everything is critical to our successes to be able to manage this value chain. We ship products to over 150 countries in the world. We manufacture in 13 countries today, we are very complex and we have very broad range of portfolio. This comprises of everything from small IP firms to very large refrigerators. In order to manage that complexity, it takes a lot of internal connections but also very, very tight ecosystem.

To give you the sense of scale we move around 30,000 orderable products which are close to two hundred twenty thousand components daily which is a very high velocity. But it is broad – which is very different. We have a very high velocity but broad product portfolio so from our supply chain perspective; we need to have scale for particular product through manufacturing in a couple of places in the world for exports to all other countries as opposed to setting up manufacturing in every single country for single product which is not feasible for us.

So we should talk not only "Make in India" from assembly perspective but actually start increasing the amount of sourcing and then also increase the foot print to be able to make in India for India and also to expand to export to rest of the world ''

Conclusion:

Statistically, the opportunity staring at us with regard to the electronics manufacturing industry is immense. The extent of electronics under-penetration in India, cheaper production costs and the government thrust to reduce import of electronic items,  make for a good case of investing in some of the listed EMS companies in India.

But a major concern for these indigenous players  going ahead would be the stiff competition from global MNCs rapidly shifting their base from China to India. With the ever-increasing presence of OEMs such as Samsung and EMS giants such as Foxconn in India, the local players might find it difficult to attract incremental business from the global clients.

Hence, simply by looking at the size of the opportunity, the notion of investing in the EMS companies seems lucrative but first we will have to see how the home-grown players respond to this pressure from the 'bigwigs' in the times to come.

References:

  1. https://indianexpress.com/article/explained/simply-put-rise-of-imports-beyond-crude-rupee-vs-dollar-sensex-fuel-price-5347793/
  2. https://thewire.in/economy/worlds-largest-mobile-phone-plant-india-electronics-import
  3. https://en.wikipedia.org/wiki/Electronics_manufacturing_services
  4. https://www.weforum.org/agenda/2018/04/the-worlds-biggest-economies-in-2018/
  5. http://meity.gov.in/writereaddata/files/Annual_Report_2017%E2%80%9318.pdf
  6. http://mait.com/pdf/files/Final_Report_Kantar.pdf
  7. https://ww2.frost.com/files/6815/0754/1035/8737722.pdf
  8. https://globenewswire.com/news-release/2018/01/29/1313412/0/en/Consumer-Electronics-Market-to-hit-1-500bn-by-2024-Global-Market-Insights-Inc.html
  9. https://www.gminsights.com/industry-analysis/consumer-electronics-market
  10. https://en.wikipedia.org/wiki/Foxconn
  11. https://in.nec.com/en_IN/pdf/-AssochamReport-NTIasKnowledgePartner.pdf
  12. http://meity.gov.in/writereaddata/files/Draft_NPE_2018_10thOct2018.pdf
  13. https://www.bloombergquint.com/global-economics/india-raises-tariffs-on-electronics-to-curb-surging-imports#gs.QL0gvIs
  14. http://www.sddt.com/Commentary/article.cfm?Commentary_ID=140&SourceCode=20140811tbc&_t=Why+cant+the+US+build+consumer+electronic+products#.VA7b2RbOP-k
  15. http://iesaonline.org/store/uploads/2018/07/IESA-VisionSummit-Newsletter-2018.pdf
  16. https://en.wikipedia.org/wiki/Electronics_and_semiconductor_manufacturing_industry_in_India
  17. https://www.financialexpress.com/economy/how-india-can-attract-big-electronic-manufacturing-units-moving-out-of-china/1343525/

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