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Make in India: Production Relocation and Market Opportunities for Hong Kong Electronics Companies podcast

India offers a good relocation choice for Hong Kong electronics manufacturers, as well as a fast-growing domestic market.

Hong Kong’s electronics sector is the city’s largest export earner, contributing 64% of total exports in 2015. Most Hong Kong electronics manufacturers have production facilities based on the Chinese mainland, in particular the Pearl River Delta (PRD), which has witnessed an upward spiral in production costs in recent years. As the manufacturing hinterland, the Chinese mainland is Hong Kong’s largest electronics export market, although its uptakes from the city have shown moderating growth from 7.7% in 2013 to a mere of 1% in 2015.

 

First and foremost, the suitability of India as an alternative production base for Hong Kong’s labour-intensive manufacturers is critically examined. While India as a major developing economy aspires to become a globally competitive manufacturing hub, it also provides a ready market with good opportunities due to its strong growth in GDP and income spawning a rapidly growing middle class. Despite a rather gloomy global economic outlook for 2016, India is poised to outperform with GDP growth forecast at 7.5%. In the first quarter of 2016, India’s GDP expanded by 7.9% year-on-year, continuing to outshine China, which chalked up growth of 6.7% year-on-year over the same period.

 

This article is the sixth in the series, examining the production and market opportunities for Hong Kong’s electronics companies with regard to the structure of India’s electronics sector, government policies and initiatives. This article should also be read in conjunction with or alongside other articles in the series, which examine India’s general manufacturing landscape and business environment, [1] especially relocation to Gujarat, India’s economically freest state, [2] and Maharashtra, which has the highest GSDP [3] among all Indian states, [4] along with the production and market opportunities for Hong Kong’s garment companies [5] [6]. These articles can be accessed via the hyperlinked end notes.

Enormous Potential of India’s Electronics Market

India’s robust economic growth in recent years has raised the disposable income of Indians and created an expanding middle-class population. Along with increasing government spending on electronics products for the upgrade of public services under the Digital India Initiative (see the section Strategic Support on Electronics Industry by the Government of India further below), the Indian electronics market is ripe with enormous business potential.

The Indian Electronic Systems Design & Manufacturing (ESDM) [7] sector was estimated to be worth US$94.2 billion in 2015, expanding at a compound annual growth rate (CAGR) of 10% from 2011 to 2015. The ESDM sector is regarded as India’s manufacturing driver, given the huge local demand. In 2015, electronics constituted India’s third-largest import, after crude oil and gold. It is estimated that about 65% of the current electronics demand is satisfied by imports.

As shown in the figure below, the growth in the demand for electronics in India has been faster than that of local production in recent years. It is expected that by 2020, India’s demand for electronics products will reach US$400 billion, while local production will be US$104 billion, with imports catering to the excess demand.

Chart: Electronics Demand Outpaces Local Production
Chart: Electronics Demand Outpaces Local Production

The size of India’s consumer and telecommunication electronics market is expected to keep surging in the lead up to 2020, with the consumption of digital products including phones, tablets, cameras, televisions and audio items expected to boost continual sectoral growth. According to a research report by Corporate Catalyst India, the consumer-electronics market in urban areas is growing at an annual rate of 7-10%, while the market in rural areas is expanding at an even faster rate of 25% a year.

During HKTDC Research’s fact-finding trip to India, retail outlets for major international consumer-electronics brands, such as Samsung, LG, Apple and Sony, can be easily found in every major city we visited, many of which are situated inside shopping malls. However, it is not uncommon to find street-level multi-brand retailers, which are still largely off-limits to foreign investors despite legislation during the tenure of the previous government [8].

Photo: Foreign consumer-electronics brands are popular in India among growing middle-class consumers
Foreign consumer-electronics brands are popular in India among growing middle-class consumers.
Photo: Foreign consumer-electronics brands are popular in India among growing middle-class consumers
Foreign consumer-electronics brands are popular in India among growing middle-class consumers.
Photo: An electronics retailer sells locally-made products
An electronics retailer sells locally-made products.
Photo: An electronics retailer sells locally-made products
An electronics retailer sells locally-made products.

Increasing Trade on Electronics Products between Hong Kong and India

India’s strong domestic demand has grown alongside its electronics imports from Hong Kong, with the country becoming Hong Kong’s fourth-largest export market for electronics in 2015, rising from sixth in 2014. Hong Kong’s electronics product exports to India experienced promising growth at 12.8% CAGR from 2012 to 2015. India is expected to be one of the key growth markets for Hong Kong’s electronics industry. The table below shows the top five types of electronics products exported from Hong Kong to India.

Table: Hong Kong’s Electronics Exports to India
Table: Hong Kong’s Electronics Exports to India

Production Landscape of India’s Electronics Industry

As discussed above, India’s demand for electronics products has been outstripping its local supply, a gap that is expected to widen further with demand growing at double-digit rates. This points to a growing reliance on imported electronics products in the foreseeable future, unless industrial polices foster a change early enough to arrest this trend.

Meanwhile, India’s electronics production landscape is characterised by its bipolar nature, with many large indigenous and multinational companies on the one hand, and a much larger number of smaller companies on the other.

