Smartphones and India: Foreign Manufacturers Take a Bite

By Pritesh Samuel 

This week, the domestic media reported that Apple is set to manufacture its iPhone SE model in India. Taiwanese contract manufacturer Wistron Corp will manufacture the phone.

While the proposal will need to be approved by the prime minister’s office due to special incentives requested by Apple, things seem to be moving forward quickly as Apple is eyeing India’s Silicon Valley in the southern city of Bangalore as its ultimate destination.

India is a mobile-hungry market dominated by Samsung, followed by several Chinese manufacturers, such as OnePlus, Xiaomi, Oppo, and Lenovo pushing out Indian smartphone manufacturers from the top five list; Apple is 10^th . The budget smartphone market between the price range of US$149 to US$223 dominates India’s smartphone business.

Chinese vendors doubled their sales to 68 million last year, and have established a bedrock in India’s US$10 billion smartphone market, according to market researchers. In the latter part of 2016, one in every two phones sold in India were a Chinese brand – accounting for more than 50 percent of smartphone sales, as compared to 19 percent in the previous year.

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Chinese makers: joining the Make in India bandwagon

Apple isn’t the only one looking to ‘Make in India’. Chinese companies like Xiaomi and Gionee are already making phones at a Foxconn manufacturing facility in the southern state of Andhra Pradesh, while LeCo opened a facility in Noida, which adjoins the capital Delhi. Domestic phone manufacturers such as Micromax, Lava, and Karbonn have planned facilities in the states of Rajasthan, Maharashtra, and Noida (Delhi NCR), respectively.

The government has continued to push the Make in India campaign in the electronic segment. India imports electronic goods worth US$44 billion (Rs 3 lakh crore). By 2020, the government wants to bring this down to zero. Under Make in India, more than two-third of the smartphones shipped in April to June 2015 were assembled in India.

The government is providing US$1.4 billion (Rs 10,000 crore) under the Electronics Development Fund to support entrepreneurs in the electronics sector. In this year’s budget, the government increased allocations for Modified Special Inventive Package Scheme (M-SIPS) and Electronic Development Fund (EDF) to RS 745 crore for 2017-2018, which are schemes for companies manufacturing in electronics, telecom, automatic, and consumer electronics.

In 2015, the government imposed a 12 percent duty on imports, which further encouraged manufacturers to make phones in India. In this year’s budget, the government also imposed a 2 percent duty on the import of printed circuit boards for manufacturers of mobile phones, accounting for a significant cost for smartphone makers. While this may increase the price of phones in the short term, manufacturers will increasingly look to make their products in India to reduce such costs in the future.

The government also launched the Electronic Manufacturing Clusters (EMC) scheme in 2012, which provides support for world-class infrastructure to attract investments in the electronics systems design and manufacturing (ESDM) sector. Currently, there are 14 registered EMCs in the states of Andhra Pradesh, Kerala, Tamil Nadu, Karnataka, Odisha, and West Bengal.

In addition, electronic manufacturing component makers plan to invest US$14 million (Rs 1000 crore) into the ELCINA manufacturing cluster in Bhiwadi, Rajasthan. ELCINA was originally launched by the federal government, which plans to launch 18 other such manufacturing clusters in several cities and towns. Companies investing in these clusters will also get benefits under the M-SIPS program, which provides ESDM companies with subsidies for capital expenditure.

The government has also introduced the Phased Manufacturing Program (PMP). Under this initiative, a different duty structure has been introduced for three components: chargers, batteries, and headsets, with a concessional rate of duty at 2 percent, instead of 12 percent.

Further, the government aims to create seamless credit in the supply chain under a common tax base under the proposed Good and Service Tax (GST) laws. Importers will be eligible for tax credits in return for GST paid on the import of mobile handsets, which will unlock more non-creditable taxes than are available to domestic manufacturers. The difference could be as high as 10 to 15 percent.

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Negotiating remaining challenges

India is gradually moving from the completely built units (CBU) import model to assembly, but design operations, hardware testing, and tooling are still based outside of India. This is even true for Indian smartphone manufacturers.

While many incentives have been launched, it still isn’t cheaper to make phones in India. Further changes to duty structure may impact this further. In addition, challenges continue to hamper the end-to-end manufacturing of phones in India, such as: limited component supplies, underdeveloped manufacturing ecosystem, the high cost of finance and infrastructure, low availability of talent, and barrier to technology and research and development (R&D).

To offset these challenges, Apple has continued to ask for concessions from the government to manufacture in India. If the government does agree to its demands, it may have to bend the rules for other smartphone manufacturers seeking similar incentives.

Apple has reiterated that regardless of the government’s position, it still plans to manufacture in India. Several states have also rolled out the red carpet. The chief minister of Maharashtra, for example, stated that they will offer compensation for the 11.5 percent import duty in case the proposal with the federal government does not go ahead.

With the government continuing to push Make in India, launching incentives, and increasing taxes for imports, smartphone manufacturing is likely to shift base in the short to medium term. It is just a matter of time.

India will need to speed up its federal initiatives so that domestic as well as foreign smartphone manufacturers can benefit from an end-to-end manufacturing process, starting from the designing stage all the way to finished product and packaging. As with all things, time will tell if the government can pull through with this challenge.

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