As in other manufacturing sectors in India, the bulk of indigenous electronics manufacturers consist of small and informal units [9], which limit their production scale, value-added and complexity of their products. A central reason behind this is the country’s arcane and complex labour laws.

Small and Informal Domestic Electronics Manufacturing Units Dominate India

According to a study by Asia Monitor Resource Centre [10], most domestic electronics factories in India employ fewer than 40 workers. They are classified as Micro, Small and Medium Enterprises (MSMEs), which are exempted from those cumbersome labour laws that apply to larger enterprises. On the flip side, these MSMEs are unable to benefit from upscaling to reduce production costs, and lack resources for research and development in order to keep innovating. To empower Indian manufacturing companies with greater employment flexibility, the Modi government has attempted to simplify the labour tax and repeal outdated employment codes.

Many MSME manufacturers have switched course over time to become traders, as it appears to be easier to import and distribute electronics products than to produce them. Therefore, growth of local electronics production has been rather small, contrasting starkly with the surge in electronics imports. India’s electronics output is just 1.3% of global output, disproportionately small for a country with more than one-sixth of the world’s population.

Presence of International Electronics Manufactures in India

The mainstay of electronics manufacturing is gradually shifting from advanced to emerging economies to capitalise on lower production costs. Benefitting from this development, an increasing number of global electronics manufacturers have relocated some of their production lines to India, including Samsung and LG from Korea, Flextronics from the US, Panasonic and Mitsubishi from Japan, Bosch from Germany and Foxconn from Taiwan. Multinational corporation production covers a wide range of products spanning consumer electronics, computers and semiconductors, and telecommunication equipment.

Among all major categories, mobile phones show the fastest growth rate in production, and have been identified as the largest growth market. For example Chinese mobile-phone manufacturer Transsion Holdings, a major player in Africa, has rolled out a fully-fledged plan of entering the India market with affordable mobile phones by setting up production and operation bases in various Indian states. The table below shows the key multinational corporation players in India’s electronics sector.

Table: Key International Players In India Electronics Sector
Table: Key International Players In India Electronics Sector

Apart from establishing their own production sites, some of these international electronics players assign contracts to Indian electronics manufacturers. Apart from organic growth, international electronics companies in India expand through mergers and acquisitions with Indian companies or other international companies in India, or by forming joint ventures. International manufacturers are also inclined to set up R&D and operations in India. These companies bring not only FDI into India, but also technology, while creating jobs spanning manufacturing, services and research sectors, therefore generating positive growth drivers for India’s economy.

Photo: Chinese smartphone brands are found in major shopping centres in India
Chinese smartphone brands are found in major shopping centres in India.
Photo: Chinese smartphone brands are found in major shopping centres in India
Chinese smartphone brands are found in major shopping centres in India.
Photo: Foreign electronics companies may acquire Indian brands for business expansion
Foreign electronics companies may acquire Indian brands for business expansion.
Photo: Foreign electronics companies may acquire Indian brands for business expansion
Foreign electronics companies may acquire Indian brands for business expansion.

International electronics companies, especially in consumer and mobile electronics, invariably welcome the Modi government’s Make In India Initiative (MIII). (See the session Strategic Support on Electronics Industry by the Government of India further down the article). Companies engaging in negotiations on entering or increasing investment in India’s electronics sector include Samsung, LG, Bosch, Haier and Panasonic. The figure below shows that FDI to India’s electronics sector has shown a steady increase in the past few years.

Chart: Cumulative FDI Inflows to Electronics Sector (FY 2015)
Chart: Cumulative FDI Inflows to Electronics Sector (FY 2015)

Strategic Support on Electronics Industry by the Government of India

India’s electronics industry has ample room to further grow and upgrade. To pull in more resources, the Modi government has been active in attracting FDI to the electronics manufacturing sector through the Make In India Initiative (MIII) and Digital India Initiative (DII).

The Modi government has made various policy provisions under the MIII umbrella. Firstly, there is the continuation of India’s National Policy on Electronics (NPE), which was first drafted in 2011 by the previous government. It involves a national strategy to create a globally competitive ESDM industry in India by promoting exports, improving supply chains and building competency, and aims to attract US$100 billion in investment and create 28 million jobs. Under the NPE, some state governments such as Maharashtra and Gujarat have also developed state-level electronics industry policies.

In addition, continued adoption of the Modified Special Incentive Package Scheme (MSIPS), first launched in 2012, is one of the most important policy tools under the MIII. MSIPS is a sector-specific scheme to promote India’s electronics production. It aims to establish an ecosystem for electronics production in India including design, research and manufacturing. In the 2015-16 Union Budget the central government allocated US$1.7 billion in benefits through the MSIPS to the electronics sector for the upcoming five years.

The scheme provides a capital subsidy of 20% for manufacturing units in Special Economic Zones (SEZs) and 25% for non-SEZ electronics manufacturers. Reimbursement of excise for capital equipment is offered to all non-SEZ units. The incentives are available for the entire value chain of electronics production for 10 years from the date of approval. Up to September 2015, project investment worth US$17.5 billion had been received under the MSIPS. Along with the MSIPS, other policy provisions under MIII include the following:

Table: MIII Policies to Promote the ESDM Industry
Table: MIII Policies to Promote the ESDM Industry

The DII aims to empower India through digitalising government services, upgrading internet networks and promoting IT industries. The Modi government believes that the development of e-governance and internet networks will generate high demand for electronics equipment, and that the government will in turn become one of the biggest consumers of electronics products.

In the spirit of the MIII, one of the key policy intentions of the DII is the development of home-grown electronics products in order to reduce imports. It is worth noting that the Modi government has signaled its preference for procurement of domestically manufactured goods. In this connection, foreign electronics manufacturers wishing to better penetrate the Indian market can take advantage of incentives being offered and set up production bases in India.

Allotments for Developing Electronics Manufacturing

There are two major types of allotments for promoting electronics manufacturing in India: the Electronic Manufacturing Clusters (EMCs) and the SEZs. India’s central government introduced the EMC scheme in 2012 to provide support to states for developing infrastructure and common facilities. Manufacturers can enjoy a subsidy of 50-75% up to US$10 million per 100 acres (about 40 hectares) of land to develop greenfield or brownfield sites in the form of grant-in-aid. About 30 EMCs have been notified and the government is aiming for 200 by 2020. As of December 2015, investment of US$18.67 billion had been allocated to the EMCs. The map below shows their locations.

Map: Locations of Electronics Manufacturing Clusters in India
Map: Locations of Electronics Manufacturing Clusters in India

Furthermore, SEZs specialising in electronics manufacturers can be found in a number of Indian states. Production units in these SEZs enjoy tax holidays, duty exemption on imported or domestic procurement and exemptions on other taxes such as service tax. While units in the SEZs enjoy a number of incentives, they are deemed to be in foreign customs territory, and bilateral trade between domestic tariff areas [13] and SEZs are considered to be exports from, and imports to, India. As such, SEZ units have to pay regular custom duties when they sell their products in the domestic tariff area. The map below shows the distribution of electronics SEZs across India. Most of the electronics SEZs are located in the southern states, in particular in Tamil Nadu.

Map: Numbers of SEZs in Indian States
Map: Numbers of SEZs in Indian States

Establishing production units in SEZs may be more convenient as the allotment of the production site and utility connections are better organised. However, if foreign manufacturers would like to explore India’s domestic electronics market, they should note that products manufactured in SEZs will be subject to regular custom duties.

Apart from national policies, different states also offer different incentives such as value-added tax abatement, electricity-duty exemption, fiscal incentives for fixed-capital investment and skill-specific training to attract investment in the ESDM sector. Sometimes the state governments also negotiate investment arrangements with manufacturers directly in order to attract investors.

Summary

This article provides an overview on the landscape of India’s electronics sector. As the majority of domestic electronics manufacturers are rather small and informal, local electronics hardware production is insufficient to cater to the surging domestic demand amid the rise of India’s middle class. Foreign electronics companies relocating their production bases to India can take advantage not only of lower production costs, but also realize the potential of its huge local market. In short, it is a promising market for Hong Kong electronics companies to explore business opportunities in terms of both production and sales. 


[1]  Make in India: An Alternative Production Base with a Huge Local Market

[2]  Make in India: The Gujarat Production Base Opportunity

[3]  GSDP: Gross State Domestic Product

[4]  Make in India: The Maharashtra Production Base Opportunity

[5]  Make in India: Production Relocation Opportunities for Hong Kong Garment Companies

[6]  Make in India: Domestic Sales Opportunities for Hong Kong Garment Companies Considering Factory Relocation

[7]  The ESDM sector comprises electronics products (which broadly include IT systems and hardware, telecommunication products and equipment, consumer electronics, industrial and automotive products, etc.), electronics components, semiconductor design and electronics manufacturing services.

[8]  The Modi government has retained the policy of allowing up to 51% FDI in multi-brand retail (MBR) from the previous government. However, it declared in October 2015 that it would not approve any FDI in MBR proposals during its tenure. 100% FDI is allowed in single-brand retail (SBR), though there are certain provisions governing local sourcing. Meanwhile, the Modi government is examining FDI proposals from foreign electronics brands such as Apple, Xiaomi and Lenovo, taking into account whether there is a need for more flexible local sourcing.

[9]  While the majority of domestic electronics manufacturers in India are small and informal, there are some large Indian consumer electronics manufacturers, including Micromax Informatics Ltd and Mirc Electronics Pvt Ltd.

[10]  Workers in Electronics Industry in India: The case of Samsung, Asia Monitor Resource Centre

[11]  At the same time, India also increased customs duty on imported electronics goods to favour local manufacturers.

[12]  CENVAT credit is a scheme that allows manufacturers or service providers to set off the central excise paid on the inputs or input services used while manufacturing or providing the service. The inputs, capital goods and service eligible for credit are defined under the Cenvat Credit Rules 2004.

[13]  Domestic Tariff Area refers to the area outside the SEZs in India.

Content provided by Picture: Kenix Lee
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